Nov 2014

Arrow Electronics & the IOT

Last week I commented on an advertisement I saw in which one of my former employers (Arrow Electronics) was doing a roadshow to promote the “Internet of Things.” I said manufacturers’ reps have been predicting this for decades, and implied that ideas such as smart refrigerators were silly.

I actually got a response from @ArrowGlobal on Twitter that included a link to an Italian company called Bluewind that does embedded systems design. So I thought I’d expand on my original comment.

Arrow is an interesting company. I remember when I was there the CEO, Stephen Kaufman, had just returned from one of his stints as a visiting lecturer at the Harvard Business School. Kaufman brought back the word “disintermediation,” and Arrow spent a lot of time thinking about how to avoid being squeezed out of the supply chain. They’re still going strong over a decade later, so obviously they found a way. Bluewind illustrates this value-add strategy.

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There are a lot of interesting applications of embedded systems, and many of them are featured on the Bluewind website. Some are more compelling, I think, than others. Of course, it’s a matter of opinion whether a smart espresso machine is less important than a power inverter that enables wider deployment of solar and wind energy technology. The problem, like the decades-old discussions about smart fridges and slot machines that can outsmart casino players, may be that the market is not really the most effective way to judge.

Where I now live, people are concerned about the pipelines proposed by Canadian petroleum companies to transport their tar sands across our farms and forests. Northern Minnesota finds itself caught in what I can only think of as a nineteenth-century logical fallacy about centers and peripheries. The other project currently being promoted up here is a copper sulphate mining scheme. Like the pipeline, the argument is about trading long-term environmental quality for short-term jobs.

The point and the revolutionary promise of global communications, whether it’s the internet of things or the internet of ideas, is that it can dissolve the anachronistic logic of centers and peripheries. In the long run, this is the ultimate disintermediation. Of course, society needs to find a way to embrace new technology even when it disrupts the establishment. There are a lot of sunk costs in the status quo, as shown in my
local power coop’s foot-dragging regarding net-metering and decentralized power generation.

The really cool, radical, game-changing role for companies like Arrow and Bluewind, I think, is the role of catalyst. The market needs to see that there are jobs, products, and profits in new technology. And in public discourse there has to be an alternative to the polar visions of either more of the same or global catastrophic collapse. Technology combined with social change is the way we dig ourselves out of this hole. So, good luck with the road show, Arrow.

What Moves Markets?

Since I’m sort-of on the subject, today I’ll look at stocks.

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Take Pandora (P), a company that provides streaming music over the web. If you look them up, you’ll find that Pandora stock has ranged in price this year from a high of $40.44 per share (last March) to a low of $17.55 (earlier this month). At the current price of about $18.43, the company has a market capitalization of about $3.83 billion. And the stock has a “Beta” of 1.76, which means it is nearly twice as volatile as the overall market.

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Or take Netflix (NFLX), which provides both in-the-mail and streaming movies. Netflix stock has been as low as $299.50 per share (last April) and $489 (in early September). At its current price of just about $347 per share, the company is worth just about $21 billion. And Netflix has a “Beta” of 1.15, which means its price moves follow those of the overall market very closely.

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Pandora, according to NASDAQ.com, is 99.51% institutionally owned. 289 organizations hold over 207 million shares out of a total of about 208 million. The three largest holders are T. Rowe Price (mutual funds), Wells Fargo (Trusts and mutual funds) and Vanguard (mutual funds). These three companies alone account for over 44 million shares, or nearly a quarter of Pandora. In addition there are a handful of insiders (usually executives or  founders of the company) who (according to Form 4 Insider Trade documents) seem to own about half a million shares each (the numbers don’t add up exactly because they’re from different sources, and there may be some double-counting if insider shares are held in trusts). So basically, nearly all of Pandora stock is controlled by insiders or financial institutions.

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Netflix is 91% institutionally owned. 520 organizations hold about 55 million shares out of a total of about 60 million. The three biggest holders are Capital Research Global Investors, T. Rowe Price, and Vanguard; all mutual fund companies (Capital Research also manages portfolios for private clients). There are also several insiders (several of them Silicon Valley hedge fund directors) with million-share stakes. So once again, Netflix is pretty much fully owned by insiders and institutions.

