$1 Million Dollar Bet

This week CNBC reported that JPMorgan became the seventh bank to cover Buffett’s Berkshire Hathaway, calling it a screaming buy. Its “businesses benefit from best-in-class managements, unmatched balance sheet strength, and many of the companies have strong brands, scale or low-cost competitive advantages,”. “Berkshire’s balance sheet strength is a significant competitive advantage, and its liquidity position is the highest ever,” analyst Sarah DeWitt writes. 

This is not a recommendation to buy or sell Berkshire Hathaway. In full disclosure, Berkshire Hathaway is owned by most of my clients.

In 2007, Buffett made a $1 million wager with Ted Seides who is a hedge fund manager with Protégé Partners. It could be the easiest money Buffett has ever made. Even easier than the millions in interest that he collects every day in the bank. He bet that a low-cost S&P 500 index fund would fare better than a collection of Protégé Partners hedge funds.  This week Ted conceded on his horrible bet early, which was winding up at the end of this year. The $1 million hedge fund investment has reportedly only earned $220,000 in 10 years, while Buffett’s S&P 500 investment returned $854,000. The timing of Ted’s bet couldn’t have been worse. We are now in the second longest bull market in history. If you could own one investment in a bull market, it would be the S&P 500 index fund. A typical hedge fund is constructed to offer downside protection in bear markets. Without World War III, there really was no way that Buffett could lose this $1 million bet. An analogy would be buying term life insurance and never dying. The good news is that you lived, but the bad news, is you lost money. The same could be said of Buffett’s bet. The markets never failed and the insurance was never needed.

The other reason is that the fees alone in a hedge fund are excessive. The typical fees for a hedge fund are 2 and 20. The 2 represents a 2% annual management fee and the 20 represents the 20% cut that the hedge fund gets of profits over a certain return threshold.

Buffett recommends that investors should own the S&P 500, but he didn’t make his billions investing in indexes. This is the one area where he doesn’t take his own advice on investing. He has hired two investment advisors to manage Berkshire’s capital. His managers, Todd Combs and Tedd Weschler, managed their own hedge funds before joining Berkshire. They have been credited for investing in Apple. They now mange over $20 billion in Berkshire capital and it will eventually be all of the money. The reason why Buffett won’t invest in the S&P 500, is he doesn’t want the downside risk of the S&P 500. He made his billions by making bets when the odds were tilted in his favor. The S&P 500 offers 100% upside risk and 100% downside risk. He prefers when the odds are 500% upside risk and 50% downside risk. The better the upside/downside ratio, the bigger his investment.

With markets near all-time highs, the odds of the S&P 500 repeating the same returns over the next 5 years is much less likely to happen. My $1 million bet would be that Todd Combs and Tedd Weschler stand a better chance of outperforming the S&P 500 over the next five years.

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Market Anxiety over Natural Disasters

A headline caught my attention the other day. It was, “What to Tell Clients Feeling Market Anxiety.” The article began by stating that financial advisors have seen an uptick of clients calling about overwhelming fears of a possible market correction. There seems much more to worry about these days. Rising tensions with North Korea, an incoherent government, and multiple hurricanes striking the U.S within weeks have investors on edge.

Investment returns couldn’t really be any better this year. Both the stock and bond market have had monumental gains over the past year. I’d hate to see investors anxieties if they actually experience a loss! I find that the same cast of characters are warning of a market bubble and their warnings grow louder as investors turn their attention to these devastating hurricanes.

The short-term impact of these storms has been very negative for the markets. However, it’s much more difficult to predict the long-term impact. Warren Buffett remains optimistic. He predictes that the damage from Harvey won’t derail the relatively steady 2 percent growth in the U.S. economy, but it will be devastating to some individuals and families. In the interview, he went on to say, “Berkshire hasn’t written much catastrophe insurance in recent years because prices were too low, so that will limit the Omaha, Nebraska-based company’s exposure.” Insurance premiums will surely rise after these storms, as companies payout claims.

The inner workings of the economy are so complicated that it’s impossible to say for sure how the hurricanes will impact the stock market. The warnings coming from government officials to flee Florida ahead of the hurricane were very telling of what will come next. They stated that we can’t fix your life, but we can fix your house. The silver lining of the devastation caused by Irma and Harvey will be a massive rebuilding effort that will bring people together. It could even cause the government to begin to work together again for the people instead of serving their own self interests.

