iftttwall

You know it's bad when even the traditional 'pumpers' are getting anxious. While obviously counched in its own "well maybe that's not totally terrible" spin, reading the following from Charles Schwab suggests Liz Ann Sonders, Brad Sorensen, and Jeffrey Kleintop were all struggling to defend any bullish position and perhaps more desperate to CYA in case reality doesn't match their hard-sold perception…

Via Schwab.com,

How long?

Are risks growing or will the bull market continue? We believe the answer to both is yes. Political bumbling, monetary policy shifts, and geopolitical tensions have all escalated, but the bull continues to power ahead, largely unscathed by the tumult that surrounds it. This is actually in keeping with history, as partisan conflict in particular has served as a contrarian indicator for stocks in the past. Since past performance is not an indication of future results, consider it yet another brick in the wall of worry. However, it's uncertainty around monetary policy that would likely be a culprit behind any coming choppiness in stocks.

The aforementioned uncertainties have kept investor sentiment from becoming too frothy, which helps to support the ongoing bull market. We don't see signs yet of a "melt-up" scenario, where investors frantically rush into stocks, afraid they’re missing out on gains. As good as melt-ups feel while they’re underway, they don't end well.

The possibility of a correction (defined as a greater than 10% pullback) is greater now than it was at the beginning of the year; especially given the uncharted territory in which the Federal Reserve finds itself, as it soon begins to unwind its $4.5 trillion balance sheet. We are modestly concerned about asset valuations that have soared in the era of artificially low interest rates and a bloated balance sheet.

We don't think the bull is ready to take a bow just yet, and at this point would view pullbacks as healthy. According to Strategas Research it has been 268 trading days since the last 5% pullback—the fourth longest streak since 1950 (the 1990s had two of them).

Earnings growth is the mother's milk of sustainable stock market gains and the next few weeks will go a long way to determine the status of corporate health. With one quarter down and another one in the process of being reported, it looks good, with the Thomson Reuters-reported consensus expecting at least a 10% year-over-year increase in earnings for 2017. What is more impressive is that the year's expectations have only been downgraded slightly from the 14% growth rate projected at the beginning of the year. To illustrate how solid that is, look back to 2016, when projections at the beginning of the year were for 13% annual growth in earnings. Those projections were steadily downgraded throughout the year before ending up with an actual growth rate last year of less than 2%. 

Of course, a high expectations bar leaves open the possibility of disappointments, which could add to volatility in the coming weeks. Already we've seen major banks largely beat estimates but pull back on some concerns about some seasonally soft numbers—which arguably should have been built into expectations. And the energy sector's contribution to forward-looking expectations is already past its peak.

Economic data continues to confound

Another support for stocks may be coming from economic data that is showing a robust labor market, but few signs of inflation building.  The unemployment rate is 4.4%, yet wage gains remain modest. The Consumer Price Index (CPI) was flat month-over-month, while ex-food and energy it only ticked 0.1% higher.

More concerning is the lack of solid increases in retail sales, although we believe the measuring process may be somewhat flawed due to the changing mix of sales. Nonetheless, it isn't particularly encouraging for an acceleration of economic growth when retail sales as reported by the Census Bureau were down 0.2%, and ex-autos and gas sales ticked 0.1% lower.

On the plus side, the latest industrial production reading provided by the Fed bested estimates by showing a 0.4% gain, while capacity utilization moved higher to 76.8%; heading in the right direction but still 3.3 percentage points below the long-term average. Also, after a sharp decline, the U.S. Citi Economic Surprise Index has started to turn around, which should be another support for the ongoing bull market in stocks.

Fed seems confused, while politicians are befuddled

Economic uncertainty has confounded the Fed, which may raise the risk of a policy mistake and/or bouts of market volatility. In her testimony before Congress last week, Chairwoman Yellen indicated that the Fed is somewhat confounded by lower-than-expected inflation; citing "temporary" (and transitory) factors. She voiced no concern about elevated asset valuations, arguably brought on to some degree by the Fed's unprecedented monetary policy since the financial crisis.  This put the potential for another rate hike this year into greater doubt. We're sticking with our forecast for one more hike this year along with the start of a gradual reduction in their balance sheet in their effort to "normalize" monetary policy; but also believe the latter could come before the former. However, Yellen also bolstered the doves' case by noting that it is becoming more apparent that the "normal" level of interest rates may be below what it had been historically.