I didn’t cherry-pick these two companies. Of the hundred-fifty or so technology companies I follow, these ownership percentages are pretty typical. But let it sink in. In the technology sector at least (and I strongly suspect in other sectors as well), the market is dominated by institutional investors. Given this fact, how do we explain they type of volatility we see in stocks like Pandora and Netflix?

Mutual funds, remember, are supposed to be long-term investments. And stock prices are supposed to represent the shifting consensus of the free market regarding the value of a company and its prospects for earning money for shareholders. Can we explain the 160% variation in Netflix’s price (from low to high) or the 230% range of Pandora’s, by supposing that a couple of hundred fund and trust managers really changed their minds about the long-term prospects of these companies that significantly?

There does seem to be a fair amount of buying and selling. Of the 289 institutional owners of Pandora, 131 increased their ownership positions and 127 decreased their positions last quarter, while 31 institutions held stable. But most of those companies were only making incremental changes. Only 37 institutions bought into Pandora from zero, and only 34 sold out completely. The picture is similar for Netflix. 244 institutions increased holdings a bit and 210 decreased a bit, while 66 holders stayed pat (on holdings of 44 million shares). Only 64 holders bought in from zero, and only 36 sold out — and this activity only amounted to a couple million shares. So again, how do we explain the volatility of these stocks?

Another question. If the players are all professionals, who is the audience for all the news and opinion flooding the web about these companies and the market? The Motley Fools I mentioned yesterday, the Seeking Alpha guys, Jim Cramer screaming on TV; who is it all for? Is the stock market just another NFL? A game hardly anybody in America really plays, but everybody watches and obsesses about their fantasy teams? Today’s news on Netflix, for example, includes a press release declaring that a brokerage firm downgraded its rating on Netflix shares from “Buy” to “Hold” and that the stock is down over $10 per share as a result. Really? The portfolio managers at Capital Research, T. Rowe Price, and Vanguard really care that much what some analyst has to say, that they’re all going to panic and hit the sell button?

On the other hand, look at those charts again. Even if the stocks are not appreciating overall, there are peaks and troughs that are fairly regular and , you might even say, predictable. There’s clearly money to be made if you can buy at the bottom and sell at the top. Then you can wait for the next bottom and buy in again. And gee, wouldn’t there be even more potential for profit if you could somehow anticipate — or even influence — those peaks and troughs?

12/2 Update: Okay, I've done a little more reading. apparently, buried in the list of institutional holders along with the trust departments and mutual funds, are exchange traded funds ETFs. Unlike funds, ETFs are valued in realtime, which means that the stocks carried in them are subject to amplified variability. This explains both why stocks with almost complete institutional ownership swing as wildly as they do, and also why they swing
together. The point isn't that when there's bad news about Netflix, that Yahoo and Amazon owners fear their companies are also in trouble. The point is that news triggers selling of the ETFs that hold Netflix, and they also hold Yahoo and Amazon.

The Enemy Market?

There's an article today in the Wall Street Journal by the Motley Fool's Morgan Housel, called "An Open Letter to Millennials: The Market is Your Friend." People born between 1980 and 2000, Housel says, seem to prefer to keep most of their money in cash. The previous generation was more likely to invest in longer-term securities such as stocks or mutual funds. "An investor born in January 1980 who invested $1,000 in the stock market on his 18th birthday would have had just $1,030 when he turned 30," Housel admits (it's worth remembering that a Gen-Xer or a Baby-Boomer had exactly the same investment performance over this period, but apparently they reacted with less disgust and distrust than Millennials).  Housel is very concerned, and provides a link to a Vanguard Stock Market Index Fund that his readers might want to consider.

This strikes me as funny in a couple of different ways.

First, Housel is one of the geniuses behind the Motley Fool, which in my opinion is one of the silliest investment websites around. Not silly in the hip "Fool" way they want to be, though. Their investment advice just isn't that good. Sure, it's better than Jim Cramer or Seeking Alpha -- but that isn't saying much. Basically, they're wrong as often as they're right. And it's all about selling info and sponsor's products.

Take the Vanguard Stock Index Fund (VTSMX) Housel recommends. It's doing pretty well right now. It's actually at it's all-time high. Wait a minute. It's buy low, sell high, isn't it? So maybe this isn't the moment to jump in.

