The Big Picture | July 2004

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Recessions: A family affair?

Saturday, July 31, 2004 | 12:26 AM

When looking at a historic depiction of U.S. GDP over 20 years, its fairly hard to avoid noticing the business cycle. The lighter line showing the year over year change in the annual rate of GDP reveals fairly regular periodic oscillations:

Real GDP growth, % change, annual rate
real_gdp_growth
Graphic courtesy of Lombard Street Research

As these cyclical changes suggest, the broader business cycle of expansion and contraction beats (to a large degree) to it own internal rhythm. One would be hard pressed to find a 'headline cause' for each and every strengthening or weakening of the economy shown above. It is to a large degree organic.

Of course, there is a false conceit that the President largely controls the economy. I agree with other commentators who suggest that Presidents get too much credit for good economies, and too much blame for bad ones. At least, relative to what their marginal impact on the business cycle actually is.

So that makes the chart below even more ironic: How is it that two Presidents -- each named Bush -- managed to time their Presidencies to coincide with the 2 major economic recessions of the past 20 years:

Bush Recessions, 1990, 2001
bush_recessions

Was it bad policies? Something genetic? Or just dumb luck? Regardless, one has to laugh at the sheer absurdity of the coincidence.

The chart above helps explain why the Bush administration is backpedalling so desperately to pre-date the 2001 Recession into 2000, attempting to put it firmly under the watch of the Clinton administration:

The Commerce Department released benchmark revisions to GDP back to the first quarter of 2001, which showed a different pattern than the previously seen three quarters of decline. The new data showed that GDP fell 0.5% in the first quarter of 2001, then rose at a 1.2% pace in the second quarter, and fell at a 1.4% rate in the third quarter. The old 2001 data had GDP falling at annual rates of 0.2%, 0.6%, and 1.3% in the first through third quarters, respectively.

Armed with a negative third quarter in 2000, Mr. Bush and others in his administration have been arguing that they "inherited" a recession when they took office. In fact, the new data would suggest that there was no recession at all, according to the oft-cited definition of a recession as a downturn in economic activity represented by at least two consecutive quarters of falling GDP.

Its not just ego: The fear is that blame for the recession is more resonant if it started under Bush II, rather than merely inheriting the slow down form Clinton.

This is a peculiarly amusing parallel -- between father and son -- each presiding over the two most significant downturns of the last 25 years happening under Presidents named Bush. Of course, rationalists will tell you that both recessions would have happened anyway, even if neither Bush took office. But if you are superstitious, it makes you wonder what bad family mojo is kicking around, potentially making both Presidents one termers.

Stay tuned.

Source:
U.S. Economic Growth Slows As Consumers Curb Spending
WALL STREET JOURNAL, July 30, 2004 2:05 p.m.
http://online.wsj.com/article/0,,SB109119026547878928,00.html

Economic Growth Slows

Friday, July 30, 2004 | 02:39 PM

in Finance

q2_04_gdp

We've mentioned previously that as the stimulus fades -- once the pig is through the python -- the economy will settle into a more normalized growth rate. That process is now well under way:

The graphic above shows that the Frankenstein thesis -- a massive dose of stimulus in a post bubble/ excess-capacity era -- has generated an anemic recovery. Compare this to Ronald Reagan's full blown, chock full of new non-farm payrolls, self sustaining expansion.

Here is an excerpt of this official WSJ chatter:

U.S. economic growth decelerated to a slower-than-expected pace in the second quarter as consumer spending fell to its weakest rate in three years.

Gross domestic product, the total output of goods and services, increased at a 3% annual rate from April to June, the Commerce Department reported, compared with a revised 4.5% pace in the first quarter. The report showed gauges measuring prices rose slightly. Economists had expected a growth rate of 3.6% this spring, according to a survey by Dow Jones Newswires and CNBC.

One last issue, the government revised the benchmark used to calculate GDP since the Q1 2001. The recalculation calls into question the dating of the latest recession. We'll have more on this issue -- and the strong political overtones -- later.