Down the street…what can be said? Politicians continue to play politics. Behind the headlines some business friendly policies have begun to have some positive impact, such as a reduction in the regulatory burden. But the three biggies—health care reform, tax reform and infrastructure spending—all appear mired in the morass that is Washington. Business leaders are used to this sort of muck in Washington and have made few plans based on potential changes. But there is little doubt in our mind that if nothing gets done, there will be disappointment among businesses and investors alike, which could add another log to the pullback fire. Already we are seeing the subjective "soft" data (survey- and confidence-based) catch down to the weaker objective "hard" data, as we expected.

…

So what?

A solid earnings season should contribute to a continuation of the bull market in stocks. Dangers are lurking, however, and the possibility of a decent-sized pullback has grown over the past couple of months, in light of monetary policy and geopolitical uncertainties. While we would likely view such a move as healthy, it can be disconcerting. Stay diversified and be prepared to guard against overreacting to any such move.

via http://ift.tt/2gXZl47 Tyler Durden

Google, aka Alphabet, reported Q2 earnings that beat on the top and bottom line, reporting EPS of $5.01, above the estimate of $4.45, and earnings per share excluding the $2.7 billion European Commission fine of $8.90, also above the $8.25 expected. Total Q2 revenue of $26.01 billion rose 21% Y/Y, and also beat consensus of $25.64BN.

Yet while Google’s top and bottom line results were both impressive, the reason why the stock was down as much as 3.6% in the after hours appears to be that Google reported paid clicks in Q2 rose by 52%, well above expectations, while cost-per-click – which measures what advertisers pay when people click on search ads that show up alongside the results served up by Google’s search engine – declined 23%, a  drop from the -19% CPC reported in Q1 and down even more from the -15% in Q4 2015.

In other words, more people are clicking on ads, but those clicks are costing advertisers less money per click, and generating less sales for GOOGL. In short, a potential revenue mix concern where Google is compensating for lower pricing power (due to the encroachment of Facebook?) with higher ad volumes.

One thing is certain: the CPC trend is certainly not Alphabet’s friend:

Additionally, Q2 Revenue ex-Traffic Acquisition Costs was $20.92 Billion, modestly below the $21.07 billion consensus estimate.

Some other details:

• 2Q Other Bets revenue $248 million
• 2Q Other Bets operating loss $772 million
• 2Q Google advertising revenue $22.67 billion
• 2Q free cash flow +$4.57 billion

While the stock initially responded favorably, surging to new all time highs above $1000, the latest print was down 2.5% as the market digests the potentially disappointing revenue mix data.

via http://ift.tt/2uuot5e Tyler Durden

We just read a very insightful post in zerohedge in which the author describes a massive potential payout for someone who recently placed a large option play on in the ViX. Here is his description as quoted in Business Insider.

From Michael Snyder and theeconomiccollapseblog.com:

I want to be very clear about the fact that I do not know what will or will not happen by the end of October.  But one mystery investor is extremely convinced that market volatility is going to increase over the next few months, and if he is correct he will make an astounding amount of money.  According to Business Insider, the following is how the trade was set up…

• To fund it, the investor sold 262,000 VIX puts expiring in October, with a strike price of 12.
• The trader then used those proceeds to buy a VIX 1×2 call spread, which involves buying 262,000 October contracts with a strike price of 15 and selling 524,000 October contracts with a strike price of 25.
• For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.
• In a perfect scenario, where the VIX hits but doesn’t exceed 25 before October expiration, the trader would see a whopping $262 million payout.

We’d like to put a finer point on a couple things that Business Insider said:

The $262MM is the max potential payout if themarket expires at 25 as BI implies. But what about the risk? First off; a  BET relates to how much money was laid out.  We do
not know the amount BET, but assume it was a small amount based on the structure’s complexity. The amount at RISK is part of the bet as well. And the trader has real risk here if the market moves below 12 or above 35 (not 25).  Frankly, his risk is open-ended in both directions. His VaR is far more than the $262 MM max profit he can make. But that does not factor probabilities or expected payout values. Your bookie would just say ” the Odds” of him getting killed are low.  Simply put: The trader bet “X”  ( likely a small amount) 
and is risking an additional  “Y” (potentially huge) to make up to $262MM (not too shabby).

