The Big Picture | April 2004

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Trend Following

Friday, April 30, 2004 | 08:50 PM

Amos Hostetter, the wise sage of the infamous Commodities Corporation, offered wisdom, well worth sharing:

Trading Dont's

Don't sacrifice your position for fluctuations.
Don't expect the market to end in a blaze of glory. Look out for warnings.
Don't expect the tape to be a lecturer. It's enough to see that something is wrong.
Never try to sell at the top. It isn't wise. Sell after a reaction if there is no rally.
Don't imagine that a market that has once sold at 150 must be cheap at 130.
Don't buck the market trend.
Don't look for the breaks. Look out for warnings.
Don't try to make an average from a losing game.
Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.

Dangers in Trading caused by Human Nature

Fear: fearful of profit and one acts too soon.
Hope: hope for a change in the forces against one.
Methodology: Lack of confidence in ones own judgment.
Independence: Never cease to do your own thinking.
Objectivity: A trader must not swear eternal allegiance to either the bear or bull side.
The individual fails to stick to facts!
People believe what it pleases them to believe.

Think about how simple Hostetter's wisdom appears on the surface. But how many people could actually adhere to his strict rules? Its been said that rules to making money in the markets could be in the front page of the daily papers, and people would still ignore them . . .

See also Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael Covel. More about the book at trendfollowing.com

Advance Decline Line Brings Good News and Bad

Friday, April 30, 2004 | 09:33 AM

in Finance

There have been a few reports recently suggesting that the Bull move is over. Based upon deteriorating market breadth, these authors are predicting the end of the rally. Under specific circumstances, we’d be inclined to agree with that perspective. Typically speaking, a narrowing advance-declines line that diverges from a rallying market is cause for grave concern. Under those conditions, the A/D line would be an early signal of an imminent collapse.

That rule doesn’t apply to periods like now.

Why? We are in a rising rate environment. One should expect to see the NYSE experience a marked weakening in the number of advancing versus declining issues. The NYSE is home to a broad variety of interest rate sensitive issues. As the weakening NYSE A/D reveals, these are selling off in response to rising rates. Many of these issues have taken tumbles of 15% or greater. REITs, closed end bond funds, and other similar non-operating companies are doing exactly what they are supposed to do in this environment.

But that doesn’t mean the present A/D decline weakness is anything more than a concurrent - and not a leading - indicator. It is merely tracking a softening market, which is distracted by geopolitics, a rallying dollar, and valuation concerns. That situation is a far cry from times when the A/D line diverges from a strongly rallying market. Recall that divergence occurred in late 1999 and early 2000.

So the A/D line is falling with the market: That’s the good news. The bad news is that none of our favorite indicators have reached the point where we feel we must start getting long again. The one notable exception: The NYSE McClennan Oscillator has reached moderately oversold levels. Some practitioners use this Oscillator to provide a short term snapshot of when the market is getting oversold. But since it is essentially a breadth derived signal, I prefer to see it much more oversold, in light of the previously mentioned trading in interest rate sensitive REITs and Funds, before getting too excited.

Investors still remain quite optimistic, by most recent sentiment measures. Measures such as the AAII Bull Bear Ratio, the Volatility Index (VIX), and the Put/Call Ratio are still relatively strong (see nearby chart). On Wall Street, Pessimists are your potential buyers, while Optimists are potential sellers.

We continue to suggest trading smaller and less frequently until we see contrary extremes in these measures.

Barrons picks up The Future of Music

Thursday, April 29, 2004 | 06:00 PM

in Finance | Music

The increasingly hip Barron's picks up the "Future of Music: Monetize Your IP" piece here.

Way cool!

Source:
The Future of Music?
Barron's
MARKET WATCH TODAY 2:05 p.m.
http://online.wsj.com/barrons/article/0,,SB108317569959996157,00.html

Chart of the Week: S&P500 versus Sentiment (1988 to present)

Thursday, April 29, 2004 | 04:22 PM

in Finance

Investment advisors have remained extremely optimistic, despite the less than stellar market conditions since the market peaked late January. This works as a contrary indicator, because people become more bullish after buying stock - call it the pride of ownership).

S&P500 versus Sentiment (1988 to present)
spx_versus_optimism
Source: Chart of the Day

One can disregard overly optimistic sentiment indicators if the tape and internals are strong. They have been choppy lately, and not providing very much guidance.

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Quote of the Day:
"Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable." ~ Sydney J. Harris (1917-1986)

GDP soft, Inflation rises

Thursday, April 29, 2004 | 10:11 AM

in Finance

The WSJ Econ Roundup:

"The U.S. economy strengthened during the first three months of the year, but at a weaker-than-expected pace, the government said Thursday in a report that also suggested inflation rose at a faster rate.
The reading on gross domestic product for the January-to-March quarter, reported by the Commerce Department, marks a slight pickup from the 4.1% rate registered in the final quarter of 2003. While the first-quarter figure suggests that the recovery is in good shape, it fell short of the strong 5% pace that economists were forecasting. . .