Source:
U.S. Economic Growth Slows As Consumers Curb Spending
WALL STREET JOURNAL, July 30, 2004 11:16 a.m.
http://online.wsj.com/article/0,,SB109119026547878928,00.html

Coconuts ventures into online Music

Friday, July 30, 2004 | 12:16 AM

in Music

coconuts_logo

I have kinda mixed feelings about this one: I get an advert in last weekend's paper for Coconuts Music & Movies; (their website wasn't even up as of Saturday). I was never a fan of their chain, whose prices tended towards MSRP.

Now here's where it gets interesting:

A terrific CD I've been intending to buy -- English jazz-pop singer-pianist Jamie Cullum: Twentysomething -- was on sale for $6.99 + free shipping. In additon, there were a buncha of discs prices at $4.99, $5.99, $6.99 and $7.99.

On the one hand, this was pretty cheap -- anything introducing genuine price competition into the industry is good. Indeed, I frequently argue that this is what CDs should cost at list price -- now as loss leaders.

One the other hand, I do not se how they can compete with either Amazon (before we even think about iTunes). The site is somewhat thin. There is little in the way of content; I had to find the "Twentysomething" CD by searching directly for it -- it didn't come up under the artists name.

While Coconuts offers nowhere near the level of content, services and info that Amazon does, its worth watching. If these prices are typical, they can definitely build up an substantial niche of price sensitive sales.

Whether that's a viable business model or not is an entirely different question. But price competition is good, and it will be interesting to see how the marketplace responds.

Jamie Cullum: Twentysomething

Shrinking U.S. Incomes

Thursday, July 29, 2004 | 11:07 AM

in Finance

Fascinating story in today's Times regarding the drop in Americans' incomes. The surprising culprit? "Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid."

tax_2_down_years.chartjp
graphic courtesy of New York Times

This two year consecutive drop, like the tech bubble that preceded it, is unprecedented in post war America:

"The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows.

The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent.

Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002, according to the new I.R.S. data."

That is some nasty data. While we all have anecdotal tales as to how the public gets impacted by economic recessions, its certainly stark when you see it in black and white.

Continue reading "Shrinking U.S. Incomes"

Read it here first: Cuban Voters in Florida Could Determine the Outcome of the Election

Thursday, July 29, 2004 | 10:25 AM

in Politics

As we have noted recently and on several occasions in the past, Cuban American voters in Florida continues to be a potential problem for President Bush in the upcoming election.

One of the small media outfits in town finally discovered this same issue:

"Critics say the measures, which were laid out in a policy report from a presidential commission led by Secretary of State Colin L. Powell, are chiefly intended to add to backing for President Bush among Cuban-Americans, a group White House advisers have acknowledged is central to his re-election strategy.

Paradoxically, some of the critics say, several provisions - like a tightening of travel restrictions and a curb on relief packages - may backfire, harming Mr. Bush's chances in Florida, a crucial swing state."

Sorry for the snarky attitude on this story, but where have you been for the past four months?

Sources:
Get-Tough Policy on Cuba May Backfire Against Bush
CHRISTOPHER MARQUIS
N.Y. Times, July 29, 2004
http://www.nytimes.com/2004/07/29/politics/29cuba.html

Cuban Voters in Florida revisited
The Big Picture
Wednesday, July 14, 2004
http://bigpicture.typepad.com/comments/2004/07/cuban_voters_in.html

Cuban Voters in Florida Wavering in Support for President
The Big Picture
Wednesday, March 24, 2004
http://bigpicture.typepad.com/comments/2004/03/cuban_voters_in.html

Additional Poll on Florida's Cuban voters
The Big Picture
Wednesday, March 24, 2004
http://bigpicture.typepad.com/comments/2004/03/additional_poll.html

Money & Politics

Thursday, July 29, 2004 | 07:47 AM

in Politics

WSJ:

"While U.S. voters are nearly evenly split about Mr. Bush's performance, a recent Wall Street Journal survey found that among professionals and managers, who tend to be wealthier than the average, 53% disapproved of his performance. Meanwhile, administration counterterrorism efforts have won support for Democrats among ethnic groups opposed to a focus on Middle Eastern immigrants."

