Amazon's apparel sales were $16 billion in 2015

1. Amazon's apparel sales at $16 billion are more than combined 'online' sales of GAP, Macy's, Nordstrom, Khol's and L Brands (Victoria Secret's parent).

2. According to Morgan Stanley, Amazon is now second to Walmart's apparel market share.

3. The retail sector in the US turned out to be an under-performer over the last 20 months. The sector gave negative returns, -8%. Amazon during the same period gave a returns of 170%.

Your note: It pays to spread your bets across the index companies. All along you though Amazon was expensive, yet for almost 4 years Amazon has been outperforming.



http://dailyreckoning.com/pocket-203596-60-seconds/?curator=alphaideas&utm_source=alphaideas

Indians wealth is $5.6 trillion, almost 3 times the GDP

Wealth of major Indian cities.

Mumbai - $800 billion
Delhi - $500 billion

Bangalore, Hyderabad (my erstwhile capital city), Kolkatta - $300 billion each

Pune - $200 billion

Chennai (my current city) - $150 billion

Gurugram - $100 billion

India is home to about 250,000 millionaire and 100 billionaire.

***

Other emerging cities in the country include, Surat, Ahmadabad, Visakhapatnam, Goa, Chandigarh, Jaipur, and Vadodara, the report said.

It noted that over the next decade, India is expected to benefit from strong growth in local financial services, IT, real estate, healthcare and media sectors.

"In particular, the local hospital services and health insurance sectors are expected to grow strongly. Hyderabad, Pune and Bengaluru are expected to lead the pack in terms of wealth growth," it said.

Millionaires or high networth individuals (HNIs) refer to individuals with net assets of $1 million or more.

Billionaires refer to individuals with net assets of $1 billion or more.

Other wealthiest cities include, 

Hyderabad (total wealth of $310 billion, has 8,200 millionaires, 7 billionaires); (My comment: So, just 8,000 people out of 70 lakhs population are millionaires in Hyderabad. Sounds low to me, considering the many luxury and ultra-luxury apartments and cars in Hyderabad.)

Kolkata ($290 billion, has 8,600 millionaires and 10 billionaires); 

Pune ($180 billion, has 3,900 millionaires and 5 billionaires); 

Chennai ($150 billion and has 6,200 millionaires and 4 billionaires) and 

Gurgaon ($110 billion and home to 3,600 millionaires and 2 billionaires).

http://www.bloombergquint.com/business/2016/09/28/mumbai-wealthiest-indian-city-with-total-wealth-of-dollar820-billion

Difficulties of predictions / forecasts

1. The 3 most important words for an investor are "I don't know."

2. Most investors make money because of things the decided 'not to do'; ignoring forecasts/predictions falls precisely into this.

3. Predictions/headlines attract eyeballs but repel returns

4. Past performance is no guarantee of future returns. In 2006, REITS gave a return of 36%, in 2007 a return of -17%. In 2007, emerging markets gave a return of 40%, in 2008 a return of -53%

5. In the last 15 years, only 17% equity and 7% bond fund managers have beaten their index as per Dimensional Fund Research.

6. Some retail investors enjoy predicting prices of commodities. Some trade oil using leveraged ETFs.

http://tonyisola.com/2016/09/who-knows-not-me/?curator=alphaideas&utm_source=alphaideas

Banking at even established banks like Citibank is going branchless

1. It's not just fin-tech start-ups which are adopting technology. Even established bank are going digital and reducing physical presence. Citibank India is reducing number of branches from 44 to 40.

2. Citibank India - 97% of transactions are done through digital branches, compared to 75% of transaction 3 years earlier.