If you had invested a thousand bucks in this fund in March of 2000, you would have bought in at about $35 per share. Today, that stake would be worth about $50 per share, and your initial $1,000 would be worth about $1,400. And there would have been some dividends that you might have chosen to reinvest automatically, so you might have slightly more. Sounds pretty good, right?

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Timing is everything, though. If you had needed the money in March of 2003, you would have gotten $19 per share, or $543. If you had needed the money in March, 2009, you would have received $474 back on that initial investment of $1,000. What?

For most of it's lifespan, this Vanguard fund has been in the toilet. There was a moment, just before the stock market crash associated with the 2008-9 financial crisis, when the fund was worth more than your break-even $35 per share. And since January of 2013, it's been on a pretty steady uptrend to its current $50 per share. So this is the performance that singles this fund out to be the one Housel recommends to wary Millennials?

Personally, I'd wonder whether the Millennials are onto something? But here I have to admit I'm a bit biased. Decades ago, when I was a fresh-faced college grad myself, I worked as a Registered Rep. and then as a Registered Principal for a mutual fund company. That means I was one of the guys responsible for running a field office, supervising reps, making sure people were investing appropriately and the company was meeting its fiduciary duties, etc. I came out of that experience with a strong suspicion that on the whole, mutual funds are not a great investment for regular people. They're great for fund managers and salesmen like Housel, because if you can arbitrarily choose the start and end-points on that chart, you can make it look like a great investment. For example, if you had bought $1,000 of VTSMX in March, 2009, you'd have tripled your money and would be sitting on over $3,000 today.

The problem is, real life usually gets in the way of ideal timing. Congratulations to Millennials for figuring this out.

Economic Concentration, 1937

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In 1937, roughly 70% of the stock of the 200 largest American non-financial corporations (that is, manufacturers) was owned by just 5% of the shareholders. Regular people also invested in the stock market, in spite of the fact that the Great Depression was still definitely "on" in 1937. Half the stockholders of the top 200 industrial firms were small investors holding less than $500 in shares of any particular company. Their share of equity in the top 200 companies was just under 3% (or about $901 million). Another 45% of the shareholders, with individual holdings between $500 and $10,000 each, accounted for about 27% of the equity in these industrial companies. The top 5% of shareholders, with individual stakes of more than $10,000 each, owned 70% of America's top 200 companies (or about $23.4 billion), and controlled 70% of the voting stock.

That's concentration of economic power.

Source: Temporary National Economic Committee, Monograph #29, The Distribution of Ownership in the 200 Largest Non-financial Corporations, 1940

Smedley Butler Blows the Whistle


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In 1932, General Smedley Butler gave testimony to the US Congress advocating for the payment of the Veterans Bonus, which was basically back-pay owed to soldiers who had fought in World War I.

Butler is often portrayed as a mouthy, not-too-bright agitator; so this testimony is interesting as evidence of his actual abilities and passions. It's also amazing how much the veterans'  issues Butler was addressing are still with us.

I read the piece aloud (mostly or my own benefit):

Butler Bonus Testimony

Smedley Butler & the Forgotten Coup Attempt



My 11 minute documentary detailing the suppressed testimony in the 1933 Wall Street Plot to depose Franklin Roosevelt and establish a fascist dictatorship.
The story has been told elsewhere; this short film covers the difference between the Congressional Report on the hearings and the actual testimony they heard. Whether you believe in the conspiracy or not, it's important to understand how much the report left out. And to wonder why.

Change the 1%??

I've been listening to an audio-book version of Thomas Piketty's Capital in the Twenty First Century, and I've been very interested in the fact that Bill Gates has chosen to blog about the book. I've commented on his post and on others' comments a number of times, including this today:

I think another of the important things Piketty does is to refocus attention on Wealth rather than Income. I read this today, from a 1967 book (Ferdinand Lundberg's The Rich and the Super Rich) quoting a 1940 US Government Report (the Temporary National Economic Committee's Investigation of Concentration of Economic Power):

"The ownership of the stock of all American corporations is highly concentrated. For example, 10,000 persons (0.008 percent of the population) own one-fourth, and 75,000 persons (0.06 percent of the population) own full one-half, of all corporate stock held by individuals in this country." 
As for shares held by non-individuals, I think we can assume that the stock held by foundations and trusts, although its dividends might be pledged to foundation goals, tends to strengthen the "stakeholder" control of the families who fund the foundations. 