The real losses will be those lives changed forever by these terrible storms. In Houston, 80% of the homeowners lacked flood coverage. In the aftermath of Hurricane Harvey, President Trump tweeted that the storm had brought a “once in 500-year flood” to Houston, and expressed support for relief efforts. A 500-year flood does not predict the timing of a flood, but these terms refer to the chance of a flood occurring at all. A 500-year event has a 1 in 500 chance of occurring in a single year. A 500-year flood zones has a probability of 0.2 percent. These scales are flawed and out of date. They fail to take into account climate change. It is very difficult for government officials to update these flood plains because people buying homes don’t want to live in flood zones because property values will drop when maps are updated. Hopefully, the government will continue to step up and help many of these families that are in desperate need.

I expect market volatility to continue to rise over the coming weeks as investors monitor the economic impact of the hurricanes and whatever else might be lurking around the corner. As always, if you have any concerns on the market, please feel free to give me call or a schedule a meeting with me.

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Presidential Concern

I’m fortunate that I have many retired clients who have had very successful careers in business in addition to helping many active professionals that are still accumulating their wealth. They all have different political views and I value all of their opinions.

After the November election, I spoke with many clients to gain their insight into President Trump’s victory and what it meant to them. A consensus emerged that President Trump was pro-business and there was confidence that since he had built a billion-dollar real estate empire himself, he could run the country. There were many other larger investors that I follow who had similar opinions. I was in agreement with them. Tax reform, rolling back of regulations, and infrastructure spending would all be a tailwind for future economic growth. I communicated this same pro-business message in many of my blogs.

Writing about politics is tricky. As one of my clients said, “It’s a touchy issue and you’re bound to set someone off with whatever you say.” Politics is an important topic this week because future earnings are now being negatively impacted because of the poor choice of words made by President Trump. His unscripted press conference on Tuesday alienated many voters and set this country into a direction that can cause long-term damage to our institutions. To borrow a quote from my client that I thought best expresses my own feelings, “we should spend less time tearing down the past, and work much harder on building, and unifying for the future.”

I have many clients that are strong Republican supporters and they are all very upset with President Trump. Many of my other clients that are strong Democratic supporters are going one step further and asking if it is time to go to cash. We are now in uncharted territory. Never has there been a time when most of the prominent business leaders of this country no longer can support the president. Offering any public support to the president has now become toxic to their businesses. Most CEO’s that were bullish on the president’s agenda can no longer advise him.

I believe that it’s impossible to predict politics. As soon as you think you have it figured out, the news cycle changes. I don’t play politics with my clients’ money. These types of events can create value, which will help to fuel future returns. It’s been impossible to predict this president. I’m sure that we are all hoping that he can lose the twitter account, begin to demonstrate some leadership, and act more presidential. If not, the stock market could experience a significant decline.

After all the mess in Washington, I’m doing the only thing a sane person can do – going on vacation with the family! I’m away next Friday and have a family wedding the following weekend. My next post will be the week after Labor Day. I hope that you all enjoy the rest of the summer!

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Howard Marks latest memo

Howard Marks, who co-founded Oaktree Capital Management, writes a quarterly memo on investment markets. It’s one of the most widely read investment commentaries. He has earned a reputation among portfolio managers as one of the best market forecasters. Many traders consider him #2 as the best active value managers behind Warren Buffett.

There are 1,000’s of books written on how to get rich in the stock market. If someone asks me for a good resource to learn more about the markets, I always recommend them either Howard Marks memos or Warren Buffett letters. Warren Buffett letters are written every year and go back to 1977 and Howard Marks memos start in 1990. You will find many of the best investing tips buried inside of these memo’s. There are actually entire books written on summarizing Warren Buffett’s letters to shareholders

In Buffett’s letter this year, he remained positive on the markets as well as the economy. Howard Marks, on the other hand, just wrote a scathing memo that warns of an inevitable market correction. Mark’s latest memo is titled, There They Go Again….Again.

Back in 2005, he wrote a memo titled, There They go Again, which foreshadowed the market crash in 2008. He was a few years early in his call, but he eventually nailed it. I have no doubt that he will nail it again this time. The trouble is getting the timing right. There is no bell that rings at the top or the bottom of the market. I don’t agree with everything written in his memo, but he does make a very strong case for what can go wrong.