Click for larger graphic

Source:
Democrats Tap a Rich Lode: Young, Well-Off Social Liberals
They Include Internet Tycoons And Some Who've Soured On Bush Administration
Shailagh Murray and Jeanne Cummings
The Wall Street Journal, July 29, 2004; Page A1
http://online.wsj.com/article/0,,SB109105264774876886,00.html

Confusing Politics With Economics

Wednesday, July 28, 2004 | 02:43 PM

in Politics

The latest column, loosely based on Monday's comments, is up at RealMoney.com.

Here's the money quote:

"The market may not get it precisely right all the time, but it gets it right often enough to warrant paying close attention to what it's saying and why. If the economy slows, this gets reflected in the markets as lowered equity prices, often before the economic releases confirm it. Investors become less willing to pay more for slower growth, and that means weaker job growth. Invariably, this negatively impacts an incumbent's re-election chances.

Is that too general for you? Then let's get specific:

"Ned Davis Research did a recent study on post-World War II presidential campaigns and determined that while "job growth does not guarantee a victory, sluggish job growth historically has hurt the incumbent party." According to the study's data, the party in power lost the presidency whenever the change in nonfarm payrolls during the president's term was below 5%. This isn't a Republican or Democratic issue, but rather an incumbent vs. a challenger issue.

During the 1957-1960 period under Eisenhower, nonfarm payrolls grew at 2.4%, and the incumbent party lost. From 1989-1992, job growth was 1.8% and, again, the incumbent lost. In the present cycle, from 2001 to June 2004, job growth has been a negative 0.8%.

In light of these data, ask yourself: Are politics roiling the market, or are the economy and the market ailing the politicians? . . . While it may not always be "the economy, stupid," incumbents who ignore economic data do so at their own peril."

Go ogle

Tuesday, July 27, 2004 | 10:20 AM

in Finance

click for larger chart

Yesterday's Google comments bounced around the echo chamber quite a bit. Today, I see the NYTimes has a series of good graphics regarding the upcoming IPO.

I've always marvelled that everyone focuses on the mathematical usage of the term "Google" -- its the number 10^100. "Googleplex" -- the Google corproate campus -- is an even larger number: 10^[(10)^100].

Overlooked is the more simple grammatical breakdown: "Google" can be divided into "Go Ogle" -- meaning "to stare at, or observe."

click for larger chart

Lastly, Jim Cramer counts the ways the founders have screwed this up:

First, you buck the system, which had finally gotten a lot of the kinks out of it, and make sure that the thing's done Dutch. I know the bonds are used to Dutch auctions, but the unsophisticated public sure isn't. Start the Dutch revolution without me.

Second, you set the price at a level that is the most forbidding to the most people: north of $100. What the heck does that prove? That you intend to be the next Berkshire Hathaway?

Third, you talk about shareholder democracy but then you do the single most anti-democratic thing possible: issue two classes of stock.

Fourth, you wait until the dog days of summer to do the deal when no one's around anyway.

Fifth, you show total contempt for all of the institutions that, like it or not, represent most of the buyers out there, especially now that you price the deal at $100 a share.

Look, I know the process from 1998-2000 was deeply flawed. There was spinning going on, and friends and family and lots of laddering and all sorts of evil that since has been erased or silenced. The main flaw with the system, though, was that you couldn't reset demand on the fly to make it so that there was some sort of elasticity when buyers came in. The underwriters always blamed the SEC for that. If that was the real problem, let's deal with it. But this deal, I mean, can you say fiasco?

In six months, Google's gone from a company everyone wants a share of to perhaps the single-most scorned entity I can recall. Right out of the chute! Amazing.

Astute commentary from the always entertaining Cramer.

click for larger chart

Sources:
As It Goes Public, Google Says It Is Worth Up to $36 Billion
SAUL HANSELL and GARY RIVLIN
NYTimes, July 27, 2004
http://www.nytimes.com/2004/07/27/technology/27google.html

How Google Has Ruined Its IPO Deal
By James J. Cramer
RealMoney.com, 7/27/2004 8:58 AM EDT
http://www.thestreet.com/p/rmoney/jamesjcramer/10174243.html

Battleground States

Tuesday, July 27, 2004 | 07:48 AM

in Politics

Another good chart from the graphic whizzes over at CBSMarketWatch
Battleground

Check out their full coverage: CBSMarketwatch Election Special

Confusing Cause & Effect

Monday, July 26, 2004 | 02:11 PM

in Finance | Politics

As the indices flail about, groping for a bottom, the search for an explanation as to what ails the markets continues apace. The latest potential culprit: Politics! The WSJ quoted a political analyst today, who observed that:

“I would consider that uncertainty around the outcome of the presidential election [as] one of the major influences on the skittishness in the U.S. market."