Drilling down a little more on the structure

This is  a “commission bomb” trade usually pitched to large retail saps. But we must say, never this big!  He bought a 15 call and financed it by selling a 12 put, and (two) 25  calls. This is commonly called a ratio 3-way. Soft-Porn terms aside, it’s been our experience that when either a 3-way or ratio-backspread ( this is a combination of those) is implemented for little to no cost, the position holder is punting and knows little. He may know more than us directionally perhaps, but little about option risk. Otherwise he’d have done a much  less complex trade to create a similar risk/reward payout.

This person is bullish on volatility, but not that bullish. He is betting on a move  higher in the VIX, yet is net short Call options. So, if he is right directionally, but volatility overperforms his expectations, he loses. And if the VIX goes down, he loses. Here is his P&L data on expiration  day

1. He incurs no  profit or loss between 12 and 15 in the VIX except the debit or credit incurred by implementing the position

2. He loses money if the VIX goes below 12 with no lower bound (Negative volatility? UNPOSSIBLE)

3. He makes money if the VIX is between 15 and 35 (not 25)

4. His max profit potential is if the VIX is at 25 on expiration day

5. He begins to lose money above 35 in the VIX with no upper bound

Keep it Simple Stupid

Bear in mind that before expiration an adverse move in the market could trigger a margin call. And it has been our experience that some people who are obsessed with not laying out any money to implement trades (AKA CHEAP) are often undervaluing the risk that comes along with being cheap. They look at odds and not VAR of trades. There are others who do know their shit option wise. They put on posiitons and let their underlingsmanagetheday to day risk. They just don’t want to spend any money, as this trade is a hobby, and have really good trade flow info.  The  thing is, those that do know their shit in options do not put on  such complex trades with so many variables. We are going with a possible good idea implemented in a dumb trade. At least the broker was happy.He could have just sold a put spread and bought a call creating a better
risk/ reward profile in exchange for maybe laying out some premium.  But to each his own

VIX as Fear Greed Indicator

Generally speaking, the VIX will rise given a move in stocks lower. That is due to unhedged equity longs who rush in like lemmings to buy Puts in a stock wash out. Conversely,  the VIX will generally drop in an equity rally as longs sell more Calls to create dividends. The VIX is not a fear/ greed index. It is an indicator of dominant market players who are underhedged. VIX only tells you likely speed of a fall or rally, not which way stocks will go. Anyone who tells you that is just being idiotic. Skewness is a better indication of sentiment than volatility anyway.

That does not negate the efficacy of being long the VIX as a hedge against equity longs. The author is not wrong at all in his conjecture that this person is in  fact likely ot be proftiable in a stock  market washout. Of course the VIX could always be stomped on  by the PPT to keep portfolio hedges cheap and thus  subsidize stock fund managers. But hey, the government doesnt manipulate markets.

The VIX as directional indicator is simply Bullshit. But skew… that is a different story for a different time- VBL

Option geeks refer to the Skew/ Vol relationship like this: “SKEWNESS AS AN INDICATOR OF STOCHASTIC PROCESSES IN VOLATILITY”.

Volatility should expand in the direction of the skew. And the stock market’s options are definitely a put skew market. Thus a washout in  stocks increases stock volatility (VIX). In this case the stock market is dominated by stock longs who buy puts and sell calls to “collar” their risk. To wit: Call selling is not bearish. It is a sign that stock longs are less likely to to be selling their stock UNLESS it rallies. 

Additionally, we have no idea if this trade is some convoluted hedge for an existing equity position. So winning may be losing for the portfolio manager here.

To quote the author again:

I will be watching to see what happens.  If this mystery investor is correct, it will essentially be like winning the lottery.

That is the most likely scenario, unless he also happens to be long $1BB of stock… then all “Bets” are off

Here is an incredibly rudimentary P&L Graph for which we have fired the intern who created it.

• Blue lines represent the option structure at expiration.
• Brown lines represent the X and Y axes.
• X axis represents option strikes 12, 15, 25, 35
• Y axis is Profit above the X axis, loss below the X axis.

Not pictured: the massive commissions made by whoever brokered and/or cleared this monstrosity of hidden risks

via http://ift.tt/2utVVsD Vince Lanci

Another day, another record high in tech stocks…

 

A very ugly 3mo T-Bill auction today (highest yield since Lehman and inverting the yield curve) sent yields soaring once again as debt-ceiling concerns are spooking cash markets (but not stocks)…

But as Bloomberg notes, markets focused once again on the White House as news about Russian ties continued to hold sway. Jared Kushner told reporters after his Senate testimony he did nothing wrong. “Let me be very clear. I did not collude with Russia, nor do I know of anyone else in the campaign who did so,” Kushner said. The benign news calmed risk anxiety.

