SITALWeek 2-24-19

SITALWeek #181

Stuff I thought about last week 2-24-19

Greetings - a major pivot for Zillow raises lots of interesting questions, Kraft Heinz teaches us that value investing in the Information Age requires a new framework as companies face increasing existential threats, Walmart gains alongside Amazon, and more in this week's note. Last week I sent a follow up note on ARM Semiconductor and what happens when the disruptors in an industry find themselves a target of disruption - you can find it here if you missed it. As always, reply with any feedback.

[Please read important disclaimers at the bottom of this post]

Click here to sign up for SITALWeek

Stuff about Innovation and Technology

A major pivot for Zillow announced last week provides a timely opportunity for analysis and looking at which questions investors should be asking - I wrote up a longer thought piece on the Zillow news which you can find here. I think the world of Rich Barton and the Zillow Group - I am rooting enthusiastically for them, but I also have a lot of questions and a few critiques, which I address in more detail in the longer post. Zillow is doing exactly what I recommend from my post last week on what happens when disruptors find themselves to be the target of the next wave of disruption, so I am eager to learn more.

Some exciting innovation out of tech leader Samsung this week with a foldable phone (phone that turns into a tablet) and wireless charging earbuds. Apple now feels left behind Android by leaps and bounds on hardware, software and other areas of innovation. And, thankfully, Bixby is being put out to pasture.

Walmart saw good ecommerce growth recently - I’d put this in contrast to the dramatically slowing Amazon US ecommerce growth rate I mentioned in last week’s SITALWeek. Walmart is growing based on their own inventory (as opposed to 3rd party sellers that drive a lot of Amazon growth). Notably, Walmart has achieved growth in many areas, such as grocery, in which Amazon has historically struggled to achieve profits. Previously, I’ve suggested that Walmart might be poised to leverage technology to take share in offline retail (and Amazon is aggressively opening stores as well through Whole Foods and other formats), which could cause many other store-based retailers to lose out to Walmart’s and Amazon’s multichannel and technology dominance. It’s possible the #2 (or smaller) player in each physical retail vertical won’t be able to match Walmart and Amazon in tech spend, customer count, or logistics. So, Walmart is still in the game as they leverage their strengths in physical location and owned inventory to gain offline market share - albeit at a cost to their margins. To be clear, I don’t think this is about Amazon vs. Walmart; rather, it’s a story of Amazon AND Walmart consolidating share in the US. The slowing growth is certainly contributing to expanding margins at Amazon. And, with China (Amazon merging their failing China business with a NetEase unit) and India (see last week’s SITALWeek on India) seemingly closed to Western companies, this will lower international investment and help Amazon and Walmart increase margins and focus investments on other areas like multi-channel and logistics.

Google is rumored to be launching gaming hardware alongside their new streaming service at the Game Developers’ Conference. All of these efforts are likely to keep increasing the gaming market overall.

I am excited to see Chinese blockbuster Wandering Earth when it hits Netflix - another example of the global appeal of what was previously considered to be regional content (like when China is the country that saves the Earth!).

American companies like Thermo Fischer find themselves aiding China in tracking Muslims - another example of the increased age of transparency putting a spotlight on the responsibilities that companies have to a broader set of constituents - a topic we wrote about here in our NZS paper. Related: “China has succeeded in using its economic might and its political power to silence the countries in the Islamic world.”

Coolers at your local convenience store are watching you: “these screens are equipped with sensors and cameras designed to watch and profile the appearance and actions of customers who find themselves in their path, like me. Approximate age and gender. How long my gaze lingers on the bottles of tea. Whether being emotionally moved by a Red Bull ad prompts me to grab a can of that stimulant instead. The machines also get fed external data about things like the time of day, weather, and special events—all with the idea of testing tailored ads, and updating pricing on the fly to respond to trends.”