This perspective gets the cause and effect relationship exactly backwards. Unfortunately, causative errors are an all-too-common analytical blunder when reviewing market data. Given the blaring headlines and search for certainty in an uncertain world, confusing cause and consequence is a regular occurrence. This is a perfect example of that foible.

Indeed, we often see this in misguided attempts to explain the chaotic machinations of markets’ complexity: When the indices are vulnerable - during mutual fund outflows, fading M2 supply, or excessive bullishness - we see everything but those factors getting blamed.

Indeed, I have yet to figure out why it is that some terrorist attacks “roil the market” while others (with the same appalling body count) get shaken off. The horror of the situation is the same, the tragic waste of life no different; Yet the markets somehow have totally different responses. Is it, perhaps, because these headline events are not really what is causing the markets to shudder and shake?

Returning to politics: Markets are not skittish because the incumbent is in trouble - that’s getting it backwards, a perfect example of confusing cause and effect. Incumbents are in re-election trouble because the future discounting mechanism of the markets is incorporating a slowing economy into its pricing. While the markets do not always get it precisely right, they do so often enough that a weakening economy-which hurts equity prices-invariably negatively impacts an incumbent’s re-election chances.

The Journal notes:

"The most talked-about political worry is Mr. Kerry's tax policy, which, according to his policy advisers, calls for undoing the recent cuts in capital-gains and dividend taxes for investors with incomes greater than $200,000.”

Is this what’s really been worrying the markets?

Unless there is total election shocker, there will be at most a divided government, with the House of Representatives unlikely to change leadership. This would force both branches of government to move towards the center, and govern moderately - an arrangement under both Presidents Reagan and Clinton that worked out quite well for equities.

Chart of the Week: Average Election Year Markets

Monday, July 26, 2004 | 01:47 PM

in Finance

Markets historically do well during presidential election years. In the event an incumbent loses, we tend to see a post election rally, as people adapt and rationalize the change. When incumbent’s win, it suggests the economy is pretty good, and the markets have a fundamental basis for rising.

Average Election Year markets
average_election_year

Source: Chart of the Day

Either people are happy with the direction of the country, or they look forward to a change.

Random Items:
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23 Reasons Google Could Become a Penny Stock
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Quote of the Day
"I have learned as a composer chiefly through my mistakes and pursuits of false assumptions, not by my exposure to founts of great wisdom and knowledge."
-Igor Stravinsky (1882-1971)

Google prices shares at $108 - $135

Monday, July 26, 2004 | 10:55 AM

in Finance

Google priced 24.6 million shares of its IPO at the astounding level of $100+ dollars.

That's $3.3 billion worth of stock -- on the opening tick, Google would have a market cap of $36.3 billion (if it prices at $135). Compare that to eBay's $48.5 billion cap, Yahoo!'s $37.5b, and Amazon's $15.7b. (Not too shabby!).

Is Google worth one Yahoo, or two Amazons or 3/4s of an eBay? That's what they are betting with this pricing.

On the one hand, you have to admire Google's desire to capture as much of the value of their IPO for their own corporate usage as possible. In the bad old days -- starting with Netscape, and continuing on until the bubble burst -- all of that excess capital from astounding opening day pops went everywhere and to everyone BUT the company: Bankers, hedge funds, traders. A firm would raise a 100 million or so, and watch as it left billions on the table.

Of course, the insiders didn't care as much 'cause they had options, and so (on paper at least) they were wildly rich.

But without an incentive to support the stock, will Wall Street analysts and marketmakers keep Google's (GOOG) share price sky high? Some feel that they may have overreached a bit.

Now that Google has rewritten the rules for Search, they are trying to rewrite the rules on Wall Street; They may find the algorthms of the Street far less controllable than mere software code . . .