Trannies are down for the 6th day in a row (to lowest close in a month) as Nasdaq rallies to new record highs (up 11 of the last 12 days) – a dramatically divergent day…

 

VIX crashed to a new record closing low, managing to get S&P green but then it snapped

 

Retail was notably weak today (for the 2nd day in a row) as Financials outperformed…

 

FANG Stocks continued to rise today – 12th day in a row – ahead of GOOGL's earnings…FANG are up 15% in the last 12 days…

 

We note GOOGL was suddenly sold into the close…back below $1000

 

Interestingly this afternoon's quiet linear meltup in stocks was not driven by a short-squeeze…

 

Stocks and Bonds ahve recoupled from Draghi's break…

 

Bond yields rose modestly from the moment Europe opened…

 

Crude gained on the heels of Saudi promises to make deeper cuts to exports in August…Still the move was very modest considering the headlines…

 

And that helped lift the Loonie to 14-month highs against the dollar….

 

The Dollar Index ended the day unch hovering at Aug 2016 swing lows…

 

Gold also went nowhere today, trading in a very narrow range…

 

Bitcoin was also very quite today…

via http://ift.tt/2tE6KLQ Tyler Durden

Following this morning’s Acios report that Trump is considering replacing AG Sessions with Rudy Gioiliani, the former New York City Mayor spoke to CNN, and disputed the report.

Giuliani denied rumors that he was being considered to replace Attorney General Jeff Sessions on Monday, and contradicted the President by saying Sessions was right to recuse himself from matters related to the 2016 campaign and Russian meddling therein. Sessions, Giuliani told CNN, “made the right decision under the rules of the Justice Department.”

As a reminder, Axios reported on Monday morning, citing unnamed “West Wing confidants,” that “President Trump is so unhappy with Attorney General Jeff Sessions that he has raised the possibility of bringing back Rudolph Giuliani to head the Justice Department.” Trump last week expressed frustration that Sessions had recused himself from the Russia investigation.

During an interview with The New York Times, Trump said Sessions’s move was “unfair” to him. The president also said he likely would not have picked Sessions to serve as attorney general if he had known he was going to recuse himself. In a tweet Monday, Trump again went after Sessions, calling him “beleaguered.”

“So why aren’t the Committees and investigators, and of course our beleaguered A.G., looking into Crooked Hillarys crimes & Russia relations?” Trump tweeted Monday.

via http://ift.tt/2vTKAl8 Tyler Durden

Via StockBoardAsset.com,

Snopes.com is a failed liberal blog from 1994.  The website claims to
be the internet’s oldest and most popular fact-checking site. Last
year, Snopes Co-Founder was accused of embezzling company money, and spending it on prostitutes.

Now you can find the blog begging for $500k in funding via GoFundMe. So, far the campaign has raised $18,000 in 3 hours via 710 people…

Another victim of the fake news campaign backfiring on the left.

via http://ift.tt/2v1p7ud Tyler Durden

This morning, BofA has released a humongous, nearly 200-page “primer” on the global sharing economy which in the eyes of Wall Street and Silicon Valley is the biggest disruptor behind virtually all 21st century business models. Since it is impossible to summarize the report, which will be largely ignored by most of BofA’s clients who will instead focus on the hundreds of charts scattered throughout, we will simply summarize the basics as laid out by BofA, and then present some of the more interesting charts, with the remainder to be published in subsequent thematic posts.

This is how BofA recaps the basis of the “Sharing Economy”

