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AT&T, Comcast Election Watch: Trump To Favor National Champions?

Republican presidential front-runner Donald Trump could favor large-scale telecom M&A to build national champions, while Democratic front-runner Hillary Clinton would likely nominate a new FCC chairman with views similar to current FCC Chairman Tom Wheeler, who promotes competition. So says RBC Capital in an outlook report on the presidential election. Republican primaries in five states on Tuesday, including Florida and Ohio, are critical for Trump, who leads in delegates vs. Texas Sen. Ted Cruz, Ohio Gov. John Kasich and Florida Sen. Marco Rubio. On the Democratic side, Clinton has been unable to put away Vermont Sen. Bernie Sanders. Under Wheeler, the Federal Communications Commission thwarted Comcast ’s ( CMCSA ) acquisition of Time Warner Cable ( TWC ), and snuffed out merger talks between Sprint ( S ) and T-Mobile US ( TMUS ). The FCC, though, did allow  AT&T ( T ) to buy DirecTV Group. Many of Wheeler’s regulatory policy changes, meanwhile, have targeted Internet service providers, such as Comcast, AT&T and Verizon Communications ( VZ ). Jonathan Atkin, an RBC Capital analyst, says that based on his research, Trump is a telecom wild card. “Trump, on this topic, is considerably less predictable and could be an advocate of large national champions to enhance competitiveness vs. foreign countries, and hence, in certain cases, more accepting of consolidation,” Atkin said in the research report. “Cruz’s, Rubio’s or Kasich’s stance on antitrust could likely be similar to those of Bush or Reagan,” Atkin added. “This does not mean that every merger would be supported, but it would be 10%-20% easier to get horizontal deals done under a Republican vs. Democratic administration, in the view of one regulatory contact,” Atkin wrote. In a new Democratic administration, Atkin speculates that Comcast could buy a wireless company but probably not more cable TV assets. Within the telecom industry, there’s a perception Wheeler has favored Silicon Valley and Internet companies such as Apple ( AAPL ), Alphabet ’s ( GOOGL ) Google and Facebook ( FB ) ( IBD ) vs. Internet service providers. Broadband service providers are currently challenging Wheeler’s “net neutrality” rules in federal court. Atkin’s view is that Sanders’ election would be the worst outcome for the telecom companies. “Clinton could end up bringing in as FCC chair someone who is similarly aligned as Mr. Wheeler,” Atkin said. “Sanders could select as FCC chair someone who is even possibly more consumer-oriented than the current chair, and may possibly attempt to rate regulate broadband.”

Creating A Strategy Index From Long’s Law

Long’s Law states that long-term free cash flow margins (FCF/revenue) in any industry over a multi-decade time frame tend towards the inverse of the number of competitors in that industry. For example, in an industry with three competitors, FCF margins will tend towards 33.33% or 1/3. However, Economic “Laws” should best be termed Economic “Tendencies.” The rule roughly holds across a vast array of industries. In August of 2013, I outlined an illustrative portfolio of companies which ranked highly under the criterion of having few competitors. Here’s why this is important. The robber barons understood the long-term competitive advantage of owning oligopoly businesses. You should too. An interesting characteristic that some of the businesses below share is that they are toll bridge-like businesses. For example, if you want to hedge or to speculate in the futures market, chances are you will be doing so through the futures exchanges. If you want to pay for goods or services using a credit or debit card, chances are you will be using Visa or MasterCard’s payment network. You get the picture. Here is an illustrative portfolio of companies which rank highly under Long’s Law: Major Payment Networks (Network Effect Businesses) Visa (NYSE: V ) MasterCard (NYSE: MA ) PayPal (NASDAQ: PYPL ), formerly owned by eBay Major Futures Exchanges (Network Effect Businesses) CME Group ( CME ) Intercontinental Exchange ( ICE ) CBOE Holdings ( CBOE ) Major Online Auction Marketplaces (Network Effect Businesses) eBay (NASDAQ: EBAY ) MercadoLibre ( MELI ) Major Credit Rating Agencies (De Facto Regulators) Moody’s ( MCO ) McGraw-Hill Cos. ( MHFI ) Internet Search (Dominant Online Advertising) Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) Financial Database Firms FactSet ( FDS ) Morningstar ( MORN ) Capital IQ (owned by McGraw-Hill Financial) Thomson Reuters ( TRI ) Index Providers S&P Indices (owned by McGraw-Hill Financial) MSCI ( MSCI ) Morningstar Here’s how this portfolio performs vs. the S&P 500 (please note that EBAY was used in place of PayPal due to its limited trading history since the spinoff). We equally weight the 14 stock portfolio and rebalance annually. (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge The portfolio does well but is highly correlated to the market. Perhaps we can do better. Perhaps decreasing the correlation of the portfolio to the S&P 500 can increase its returns. We can see that the drawdown profile of this strategy follows that of the broader market. It would be great to get less correlated to broad market drops. (click to enlarge) Click to enlarge What could we do to further increase the strategy’s safety and performance? As I have noted in a variety of ETP-only strategies, the Direxion Daily 30-Year Treasury Bull 3x Shares ETF (NYSEARCA: TMF ) (a 3X leveraged long duration government bond ETP) has the potential to act as an imperfect hedge of sorts if equity markets crash. Because the long duration government bond ETP is leveraged 3x, we can dedicate far less capital to the bond portion of a traditional stock/bond mix. The TMF instrument almost acts like a call option on long bonds. Unfortunately, interest rates are artificially low, making the TMF portion of the strategy a very imperfect hedge indeed. However, unlike a risk-parity portfolio, because the leverage is inherent to the TMF instrument, there is no margin leverage in this strategy index. And even if long bonds get decimated due to a hyper-inflation, the TMF portion of the portfolio can only go to zero in any given year in an extreme scenario. How do the companies outlined above perform if we equally weight them at 5% each, then add a 30% allocation in the portfolio to TMF? (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge We can see that the portfolio becomes less correlated to the broader equity market, and also, the Sharpe and Sortino ratios rise sharply. Let’s take a look at the drawdown profile of this strategy. (click to enlarge) Click to enlarge The drawdown profile of the portfolio is far improved! Of course, the TMF hedge is by no means perfect, but what a difference it makes. Going forward, we will examine a variety of strategy indices which combine individual stocks with ETPs, as opposed to our usual practice of just creating ETP-only indices. Consider examining whether the addition of additional asset classes can improve the risk/return profile of your own stock portfolio. Thanks for reading. As always, our cutting-edge strategy indices are only available to subscribers , but I hope that some of the strategy indices presented here will provide inspiration for readers to create their own methods for dealing with an increasingly difficult investment environment. If this post was useful to you, consider giving our service a try . Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods. Thanks for reading. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Health Care In Emerging Markets: A Compelling Investment Opportunity