3. Citibank and other foreign banks had high overhead and employee costs earlier. They seem to now be adopting to the new era of banking where income from customers is dwindling. And competition from fin-tech start-ups is eating into many traditional income areas of banks - payments, wealth management, online-credit etc.,

http://www.bloomberg.com/news/articles/2016-09-27/citigroup-said-to-plan-india-branch-cuts-in-digital-banking-push-itkwuj5r?curator=alphaideas&utm_source=alphaideas

Case shiller home index - US housing data from 2006 to 2016 (10 years)

Note: Data as of July 2016

1. Index is back to pre-recession levels

2. Housing prices took 10 years to reach the pre-recession levels

3. Housing as an asset class negative returns over 10 year period. The annualized 10-year returns are -1%.

4. Anything purchased at low level is a good buy - housing purchased in recession years (2009, 21010, 2011, 2012) - have given good returns. The 3-year and 5-year annualized returns are about 5%.

5. The Schiller index only talks about average. As seen in Bloomberg article (Sept 2016) about home prices in Greenwich, Connecticut, owners are not able to sell expensive houses even after 2-4 years on the market. Often, they are having to mark down the prices 20%.

http://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

Housing prices improve alongside improved labor market

1. Housing market improves when labor market improves. Because only when people have jobs / higher-paying jobs can they afford homes.

2. Low inventory of houses can also lead to improvement in housing prices.

http://www.businessinsider.in/Here-come-Case-Shiller-home-prices-/articleshow/54546653.cms

Office rental - high rents leads to 'buy' decisions

1. As demand (from mainland China) increases for office space in Hong Kong, the rents soar.

2. Few companies are choosing a higher-ticket strategy: buying entire skyscrapers

3. Mainland Chinese companies have spent $3.65 billion buying office space in Hong Kong (till Sept 2016), more than half the $6.3 billion they spent in total since 2009 (i.e. more than the total of 6 years)



http://www.wsj.com/articles/why-buy-office-space-when-you-can-buy-a-whole-building-1474985424

Food, on average, makes up only about 15 percent of a consumer’s budget.

1. In recent years, Krogers - largest grocery chain with 2,800 stores in the US - cut prices to compete with Walmart and managed to increase market share and sales. 

But deflation has been hard on the supermarket chain. 

The company's stock lost more than a quarter of its value this year, as price cuts weighed on profits. 

CEO Rodney McMullen expressed frustration that many customers don't even notice.  

2. “The other thing that’s always hard is getting your message out, because it’s fascinating – in our research, most people are saying their basket of goods costs more money,” McMullen said on a call with analysts this month.

The likely reason for McMullen’s lament: Food, on average, makes up only about 15 percent of a consumer’s budget. Except for gas and other energy-related items, prices for most other goods are going up, if only modestly.

http://www.bloomberg.com/news/articles/2016-09-27/eight-cent-eggs-consumers-gobble-cheap-food-as-grocers-squirm

Are you a Warren Buffett phoney?

Buffett has often said, "I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."

There are plenty of people out there who call themselves Buffett acolytes - and as far as I can see they are all phoneys. Every last one of them. 

Find any investor who models themselves off Warren Buffett and look at what they do.

And look at their investments against a twenty punch card test. 

They fail. They don't even come close. Several big-name so-called Buffett acolytes have made more than three to five large investments in the last three years and at prices that can't possibly meet the twenty punch card test. Most phoney Buffett acolytes have been turning stock over faster than that.

Warren Buffett's two juniors (Todd Combs and Ted Weschler) have turned over many stocks in the past few years too - and at prices that don't reconcile with any twenty-punch-card philosophy. They are phoneys too. Just a little less egregious than many other so-called Buffett acolytes.  

Many so-called Buffett acolytes (phoneys, all of them) have imbibed that a concentrated portfolio is a good idea. And so they present as having five to twelve stock portfolios and are prepared to take 30 percent positions. 

But the stocks often don't meet the twenty punch-card test. And so these investors wind up with large positions in second rate investments. When one goes wrong it is deeply painful. When three go wrong simultaneously it is devastating. 

The lesson here is easily stated: "if you are going to fill your portfolio with crap, it better be diversified crap". 