• The Sharing Economy is an umbrella term which describes a range of market activity transacted over online platforms. Its history is rooted in cooperatives, kibbutz, and jitneys; online classifieds and marketplaces; and peer-to-peer (P2P) platforms. The term encompasses everything from peer-to-peer, democratized-based sharing of access to goods and services to sales transactions via online marketplaces including business-to-business (B2B). We include on-demand (e.g. Uber), gig (e.g. TaskRabbit), access (e.g. Spotify), collaboration (e.g. WeWork), platforms (e.g. Amazon), rentals (e.g. Airbnb) and peer-to-peer (e.g. Lufax) business models under our Sharing Economy umbrella.
• Key concepts behind the Sharing Economy include unlocking the value of unused or underused assets (“idling capacity”), and a shift from “asset-heavy” to “asset-light” business models. Technology matches buyers/demand and sellers/supply to reduce market inefficiencies (source: Botsman 2011). We are also seeing a major shift away from the overarching idea of owning the means of capital/production. That model dominated economic thinking from the industrial revolution through the 20th century, but is now often viewed as old-fashioned, slow-moving and inflexible. In contrast, Sharing Economy leaders are asset-light, with Uber not owning any cars, Airbnb not owning any hotels, Amazon having only a handful of brick-and-mortar stores, and eBay not managing a supply chain (source: HBR 2016).
• Converging disruptive technological factors have facilitated the development of the Sharing Economy. This includes the global take-up of smartphones (2bn+ users), mobile internet (3.6bn users), GPS location-based services (9/10 users), payments (c.375mn users) and review/rating systems (9/10 consumers trust online reviews) (source ITU, eMarketer, Gartner, Pew Research). Smartphones and apps provide the gateway, mobile internet fuels ever-faster growth, location-based services mean whenever/wherever service provision, digital payments kill cash, while recommendations and reviews are digitizing trust. Together, these developments have enabled an evolution from online classifieds/marketplaces and eCommerce to dedicated Sharing Economy “platform” networks which efficiently and effectively match supply and demand (source: Evans & Schmalensee, Arun Sundararajan).
• The Sharing Economy is being driven by consumers’ growing adoption of the ideas of “peak stuff”, “shift to thrift” and “experience economy”. Access over ownership is gaining increasing traction with £3.5/US$4.5tn worth of assets idle globally, 80% of belongings used just once a month, and 75% of Millennials (Gen Y) preferring to spend money on an experience rather than a material possession (source: The People Who Share, Peerby, Eventbrite). In an ongoing era of austerity for many, areas that have a high share of consumer wallet such as housing, transport and food – which account for 65% of the average US household consumer spend of US$32k (source: BLS) – are ripe for disruption, in our view. Sharing Economy disruptors are leveraging technology to make more efficient and cost-effective use of assets (capital, labour, knowledge) for demanding, cost-conscious and service-culture-oriented consumers.
• 72% of Americans have used 1+ Sharing Economy service, while globally, 2 in 3 consumers are willing to share and/or rent their personal assets (source: Pew Research, Nielsen). 15% of Americans have used ride-hailing and 11% home-sharing services (source: Pew Research 2016). Across the pond, 1/3 Europeans have used the services of a sharing platform (source: EU 2016). 7/10 US consumers share because they see it as convenient (#1 reason), while 6/10 share because it is cheaper and 4/10 share because of service quality and/or unique product/s (source: Crowd Companies). However, in certain markets, like Japan, many remain unaware of the Sharing Economy, with 81% saying they have never heard of home-sharing services like Airbnb before and 40% never having used ride-hailing services like Uber (source: eMarketer).
• Millennials (Gen Y) and Centennials (Gen Z) are undisputedly the #1 sharing cohorts but all demographics are increasingly driving the Sharing Economy. Millennials are 5x more likely to share than Boomers and they account for almost half (49%) of all on-demand consumers, but 30% of consumers are Gen X (35-54) and 22% are Baby Boomers (55+) (source: NTRS). Moreover, Boomers are growing in significance as they are now the fastest-growing demographic of Airbnb hosts in the US. We also note that sharing isn’t just for the wealthy, with 46% of US on-demand consumers having an annual household income of <US$50,000, and only 22% having an annual household income of US$100,000+. Sharing isn’t just an urban phenomenon either with 39% of on-demand consumers living in rural areas or small towns, 30% in outer suburbs, and just 31% in urban areas such as close-in suburbs and cities (source: NTRS).
• 600mn are involved in the Chinese Sharing Economy, and EMs particularly in Asia, will be the biggest long-term global growth drivers, in our view. South East Asia ranks the Sharing Economy as the #1 disruptive tech trend impacting the region (4 out of a scale of 1-5) with India (3.5) and Latin America (4) also ranking highly (source: Nielsen, 2017). The Chinese consumer is #1 globally (94%) in terms of being most likely to share followed by Indonesia, Slovenia, the Philippines, Thailand and Mexico (source: Nielsen 2015). China is a leader and pioneer in a wide array of spaces such as: P2P lending (Lufax), bike sharing (OfO), umbrella-sharing (Molisan), battery-pack sharing (Shenzhen Laidian) and basketball sharing (GanPai). The Chinese Sharing Economy is expected to grow at an average annual rate of 40% over the next few years to account for more than 10% of the country’s GDP by 2020E (US$1.7tn) and 20% by 2025E (US$4.4tn) (source: Sharing Economy Research Center, Chinese State Information Center, OECD). We also expect EM Sharing Economies to develop unique approaches based on local circumstances (e.g. Uber for motorbikes and rickshaw models).

