Legg Mason Investment Counsel

What's the Fed to do?

The meteoric rise in smartphones did not just bring voice and high speed data. Smartphones today can also serve as payment platforms. Mobile payments take on different use cases in different economies. Various industries from mobile carriers to internet companies, from payment processors to retailers, are all trying to have a stake in the emerging trend. In this note, we will take a brief look at different technologies and key players in mobile payments, in addition to a few use cases.

2012 turned out to be yet another year when North American production of oil from shale resources bested expectations. Early last year we highlighted for you our view of the importance of this new trend. As we have just completed the fourth year of sustained growth in onshore production of crude oil, natural gas, and natural gas liquids (NGLs - a group of key chemical feedstocks produced as a byproduct of natural gas production) in North America and as 2012 crude production onshore USA is estimated to be almost 30% above the 2008 level we think that now is a good time to take a look around us and take measure of the true impact of this energy revolution. As shale resources are now well established as a key source of future production of these natural resources, we would like to take stock of some of the changes that have occurred to date due to this new source of energy and chemical production and some of the changes that we can expect in the future. These changes are far reaching indeed and it is beyond our abilities to capture them fully in the confines of this paper but we will attempt to cover some of the areas affected and note that many of these areas are already attracting the attention of industry watchers, economists, and investors.

Imagine thousands of men, women and children gathered around a lake on open grassland.  It’s a warm day:  the sun is high, the wind is blowing.  In the background, are construction vehicles – backhoes, large dump trucks, and stacks of chain link fencing waiting to go up.  Some of the people are holding signs, some are just raising their arms, but they are all shouting: “Stop this Project! Save our water!”  Off to the side, armed security guards and anti-riot police are standing ready to open fire.  What may have been a peaceful protest could now turn violent at any moment.

The supply of water may seem limitless but we are facing a global freshwater crisis. While 70% of the Earth’s surface is covered by water, more than 97% is brackish ocean water unfit for consumption by most living things and unusable in most commercial and industrial applications. Of the remaining 3%, about 70% is locked away in polar ice caps and glaciers. That leaves less than 1% of the world’s total supply of water easily accessible for human use in the form of lakes, rivers, and shallow groundwater sources that are renewed annually. Today, we supplement this tiny supply by tapping into deep, underground aquifers. Buried deep within the Earth, these rock-encased pockets of water were formed millions of years ago and are not naturally replenished within a reasonable time frame.

Gaining control of the carbon cycle is arguably one of the most important technological challenges of our era.  As every school child learns, nature is already pretty good at it:  people take in oxygen, and breathe out carbon dioxide (CO2); plants take in CO2 and emit oxygen.  Along with other natural processes between the atmosphere and the oceans, we normally have a balanced system. However, we now face a situation where human-induced emissions of CO2 are greater than what the natural system can process. Excess CO2 means an excessive greenhouse effect and then potentially harmful climate change.  As a species, we are adept at turning the carbon present on our planet into usable energy, but the resulting CO2 may not be our friend.

The technology cycles of the 1990s and the following decade set the stage for today’s emerging paradigm shift in Information Technology (IT). Old modes of computing, communication and storage are being replaced with “virtual machines”, loosely assembled as “clouds”, which will soon communicate through “software-defined networks” to “distributed” storage arrays. Unlike past technology cycles where adoption of new technology required substantial capital investment, the coming cycle likely will be cannibalistic to the $3.7 trillion annually spent on IT. In fact, given the potential productivity gains, it’s possible the overall IT spend could contract, with the successful firms garnering a larger share of the spend, and unsuccessful firms exiting the market. This white paper will review a few of the innovative technologies expected to enter the mainstream in the coming years, which we believe will have a significant impact on the IT landscape and provide ample opportunities for a new generation of successful companies.

Many taxpayers have heard about the tax laws that expired or changed in 2011 and 2012 as a result of the Tax Relief Act signed into law in December 2010. However, many taxpayers are not as familiar with the increased Medicare tax scheduled to begin January 1, 2013 which was part of the Patient Protection and Affordable Care Act of 2010.