I’ve written often about the low volatility trade, speculative digital currencies, the FANG stocks, and the herd of investors moving into exchange-traded funds (ETFs). Howard covers them all in this memo, and reaches the same conclusion as I, which is investor optimism is a sign that we have to be on the lookout for a correction. The elevated status of markets gives him the most concern.

Many investors back in 2007 had a very easy time spotting the housing bubble. This time around, Howard Marks writes about many other areas starting to show signs of a bubble. The biggest and easiest to spot, is the digital currency bubble in Bitcoin. I first wrote about this bubble in May when Bitcoin was $2,800 and it’s up another 25% since that time. In that post, I wrote how I believed the currency could go up 400% more or possibly down 80%. The technology bubble in 1999 had very similar characteristics. Most Bitcoin buyers know that they are buying into a bubble and don’t care because other people are getting rich and they want in. The 1999 technology bubble was no different. At least the housing bubble put a roof over people’s heads. Howard Marks memo goes into great length explaining this cyber currency bubble. Howard gives a thorough explanation why there could be bubble forming in ETFs and to avoid illiquid bonds.

There seem to be increasingly more investment commentaries written about other bubbles growing in real estate, stocks, ETFs, and even bonds. There could even be a bubble in cash for all of those who have been scared into waiting for all these other bubbles to burst! I believe the likely outcome to all this recent wealth creation, is inflation. If there turns out to be no real bubble and markets are not overvalued, we could be at the start of an inflationary cycle. If I begin to see signs of inflation, I will be begin to make some adjustments in your portfolio to try to get in front of this change.

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Is President Trump responsible for this market rally?

The Dow Jones Industrial Average is now up 4,000 points since the election. President Trump is taking a victory lap for this accomplishment. Here is a recent tweet from President Trump, “Stock Market could hit all-time high (again) 22,000 today. Was 18,000 only 6 months ago on Election Day. Mainstream media seldom mentions!

I’m quite confidant that if markets go down, he wouldn’t take the blame. The humble approach works much better, but we all know that’s not in President Trump’s DNA. Warren Buffett would have some astute advice for President Trump. Here is one of Buffett’s most popular quotes, “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

Buffett believes that it is earnings that drive stock prices and not presidents. The main reason why the market continues to hit new highs is that profit and sales growth continues to climb. Apple selling more iPhones and Boeing selling more planes has more to do with the recent rally than President Trump’s policies. The fortunes of Facebook, Amazon, Google, Netflix, Microsoft, and a few other large cap growth stocks are largely responsible for the gains this year. Large growth stocks have been on a tear this year.

According to FactSet a record-high 73% of S&P 500 companies are beating sales estimates to date for Q2.

The following headline from a Wall Street Journal article on July 30th sums up just how good earnings have been – U.S. Companies Post Profit Growth Not Seen in Six Years.  The article highlights, “strong earnings come as tax and infrastructure initiatives that were expected to spur economy have been sidetracked amid Washington infighting.” It’s no surprise to me that the S&P 500 is up 11% YTD, and earnings at S&P companies are expected to rise 11% this quarter.

The underpinning of this bull market is the U.S. labor market couldn’t get much stronger. The job report on Friday showed the jobless rate matching a 16-year low and monthly wage growth picking up. People are flush with cash and are feeling more secure in their jobs. The housing market is even stronger than the job market. House prices are rising twice as fast as wages and house prices are the strongest in nearly 3 years.

But there can be a good case to be made that President Trump has spurned the economy.  Jamie Dimon, who is the CEO of J.P. Morgan, has been a strong supporter of President Trump. He stated back on March 9th that President Trump’s economic agenda has “woken up the animal spirits” in the U.S..  A quote from this Bloomberg Television was that the President’s plans “will be good for growth, good for jobs, good for Americans. The caliber of Trump’s economic advisors gives him confidence, and advised observers to “forget the tweets” and instead focus on Trump’s policies to reduce corporate taxes, cut regulatory red tape and build new infrastructure.”

