Issue 94 – July 3, 2014

It’s not the “New Normal” – It’s the 21st Century


2014 has been witness to a remarkable period of change and disruption. Long standing business models have been upended, traditional relationships between productivity and employment have been shattered, and economic forecasts which incorporate 20th century assumptions are failing to capture the dynamism of the current day. The new century features an economy restructuring around technological innovation and basic underpinnings such as ownership are being replaced by wide scale “access” to the same goods and services. Clearly, traditional methods of measurement are falling behind or losing relevance as they fail to capture the nature of this new activity. When we couple this understanding with the reality of global central bank policies and downstream balance sheet impacts, we can appreciate the current world in a constructive investing light. Sometimes things really are different. In our March 18th newsletter, we spoke of the impact of reliable high speed internet access that has become ubiquitous. It has created tipping points across a number of industries perhaps most notably retailing. However, it is also changing long-held behaviors in ways that we are just beginning to understand and will have profound investing implications in the coming months and years. Technology is now no longer a category or an asset class so much as it has become an essential ingredient infused into every process and every industry.



In This Edition


·         It’s not the “New Normal” – It’s the 21st Century

·         Access

·         Disruption and Influence

·         Geopolitics

·         Paint Drying



Huntington Steele

1700 7th Avenue

Suite 2210

Seattle, WA 98101



206 204 0320



Past Issues


93 - 03.18.14
Q1 2014 – Technology Asserts Itself/ Shopping 2.0/ The Meaning of Uber/ Earnings, Rates, Geopolitics/ The Road Map

92 - 01.06.14
2013 – The Year is Review/ 2014 – The Year of Capex/ $4 Trillion Flood in the Basement/ The US vs. the World – a Differential in Speed

91 - 09.25.13
Implications/ Opportunity/ No Taper for Now

90 - 07.08.13
Half Time 2013/ Shape of Things to Come/ The Path Forward for Detroit/ Second Half Outlook

89 - 05.31.13
Strong Hands/ #1 The New Federal Funds/ #2 Income as a Commodity/ #3 New Buyers, Fewer Markets, New Terms/ #4 Changing Demands for Leverage/ Measuring Our Multi Speed World with a 12 inch Ruler

88 - 03.27.13
European Union?/ Global Arbitrage/ 1940s Fed

87 - 03.08.13
Pulling & Pushing/ Deus ex Machina/ Perfect as the Enemy

86 - 01.04.13
The Fiscal Alps/ The Paradox & the Rub/ Next up - Zero Rates Forever/ 2013: Promises & Plausibility/ On a Positive Note

85 - 12.13.12
Giving Sausage a Bad Name/ Drowning in a River 2 Feet Deep/ Scarcity in US Treasuries

84 - 09.19.12
Plus Ça Change/ Fantasia meets the Euro Zone/ Cue the Federal Reserve/ Shifting Transmission/ Bottom's Up

83 - 08.21.12
Summer Time Slows but the Lawyers are busy/ Whatever it Takes/ Heavy Weight Fight

82 - 06.29.12
Half Time 2012/ 19 Euro Summits - A Tiger by the Tail/ The Crystal Ball

81 - 06.11.12
Next Chapter/ Election Lessons/ A Gentleman's C/ Opportunities

80 - 05.10.12
Choices/ Texas Hedge/ Outcomes

79 - 04.09.12
13,000 x 1,400/ Lessons Learned/ It's Not Insider Trading When Congress Does It/ Crystal Ball

78 - 03.21.12
Goldman's Casablanca Moment/ Mr. Macy meet Mr. Gimbel/ The Fiduciary Standard - The Gold Standard

77 - 03.05.12
Punxsutawney Greece/ Foaming the Runway/ "The Euro Crisis is Behind Us/ Healing Hoopla/ What Price Income?

76 - 01.09.12
2012 - The Continuum/ Europe - Working in the Injury Time/ "Risk On - Risk Off"/ The Road Ahead

75 - 12.05.11
The Problem/ What Could Go Wrong/ Compound Interest/ Germany or Bust/ The Cavalry/ Stress Tests/ Next Chapters/ MF Global

74 - 09.29.11
Broken Transmission/ Chickens and Eggs/ Where to?

73 - 08.29.11
The Confluence/ The ECB/ US Economy - Distinction without a Difference/ A Different Kind of Exit/ Gold as a Thermos/ Where to Now?

72 - 06.28.11
Sovereign, Central, Commercial/ Why we call them "Banksters"/ "Extended Period" just got a lot longer/ Forward.

