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Technology Stocks : Investing in Exponential Growth

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From: Paul H. Christiansen9/4/2017 3:12:53 PM
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Tesla, Netflix And Other U.S. Innovators Shine As Tech Revolution Accelerates



The 2016 presidential election was won on visions of idled coal workers and manufacturing jobs lost to Mexico and China, of collapsed inner cities and a country fallen behind in almost every critical economic measure.

But the stock market has told a different tale over the past several years, one of an economy that's not just holding its own, but is generating new technologies and revolutionizing industries at a blistering pace. This has come not only in the form of technical innovations, such as driver-assist technologies and horizontal drilling for gas and oil, but in new ways of imagining industry clusters as traditional as taxi cabs, retail shopping and entertainment, as well as even more deeply embedded cultural traits, such as the way we communicate with family and friends.

The result is a new world that has rapidly taken hold across developed countries, in which U.S. companies command dominant global roles, and which has produced many of the early 21st century's most significant stock market winners. The explosive change challenges investors to keep a close eye on their longer-term holdings and stay on the lookout for truly visionary companies with ideas and technologies that may ripple out to all corners of the global economy.

"I really can't think of too many, if any, major industries that aren't being significantly affected by the high-tech revolution," said Ed Yardeni, chief investment strategist at institutional investment consultant Yardeni Research. "It's disrupting business plans and models everywhere."

Change has been so steady and pervasive that it can be difficult to describe how different life is today than it was at the turn of the century.

Toyota Motor ( TM) began shipping its novel hybrid-electric auto, the Prius, to the U.S. in 2000. The quick response from consumers verified the U.S. appetite for fuel-efficient transportation. In 2002, Honda Motor ( HMC) joined in with a Civic model hybrid, and the trend gained momentum when Ford ( F) brought out its Escape SUV hybrid in 2004.

Tesla ( TSLA), breaking barriers with its fully electric, luxury vehicles, was born in 2003, with innovator Elon Musk coming aboard as chairman and financier a year later. In June 2010, Tesla became the first American car company to go public since Ford Motor's IPO in 1956.

But electric and hybrid cars were only the tip of the spear in the auto industry's reformation. Driver-assist technologies, global-positioning-system navigation, and alloy and composite materials also rapidly revolutionized auto design and consumer expectations.

There were only iPods, no iPhones, when Facebook ( FB) launched its social networking service in February 2004 — eight years before the company went public. At about that same time, the shale gas drilling revolution was getting underway, picking up momentum just as natural gas prices spiked to more than $15 per BTU in 2005. That revolution spread to the oil side of the business a half-decade later, after oil prices swelled to above $147 per barrel in 2008. Today, both oil and gas trade steadily at about a third of their peak prices.

Netflix ( NFLX) initially launched as a mail-order DVD sales and rental business in 1997. But in 2007, it became a tech name after introducing its streaming film-rental business. In June of that same year, people lined up to buy Apple's ( AAPL) first iPhone, officially setting in motion the smartphone revolution. Other smartphones were on the market at the time, led by RIM's BlackBerry, but Apple's touchscreen keyboard, sexy design and potent, app-capable processor set a new standard.

In February 2005, Amazon Prime arrived. Amazon.com's ( AMZN) $79-per-year subscription service upended the mall-store retail sector by offering free two-day shipping within the U.S. That same month, Federated Department Stores acquired Macy's owner May for $11 billion. In a news conference, the deal's architect, Terry Lundgren, said the chains combined under the Macy's ( M) name were competing with "everything today from Wal-Mart ( WMT) to Louis Vuitton, and consumers have demonstrated that they are willing to cross-shop at all kinds of stores.''

Investors have sent Apple's shares up 837% since it introduced its first iPhone. Netflix has gained more than 14,000% since its 2002 IPO, and Amazon is up more than 2,100% since launching Amazon Prime. Facebook traded 339% above its 2012 IPO price this week. Tesla was more than 1,900% above its initial offering price.

But it's a tough game to call. Toyota shares have only gained 14% since its introduction of the Prius. And oil and gas producers that soared after launching the shale production boom have since fallen victim to the global glut created by their innovation.

For those engulfed in the change, it can be difficult to assess how this revolution compares with those of the past.

"Sorting out the reality from the hype is always difficult," said Richard Cooper, professor of international economics at Harvard University. But "every generation goes through a period like we're going through now."