Several of my favourite phoney Buffett acolytes have been posting catastrophic losses. It was due. The phoney Buffett acolytes still here are just waiting for their turn to have catastrophic losses. -wrote John Hempton

Kenneth Andre's PMS - looking for capital efficient businesses

My note: Throughout the note, Kenneth Andre repeats the importance of capital efficiency in running a business. Even Rakesh Jhunjhunwala talking about Indigo investment once mentioned that with 50 crores capital, they achieved 10,000 crores sales and with the same 50 crores capital, they achieved 15,000 sales. Basically, they grew without raising additional capital. Such 'capital efficient' businesses are what make great stock eventually.


Notes from Andre's PMS presentation


1. Investment philosophy 

- Identify businesses early into a cycle
- Companies in industries that are consolidating,
- Companies that demonstrate leadership skills
- Companies that have financial discipline


2. Investment Strategy

Create a portfolio of companies which meet the criteria of

- Capital efficiency
- Low leverage
- Profit making with low capex scheduled
- Low valuation

Companies in valuation range of $50mn to $2bn

Portfolio may not necessarily be diversified across industries.


3. Stock Selection 

Capital efficient nature of business

- companies moving to higher ROE
- idea is not to predict growth but to look for capital employed to be controlled
- cash flow prositive nature of business with low gearing are critial elements required for this transition


Monopolistic / Consolidator of the industry

- preference for consolidating businesses
- identify companies gaining market share with corresponding change in capital employed
- identigy companies with lowest cost in their industry
- companies need to profitable in this transition
- leadership at the end of the cycle usually results in higher market share and pricing power


Low financial leverage

- preference for companies with negligible debt
- prefer businesses leveraging into an economic up cycle & deleveraging at the top of the cycle

Low valuation

- look for 'out of favor' businesses whcih currently reflect current depressed earnings
- EV/Sales
- Market Cap/Cash profit (flows)


Performance 

- Kenneth Andr's IDFC Premier Equity fund gave a return of twice the benchmark index over 10 year period from 2005 to 2014.

IDFC Premier Equity - 24%
S&P BSE 500            - 12.8%
CNX Midcap             - 13.7%
CNX Nifty Index       - 13.2%

(Note: Nifty Index gave a better return than BSE 500, although BSE has more stocks).


Insights from BSE 500 data (slide no. 25)

- Between 2005 and 2015 - Sales grew at 20%; but profits grew at only 11.5% (i.e. half the growth rate of sales). It means competition is high, capitalism is alive and kicking in India.

- ROE at 11% is low. The spread between ROE and govt securities (yield - 7.7% in 2015) is only 3%. At such low ROEs, it may make sense to invest in govt securities than take the risk of equities. These are average numbers and stock-selection of high ROE businesses can lead to better spreads.

- Profit margin is only 5.5% for BSE 500 companies, not much different from US S&P 500 companies (approx 6%?)

- BSE 500 companies had ROE as high as 20% between 2005 and 2008 and as high as 15% from 2009 to 2012.

- Note: The ROE% is twice the Profit margins%

- Total Debt to equity is less than 1. The total debt to equity is only about 50% higher than average/median. So, this should be manageable, right? Although, Andre seems to say that debt levels are quite high.


Insights from Small Cap Index 685 companies data (Slide no. 26)

- Small companies index of 685 companies are making only 5% of the profit of BSE 500 companies, although their turnover is 30% of the BSE 500 companies. It means their margins are very low. Since most of these companies must be supplying goods/services to large companies, the large companies must be squeezing them on pricing and margins.

- Small companies's profit margin is less than 1% of their sales.

- Small companies ROE is only 2%. Although between 2005 and 2008, they had an ROE of 15% and ROE of 10% between 2009 and 2012.

- Total Debt to Equity at 1.6 is higher than BSE 500 companies.

- So, in general the economics of Small Companies seem to bad compared to large companies. So, one has to be careful while investing. The economics of small companies seem to be especially bad during bad economic conditions. Conversely. no wonder small companies' economics improves dramatically during better economic times as they are coming from a very low point. Hence, small cap stock performance improves dramatically during good economic times / boom times / bull runs.


Credit in India (as on March 2016, non-food credit)

Industries      - 44%
Services        - 23%
Retail            - 20%
Agriculture   - 13%

Corporates / organized sector account for 65% of credit
Retail accounts for only 20% of credit

(Note: This means unorganized sector and retail doesn't have adequate credit facilities. Companies/NBFCs servicing these segments will likely do well over many years. Hence, stocks should also do well in these sectors.)