71 - 05.24.11
The Question is... How Many Years?/ "Unexpected" Housing Weakness/ P.I.G.S. Can't Fly/ Stages.

70 - 04.11.11
Inflation for thee, but not for me/ On the Other Hand .

69 - 04.05.11
Implications - A Bevy & A Wedge/ Implications - Quantitative Easing 2.0/ Implications - Rules Rules Rules/ Catching Up with the Can.

68 - 03.03.11
What Ever Happened to Housing?/ Where Do Loans Come From?/ Where Do Loans Go?/ The Last Straw/ The Path Forward/ Equity/ Clearing Mechanism/ Restart Your Securitization Engines.

67 - 01.10.11
Curiosity of the Federal Reserve/ Complacency & Fragility

66 - 11.12.10
Phew/ Taxes and Employment/ Quantitative Easing Returns/ Incentives & Unintended Consequences/ Dear Mr. President

65 - 09.28.10
Progress in the Absence of Milestones/ Changing Nature/ Correlations & Valuations/ Synthetic Securities

64 - 08.18.10
A Tricky Diagnosis/ Traditional Treatment/ Bad Medicine/ New Age Medicine/ Homeowners/ The Banks/ Pension Plans/ Bull Flattening

63 - 06.17.10
Hip & Groovy/ The Trouble with Zombies

62 - 05.24.10
Next Sequel/ 2012

61 - 05.04.10
Intensity/ Principles versus Rules

60 - 04.01.10
Grand Isle to Lincoln/ Mile Post 312/ Mile Post 353/ Mile Post 399/ P.I.G.S. are a Problem

59 - 02.17.10
Surprise, Surprise, Surprise/ P.I.G.S. Matter/ Leverage vs. Debt/ Going Forward








Consider the journey of the music industry. In the last 50 years, form factors changed from vinyl albums and 45s, to tapes, to CDs, but in all those cases, you bought your music. You might enjoy variety from a group of radio stations, but if you wanted to listen to nothing but the Beatles or Madonna, you had to buy their music and play it on a device.

Today, we enjoy streaming music from satellite radio or a wide variety of dedicated internet platforms and streaming local stations. We can request Pandora to play nothing but Frank Sinatra all day long and we can do that for free with commercials or pay a modest subscription to be commercial free. We have access via our smart phones and tablets, our desktops, and even our cars. We have 24/7 access and we don’t have to own a single “single”. This movement from “ownership” to “access” has transformed the music industry. It meant the demise of many hardware vendors and has changed the artist’s economics, while at the same time it has given birth to a new generation of music services. Consider the recent purchase of Beats by Apple who paid $3BB for the maker of high-end headphones and provider of streaming services. Beats executives use the term “conservatorship” to lay out their vision for the industry going forward. The next step along the path of renting “access” is being taken to include broader industries such as housing and transportation and the disruption is running smack into and through a wall of regulation and protests.

Airbnb and Uber, the accommodation and ride sharing services, have managed in relatively short order to amass eye popping private company valuations along with the ire of city councils and taxi medallion owners around the US and Europe. To review:

Founded in August of 2008 and based in San Francisco, California, Airbnb is a trusted community marketplace for people to list, discover, and book unique accommodations around the world — online or from a mobile phone. From

Uber is evolving the way the world moves. By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From

These modest business plans have had an impact nothing short of seismic in practice. Consider what the ability to offer a spare bedroom means to the local hospitality industry and to the collectors of the litany of taxes that are collected on every stay? Is the provider a direct hotel competitor or are they providing additional travel opportunities into what might otherwise be an unaffordable or underserved market? Additionally, the widespread adoption of the Uber car service in many European cities provoked massive protests in mid-June by the highly regulated taxi medallion owners and operators. They have paid small fortunes to own the “right” to pick up fares. Now however through the magic of a well-designed App and a smart phone, they find themselves at a massive disadvantage from those who are offering a more convenient and comparably priced solution. The transformation from having to own a good or service before you can offer it, to that which creates a platform for vendors and buyers to meet – will no doubt roll through other long held business models, changing consumer habits and investment valuations along the way.


Disruption and Influence


The current investing climate has for some time now been the tale of two stories. In the “macro” case, investors who had successfully relied upon a variety of Leading Economic Indicators as their traditional guideposts, have in many cases misread the nature of the recovery and the changing activity taking place at the company level. Economic accounting metrics designed for the mid 1900’s are at best too blunt an instrument to accurately reflect the rapidly changing nature of today’s economy, failing to capture and underreporting economic activity. “Macro” investors without the benefit of better data are therefore potentially blinkered from the influences of 21st century technology. On the other hand, those “bottoms up” investors who begin their analysis at the company level could not have possibly missed the influence of today’s technology. Its force has demonstrably disrupted consumer behavior and employer labor practices while at the same time has enabled new ventures such as those previously mentioned. It has driven efficiencies across a broad swath of industries. The power of the technology evolution impacts the earnings statement every 90 days and its influence is indisputable.