Wall Street reaction to key events during the Bush term

Monday, July 26, 2004 | 06:37 AM

in Finance | Politics

CBS MarketWatch has a terrific round up of all the political activity at the Democratic Convention in Boston this week, specifically focusing opn the impact on the financial markets.

Here's how the markets have reacted to seminal events during the Bush Presidency. Somehow overlooked is the invasion of Afghanistan (?) and the recent Abu Ghraib prison scandal.
Election Timeline

MarketWatch notes that Wall Street is "the biggest single source of campaign cash" for the President (although challenger John Kerry also receives some of the Street's largesse.) All this money buys something, and Wall Street leaders have a long wish list for Washington: The top of the list: lower taxes and lower deficits.

cbs_contributors_securitie

As the chart above shows, Wall Street's Financial services firms show 5-to-1 bias for Bush in their campaign contributions.

CBS's graphic department does a nice job on making complex subjects readily decipherable.

You should absolutely go check out the entire section of coverage . . .

Kerry & National-Security

Sunday, July 25, 2004 | 08:56 AM

in Politics

As the Democratic convention gets underway this week, the WSJ raises what may be a crucial issue for the Presidential challenger in the minds of the undecided voters: National Security.

Despite polling well otherwise, voters still give Kerry weak marks on the central issue of "Defense" and "Terrorism:"

"Voters remain wary of Mr. Kerry on national security, the issue looming over the contest as U.S. troops remain in Iraq, and post-Sept. 11 fears of new terrorist attacks at home haven't faded. Just 36% of those surveyed rate Mr. Kerry highly on "being strong in protecting American interests overseas," while 35% give him poor marks. By contrast, 62% rate him highly on "being smart and intelligent," and 48% credit him with being "knowledgeable and experienced enough" for the presidency."

During the primary, Kerry's greatest perceived strength as a thrice decorated war hero was his perceived ability to withstand a concerted GOP attack on his National Security's credentials. There is some irony here that this remains an issue. The flip side, however, is that a candidate with lesser strengths on the subject might not even be in the running at this late date.

For the incumbent, this is a mixed blessing: His record on Terror is front and center, and voters have a fairly clear idea of his positions. Indeed, its the Iraq invasion hangover -- bad intelligence, poor post war planning, questionable judgement -- that continues to weigh on his re-election chances.

For Kerry, the week offers a clear opportunity: If he can show Defense chops, build National Security street cred, and allay the fears of undecideds, he wins the Presidency. Allow the "wishy-washy" tag on Defense to stick, and risk losing.

It's just that simple.

The Journal notes the risks and rewards he faces:

"John Kerry enters next week's Democratic Convention in a better position than any presidential challenger in a generation -- but still needing to show more strength on the national-security issues that underpin President Bush's support.

A Close Race
A new Wall Street Journal/NBC News poll shows the Massachusetts senator in a virtual dead heat with Mr. Bush as Democrats gather here to nominate him as their presidential candidate in the Nov. 2 election. Not since Ronald Reagan's 1980 bid to oust President Carter, according to Gallup, has a challenger approached his nominating convention even with or ahead of a White House incumbent.

Yet the poll also shows that voters remain wary of Mr. Kerry on national security, the issue looming over the contest as U.S. troops remain in Iraq, and post-Sept. 11 fears of new terrorist attacks at home haven't faded. Just 36% of those surveyed rate Mr. Kerry highly on "being strong in protecting American interests overseas," while 35% give him poor marks. By contrast, 62% rate him highly on "being smart and intelligent," and 48% credit him with being "knowledgeable and experienced enough" for the presidency.

Thus, lifting Mr. Kerry's standing on national security is crucial to his chances, according to Democratic pollster Peter Hart, who conducted the Journal/NBC poll with the organization of his late Republican counterpart, Robert Teeter. "It's a high hurdle, but it's not a pole vault," said Mr. Hart. . .

But the new poll suggests that the public itself shares some of the same conflicts about Iraq these days. The Republican Party's advantage on handling Iraq has dwindled to eight percentage points from 27 points in January. A 47% plurality says removing Saddam Hussein from power in Iraq hasn't been worth the financial and human costs. By 56%-40%, voters say Mr. Bush should have done more to make sure that prewar intelligence on Iraqi weapons programs was accurate.