The global conflict over networking and cellular equipment for 5G, with Huawei at the center, is an increasing problem. Telecom service providers indicate Huawei is a year of more ahead of Nokia and Ericsson, and may need to delay spending and 5G rollouts until the tech is ready. Meanwhile, the UK and others have come out saying they can use Huawei, but then the US responded by saying they’d stop sharing intelligence data with any country that decided to stick with Huawei. And, Trump wants 6G, whatever that is - what a mess! I did a little more analysis on Nokia this past week and fell into some common investor traps I thought might helpful to point out - read more about that here.

Kraft Heinz’s problems this week might be explained by several factors - bankers running a consumer brands company, shifting consumer preferences for health, advertising impacts on consumption habits, and/or changing demographics. Some of the explanations are overly simple, but it feels like the next decade will see many legacy companies, often considered to be attractive value stocks, fail to transition to new social values and changing needs of consumers. “The firm’s top executives themselves sounded the alarm on the shift last year: “I’m a terrified dinosaur,” said 3G co-founder Jorge Paulo Lemann at the Milken Institute conference in April. “I’ve been living in this cozy world of old brands [and] big volumes. You could just focus on being very efficient and you’d be OK. All of a sudden we are being disrupted in all ways.” He added: “We bought brands and we thought they would last forever. Now, we have to totally adjust to new demands from clients.”

This also feels like part of a broader black eye for Buffett, who classically focuses on quality of managers. Perhaps it’s an unfair criticism, but Berkshire has invested in (or stayed invested in) several companies whose CEOs, in my opinion, are/were not classic Buffett and Munger operators - IBM, Apple, Wells Fargo, and American Express all come to mind as examples over the last decade. That armchair criticism aside, the annual letter from Berkshire (PDF link) came out this weekend and is always worth reading.

Google announced that, like Amazon Web Services, you will be able to run the Google Cloud in your own data center. This is an important development and further heightens risk to infrastructure software providers like Redhat, VMWare, and others.

Apple Pay and digital payments in general have been largely disappointing in the US. Apple has a new effort to launch a Mastercard with Goldman Sachs for iPhone users. Ultimately, however, I think mass market success will come from someone reinventing payments from the ground up, as continued efforts to Frankenstein products over the existing infrastructure seem to provide less-than-optimal game theory outcomes for consumers and businesses, thus disproportionately favoring the incumbents. In the next decade, payments will change dramatically in the West, but it’s hard to see how just yet. Either Amazon or Walmart would be in a good position to try a bold experiment in payments that collapses the layers of middlemen, who aren’t providing enough value for their tariffs on the transaction.

Podcasts have struggled to drive advertising dollars to match the growing popularity of the genre. Recently, several podcast platforms held an “upfront” for advertisers to find podcasters to align with. For listeners of podcasts here in the US, you’ll also wonder whether the whole category may implode after lost more than half of its value this week after losing a key USPS relationship - the company has been a huge supporter of podcasts for years! Here is a good article on how to solve the gap between listeners and revenues - there is a long way to go.

Facebook is siphoning very personal information from your apps without you knowing. This is yet another example of the lost moral compass at Facebook and the hypocrisy of Tim Cook’s privacy soap box that I wrote about a few weeks ago.

Amazon is increasingly insourcing freight transport, causing havoc for trucking and logistics providers, which ended in bankruptcy for one.

Miscellaneous Stuff

This article explains that a higher minimum wage can cause a big decrease in medical costs, amongst other benefits. If all a higher minimum wage accomplished was a significant decrease the number of smokers, then it’s cost is likely a net benefit to society. This explanation is a mental inversion for me, and it seems intriguing and important: “A $15 minimum wage is an antidepressant. It is a sleep aid. A diet. A stress reliever. It is a contraceptive, preventing teenage pregnancy. It prevents premature death. It shields children from neglect.”