The report also showed that gauges of inflation rose at a higher rate. The price index for gross domestic purchases climbed at a 3.2% rate in the first quarter; it advanced 1.3% in the fourth quarter. The government's price index for personal consumption rose at a 3.2% rate January through March. It had risen just 1% in the fourth quarter."

Here's the key stat to me:

Federal government spending went up 10.1% in the first quarter, compared with a 0.7% climb in the fourth. State and local government spending fell 2.6%.

That suggest that government and military spending are still a key driver of the recovery -- not typically an encouraging sign.

Source:
GDP Rose 4.2% in Quarter; Key Inflation Gauge Climbs
Consumer Spending Increases 3.8%; Initial Jobless Claims Drop by 18,000
April 29, 2004 9:10 a.m.
http://online.wsj.com/article/0,,SB108323883685597205,00.html

Harnessing Nanotechnology

Thursday, April 29, 2004 | 06:16 AM

in Finance | Science

Interesting article in Chemical & Engineering News on Harnessing Nanotechnology. Very often, the best sources for early stage R&D are specialty publications. By the time it hits the WSJ or NYT, its already in late stage development. If you do any early stage or venture investing, learn to love these sources!

You may not be aware that there is a National Nanotechnology Initiative being run by Uncle Sam, funded to the tune of nearly a billion dollars in research grants in 2005. Here are the focus areas:

NNI HAS NINE SPECIFIC R&D FOCUS AREAS
1. Nanostructured materials by design, led by NSF
2. Manufacturing at the nanoscale, led by NIST and NSF
3. Chemical - biological - radiological - explosive detection and protection, led by DOD
4. Nanoscale instrumentation and metrology, led by NIST and NSF
5. Nanoelectronics, -photonics, and ?magnetics, led by DOD and NSF
6. Health care, therapeutics, and diagnostics, led by NIH
7. Efficient energy conversion and storage, led by DOE
8. Microcraft and robotics, led by NASA
9. Nanoscale processes for environmental improvement, led by EPA and NSF.

Its no exaggeration to say that this is potentially the next industrial revolution . . .

8216gov1a_sm

Source:
Harnessing Nanotechnology
Susan R. Morrissey
Chemical & Engineering News (ISSN 0009-2347): April, 19 2004
http://pubs.acs.org/cen/nanofocus/top/8216/8216nni.html

National Nanotechnology Initiative
http://www.nano.gov/

Apple to Music Industry: Monetize Your IP

Wednesday, April 28, 2004 | 02:18 PM

in Finance | Music

"Put your full damned catalogues on-line already."

In not quite those words, Apple CEO Steve Jobs pressed the music industry to fully monetize their intellectual property. In a conference call today on the one year anniversary of Apple's popular iTunes Music Store, Jobs was was far subtler and more diplomatic than my own take on it. He correctly noted that most of the music industry's IP lay fallow.

If only the industry would digitize the 2/3rds of their catalogue currently out of print, the big labels might find a potentially high margin revenue source.

mac_mousepad Steve noted why most of the large music labels have only one third or less of their music catalogues available for purchase: It is simply not cost effective to physically press, distribute, warehouse and inventory the vast majority of the labels' intellectual property. This makes a good deal of sense, especially for specialty and niche genres which may have small but dedicated fans.

However, those prohibitive costs do not apply to digitized music.

As the chief of both Apple and Pixar, Steve Jobs is a man who knows his technology, as well as his digital content. If the music industry is smart -- and there is little to suggest that they are -- they will sit up and pay attention to what he is suggesting.

If Jobs manages to convince the major studios to release their back catalogues to Apple initially, and ideally to Apple exclusively, then they become the defacto standard for "Digital Music Distribution."

Perhaps Apple could even become to music what the the Library of Congress is to the printed book.

UPDATE: April 29, 2004, 3:18pm

Here's the excerpt from the conference call:

Steve Jobs: Oh, there's, you know, there's a lot of challenges that we all face together. Let me give you one that's really exciting to us, which is that if you look at a typical music company, less than a third of their music that they have in their vault is actually available for sale. And the reason for that is, is because with traditional CD distribution channels where you have to make a physical object, somebody has to carry the inventory, somebody has to make, you know, rent space to put it on a shelf, they can't get distribution for a lot of their catalogues that's sitting on their vault because it wouldn't sell enough to justify, you know, the record company...the record stores carrying it. And it's getting even worse with the demise of the small individual record store and the tendency of, you know, of Wal-Mart and Best Buy, et cetera, the selection is even narrowing further.

And one of the most exciting things for us is to get the rest of that catalogue, which has not been purchasable, in some cases, for decades, digitally encoded and online on the iTunes Music Store where there is no inventory, where there are no returns, where there is no rent for the shelf space, and make that music available to everybody.