Click to enlarge Many emerging market countries today are struggling to find a new growth model. Those that are reliant on commodity exports have been hit especially hard in the wake of China’s economic transition and a broader slowdown in the developed world that has weighed on commodity prices. Policy tightening in the U.S. has put additional pressure on developing markets that are heavily influenced by capital flows. Those with precarious fiscal positions, including trade/current account deficits and elevated foreign debt levels have been particularly affected. These dynamics, along with more than four years of economic growth and earnings deceleration, have led to increasingly negative investor sentiment about emerging markets. Meanwhile, valuations have generally become very attractive. Although we continue to wait for an inflection point in economic growth before becoming more bullish on emerging markets, select opportunities for discerning investors exist. We believe that certain investments in the health care sector offer attractive long-term investment opportunities. Health care services/products are underpenetrated in emerging market countries and total spending on health remains well below the levels seen in developed markets. Click to enlarge Relative to developed markets, out-of-pocket expenses as a percentage of total health expenditures are high. Generally, greater consumption of health care products and services occurs as out-of-pocket expenses fall. Click to enlarge Insurance products are also becoming more ubiquitous, and government expenditure on health as a percentage of total government spending is low. These factors in aggregate suggest that there is considerable scope for growth in emerging market health care spending as emerging economies move more in line with their developed market counterparts. Click to enlarge In addition to emerging markets having the scope to increase health care spending, developing economies have the benefit of rapidly rising levels of income and wealth, especially compared to developed markets. Empirical evidence shows a strong correlation between rising incomes and increased spending on health care, as medical care is one of the first areas in which individuals tend to increase spending as incomes grow. With wages and salaries expected to continue rising in emerging markets, consumers are slowly gaining access to services and products that were once out of reach. We believe that this trend will create myriad investment opportunities for years to come. Furthermore, we expect this investment theme to be more insulated from cyclical economic factors given the vital, essential nature of obtaining better health care. As an example, consumer health expenditure growth in many emerging markets remained robust throughout the Global Financial Crisis; 2008 – 2009 annual health spending per capita in Brazil, Russia, India, and China grew 11% on average. We believe the beneficiaries of this investment theme will be present across a number of different industries within the health care sector. These include insurance providers, pharmaceutical manufacturers, hospital owners/operators, medical equipment and supplies manufacturers/distributors, and other health care service/goods providers. Target companies do not need to be domiciled within emerging market countries to benefit from this theme provided a significant share of revenues and operating profits comes from developing markets. Despite the favorable structural backdrop for rapid growth in emerging market health care spending, it is important for investors to understand individual country dynamics and reforms that may aid or impede the consumption of health care. Investors should focus on fundamentally sound companies that have above average growth rates, attractive valuations, and are taking share at the expense of their competitors.