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    “The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.”

    -Joseph addressing the King of Egypt

    In exchange for interpreting his dream, the king put Joseph in charge of the economy. As a country, we continue to empower people who interpret our dreams.

    Though we have had seven fat years, I don’t know if we’re headed up or down. I don’t predict markets. There are too many moving parts, and entire markets respond to unknowable cash flows, butterflies, and unforeseen events. The best I can do is define value and possibilities for companies I somewhat understand, and hope that the material I buy floats on the sea of cash.

    That said, markets are a contest between the creator of money – the government – and the collectors of money – the powerful. The government was designed to provide the most good to the most people, to protect from despots, and to be overthrown by election when the people are dissatisfied.

    The people are dissatisfied. Two items:

    Two weeks ago, NBC sent a reporter to Erie, PA, a place that has not voted Republican since Reagan. The reporter displayed the termination letter that the locals received when GE shut down its locomotive factory there. Hilary Clinton didn’t bother going to Erie, but Trump went and promised to make Erie great again. Sitting in a diner, the reporter asked a woman, “Do you think the president-elect is a good man?” The woman looked up one wall, across the ceiling, and down the other wall. She finally said, “Well, he’s no worse than the politicians.” People who are losing $30 an hour jobs are desperate. GE laid off another 2000 on inauguration day.

    The owner of an excellent shop in New Hope, PA said last weekend, “Everything changed after 2008. I couldn’t sell expensive clothing, and that business has never come back.” New Hope is chock full of expensive houses and aspirational tourists. If you can’t sell expensive clothing in New Hope, the market for those items has seriously contracted. The store owner pointed out that, after 2008, many leading designers began hawking their brands through discount stores like K-Mart.

    We are so dissatisfied with the political class that we have put the collectors of money in charge of the creator of it. They will, I think, create more money. Suddenly, the Republican congress will see the need to buy infrastructure, provide incentives to companies, and ramp up debt.

    Most people cherish quaint ideas about government and the economic system: government should be small, we should reduce government spending, politicians and entrepreneurs create jobs, it is important to balance the debt, and the economic system works according to unforgiving rules akin to balancing your checkbook*. To me, the whole construction looks squishy. The government is about 40% of the economy. In fact, there is no economy as we know it without massive government spending at all levels – federal, state and local. When our economic principles break down, clever explainers invent new ones. “Now is the time for quantitative easing, by which I mean that we will pump $3.7 trillion into the economy.” “Of course – quantitative easing,” we say. “That’s a thing now.”

    The new president goes with his gut, which has served him well. He branded hot trends of the time – hotels, steaks, schools, mortgages, casinos, wine, water – and, if things didn’t work out, he bailed. Maybe his gut will serve us well, maybe not, but he has told us that he wants to be “unpredictable.” There is no rule book, and, like the healthcare system of which we may dispose, no articulated plan to keep us alive.

    This makes me nervous. I am hopeful that the Billionaire Cabinet will supercharge the economy, but nervous that there will be unintended consequences. While I continue to seek companies that will grow in good times, and survive and pay dividends in bad times, this letter is devoted to companies that lose more money every year, whose executives are selling their stock, and whose stock prices are rising. These companies are teed up for a slice, and could fall hard and fast if the lean times come.

    I am buying one-year puts on these five companies as insurance.  The best outcome: my long portfolio goes up, and these stocks fall. If the good times continue, I am prepared to lose the whole bet, but I think the most likely outcome is that one or more of the five will fall, which will cover the bet.


    One of the things I love about investment writing is the struggle to find positive news. In “Why you shouldn’t bet against Box, Inc. stock,” Zacks uses these phrases: “solid earnings estimate revision activity” and “current quarter estimates have narrowed from a loss of 31 cents per share to a loss of 30 cents per share while current year estimates have narrowed from a loss of $1.22 per share to a loss of $1.21 per share.” Key words: “estimates,” “loss,” “one cent.”

    This is not even news, but news about speculation, and not even particularly good news: it’s not that the estimates have swung from loss to gain – the estimated loss has been reduced by one cent per share per year. The truth is that BOX lost $201 million on $302 million in sales in the cloud industry dominated by company-killer, Amazon. One hedge fund manager assigns a prospective value of $1.5 trillion to Amazon’s cloud business. Amazon has lowered prices aggressively over the last five years, and is not leaving a price umbrella for competitors.


    ServiceNow is another cloud company floating on a big idea. With a $15 billion valuation, Oppenheimer says ServiceNow (NOW) has reached the "penthouse" of software-as-a-service valuations. On sales of almost $1.4 billion last year, the company lost $423 million. Here’s what insiders think (red bars indicate selling):


    Splunk is a “big data” company – another big idea that was hot two years ago. On sales of $688 million, the company lost $288 million, and is now worth $7.8 billion. Insiders aren’t buying either:


    Everyone is bullish on Exelixis. I hope they cure cancer, but, if they don’t and the market gets sick, EXEL will need an ambulance. With a $5.2 billion market, the company lost only $105 million on sales of $123 million in the last 4 quarters. Sales are up and the loss is down, but, in the most recent excellent quarter, there were 10 insider transactions – all sales for a total of over 621K shares.