The case against President Trump’s brash tweet is that the rest of the world has staged an even stronger rally. The European stock market is up over 20% (IEV) and Emerging Markets (EEM) is up 26% so far this year. The victory lap by President Trump with the S&P 500 being up only 11.72%, doesn’t look so grand when compared to the rest of the world.

The case for or against President Trump being responsible for recent gains is a great debate. I’d rather continue to focus on what is most important to investors like Warren Buffett, which is the level of interest rates, employment, inflation, housing, and corporate profits rather than the sideshow in Washington. My eyes will remain watching the playing field.

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How has the banking system changed over the last decade?

This week many of the major U.S banks reported earnings. These quarterly reports were exactly what they should be for a bank, which is very boring. They are reporting higher revenue and earnings than 1 year ago.  U.S. banks have now become cash cows.

There are still many investors who believe that banks can’t thrive when interest rates are low. These investors have failed to realize that the low interest rate environment has been a boon for profitability. Even though interest rates have been very low, banks are extremely profitable. In the past, banks had trouble making money when interest rates were low. This was because of something called net interest margin. The net interest margin for a bank is the interest rate spread between deposits and loans. The higher the spread, the higher a bank’s profits. This spread is very important for a bank. Banks can create more profit by borrowing cheap in the short-term and lending high in the long-term. They prefer a larger yield differential, or a “steeper” yield curve.

Bank stocks will tend to rise on days when interest rates rise. I believe that this is now the incorrect way to value a bank. If banks had it their way, they would prefer for the economy to be exactly the same way as it has been for the past 5 years. It is much more important that there is stable employment and a strong housing market. The low interest rate and slow growth economic backdrop have been a great combination for a bank’s profitability. Banks can now generate more income from fees and they rely less on the spread between interest rates.

Ten years ago, before the credit crisis hit, banks were highly leveraged, had lower capital ratios, and they didn’t have solid underwriting standards. Now fast forward a decade, banks have rebuilt their balance sheets, have tightened lending standards, and have diversified their revenue streams. The operations inside of a bank have also become much more efficient. Banks have closed branches, lowered headcount, while continuing to invest into technology.

A well-known bank analyst reported that banks are swimming in so much excess cash that they don’t know what to do with it. Most banks have been returning cash to shareholders in the form of rising dividends and share buybacks. The largest U.S banks are now buying back shares at a greater rate than many cash rich technology companies.  I expect that this pace of buybacks and dividend increases will only increase over the next few years.

I will continue to favor banks as long as the housing market stays strong and the unemployment rate remains low. I’m much less focused on falling or rising interest rates than most other investors. The banking system has helped to facilitate economic growth and should continue to do so as long as banks keep their future earnings reports very mundane.

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Amazonification

It’s Christmas in July! This week my two teenage daughters were shopping on their iPhones like the other tens of million of people on Prime Day 2017. Amazon’s 2017 Prime Day sales increased 60% over the same period last year and more new members joined Prime on July 11 than on any single day in Amazon history.

Amazon has not only disrupted the retail sector, they are now disrupting the entire economy. According to Bank of America Merrill Lynch strategist Michael Hartnett, “Amazonification” of Main St is killing wages, causing Japan-like deflation. While most of the cable news media continuously pound President Trump, the real story this year has been how Amazon and a few other innovative companies are reshaping our entire economy.

Just a rumor of potentially competing with Amazon can send a company’s stock down sharply. On Monday, Zillow’s stock fell 4% after a “Hire a Relator” link suddenly appeared on Amazon’s website. According to Investopedia, the page, which was later taken down, was reportedly located in the Home and Business Services section, a part of Amazon’s website dedicated to connecting customers with experts in home improvement, electronics installation, and various other services.”

Best Buy also saw its value drop by over 7% Monday when Amazon took aim at launching their own version of Geek Squad. Amazon will be offering their own in-house experts.

The entire retail sector has been in a brutal bear market. It is telling that my two teenage daughters were on their phones shopping, rather than at the mall. The mall stocks have gotten pummeled this year. The loses are staggering. Here is a sample of a few retail names that you are familiar with returns through last Thursday (7/14/17) –

J.C. Penney – Down 40%

Express Inc – Down 39.9%

Macy’s Inc – Down 38%

Abercrombie & Fitch – Down 25%

Urban Outfitters – Down 35%

Foot Locker – Down 31%

GNC Holdings – Down 28%

Kohl’s, Target, American Eagle – All down around 20%

The S&P 500 Retail ETF has fallen more than 10 percent over the past 12 months, compared to the S&P 500’s, 14 percent gains. If there were a S&P 500 Mall ETF, it would probably be down over 20%.