Two conclusions you might draw from this. 1.) As Piketty implies, the 1% is not a new issue. And 2.) The name of the game may not be stirring up a grass-roots revolution, but convincing more members of the 1% that their best interests are served by a slightly more egalitarian society.

Enbridge 67

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Real Zombie Apocalypse

According to a report published by the Public Religion Research Institute, reported today in The Atlantic, half of Americans think that Climate Change is a sign of the End Times, the Biblical Apocalypse.

There's a moment in the Doctor Who season finale this year, where the Earth is (predictably) teetering on the edge, and the Doctor says "Don't call the Americans! They'll only pray." THAT is how the rest of the world sees us, and it's because of this type of nonsense.

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A 2014 Pew Research poll found "61 percent of Americans agreed that the earth's temperature is rising, and of that group, 40 percent attributed the warming to human activity."

And according to a recent
Harris Interactive poll, 68% of Americans believe in Heaven and 72% believe in miracles. So why clean up your mess here, if a.) it can be fixed by the wave of God's hand or b.) you're going to a better place anyway. In the same poll, of course, fewer than 50% of the respondents believe in Darwinian Evolution.

What are the implications of this stunning display of American opinion, on any efforts we might want to make to dig ourselves out of the ecological, political, and social hole we're in by any sort of
grass roots, bottom up action?

Latest Science on Human Origins

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An article posted this afternoon to Popular Science said that the latest genetic research backs up the story about the human populations of Europe and the Americas I tell in the introductory lecture to my Environmental History class (you can see the video here). Specifically, the article said:

Modern Europeans shared at least some DNA with this group of Northern Eurasians, themselves closely related to ancestral Native Americans, who migrated across the frozen land bridge to the Americas about 15,000 years ago. The ancient North Eurasians were not only ancestors of modern Native Americans but provided up to 20 percent of the DNA in modern Europeans as well.

My Utility COOP & Solar Power

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There’s a crucial difference between an energy utility company being concerned about the costs associated with moving toward new technology like net metering, and the company pretending concern as a tactic to avoid changing the status quo.

According to a Deutsche Bank study, related in
a great article by Lucas Mearian for Computerworld, ten US States already “boast solar energy costs that are on par with those of conventional electricity generation.” And by 2016, the study expects price parity in all 50 states. Comparing American solar capability with that of the world leader, Germany, the study says cloudy “Seattle is the worst place in the continental U.S. For solar. Germany’s worse than Seattle.”

Last August, my local electric utility’s quarterly PR magazine included a letter by the utility’s General Manager, saying the company was concerned that in “traditional individual-owner net metering applications, the solar owner’s share of the utility fixed costs is transferred to other members.” I was unsure whether this was a real concern or a smokescreen, so I wrote to the GM and received a response from both her and from one of the technical managers.

The utility’s idea of implementing solar seems to be a scheme that would allow customers to buy a “share” of the output of a solar generating plant operated by another nearby utility. While there may be some economies of scale in a big “on-grid” solar farm, the successful model in places like Germany where solar has really taken off has been rooftop. Solar farms seem like just another way for the utilities to retain control and hang onto a lion’s share of the benefit. To make matters even stranger, my local utility is a cooperative. And its most recent PR magazine featured an article urging customers to fight the proposed new EPA carbon rule under the Clean Air Act.

So what’s the solution for electricity customers interested in trying new technology? As Photovoltaic costs continue to come down, there will certainly be more of us. The government confers monopolies on public utilities, using the logic that a region only needs one, and competition would be bad because the streets would constantly be torn up by new companies laying redundant cable. This makes sense, as long as the company granted the monopoly remains focused on the best interests of the community. I don’t see how advocating for less regulation on coal and dragging your feet on new, sustainable technology benefits the community in the long run.

My utility coop’s approach seems more likely to drive the really interested users off the grid entirely. We’ve all heard stories about the local visionary northwest of Bemidji who installed solar panels on his roof, only to have the utility issue a rate increase to all his neighbors to cover the cost of retrofitting to the smart grid. Talk about driving away precisely the people who could be your best allies! I’ve got to admit that faced with that type of attitude, my response is, “Well, is there a way I can do off-grid power for part of my needs, and just reduce my dependence on the utility?” this may be good news for battery manufacturers, but it’s probably not the most efficient or effective way to move the community toward a sustainable future.