    Despite hot headlines about computer security problems, Palo Alto Networks hasn’t figured out how to sell computer security profitably. Sales for the most recent quarter expanded from $297 million the previous year to $398 million. Instead of making money, the company lost $49.9 million versus a loss of $30.8 million. The company is valued at $13.3 billion. Insiders are profiting by selling their shares:

    What happened to Meridian Biosciences (VIVO)?

    On January 25, VIVO cut sales forecasts from the consensus $206 million to $193 to $199 million reduced the dividend from 80 cents to 50 cents, and reported sales for the quarter were down 1% and profits down 29%. Two law firms immediately announced investigations. The stock has fallen from$18 to $13, an erasure of about $200 million in value. Meridian, which is still profitable, is a telling example of how any company can be punished for bad news. It’s the reason to diversify: you never really know what’s going on inside a company.

    Is VIVO a buy now? I often think of the people in the Egyptian hot air balloon fire of 2013: as they neared the safety of the ground, the pilot and another passenger leapt out and saved themselves. The balloon, lightened, shot into the air and exploded, killing everyone else. In a disaster, things often go from bad to worse, and no one ever tells you the best time to jump. The leading indicator is the pilot: for VIVO in the last quarter, there have been 12 open market buys and 17 sells, but 80K more shares have been bought than sold, so insiders are betting (net) more than $1 million that this isn’t a disaster. It’s a tough call.

    A reduced profit is annoying, but the real problem with VIVO is that it’s not growing sales, which is the hardest thing to do. Five years ago, sales were $172 million; next year, they may be $193 million or less. It’s looking like VIVO is not going to make us rich, and it might make us poorer.  Where else to put the money?

    Buy OTEX

    OpenText was one of the first companies to catch my attention in the new PerfectCompany data this year, and it looks like everyone wants to ride. Zacks, Barrons, and others are touting OpenText because it has a reasonable valuation, makes money, has growth opportunities and even pays a 1.3% dividend. OTEX will get a bump in sales this year from buying Documentum for $1.6 billion. The company likes to call itself “the largest independent software provider of Enterprise Information Management (EIM).” It’s a content management company for corporations – think of it as Iron Mountain for live data – a good long-term business.

    The Privileges of Owning IDWM

    Sell Disney and buy a share for IDWM for your nephew.  He may get an ultra-rare collectible comic book like this one produced only for shareholders. Not only is IDWM up 800+%, but it sends you swag, too! 


    * Some further counter-thoughts to socially acceptable economic precepts:

    Government should be small; we should reduce government spending.

    We are all suspicious of bureaucracies, but we love their benefits. We want to live longer, we want safer bridges, we demand safe drinking water, we profess to love the military and everything that it does, and we crave government jobs and pensions. When the economy hits the fan, we look the other way while firemen hose trillions into the system. We love big government.

    Politicians and entrepreneurs create jobs.

    Politicians can provide incentives like tax rebates that we ignore as if they are cost-free, which can help companies pay for jobs. We are seeing now that politicians can threaten to tax companies, too, if they move jobs, but politicians cannot create jobs.

    Entrepreneurs are mostly job destroyers because their job is to find more efficient ways to do things. If companies were 100% efficient, there would never be new ones. When Mitt Romney claimed that he created thousands of jobs at Staples, he failed to mention the tens of thousands of higher paying jobs he helped destroy in office supply companies nationwide. It would have happened without Staples, but Romney is no job creator.

    Occasionally, an entrepreneur devises some new way of doing something that adds value to the world, but these are rarely the names we know. Steve Jobs was a brilliant packager who captured the lion’s share of the value in selling cell phones, but the technologies were invented and miniaturized by others so that Jobs could package them in the iPhone. Even inventors like Edison were racing toward the same goals with hundreds of nameless workers who enabled Edison to file patents sometimes hours ahead of the competition. We tune into a stream of ideas that we attempt to capture and package in our own names, which is how we create personal wealth.

    It is important to balance the debt, and the economic system works according to unforgiving rules that are akin to balancing your checkbook.

    The U.S. likes to tell other countries that austerity is important. The Greeks should pay more taxes and spend less, but, for ourselves, we have managed a slow-motion devaluation for decades. The fundamental value of any country’s currency is the personal safety and liberty it conveys. If you have enough dollars, you can live in relative safety and liberty in the U.S. However, even billions of yuan or rubles may not prevent party bosses from locking you up in Beijing or Moscow. Whenever possible, people dump unsafe currencies and acquire safer ones, so it is possible for the U.S. to print more currency than less safe places and hold its value. Conversely, China wants to steal jobs, so having 250% debt levels helps ensure that its valuation remains low, and that jobs stay in China. China values jobs and institutional control over individual liberty and safety so their currency is relatively less valuable.

    Where do jobs come from?

    Jobs appear when an entrepreneur concentrates expertise at reducing a particular cost. Suddenly, that enterprise is sucking in cash from around the country and the world. Cash fertilizes the whole area; new businesses spring up to sell sandwiches and temp workers to the cash collector. Think Seattle, Silicon Valley and Bentonville, Arkansas.

    On top of this practical economy, we build a new economy that satisfies our impulses: Candy Crush, Netflix, processed food, and expensive totems to prove our worth to each other. Serious people devote their lives to the next level of engagement: the attention economy. Will these jobs last? If they fulfill our dreams.

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