Transcript courtesy of MacObserver
http://www.macobserver.com/article/2004/04/29.9.shtml

Apple iTunes Music Store 1 year anniversary

Wednesday, April 28, 2004 | 01:37 PM

in Finance | Music

jukeboxtopwin04272004

I listened in on the Apple / Steve Jobs conference call today. (The potentially blockbuster news will get posted later today).

A few interesting tidbits from the conference call:

-Apple iTunes Music Store downloading 2.7 million songs a week; That's a run rate of 140 million annually;

-ITMS now has 700,000+ songs, expects to have over 1 million songs by year's end;

-Music Videos as well as film previews now playable thru the ITMS;

-HP is (or will be soon) shipping 8 million copies of iTunes pre-installed on Windows PCs;

-iTunes users now have access to a free single, every Tuesday;

-CD Insert Printing allows users to print a jewel case insert right from iTunes -- Includes mixed CDs with multiple album covers;

-iTunes Music store was profitible this Quarter.

Here's some more details from the official press release, :

-- "iMix," a new way for users to publish playlists of their favorite
songs on the iTunes Music Store for other users to preview, rate and
purchase. iMix creates a virtual iTunes community, enabling users to
discover new music recommended by fellow music fans and rate the iMixes
published by other iTunes users;

-- "Party Shuffle," a new playlist that automatically chooses songs from a
user's music library, displays just-played and upcoming songs, and
allows users to easily add, delete and rearrange the upcoming songs on
the fly. Party Shuffle is the ultimate DJ at any gathering, and a great
way for users to get reacquainted with their personal music library;

-- Radio Charts from more than 1,000 radio stations, enabling users to
easily find and buy the top songs played on local radio stations in
major US markets and buy directly from the charts with just one click;

-- A new Music Video section featuring more music videos than ever, and a
new Movie Trailer section with the most popular movie trailers on the
Internet and links to buy songs from the soundtrack or audiobooks
related to the movie;

-- The rights to play songs purchased from the iTunes Music Store,
including songs previously purchased, on up to five personal computers,
two more than before;

Fascinating stuff.

itunes_music_store

Are Deficits Caused by Tax Cuts?

Wednesday, April 28, 2004 | 05:30 AM

in Finance

The NYTimes discussed the CBO's Analysis of the President's 2005 Budget, and Deficit Analysis. I've been meaning to get to it, as its a somewhat overlooked issue. Now that the Greenspan testimony is behind us, let's take a gander at the Budget, and see what causes deficits:

"When President Bush and his advisers talk about the widening federal budget deficit, they usually place part of the blame on economic shocks ranging from the recession of 2001 to the terrorist attacks that year. But a report released on Monday by the nonpartisan Congressional Budget Office estimated that economic weakness would account for only 6 percent of a budget shortfall that could reach a record $500 billion this year. . .

The new numbers confirm what many analysts have predicted for some time: that budget deficits in the decade ahead will stem less from the lingering effects of the downturn and much more from rising government spending and progressively deeper tax cuts.

Administration officials do not dispute the basic thrust of the agency's estimate, but they still say that faster growth and spending restraints can reduce the deficit in five years."

There are 2 issues here which seem to get confused into one: 1) What causes the present deficit? and 2) What will determine the size of future deficits/surpluses.

The source of the present deficit is the easier question: Its simply a matter of revenues versus expenditures. Whenever Uncle Sam spends more than he takes in, deficits result.

There are two sides to the equation: Spending and Revenue. The present administration has increased spending at the same time it decreased revenues. The math on this is simple enough so that even Supply Siders can understand it. Things get more complicated when we look out a few years. Estimates for the growth rate of the country vary dramatically, so revenue projections will similarly vary.

What makes the Congressional report so damning however, is their conclusion "that the 'cyclical' problems of slower growth are a tiny part of the overall budget problem. The Congressional agency estimated that slower growth reduced tax revenues by $53 billion in 2002, accounting for a third of the budget deficit that year. In 2003, the agency estimated that subpar growth cut tax revenues by $68 billion. The overall budget deficit in 2002 swelled to $375 billion as a result of spending on the Iraq war and Mr. Bush's tax cuts."

That means that the structural changes introduced into the budget are not only the underlying cause of the deficit, but will also generate deficits going forward -- even if we meet the most aggressive target's for economic growth.

Higher military spending and homeland security spending is a significant issue. But the CBO is telling us that deeper revenue losses, and not temporary economic distress, is the primary source of tyhe deficit.

Source:
Deficit Study Disputes Role of Economy
By EDMUND L. ANDREWS
NYTimes, March 16, 2004
http://www.nytimes.com/2004/03/16/politics/16BUDG.html

NYSE Short Interest Rising

Tuesday, April 27, 2004 | 01:30 PM

in Finance

Something definitely worth tracking -- along with outstanding Margin -- is Short Interest. The WSJ reported that Nasdaq Short Interest rose this month, as "sellers began to anticipate an interest-rate increase by the Federal Reserve.