Some other fascinating details emerge from the WSJ/NBC Poll:

After seeing his job-approval ratings erode since January, Mr. Bush has rebounded moderately:
• 48% now approve of his performance, while 46% disapprove; in June, a 49% plurality disapproved;
• 47% say Mr. Bush doesn't deserve re-election, down from 50% last month.

The contours of national opinion are positive for the party out of power:
• By 48%-36%, voters say the country is on the wrong track;
• A robust 58% majority sees the U.S. economy heading for trouble rather than prosperity;
• Voters now say Democrats would do a better job on the economy by an 8% margin.

The intensity of support for the challenger has edged up to similar levels as the incumbent:
• 72% of those backing Mr. Kerry now say they "definitely" will vote for him, up from 64% in June.

Potential for growth:
• One-third (33%) of the electorate says it still knows little "about John Kerry and what he stands for;"
• one-fifth (20%) are neutral in their opinions about him;
• 42% of voters who are not now supporting Mr. Kerry say there's some chance they will vote for him;
• 34% of non Bush supports say they might vote for him.

The horse race continues . . .

Source:
Kerry Faces National-Security Hurdle
Bush's Challenger Fares Well in Poll, but Voters
Give Democrat Weak Marks on Central Issue
By John Harwood and David Rogers
The Wall Street Journal, July 23, 2004; Page A4
http://online.wsj.com/article/0,,SB109053659325871663,00.html

Download full polling data
http://online.wsj.com/public/resources/documents/poll20040722.pdf

Voluntary Collective License

Sunday, July 25, 2004 | 07:01 AM

in Music | Web/Tech

Ren Bucholz is a San Franciscan who works for the Electronic Frontier Foundation. His recent graphic on VCL's (Voluntary Collective License) is rather intriguing:

Click for larger graphic

via Bucholz's site, trubble.com

Is the market reacting to the incumbent's chances?

Saturday, July 24, 2004 | 05:31 AM

in Politics

Nothing like a little political discussion to spice things up on a rainy Saturday morning.

In an attempt to add some empirical facts to a highly emotional issue, Bianco Research has been tracking the relationship between the S&P and Transport.com's Bush reelection futures, and has concluded they're symbiotic.

I disagree.

Bianco notes, via Aaron Task of the TheStreet.com, the following (dubious IMHO) relationship:

"A couple of interesting things – Bush has always been above 50% in this [futures] market, which belies some of the polls that we've been seeing lately," Bianco wrote on June 30. "This market has always thought Bush was favored. ...from August 2003 to the high in January 2004, as Bush futures went to 75 briefly, the stock market was moving up over the same period. ...as Bush futures declined from 75 to 53, the stock market went sideways. Since January, the biggest rally in stocks has been the current rally of the last three weeks or so. The biggest rally in Bush futures since January has also been in the last three weeks or so [again this is of June 30]. These things might not be unrelated. The stock market might want Bush to win, and may be keying off of Bush's re-election chances."

Here's Bianco's chart; Note that my own annotations are in Purple.

bush_and_the_market

My response:

Jim Bianco makes an interesting but highly tenuous (specious, even) argument, for oh-so-many reasons. The first is that markets, being highly complex systems which seem to operate based upon same the principles which govern Chaos theory, are simply too multi-faceted for any single factor to dominate -- at least beyond a short period of time.

Second, the President's futures peaked way before the market did -- but in other instances, the futures hardly led. At best, they may be a lagging indicator -- and just one of many.

Third, an economic reality: all Presidents get far more credit and more blame than they deserve, at least when it comes to economic performance. The business cycle and the Fed Chair have alot more to do with the economy than the President does. (An argument can be made that in the present case, some of the economic policy decisions The Prez made are having their impact -- they were stimulative of some sectors, but not others, and perhaps now the stimulus is fading).

Lastly, markets get it wrong -- and quite often. I know this is a scandalous assertion to some, but sorry, I believe it to be true. Mr. Market was wrong when Nasdaq was at 5,100, and he was wrong in Oct '02 at 1,100. The 4 false rallies since the crash were "wrong," at least in terms of predicting a recovery.