According to BofA, the market opportunity currently is about $2 trillion, and is expected to grow drastically:

• The potential addressable Sharing Economy market is US$2 trillion globally, while we estimate the current market at US$250bn. The addressable market in the US is US$785bn, US$645bn (€572bn) in Europe and US$500bn in China – (source: BIA/Kelsey, SIC). PwC forecast that the Sharing Economy market opportunity could grow to US$335bn by 2025E with transport, home sharing, staffing, streaming and staffing expected to be the fastest-growing verticals, with 2013-25E CAGRs of 17-63% (source: PwC). Take-up of the Sharing Economy at the B2B level could be another positive game-changer with some experts seeing the B2B Sharing Economy as “bigger than the Internet” in terms of transforming how commerce gets done.
• The top 10 Sharing Economy start-up actors by estimated 2017 YTD valuation are: Uber (US$68bn, #1 global ride-sharing); Ant Financial (US$60bn, crowdfunding, QR code payments, P2P Wealth Management); Didi Chuxing (US$50bn, #1 China ride-sharing); Airbnb (US$31bn, #1 global homesharing); Lufax.com (US$18.5bn, #1 global and China P2P lender); Meituan-Dianping (US$18bn, #1 global and China on-demand delivery platform); WeWork (US$17bn, #1 office sharing); Spotify (US$13bn, #1 music streaming); Pinterest (US$11bn, visual sharing social network) and Dropbox (US$10bn, cloud/file sharing) (source: CB Insights 2017, BofA Merrill Lynch Global Research).
• We believe that many Sharing Economy companies could eventually address trillion+ rather than billion+ dollar markets in the most bullish scenario. Leading Sharing Economy companies are growing at a much faster rate than incumbent tech companies and eCommerce. For instance, on-demand services like Uber, Lyft reached 5.1% penetration of the US addressable market in 2016 less than a decade after launching. By comparison, eCommerce has only reached ~9% of total US retail sales at the end of 2016 more than 20 years after its introduction (source: BIA/Kelsey). Furthermore, it took Uber 4Y to reach a market cap of US$1bn compared with Google at 8Y (source: Pitchbook, Fleximize). Sharing Economy companies are also expanding into an ever-broader array of fields with Uber, for example, getting involved in food delivery (UberEATS), courier logistics (UberRUSH), freight/trucking (UberOTTO), among other areas. This has led some experts to believe that Uber’s potential total addressable market (TAM) is anywhere between US$150bn and US$1.35tn vs. Uber’s current valuation of US$68bn (source: NYU’s Stern Aswath Damodaran, VC investor Bill Gurley, GAFAnomics Research). Leading actors such as Airbnb and Uber are seen by some as the next eBay/Amazon (source: Crowd Companies)

Of course, much of that assume virtually unlimited access to cheap VC funding for the foreseeable future, a rather generous assumption if indeed central banks are hoping to tighten financial conditions in the coming months, let alone years.

Whatever the final outcome of the “sharing economy” paradigm, here are some of the more interesting charts we picked from the presentation:

The sharing economy in a nutshell

The total addressable universe of users

The premise: the transaction of underused assets among people via online platforms

Main players in the sharing economy: from Peer-to-Peer, to Second Hand, to On Demand, to Rental, to Access.

The draw: transformations from products to platforms, from incumbents to disruptors.

Consumer use of the Sharing Economy is already strong with 72% of Americans having used at least one of 11 digital commerce platforms in the space. Overall, 21% of Americans have used 4+ services which grows to 1 in 3 among those aged <45. The most popular sharing platforms are eBay/Craigslist (50%), which sell used or second-hand goods online, and Amazon Prime/Google Express (41%), which offer same day or expedited delivery of online purchases, according to Pew Research (2016).