In addition, the efforts of global central banks since 2008 to restore equilibrium and liquidity to capital markets through their use of open market government securities purchases, known as Quantitative Easing, has dramatically lowered the term structure of interest rates. The influence of these historically low rates throughout the world has afforded companies the environment to make substantial and opportunistic decisions relating to share repurchases, dividends, and other capital market transactions. This “engineering” of their balance sheets has been disparaged by pundits who want earnings growth purely from expanding revenues. However, earnings that include opportunistic financing components should not be disregarded. Jim Bianco of Bianco Research has noted on any number of occasions, “We have a C- economy. “ But, while true at one level, it misses the unambiguous progress that companies have made since 2008 in rationalizing their businesses and improving their financial standing. If anything, US corporations are now, broadly speaking, under levered. Taken in concert with the continuing technological improvements and efficiencies, US companies are now powerful potential earnings machines.

In contrast to US corporations, US banks now find themselves in a far less prosperous environment as they are subject to a new set of much more rigorous capital and regulatory requirements. Domestic banks have recapitalized and recent articles notwithstanding, are being far more judicious in their lending programs. With less operational latitude and leverage, the banks as a result have much reduced profitability potential. While this recalibrating of earnings potential remains a significant challenge for investment managers, there is much to recommend a lower volatility profile throughout this critical industry.

In summary, the prospect of continuing historically low interest rates combined with business and balance sheet improvement should be reassuring to investors in the knowledge that we have the enviable positon of strength in both our banking resiliency and our corporate earnings potential as we navigate further into the 21st century.




While we can analyze the balance sheets and run scenarios for a variety for earnings paths, geopolitics will also play their wildcard role. 2014 has already seen in the first six months major events in Ukraine and now in Iraq. In Ukraine, the events have led to an annexation of the Crimea by Russia as well as further conflicts along the eastern border of Ukraine. However, while these events are critical in the evolution and sustainability of many pan European institutions such as NATO, the immediate market reaction has been muted. This is not the case with Iraq. The move by the Islamic State of Iraq and Syria, known now as ISIS, into the northern portions of Iraq has immediately impacted oil prices, driving both spot and future prices higher.

Earlier this year it was widely expected that the world would have ample crude oil supplies. US crude production is rising and thereby reducing our import needs while Iran, Nigeria, and Libya were expected to add modestly to global supply. Meanwhile, Iraq’s contribution was expected to grow substantially, with an anticipated doubling of their exports through the end of the decade. Events to date have not precisely followed the script. The US has in fact increased its own production but none of the global increases have been forthcoming. Meanwhile, global demand has increased modestly exacerbating an already tight market. Now in regards to Iraq, many pundits have opined that the ISIS invasion which has taken place far from the major oil producing fields in Basra, southern Iraq, would ultimately turn out to be a relative nonevent for world oil markets. However, Helima Croft of Barclays has noted a number of reasons to consider why this view may be Pollyannaish.

·         To date, there have been no attacks on southern energy sites. However, as we have noted before, the south of the country is not beyond the geographic reach of extremist groups seeking to undermine the government. According to a report by the Institute for the Study of War that examines the ISIS annual reports (ISIS Annual Reports Reveal A Metrics Driven Military Command, May 22, 2014), around 11% of ISIS attacks in 2013 occurred in Southern Iraq. This figure includes 130 assassinations, 125 vehicle-borne improvised explosive device attacks, and 375 improvised explosive device incidents (IEDs).

·         Amid direct threats to energy infrastructure, ISIS may also be able to destabilize the country indirectly by targeting the domestic energy industry. Northern oil and gas are mostly used for domestic consumption and occasional export via the Iraq-Turkey line, but almost 90% of Southern oil is exported. Iraq has made great strides in improving grid access, but continued poor reliability has encouraged widespread use of diesel-fired generators. Diesel-fired electricity in Baghdad alone totaled at least 1000 MW. Even before recent events, peak summer power demand, which is 50% higher than the rest of the year, was expected to strain the system. Power curtailments, particularly during peak summer months, could fuel public unrest in parts of the country that Prime Minister Maliki will need to keep under control. Previous summer blackouts have sparked protests in key southern cities such as the oil hub Basra.