For the month through April 15, the number of short-selling positions not yet closed out rose 2.8% to 4,993,345,137 shares, up from 4,855,579,913 in mid-March. The short ratio, or number of days' average volume represented by the outstanding short positions, rose to 2.9 from 2.6 a month earlier."

Makes sense -- After licking their wounds, the Perma Bears have taken the markets listlessness as a negative. The reality is that after making a low on March 22, the market went too far too fast (The Dow shot up 500 points on 8 days). That made it vulnerable to a pullback:

"Over the period covered by the latest short-interest report, the Nasdaq Composite Index rose 3% -- a trend that would have hurt the value of many short positions.

Nevertheless, short sellers are becoming emboldened, after taking a prolonged beating, said Harry Strunk, managing director of Aspen Grove Capital Management, which tracks short sales.

He said the average short portfolio is down about 2.5% for the year, including a 0.5% decline in March. While that performance isn't great, short sellers are at least happy to see their losses are slowing, compared with a 28.2% drop in the average portfolio in 2003, the worst annual performance in 12 years."

I need to start charting this regularly . . .

Source:
Short Interest Grows as Market Bets on Rate Rise
Portfolio Losses Slow, Down 2.5% This Year; Sellers Pin Hopes on Fed
PETER A. MCKAY
WALL STREET JOURNAL, April 27, 2004; Page C14
http://online.wsj.com/article/0,,SB108301216713693809,00.html

Me, the Senator & Cavuto

Tuesday, April 27, 2004 | 07:03 AM

in Media

A quick note about last night's Fox appearence:

After I check in at the desk, I'm standing near the security guards waiting for my escort into the studios -- security is pretty tight around Fox. I hear a voice I recognize, look up -- its Senator Al D'Amato, but 7 feet away from me. He shakes hands with the entire circle of well wishers within a 5 foot radius -- and I'm just outside that range.

"Hey Senator, what I am, chopped liver over here?"

Senator Pothole (as he was known in NY) laughs, reaches over and grabs my hand. He's lost weight since he left office -- in the midst of a variety of scandals, he lost to Schumer in 1998.

You can see right away why the guy was a successful politician: He greets the guards -- who all know him, recognize him and greet him with a genuine warmth. He has an instant personal connection. He tells security he is waiting for an escort for Cavuto's show (as do I).

The building is practically a full city block long. I see Anita in a red outfit coming to get us -- she's a 6 inch tall speck all the way down the long hallway.

I say "Here comes our ride," and the Senator starts talking with me. I tell him my wife and I enjoy him and Ed Koch on Bloomberg radio (Koch has a show on the weekends, and D'Amato is a frequent guest). The two of them are very entertaining, even if their politics are, shall we say, unenlightened. And, it turns out his son works for my firm. So we chat the whole walk over -- about 3 minutes.

We get into the studios, I do the 4:10 segment -- I'm on with Neil, Brenda Buttner (host of Bulls and Bears) and Fox reporter (and former Street.com columnist) Dagen McDowell. On remotely in Chicago, the over-caffeinated Jonathan Hoenig goes off on how we should bomb Fallujah; Everyone else is totally reasonable.

Our segment ends, and in walks Senator Al, just as I and the women are leaving The Senator -- in his very charming way -- says: "Why is it that I am not on with all the beautiful women?"

My straight-line-atitis kicks in: That is simply a hanging curveball I cannot pass up. So as I'm exiting, I lean over to D'Amato, and in a faux sotto voce voice, loudly whisper "See me the next time your on, Senator: I'll hook you up with the ladies."

Everybody has a good laugh.

My life just keeps getting more and more bizarre.

NASD Investigating Rating Systems

Tuesday, April 27, 2004 | 06:10 AM

in Finance

We've mentioned previously that much of the bulge bracket firms' research is still overweighted to issue "Buy" recs (pun intended).

According to the WSJ, the NASD is finally looking into the matter. The Journal sums up the issue perfectly: "This isn't a trick question: Is an "underperform" stock in an "outperform" industry more attractive than an "outperform" stock in an "underperform" industry?"

The upshot for investors in the meantime is this: While at some firms a "buy" actually means a stock is expected to rise in value, at others it means the stock could fall -- but less than its rivals. Common are words like "underperform," "in-line" and "peer perform."

The Journal uses some ratings on Intel (INTC) as a somewhat humorous example:

Un-INTEL-ligible

Wall Street firms think Intel stock will do well in the next year or so, but that's not always easy to tell from their jargon. Their definitions don't help much. Maybe we can.