Meanwhile, consumer interest in the Sharing Economy and the companies involved has been skyrocketing, as shown in the two charts below. Uber by far leads the pack on Google Trends web searches, while GrubHub (Seamless) and Lyft have also seen strong growth in the past five years. There have been 200+ mentions of the “sharing economy” in company presentations / earnings transcripts globally between 2013-2017 YTD. Notable companies with mentions include: eBay (8), GM (5), Ford (2), Expedia (2), Hilton (1) among others (source: BofA Merrill Lynch Global Research, Bloomberg

The value propostion: shifting from “asset heavy” to “asset light” business models. In the 1970s, large asset builders like GM employed c.600,000 workers. Today in 2017, network orchestrators like Facebook and Google employ c.18,000 and c.57,000 respectively.

The Sharing Economy is not a wholly new phenomenon but rather represents an evolution of historical precedents. On the web, peer-to-peer (P2P) models started with eBay in 1995. The company remains an important internet standard and it has influenced many of the P2P models used today. Then came Craigslist, which started in the late 1990s, followed by Zipcar, whose fleet entered the market in 2000, Couchsurfing in 2004, the first instance of the gift economy, and Airbnb in 2007. Collaborative consumption was championed in 2011 with the release of Rachel Botsman’s book What’s Mine is Yours: The Rise of Collaborative Consumption. This was when the modern conceptualization of the Sharing Economy started to gain traction.

Location-based services: whenever, wherever service provision. A key enabler of the evolution from online marketplaces to the Sharing Economy is GPS-enabled location-based services. With traditional online marketplaces such as eBay the location of the good/product/service doesn’t matter, e.g. the seller could be based in China and buyer could be based in the UK. However, with Sharing Economy providers like Uber and Airbnb “localization” of supply/demand matters a great deal, e.g. London Uber drivers required for London Uber riders, NYC Airbnb hosts for NYC Airbnb renters etc. Location-based services enable this level of precision in matching supply/demand. According to Pew Research, 9 in 10 smartphone owners now rely on their phone for location services and/or to get directions vs. 7 in 10 in 2013. Furthermore, location services appeal to all ages with usage ranging from 82% among those aged 50+ to 95% among the 18-29Y demographic.

Key consumer driver: “peak stuff.” unbundling £3.5tn/US$4.5tn in idle assets to drive access over ownership. A key factor driving the overarching business model of the Sharing Economy is unlocking the value of unused or under-utilized assets – idling capacity – whether for monetary or non-monetary benefits (social, economic and/or environmental). We think we have reached “peak stuff” with many industries’ idle capacity ripe for the Sharing Economy to “unbundle” and drive the shift towards access over ownership:

Experience economy is booming, Sharing Economy will drive this further. The experience economy prioritizes doing, seeing and feeling over having “stuff” or possessions. This includes “doing something different” and searching for unique, often personalized experiences. Among Millennials for instance, vacation/leisure experiences rank as the #1 spending priority (source: Euromonitor). In addition, Millennials and Gen Z are driving mindshare on live music and festivals. 81% of Millennials say music triggers their best memories, and 8/10 say that the most effective way to connect with them is through a branded live music experience

Customer is Queen/King: Sharing Economy is cheaper and more convenient than incumbents.  Consumers are attracted by the Sharing Economy because it is more convenient and cheaper than traditional methods. According to Crowd Companies: 7/10 consumers cite convenience as the #1 reason to share, 6/10 share because it’s cheaper and 4/10 do so because of service quality and/or unique product. Product wise, consumers were most willing to share electronics (28%), lessons/services (26%) and power tools (23%) (source: Nielsen).

Like in traditional consumption, brands matter in the Sharing Economy because they develop trust among consumers with the aim of becoming a go-to service. With most users still learning the ropes in the Sharing Economy, increasing brand mindshare as the leader in market verticals is crucial. According to Vision Critical and Crowd Companies brands are important across sectors like personal/professional services, pre-owned/custom goods, crowdfunding etc. For any given sector below only up to five key brands were used by Americans as their go-to, with some more concentrated than others e.g. 91% of Americans use Etsy for custom products

Sharing economy platform usage trends were the most positive. In order, Lyft, Airbnb and Uber had the largest percentage of users indicating increased usage. Millennials relative use of sharing economy sites were much higher than 30-60 age group. Sharing economy sites getting the best traction include well-known brands like Uber, Airbnb and Lyft with the largest percentage of users indicating increased y/y usage, while Orbitz, Priceline.com and Hotels.com had the biggest percentage of users reporting decreased usage.