I think of this quote by Sir John Templeton’s when markets go to extremes, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”.

There couldn’t be more pessimism in the market for retail stocks. Most of these companies are now closing stores and reinvesting back into ecommerce. For instance, Nordstrom’s noted on their last earnings conference call that nearly one-quarter of their sales are from online purchases compared to roughly 5% from 10 years ago.  According to digitalcommerce360, Best Buy’s web sales grew 20.8% for the fiscal year which ended Jan. 28 and totaled $4.85 billion. Best Buy Co. Inc.’s online sales grew at a faster clip than the U.S. e-retail industry average in 2016, and they outperformed online leaders Amazon.com Inc. and Wal-Mart Stores Inc.

This pronounced trend towards ecommerce has been a major reason why the technology sector has been on such a tear. Many companies are now investing in technology for their very survival. I expect that the Amazon effect will push next year’s technology budgets to their limits. I’m spending more time researching for those companies that I believe will benefit from these apparent trends and selectively buying into undervalued companies that can either protect their business from Amazon or successfully differentiate their business from the threat of Amazon.

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The Importance of Liquidity

This week a client asked me a great question in response to an investment that I recommended to him. He wanted to know how liquid the investment would be if the markets headed south. My answer to him, for this particular investment, was it matters why markets were crashing.

The stock market and the housing market are now both higher than they were in 2007 when the economy almost failed. The Great Recession started out as an economic slowdown marked by massive job losses, and then morphed into a liquidity event. Without the government bailout and subsequent money printing by the Federal Reserve, I highly doubt the economy would have rebounded as sharply as it did.

There have been a number of “flash crashes” in recent years, which were all the result of liquidity disappearing overnight. Other recent events included the BREXIT vote and the shock on election night when the markets woke up to the fact that Hillary would not be President.

On Wednesday, Bank of America rang a warning bell regarding all the money that has piled into passive exchange-traded funds. According to CNBC, “The bank says the massive popularity of ETFs may be leading us on a road to a liquidity problem. The note issued by Bank of America, Merrill Lynch’s Global Research department warns “the actual shares available, or true float for S&P 500 stocks, may be grossly overestimated. That could lead stocks and the overall market to fluctuate more violently, especially to the downside, due to a future event affecting either a single stock, a sector or the market at large.”  Joe Terranova, the chief market strategist for Virtus Investment Partners, which manages $25 billion, said, “The danger is when the market falls. Liquidity will evaporate.”

Here is another quote from the leading story in this week’s Barron’s Magazine – “We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998.”

Below is a chart from the same Barron’s article.

This is the #1 fear that is now very well understood by investors. The #2 fear is if interest rates become unstable and rise sharply. Since June 26th the 10-year Treasury yield has risen from 2.12% to 2.40%. The 10-year yield would need to go over 3% before investors take note. The #3 fear is best summed up with the following quote by Donald Rumsfeld, “…there are also unknown unknowns. There are things we don’t know we don’t know.” It’s the unknown event not anticipated by the market which will likely cause the next liquidity crisis.

It is difficult to predict when the distortion of the market causes a liquidity event. The Man vs. Machine debate will continue and it will only grow louder as passively managed funds gain more and more assets. If the popularity of indexing continues for years to come, I believe that it will be the computers that exacerbate the next market crisis. It is a very interesting debate and even concerns Vanguard founder Jack Bogle, who created the world’s first index fund. He warns, “the implications of this rapid trading in ETFs “have yet to be fully examined.” I believe that we might have to wait until interest rates are much higher before the implication of ETFs can be fully examined.

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One Strike on Technology

Among other negative tweets this week, President Trump took a shot at Amazon and Jeff Bezos.

The #AmazonWashingtonPost, sometimes referred to as the guardian of Amazon not paying internet taxes (which they should) is FAKE NEWS! — Donald J. Trump (@realDonaldTrump) June 28, 2017

As everyone has figured out by now, President Trumps tends to go on the attack in order to distract the media from the real news. The real news this week was that the Republicans were unable to pass major healthcare reform. They need to pass this legislative before they can turn their focus on infrastructure spending and tax reform.