Firm	Rating	What they say	What they mean
Bear Stearns	Stock: Outperform; Sector: Market Weight	"Projected to outperform analyst's industry coverage… . Expect the industry to perform approximately in line with the primary market index."	It'll probably do better than other semiconductor stocks, and that industry will be an average performer.
Morgan Stanley	Overweight	"Return is expected to exceed the average … of the analyst's industry coverage … on a risk-adjusted basis."	It could go up or down, but it should do better than rivals.
Smith Barney	Buy/Medium Risk	"Expected total return of 15% or more."	What they said.
UBS	Buy 2	"FSR is >10% above the MRA, lower degree of predictability."	It'll probably go up by 15%-plus (yup) over prevailing interest rates but they're not as sure about it as other stocks.

Source: WSJ

Simply stated, research is still too BUY oriented. Now, you have the added value of being confusing also.

UPDATE: April 27, 2004 9:10 am
Tom Brown explains why they went indie here.

Source:
A Year After Firms' Settlement, NASD Is Launching Inquiry Into How Ratings Are Applied
Susanne Craig and Ann Davis
Wall Street Journal, April26,2004;PageC1
http://online.wsj.com/article/0,,SB108293059991992884,00.html

Media Appearence: Neil Cavuto's Your World

Monday, April 26, 2004 | 02:36 PM

in Finance | Media

I'm on Fox today (Your World with Neil Cavuto @ 4pm EST) discussing the usual: Interest rates, earnings, terrorism and the markets.

See recent comments for a preview of the conversation . . .

Not Turning Japanese

Monday, April 26, 2004 | 02:11 PM

in Finance

With all the concern (some might say excessive concern) about impending rate hikes, we thought it might be helpful to review how we arrived at the present interest rate levels. We hope this will provide some insight as to what possible market reactions might be to the impending interest rates increases.

Indeed, notable by its absence was the word “Patience” in Alan Greenspan’s Congressional testimony last week. This leads us to expect that at the Fed meeting in May, they will produce a change in language in their official statement. That leaves them the option of increasing rates a ¼ point at a time, should they need to, at the August meeting.

As such, it may be instructive to compare analogous post bubble periods - 1990 to 2000 for Japan, versus 2000 - present for the U.S. As the nearby chart reveals, the Federal Reserve cut rates faster and more aggressively than the Japanese Central Bankers. Over the course of a year (2001-02), Greenspan & Company cut the discount rate from 6% to 2%. By contrast, the Japanese bankers took almost 4 years (1990-94) to slash rates that low. One year later, the Fed had brought rates down to 1%. That same process took Tokyo an additional 30 months or so.

In comparing the post-bubble experiences of both countries’ economies, the U.S. has enjoyed far more stimulus, and far sooner, than did Japan. This may be attributable to Central Bankers here learning from the mistakes of the Japanese. Additionally, the Keiretsu - the massive, vertically integrated, interconnected conglomerate - does not exist in the U.S. corporate universe. They are a prevailing form of corporate structure in Japan.

We also note that in the U.S., the bubble was primarily concentrated in technology, internet and telecom sectors. While the entire market did get overheated, these sectors had the greatest run ups - and the greatest crashes. Because of the way Japanese corporations are structured, their bubble cut across far more sectors of the economy: Banking, insurance, and real estate took a heavy beating as well technology and telecom.

The net result is that post bubble, the U.S. has enjoyed a much greater level of stimulus than Japan did. That is reflected in the past year’s market run up. Indeed, only now, some 14 years after their bubble popped, are some analysts first getting comfortable with the concept of buying Japan. The risk factor is that post-bubble excesses still exist which, have yet to be wrung out of the economy here. Under normal circumstances, we would not be too concerned with increasing rates. The problem is that these are anything but normal circumstances.

Chart of the Week:US vs. Japan: Post Bubble Comparison

Monday, April 26, 2004 | 01:37 PM

in Finance

A post bubble comparison between the CPI and Central Bank set Discount Rates vis a vis the United States and Japan.

US vs. Japan: Post Bubble Comparison
us_v_japanpost_bubble
Source: Jim Stack, Investech Research

Japan has had several false starts, based upon their CPI rallying and failing. Whether the US is similarly situated is at present unknown.

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Quote of the Day:
“If you are not willing to study, if you are not sufficiently interested to investigate and analyze the stock market yourself, then I beg of you to become an outright long pull investor, to buy good stocks and hold on to them; for otherwise, your chances of success as a trader will be nil.”
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The Theory of Reflexivity by George Soros

Monday, April 26, 2004 | 10:00 AM

in Markets

Delivered April 26, 1994 to the MIT Department of Economics World Economy
Laboratory Conference Washington, D.C.

When Rudi Dornbusch invited me to speak at this conference, he gave me a totally free hand in deciding what I wanted to talk about. Well, I want to discuss a subject which fascinates me but doesn’t seem to interest others very much. That is my theory of reflexivity which has guided me both in making money and in giving money away, but has received very little serious consideration from anybody else. It is really a very curious situation. I am taken very seriously; indeed, a bit too seriously. But the theory that I take seriously and, in fact, rely on in my decision-making process is pretty completely ignored. I have written a book about it which was first published in 1987 under the title The Alchemy of Finance; but it received practically no critical examination. It has been out of print for the last several years but demand has been building up as a result of my increased visibility, not to say notoriety, and now the book is being re issued. I think this is a good time to get the theory seriously considered.