Contrary to popular perception, the Sharing Economy is not just a DM-specific megatrend; it is EMs that are taking the lead in driving this space. Countries with a strong socialist background and a more closed economy are more likely to share. The lower the country scores on the Index of Economic Freedom the more likely its consumers are willing to share goods with others. The two cultural extremes of China and the US illustrate this phenomenon.

The Sharing Economy is especially strong in Europe: Half of Europeans are willing to share with a third having used the services of a sharing platform. One in two Europeans have heard of collaborative platforms. France ranks #1 in Europe on Sharing Economy services, which have been used by more than a third of the population (source: Nielsen 2014, EU 2016).

Meanwhile, Chinese companies are already leaders in the Sharing Economy and are also pioneering new forms of sharing e.g. rides (Didi), bikes (Ofo), umbrellas (Molisan), battery-packs (Shenzhen Laidian), basketballs (GanPai) and P2P lending (Lufax).

Sharing Economy startup valuations are the highest in the world, or “From unicorns to decacorns”: 8/10 start-ups are Sharing Economy-based. Globally there were 194 companies valued as unicorns (start-up value of >US$1bn) with a cumulative valuation of US$745bn as of May 2017 (source: BofA Merrill Lynch Global Research, CB Insights). 8/10 largest start-ups by valuation 2017 YTD were Sharing Economy companies, including Uber (US$68bn), Ant Financial (US$60bn), Didi Chuxing (US$50bn), Airbnb (US$31bn), Lufax.com (US$18.5bn), Meituan-Dianping (US$18bn). WeWork (US$17bn), Spotify (US$13bn), Xiaomi (smartphones, US$46bn) and Palantir (big data, US$20bn) were the only two companies not involved in the sharing space (source: BofA Merrill Lynch Global Research, CB Insights).

There are 40 unicorns and even 10 decacorns globally in the Sharing Economy space. Of the decacorns, i.e. start-ups with a valuation of US$10bn, the US accounts for four (Uber, Airbnb, WeWork, Dropbox) but China has also emerged as a dominant player with another 4 (Ant Financial, Didi Chuxing, Lufax.com, Meituan-Dianping). Europe also has a thriving Sharing Economy start-up scene with 7 unicorns (BlaBlaCar, Farfetch, HelloFresh TransferWise, Funding Circle, Delivery Hero, Adyen) and 1 decacorn (Spotify) year to date in 2017.

Disruption in context: US$6tn of global GDP already disrupted.12 broad industry sectors, accounting for an aggregate US$6tn or 8% of global GDP, are at risk of disruption over the long term (source: BofA Merrill Lynch Global Research based on various sources). The 12 sectors are education, energy/waste, financials, food, goods and equipment, health/healthcare & wellness, ICT, logistics & services, media, retail, shelter (travel, leisure & work) and transportation

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Authored by Bryce Coward via Knowledge Leaders Capital blog,

The financial sector has been getting a lot of attention recently with earnings announcements so we thought we’d weigh in on one aspect of financial stock relative performance that is making it difficult for financials to truly lead this market higher: the flattening yield curve.

As most of our readers are aware, one way financials in general and banks in particular make money is by capturing the spread between short-term funding costs and long-term lending returns.

A nice proxy for the margin that is earned is the 10-year minus 3-month US Treasury yield spread. When the spread is expanding (curve steepening) it implies bumper times for financials and vice versa when it is contracting (curve flattening). Well, after the brief steepening episode that occurred between the middle and end of 2016, the yield curve is back to the flattest it’s been all cycle, and flattening still further.  That has, so far in 2017, been an impediment to financial stock relative performance and has kept the group from breaking out of its range-bound trend (chart 1).

So the obvious question for financial stock bulls is what would it take to get a steeper yield curve?

At this stage in the cycle a steeper yield curve could be generate by the economy producing higher inflation or higher real growth. As charts 2 and 3 demonstrate, there is a tight relationship between both inflation and real GDP growth and the yield curve.

Inflation has been trending lower since 2011 and real GDP growth has been trending lower since 1Q15. Unfortunately, we don’t think that is about to change.

Indeed, employment (one important component of output) has been trending lower on a year over year basis since the end of 2014…

 

And corporate profit growth (one component of employment) remains weak and looks to be headed lower.

These things should keep a lid on the yield curve, and may thus impeded financials from sustainably leading this bull market.

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