- In India, retail credit is 20% of total credit and 10% of GDP (which is quite low relative to other developed countries). But perhaps, is likely is remain low due to non-availability of social security and other safety nets in India.

- Housing loans account for 50% of retail credit (Note: the high contribution of housing)

Trends to play out

Easier to grow retail credit than corporate credit. Retail credit could grow at even 30% cagr.

Retail credit rates will have a secular down-trend.

Availability of credit will release equity employed in SMEs.

Consumption could be a secular trend (from growth in retail credit and increase in cash with SME owners).

Rural Rush - direct benefit transfer, cutting of middlemen in marketing, increased crop insurance coverage, etc., could lead to increasing rural incomes and their spending levels.


https://docs.google.com/viewerng/viewer?url=http://alphaideas.in/wp-content/uploads/2016/08/Old-Bridge-Capital-Kenneth-Andrade27s-Equity-PMS.pdf&hl=en_US

Greenwich, Connecticut - Realestate upto $2mn is selling; realestate above $5mn extremely difficult to sell

1. Greenwich, Connecticut is home to the most posperous communities in America. It is 35 miles from Manhattan, home to about 60,000 residents, has 32 miles of seashore line.

2. The median household income is $135,000 compared to $56,500 for the entire country (USA).

3.  "Members of younger wallstreet crowd are quite conservative." says a realestate broker (My note: Risk-taking levels are lower, perhaps, for the entire current generation, not just in wall street).

'Earlier generation, they used to say, they will strech. Now, they are more practical, they will ask what the utility bills are...and then they say they don't want it.'

That could explain, the home sales data. Upto Sept 2016, compared to 2015:

Home sales of houses with prices
upto $1mn - are up 30%
between $1mn and $2mn - are up 70%
between $5mn and $6mn - down 80%

4. Back in the day, 'everymody wanted 5 acres and pillars on their drive way, because that's what you got when you 'made it'.'

'Now 'made it' means a brand-spanking new house on a small plot on the waterfront,'

5. $250,000 S-class coupe Benz is sitting in the showroom, while models priced $70,000 are flying through the door.


Source: http://www.bloomberg.com/news/articles/2016-09-26/in-greenwich-that-250-000-mercedes-isn-t-the-hit-it-used-to-be

Performance of various asset classes in India (1996 to 2015)

POST TAX RETURNS (CAGR) OF ASSET CLASSES
	5- YEAR	10- YEAR	15- YEAR	20- YEAR
EQUITY	11.0	17.0	13.6	12.0
GOLD	9.0	12.9	11.0	8.4
BANK FD	5.7	5.2	5.1	5.5
PROPERTY	8.0	13.4	10.8	6.2
CAGR IN WPI	6.2	5.9	5.7	5.5
AVG INFLATION	7.4	6.3	5.9	5.7
(FIG IN %)

The above is from a  MORGAN STANLEY report that is more than a year old (report must be of 2015, this article was published in sept 2016). There are several lessons or takeaways for us:

1. Equities are the best weapons to fight inflation and bank deposits are the worst;
2. Property is good, provided we are lucky with our choice. The above return is an ‘average’;
3. Gold is neither as good as it is touted to be nor as bad as it seems.
4. A return that measures the ‘average’ of a group or a set of products hides the real story.

https://balablogsdotcom.wordpress.com/2016/09/04/the-elusive-multi-bagger/?curator=alphaideas&utm_source=alphaideas

Trader makes 2100% in commodities trading - China

http://www.bloomberg.com/news/articles/2016-09-07/hedge-fund-makes-2-100-from-world-s-most-extreme-market-mania?curator=alphaideas&utm_source=alphaideas

Bond yields are finally rising

After a long time, bond yields are rising - in Japan and in Germany.

http://www.bloombergquint.com/gadfly/2016/09/09/gundlach-puts-his-finger-on-bond-market-tipping-point