I was invited to testify before Congress last week and this is how I started my testimony. I quote: “I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.” I did not have time to expound my theory before Congress, so I am taking advantage of my captive audience to do so now. My apologies for inflicting a very theoretical discussion on you.

Continue reading "The Theory of Reflexivity by George Soros "

Choice and Price are Just Data

Monday, April 26, 2004 | 12:19 AM

in Finance | Web/Tech

Virginia Postrel buys into MIT Professor Brynjolfsson's somewhat false dichotomy of the issue of Variety vs. Price on the internet:

"When I first started doing work on how the Internet is affecting commerce, like a lot of people, I was really excited by this nearly perfect market," said Erik Brynjolfsson of the Sloan School of Management at Massachusetts Institute of Technology.

His early research found that prices on the Internet were 6 percent to 16 percent lower than prices off-line. But when he thought about how people actually shop online, and what they find valuable, he realized that low prices are not the big story. Selection is. The Internet offers variety that is simply impossible in traditional stores.

I have to take issue with Brynjolfsson's somewhat false dichotomy of Variety vs. Price. Its not an either/or choice; You get to do both very, very easily on-line. The more cogent issues -- and more interesting challenges -- arise when we look at on-line versus off-line shopping.

At the risk of oversimplifying this interconnected 'net thingie, its all about the data: On line shopping is all price, selection, product information, relative comparisons, opinions/reviews, etc. -- all a click or two away. These are simply data points which merely reflect the internet as a massively relational data base. (Google just adds another interleaved layer underneath it all).

Price and/or variety are just different aspects of the same unifying thread: More information about consumer items. Business purchases also, for that matter. (Just 'cause the B2B stocks cratered doesn't mean that B2B itself isnt alive and well.)

Compare the information-based shopping experience in the virtual world with the real world: Shop in a physical store, the experience is tactile. You can touch, smell and feel the items you are considering buying. You are also out in public, often socially engaged.

Price comparison shopping in stores is a time consuming chore. So depending upon where you shop -- discounters, upscale mall, specialty stores, etc. -- price may be more or less important to you. Inf act, where you do your shopping is largely determined by where in your hierarchy of values you place "Price." The "shopping experience" is a variable part of what you are paying for in your purchase price.

Indeed, "sport shopping" (as my wife and her sister label it) is less about retail acquisition and more a form of modern consumer entertainment.

Online shopping, on the other hand, can be far more of a cerebral experience. Most of what shoppers do on line is data processing: It's primarily about searching, finding, sorting and digesting data. Once the right data points are located and processed, a transaction can occur. Compared with the more social store experience, it is a much more solitary, geekier event.

Data knows no geographical boundaries, where physical shopping does. Its broader, more global. Where Postrel is correct is in the observation that there is a value in choice: "The Internet offers variety that is simply impossible in traditional stores." That's true, we all have access to stuff that simply wouldn't be feasible otherwise. On line, I buy BBQ sauce from Syracuse, I order shaving cream from Portugal, I get t shirts designed in Canada, I buy bath bombs from London, hot sauce from Vermont, Coffee from Greenwich Village.

Variety and price are each different aspects of that thing called information. Whether you want to find it cheaper or look for a greater variety is really quite irrelevant . . . What we do on line is pursue specific data about that certain something -- a purchase, a song, a factoid -- which we desire.

Indeed, as I sit in my home just outside of NYC writing this, I am listening to a streaming broadcast of Bob Harris on BBC 6 Music. His Sunday afternoon program is awesome. Its another example of data coming to me through a fat pipe, providing what couldn't be done (at least not practically) prior to widespread internet adoption.

Look, I don't want the job of fisking everything that comes off of Virginia Postrel's keyboard. Her prose is usually interesting and some of her ideas thought provoking -- even if she is often wrong. In the present article, she is (mostly) reporting on MIT Prof Brynjolfsson's research.

Where Brynjolfsson, and for that matter, Postrel seem to turn wrong is in not recognizing that Variety and Price are different aspects of the same easily accessible thing on the internet: Data.

Source:
Choice Trumps Price on the Internet
Virginia Postrel
New York Times, April 22, 2004
http://www.nytimes.com/2004/04/22/business/22scene.html

Apple morphs into a Consumer Electronics Co

Sunday, April 25, 2004 | 08:19 AM

in Finance | Music

I've been meaning to put a post up on this subject for a while -- the excellent research firm Faultline has been all over this.