The current storm of modernization compares to that of the late 1950s and 1960s, Cooper says. That transformation introduced the transistor, commercial jet aircraft, the U.S. space program, the buildup of the Defense Department's nuclear arsenal and the U.S. interstate highway system.

One technological aspect shared between that revolution and the current one? Automation. Workers on assembly lines — in machine shops, textile and printing operations — were among the many whose jobs were threatened by machines.

"There was a big concern in the late 1950s and early 1960s about automation, substituting machines for people," Cooper said.

The transistor set the stage for the semiconductor chip, which Yardeni asserts provides the basis of the current revolution. Even in the harsh and gritty trenches of oil and natural gas production, computers drive much of the decision-making and analysis enabling the shale revolution.

"There is a tremendous amount of computing power necessary to optimize where you drill and how you drill," Yardeni said.

Computers drove the PC revolution that reshaped the economic landscape in the 1990s, advancing beyond simply replacing horses, or welders or lathe operators.

"The focus of this technology revolution is on the brain," Yardeni said, "on increasingly using technology to do what the brain does."

The new focus, aided by chips and microprocessors calculating tens of thousands of metrics per second, enable technologies that promise to free consumers from driving their cars, managing their home energy systems and shopping for necessities. It is allowing deep dives into exploring the genetic and molecular underpinnings of maladies such as cancer, Alzheimer's and Parkinson's.

But it is also putting on notice a countless array of job descriptions, from taxi driver and factory warehouse manager to accountant, financial analyst, journalist and, God forbid, movie star.

"Through the ages, technological advancement has led to job loss, dislocation, anxiety," said David Rosenberg, chief economist and strategist with Toronto-based wealth management firm Gluskin Sheff & Associates.

The process ultimately leads to a higher standard of living, Rosenberg says. In the meantime, workers at risk undergo stress and uncertainty. He contends that stressed workers only partly explain the discrepancy between a phenomenally low 4.5% unemployment rate and a U.S. GDP growth rate unable to hold above 2% over the past decade.

There are many reasons for the disconnect, Rosenberg says, not least of which are a tight labor market and a capital-spending environment held back by the current clouded policy outlook.

Rosenberg and Cooper both view labor and productivity numbers as distorted by factors such as automated labor and a shift to service-sector jobs. Those and other changes are wreaking havoc on the data and on traditional economic models understood and respected by economists.

"Those models are changing and changing fast," Rosenberg said.

The unemployment rate would be closer to 8% than 4% if data included the 55 million Americans, age 16 to 64, currently not participating in the labor force, Rosenberg says. The same is true if labor calculations included robots as a competitive factor in the market.

Gauges that have shown U.S. productivity stalling over the past several years are highly suspect, both Cooper and Rosenberg say, as are data reporting the average workweek effectively unchanged at 34.5 hours for the past decade.

Also, Cooper says, "We do a terrible job of measuring output in the service sector," particularly in education and health care. This is increasingly critical as the economy expands faster on the services side. More than 3.1 million of the record 6.2 million advertised, unfilled positions reported in the Labor Department's June Job Openings and Labor Turnover Survey were in professional services, education and health care.

So as the health care sector inevitably expands to cater to the aging baby boomer generation, more data fall through the cracks.

"As a result, measured productivity goes down, even though people are better and better off," he said.

One encouraging, and vexing, piece of the GDP growth picture is the record number of unfilled jobs cited in the June survey. The vacancies effectively equal the 6 million Americans who are unemployed and actively looking for work.

"The level of job openings in the private sector has never been as high as they are today," Rosenberg said. "And yet … the (number of) applicants for those jobs who have the necessary skills is practically at an all-time low."

This points to education as one area still ripe for technological restructuring. Truck drivers are already high on the list of tech targets. And homebuilding — an industry in which growth is currently being held back by labor shortages — is also long overdue for a high-tech makeover.

So what does the future hold? Drone deliveries and self-driving automobiles, taxis and trucks in the not too distant future, and maybe even a hyperloop. From a historical standpoint, Cooper says, the U.S. economy is particularly well-suited to change.

"We're always at a crossroads, but generally (the American economy is) quite good at adapting to change," he said.

The capitalist structure of that economy, first and foremost, bets on the ability of markets to be open to new entrants, Yardeni says, and high technology itself is inherently beneficial to capitalistic organization of markets.

"It breaks down barriers and allows new entrants to challenge established order," he said. "And, again, that is very revolutionary."

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