The attack on twitter left many wondering what President Trump meant by ‘internet tax’. There is no such thing as a ‘internet tax’. Amazon does collect sales taxes in every state that has a sales tax. The shot across the bow of Amazon was aimed at its founder Jeff Bezos, who owns the Washington Post. Amazon doesn’t directly own the Washington Post, but Jeff Bezos bought the company for $250mm in 2013. The Washington Post has broken many stories against Trump. This tweet was most likely inspired by the Post‘s recent story about a fake TIME magazine cover featuring Trump hanging in some of the president’s clubs.

Last week, I wrote how the advances in artificial intelligent were beginning to displace jobs across every industry. More and more white collar and blue collar workers alike are beginning to lose sleep over how their jobs can be replaced by technology. President Trump has continued to promise 3-4% GDP growth. I don’t expect him to meet this ambitious growth target unless he can either stop the disinflationary effects of technology or pass legislation for infrastructure spending and tax reform. My concern is that if President Trump is unable to accomplish this legislative agenda then he will be forced to attack technology companies. President Trump has influenced some manufacturing to return back to the U.S., but more companies are saving on labor by automating their plants. Amazon has been the biggest disruptor as it has displaced hundreds of thousands of retail jobs. A look inside an Amazon warehouse would reveal more robots than humans. The same goes for new automotive plants.

The European Union is one step ahead of President Trump. This week they slapped a $2.7 billion record fine on Google over charges the company unfairly elevated its Google shopping business over competitors’ advertisements. The statement from the European Commission was as follows:

“What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.”

The attacks on Google, Amazon, and failure to pass healthcare reform caused the NASDAQ to drop -2.55% this week (QQQ ETF). I consider major technology companies such as Google, Amazon, Facebook, Netflix, Tesla, Microsoft, Intel, and Apple as emerging monopolies. It just so happens that these companies comprise a large part of the S&P 500 index, and are largely responsible for the above average investment returns over the last year.

These same companies will also benefit the most from any major tax reform. I expect the technology sector to remain volatile as investors weigh the odds of President Trump achieving major legislation vs. the chance that other governments will begin to reach into the pockets of cash rich monopolist technology companies with record fines.

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Here come the Robots

Jeffrey Gundlach is the chief executive officer of DoubleLine Capital whom I quote often in my blog. The other day in his introduction to the Fixed Income Analyst Hall of Fame, he singled out so-called robo-advisers, which provide online portfolio management using little human intervention, as a dangerous bet.

“It’s a one-size-fits-all financial solution,” he said. “Everybody gets the same portfolio, which means everybody owns the same stock, which means when they all decide to get out it causes a crash.”

Gundlach is worried about investors’ herd mentality. There has been a surge into passive investing. As an active manager who believes in fundamental analysis, I share his concern. Artificial intelligence is not only disrupting the investment management business, it’s disrupting ALL businesses. Even the cashiers job at McDonald’s isn’t safe. McDonalds has plans of replacing 2,500 human cashiers with digital kiosks.

This week on “Mad Money” Jim Cramer interviewed IBM CEO Ginni Rometty and much of the conversation was about artificial intelligence in the technology world. IBM is pushing the boundaries in AI and has bet it’s future on a computer named after its first CEO, Thomas Watson. Your life or a family members might one day depend on Watson diagnosing how to treat a major illness such as cancer.

My top investment opportunity for 2017 was investing in companies that are innovating in AI. There have been tremendous gains in technology companies this year and the pace of change is much faster than I even anticipated. Technology companies have been the best performing and many have been leading the charge into AI. The worst performing sector of the market this year is the Energy Select Sector SPDR® Fund, which is down -14%, and the PowerShares QQQ ETF is up almost 20%. In the past six months, the 34% difference in return between sectors is extraordinary.

The energy industry is a capital-intensive business and is much less profitable at lower energy prices. On the other hand, the digital kiosk at McDonald’s has no labor and limited capital costs. The cash flows for technology companies have shown the most growth. The drop in oil prices and the capital appreciation in technology have been the major market trends for the first half of the year. At some point, the pendulum will swing the other way, but for the moment, the growth has been investing in technology companies.

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