He who hesitates is lost -- the NYT beat me to it with a terrific piece on Apple in the biz section of the Sunday NYTimes:

"Since returning seven years ago to Apple, the computer maker he helped to establish in 1976, Mr. Jobs has created a fusion of fashion, brand, industrial design and computing. He has opened a chain of 78 retail stores to showcase Apple's consumer-oriented designs and to surround the company's computers with an array of digital consumer products. The stores themselves have become another billion-dollar business, a feat all the more impressive considering that one of Apple's chief competitors, Gateway, failed with a similar retail strategy during the same period.

As a result, Apple is acting less like a computer company and more like brand-brandishing, multinational companies such as Nike and Virgin. The iPod's success is also the clearest indication that Mr. Jobs, if he is to successfully revamp Apple, will ultimately win not by taking on PC rivals directly, but by changing the rules of the game.

The Apple that is starting to emerge may be a harbinger. The company's growth may no longer be defined by its PC market share, now a declining sliver of the PC industry, but instead by Mr. Jobs's ability to create consumer markets."

That's a huge shift in their model. The PC industry has been cutthroat, with Dell the only OEM winner on the Windows side of things.

Apple has further refined their niche -- a BMW like 5% of the PC marketplace -- but they did it by owning their machines operating system and software development. This has allowed Apple to carve out a unique, branded and highly profitable busines -- right at the convergence of PCs and home entertainment:

"So will Apple eventually be overwhelmed by its bigger, better-heeled competitors? Throughout the technology world, there seems to be a simple, uniform answer to that question: Never underestimate Steve Jobs.

With roots both in Silicon Valley's digital culture and the 1960's counterculture, Mr. Jobs has long been an arbiter of what is cool in technology, much like a real-world version of a trend-spotting character from "Pattern Recognition," one of the cyberpunk novels by William Gibson.

AND, helped by his growing prominence in Hollywood through his second company, Pixar Animation Studios, Mr. Jobs has attained a level of influence over how life is lived in the digital age that is unmatched by even his most powerful computer industry rivals. "He is the Henry J. Kaiser or Walt Disney of this era," said Kevin Starr, a culture historian and the California state librarian."

Now that the mainstream press has caught on, let's see how this developes . . .

Oh, Yeah, He Also Sells Computers
By JOHN MARKOFF
New York Times, April 25, 2004
http://www.nytimes.com/2004/04/25/business/yourmoney/25jobs.html

Red vs Blue?

Sunday, April 25, 2004 | 07:00 AM

in Politics

Very interesting article in the Washington Post today: The first piece of a three part series on political division in the Nation:

"Hans Noel, a political scientist at the University of California at Los Angeles, is the author of a paper called "The Road to Red and Blue America." In an interview, he said, "Most people say they are 'moderate,' but in fact the country is polarized around strong conservative and liberal positions." For the first time in generations, he said, those philosophical lines correspond to party lines. The once-hardy species of conservative Democrats -- so numerous in the 1980s they had a name, "Reagan Democrats" -- is now on the endangered list, along with the liberal "Rockefeller Republicans."

"It has taken 40 or 50 years to work itself out, but the ideological division in America -- which is not new -- is now lined up with the party division," Noel said.

At the same time, more and more Americans in a highly mobile society are choosing to live among like-minded people. University of Maryland political demographer James Gimpel has documented the rise of a "patchwork nation," in which political like attracts like, and ideologically diverse communities are giving way to same-thinking islands. A recent analysis sponsored by the Austin American-Statesman, comparing the photo-finish elections of 1976 and 2000, made this clear. While the nationwide results were extremely close, nearly twice as many voters now live in counties where one candidate or the other won by a landslide. Person by person, family by family, America is engaging in voluntary political segregation."

We have become a polarized country, and the political parties are only accentuating the differences between Americans:

"This split is nurtured by the marketing efforts of the major parties, which increasingly aim pinpoint messages to certain demographic groups, rather than seeking broadly appealing new themes. It is reinforced by technology, geography and strategy. And now it is driving the presidential campaign, and explains why many experts anticipate a particularly bitter and divisive election."

I'm looking forward to seeing the rest of this . . .

Source:
Political Split Is Pervasive
Clash of Cultures Is Driven by Targeted Appeals and Reinforced by Geography
David Von Drehle
Washington Post Staff Writer
Sunday, April 25, 2004; Page A01
http://www.washingtonpost.com/wp-dyn/articles/A39044-2004Apr24.html

Full Graphic

Music Industry Intent on Commiting Hari-Kari

Saturday, April 24, 2004 | 01:16 PM

in Finance | Music

Its fascinating to watch an industry implode -- in slow motion -- over the period of a decade. It becomes even more engrossing when the wreckage is self inflicted, due to foolish policies and technophobia.

Mind you, we are not discussing historical anachronisms, like steam engine manufacturers or the machine leather belt companies which were needed to transfer the steam power to a mechanical device. No, what I refer to is occurring right now in the music industry. It has been poisoning itself for decades, and we are seeing -- a kind of time lapsed photography -- the long term effects of their own toxicity and short sightedness.