·         The attacks on energy infrastructure will also likely strain the budget and increase oil demand. If Iraq cannot provide stable power supply via its own fuel sources, it will have to ramp up refined product imports. Bloomberg reported today that Northern Oil Company reduced output from 650 kb/d to 30 kb/d, heightening the disruption that arose in March from the closure of the Iraq-Turkey Pipeline. On the demand side, Iraq’s oil demand increased by over 40% from 2009 to 2013 to around 700 kb/d (according to JODI figures) and around 30% of that growth came from diesel and gas oil. 

Furthermore, the fallback position of filling any potential global supply gap had Saudi Arabia ramping their production. This too is far from a certainty. Again, from Helima Croft:

·         The oil market has reacted to the heightened security of supply risk with increasing prices. Spare capacity is centered almost entirely in Saudi Arabia, which needs to satisfy its own domestic demand with crude for direct power burn. The latest estimates place Saudi production at around 9.5 mb/d, but the country may have to ramp production to more than 10 mb/d to meet supply disruptions elsewhere and a rising call on OPEC crude in the second half of the year, narrowing the spare capacity cushion.  It is worth remembering that Saudi Arabia has lifted crude production to these levels only three times in history: for one month in 1977, two months in 1979, and 11 months in 1981.

Perhaps in response to these rapidly changing events, the US Commerce Department announced on June 24th, a modest allowance to two specific US energy companies to export ultralight crude oil known as condensate. This is the first change to the crude oil export ban since its establishment in 1975. As a reminder, US companies may export unlimited amounts of refined products such as gasoline and diesel but may not export unprocessed crude oil. Given a working premise that the unstable conditions in Iraq are unlikely to be resolved anytime soon, oil markets will price in a new and more appropriate risk premium. One that is not looking necessarily for global shortages, but rather one that recognizes that the world is not going to be awash in excess crude oil inventories.


Paint Drying


The second quarter of 2014 featured good forward progress for both bonds and stocks on volumes and volatility that were extraordinarily light and muted. Once again, the bond market did not cooperate with the many experts who have called for substantially higher rates, as both US Treasuries and Municipals moved to lower absolute levels. Municipals in particular are reacting to both the new 43.4% top Federal Tax rate which includes the most recent tax on investment income as well as a much reduced supply of bonds, down some 20% versus last year. The Federal Reserve maintained their overall stance on interest rates and continued down the path of tapering their open market purchases of US Treasuries and mortgage backed securities having now gone from a monthly run rate of $85BB in January to $35BB in July. At this pace, they will end this part of their program by year end. That being said, the Federal Reserve will continue to reinvest the proceeds of maturing securities and interest received, some $16BB per month on average. On balance, their policy remains extremely accommodative.

The balance of 2014 may well look like the first half. The underlying influences of technological innovation and disruption, central bank influences, and further unsettled geopolitical events will remain with us. Further innovation and development in domestic energy markets will continue to be a powerful tailwind to US manufacturing and industry as well as consumer energy prices. Strong M&A activity will likely continue as under-levered businesses search for new earnings streams and in some cases, friendlier tax locales. It may remain a market of frustrated stock and bond bears with low volatility and volume. However, we are optimistic that the overall economy is moving in a positive direction. Long term investors will be rewarded by looking beyond the day to day noise and focusing on the larger and more important secular changes and opportunities being presented.


Our best wishes to you and your families for a happy 4th!


Jen & Patsy


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Huntington Steele LLC

Jon Michael Topolski, IT Manager/ Investment Analyst
1700 7th Avenue - Suite 2210
Seattle, WA 98101
Office: 206.204.0321
Fax: 206.204.0322


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Huntington Steele LLC.

Huntington Steele LLC

Jon Michael Topolski, IT Manager/ Investment Analyst
1700 7th Avenue - Suite 2210
Seattle, WA 98101
Office: 206.204.0321
Fax: 206.204.0322


This message contains confidential information and is intended only for the individual(s) addressed in the message. If you are not the intended recipient, you should not disseminate, distribute or copy this e-mail. Please notify the sender immediately if you have received this e-mail by mistake and delete this e-mail from your system. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.

Huntington Steele LLC.

Huntington Steele LLC

Jon Michael Topolski, IT Manager/ Investment Analyst
1700 7th Avenue - Suite 2210
Seattle, WA 98101
Office: 206.204.0321
Fax: 206.204.0322


This message contains confidential information and is intended only for the individual(s) addressed in the message. If you are not the intended recipient, you should not disseminate, distribute or copy this e-mail. Please notify the sender immediately if you have received this e-mail by mistake and delete this e-mail from your system. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.

Huntington Steele LLC.