The rise of emojis as courtroom evidence: “Despite the potential for emoji to be interpreted in a wide array of ways, emoji experts don’t really exist. “Emoji usually have dialects. They draw meaning from their context. You could absolutely talk about emoji as a phenomenon, but as for what a particular emoji means, you probably wouldn’t go to a linguist.”

The brain represents optical illusions as delayed reality - causing us to live many milliseconds in the past while believing we live in the present. The brain has evolved to trick us in many ways, a fact always worth remembering when making decisions.

Following up on my paragraph last week on the terrific prevalence of biking in Dutch cities, I recommend all my Colorado friends support this effort to recreate that culture in a local town!

Stuff about Geopolitics, Economics, and the Finance Industry

This WSJ article on the difficulty in finding a “real” value fund - one that invests in beaten up stocks trading far below intrinsic value - is interesting. Essentially, the Journal suggests that there only a couple of real value funds, while most funds calling themselves “value” are disguising a different strategy (this value fund manager owns Google and Facebook!) The digitization of the global economy is creating transparency and business model shifts that many traditional companies and industries can’t respond to; therefore, you could argue that “value” investing is now just “value trap” investing, and many companies that appear to be value stocks are facing existential death traps.

The top app in China is a Communist party propaganda piece made by Alibaba: “ ‘Xuexi Qiangguo’, which literally translates as ‘Study to make China strong’ and is a play on the government propaganda theme of applying President Xi Jinping’s thoughts, overtook Tik Tok’s Chinese version Douyin and WeChat to become the county’s most popular app on Apple’s China app store last week.”

The 4 billionaires created by China’s surveillance systems: “In Xinjiang -- where as many as 1 million Uighurs have been held in mass detention camps -- Chinese authorities are deploying AI-powered cameras, facial scanners and audio surveillance tools to carry out what Human Rights Watch has described as a “systematic campaign of human rights violations.’’ China has said that the camps are voluntary education centers that help purge “ideological diseases.”

“A group of some of China’s smartest students have been recruited straight from high school to begin training as the world’s youngest AI weapons scientists. The 27 boys and four girls, all aged 18 and under, were selected for the four-year ‘experimental programme for intelligent weapons systems’ at the Beijing Institute of Technology (BIT) from more than 5,000 candidates, the school said on its website.”

Tyler Cowen on the commonsense morality driven success of Utah:

“I think globalism works better when more people pursue common sense morality. Just one example: Look at Utah. The state is about half Mormon. Utah has quite an intact middle class and robust economic growth. It's pretty well-run. It's not that I think everyone should become a Mormon. I'm not a Mormon myself. But it does show there's a kind of moral cultural foundation for capitalism. It's not that I think everyone has to live a particular way, but you need some middle-class core in a society doing that, if only to support the people who really wish to deviate.”

The greatest investor you never heard of - there is some annoying misrepresentation in this article, but still a fun read on Herbert Wertheim.

iShares has been out with an ad campaign for ESG ETFs; however, a glance at the holdings of their US mid- and large-cap ESG ETF leaves me laughing and concluding that, at least for now, if you are looking for socially responsible investing, you need an active manager’s help.

Fidelity had a record year in 2018 - I talked about why that might be in my piece on disruption this week.


Nothing in this newsletter should be construed as investment advice. I may own long or short positions in stocks discussed in this newsletter. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny - sorry.

About me:

I was the portfolio manager of the Janus Henderson Global Technology products (ticker: JAGTX) from May 2011 to November 2018. Prior to that I held various roles as an analyst and portfolio manager at Janus Henderson Investors for most of the period starting as a summer intern in 1998 up until the end of 2018. I graduated from Williams College in 2000 with BAs in Economics and Astrophysics. A complete resume can be found at

Investment framework co-authored with Brinton Johns “Complexity Investing” can be found here:

If you have any articles of interest, comments or questions please send them by responding to this email. I will generally try to read and respond to your comments or questions, but may not always be able to in a timely manner, for which I apologize in advance.