After 3 years of a overpriced, recession driven, anti-competitive, alternative entertainment choice induced sales slow down, the music industry -- for a brief instance -- found religion. The industry settled many of their own litigation/criminal issues; And then, the Universal Music Group slashed prices.

What-do-ya know, sales increased!

Alas, short memories abound: "Universal Music Group, the largest record conglomerate in the world, has announced an increase in the prices of their CDs. This comes only months after UMG slashed prices in order to make CDs more competitive in a marketplace that features pay downloads as well as the dreaded “free” (or as record executives and the RIAA like to call them “illegal” downloads”). "

Ans, its on top of very recent attempts to make "legal" download music more expensive.

The impact of this April 15th increase is already visible in the weekend adverts: None of the usual advertisers -- Best Buy, Target, J&R Music (I didn't see Circuit City's) -- have a single CD on sale for less than $9.99. Before the price hike, select CDs were advertised for $7.99 and even $6.99.

It only took a quarter or two of increased sales for the potential revival of the Music Industry to be put into danger. Its a case of Munchausen syndrome crossbred with self immolation.

The Chicago Tribune was one of the few major papers to cover the recent price increase. They noted:

"Universal stunned the industry eight months ago with the announcement that it would slash the wholesale price of its CDs by 25% in a bid to revive an ailing market and discourage piracy. At the time, Doug Morris, Universal Music's chairman, said the cuts were intended "to reinvigorate the record business in North America" and would remain in force at least through the holidays.

But Universal's competitors didn't follow suit with wholesale price cuts. Some record label executives privately dismissed the price-cut plan as a promotional ploy aimed at boosting short-term sales numbers."

My prediction: the recent sales uptick of CDs will either flatten out (i.e., small or no rise in sales) or even be reversed going forward.

I expect to see dissappointing sales numbers in Q3 / Q4 2004. And, Macro wise, those quarters should not be all that challenging on a year-over-year basis.

Here's the underlying problem which the music industry still doesn't get: I could buy the new Diana Krall for $9.99 . . . But is that really as good an entertainment deal, dollar for dollar, as let's say, The Usual Suspects -- for the exact same price? Best Buy has both for $10, or Animal House, Armageddon, Shawshank Redemption, Gladiator, and a bunch of others recent or well loved films -- at 2 for $20. As Audio Revolution so succintly put it, "the long term diminishing sales of prerecorded music has as much to do with the lack of video in the value proposition for a CD as it does with the overall price of a CD." That's one of key misunderstandings of the Music biz -- their competition is for the consumer's entertainment dollar (DVDs and Video Games) -- not one CD versus another.

We have mentioned in the past that DVD sales have been cannibalizing CD sales for quite some time now; Its only going to get worse going forward.

There are other issues we have barely explored in this blog. One of my pet peeves is the mediocre sound quality of MP3. Audio Revolution observes:

"The CD has bigger problems than being overpriced. Competing with illegal downloads is impossible; however, the problem with the CD as a format is that it no longer meets the technological or entertainment value demanded by the modern consumer. On a technological level, CDs sound better than MP3’s without question but in comparison to DVD-Audio or SACD (UMG prefers SACD but has released a number of titles in each format) the CD is pathetically underpowered. CDs (in almost all cases) do not have 5.1 surround sound, higher resolution stereo tracks (20 and 24 bits at 96 or 192 kHz sampling rates) and other added values found on the new DVD-Audio and partly on the SACD format.

Despite the late rush to promote and sell lower resolution downloadable music, consumers still appreciate better quality. In the world of video, hundreds of thousands of consumers per month upgrade to HDTVs that are exponentially more expensive than traditional TVs. Even with very little HDTV programming being broadcast to date, consumers find the value proposition of a wider, more resolute TV worth $3,000 to $30,000 or even higher. Thevalue proposition of CDs is far less favorable to consumers now 20 plus years into the format’s tremendous run."

So not only is the industry failing to market themselves creatively, they are wed to an outmoded format, which will likely only make their problems worse as time goes on.

"Aside from that Mrs. Lincoln, what did you think of the play . . .?"

Sources:
Universal Music To Increase Cost of CDs
Jerry Del Colliano
Audio Revolution, April 16, 2004
http://www.audiorevolution.com/news/0404/16.universal.html

Music labels mull digi-music price rise http://www.macworld.co.uk/news/main_news.cfm?NewsID=8397
Macworld, April 08, 2004
http://www.macworld.co.uk/news/main_news.cfm?NewsID=8397

Universal Eases Off on CD Price Plan
Jeff Leeds
Chicago Times, April 16, 2004
http://www.chicagotribune.com/technology/la-fi-universal16apr16,1,4157729.story?coll=chi-technology-hed

Price hike will sink iTunes
Matt Buchanan
Washington Square News, 04.22.2004
http://www.washingtonsquarenews.com/opinion/columnists/7370.html