I addressed how wrong prediction markets can get Iowa and Prediction Markets, which had Vermont Governor Howard "I have a scream" Dean as a sure thing in the Dem Primary.

So much for that prediction . . .

Equity Markets Could Be Ripe For A Bounce

Friday, July 23, 2004 | 11:37 AM

in Media

Yesterday's technical talk got picked up by Dow Jones Market Talk right at the Bell:

07/22 4:00P (DJ) DJ MARKET TALK:
Equity Markets Could Be Ripe For A Bounce
Story 10889

4:00 (Dow Jones) The recent stock selloff is the sort of tiring action that eliminates weak hands, exhausts sellers, and throws off enough confusing signals that both bulls and bears end up frustrated, says Maxim Group strategist Barry Ritholtz. But, it also creates a deeply oversold condition making a bounce relatively easy. He sees the markets bouncing back for the third time this year, with the Nasdaq able to recover to 2040 and S&P 500 to 1140. He sees a low-risk entry point here and says investors won't need much to go right, as long as nothing major goes wrong. (NPB)

35% of All CDs are Illegal Copies

Friday, July 23, 2004 | 07:28 AM

in Finance | Music

Despite the industry's stalking horse obsession with P2P -- the technology they both fear and fail to understand -- the bigger more dangerous issue facing the major labels continues to be counterfeiting.

By their own overblown admission, the labels (via mouthpiece The International Federation of the Phonographic Industry), is making the astounding claim that one out of every three CDs sold is a counterfeit.

This mind-boggling statistic, though likely exaggerated, demonstrates what a foolhearty distraction the RIAA litigation campaign against their consumers has been. If one third of your production is essentially stolen property, than as an industry you doing something very, very wrong. Indeed, these numbers are an admission of utterly incompetant corporate mismanagement and misfocused businesses plans.

In the real world, this sort of malfeasance invariably results in management shakeups and corporate reorganizations, with the irresponsible parties given the sack.

I do not believe the industry fully comprehends the underlying problems its facing -- or if they have the backbone to confront them.

Here's an excerpt from Digital-Lifestyles:

"The International Federation of the Phonographic Industry has published a report claiming that 35% of all CDs sold around the world are illegal copies – that's 1.1 billion pirate disks. The report also includes a list of countries recommended for government action: Brazil, China, Mexico, Pakistan, Paraguay, Russia, Spain, Taiwan, Thailand and Ukraine.

Sales of illegal discs rose 4% in 2004, though the year saw the slowest increase since 2000, an indication that increased anti-piracy activity is having a positive effect.

Clearly the biggest threat to the record industry today is not P2P networks but the more traditional CD copying seen in the the IFPI's ten priority countries where anti-piracy offensives are most needed.

The report contains a four point "Call to Governments" asking for strong and updated copyright laws, sentences to deter pirates, the regulation of disc manufacturing and a commitment to prosecute copyright infringers aggressively.

IFPI Chairman and CEO Jay Berman said: "Commercial music piracy dominates large swathes of the world’s music markets, despite an encouraging slowdown in growth in 2003. This illegal trade is funding organised crime, fuelling widespread corruption and costing governments hundreds of millions of dollars in lost taxes. It is destroying artist careers and music cultures, and robbing countries with high piracy rates of billions of dollars of investment they would otherwise enjoy.

"The responsibility now is for governments – and especially on the 10 priority countries our report names – to act decisively against the problem. This means proper enforcement, deterrent sentences against pirates, effective regulation of disc manufacturing and, above all, the political will to make sure real change happens."

Graphic courtesy of IFPI

The full report is here: http://www.ifpi.org/site-content/library/piracy2004.pdf

Source:
IFPI: 35% of All CDs Sold Worldwide are Illegal Copies
Fraser Lovatt
Digital-Lifestyles
23 July 04
http://digital-lifestyles.info/display_page.asp?section=distribution&id=1423

The Recording Industry Commercial Piracy Report 2004
http://www.ifpi.org/site-content/library/piracy2004.pdf

Media Appearance: Kudlow & Cramer (July 22, 2004)

Thursday, July 22, 2004 | 02:11 PM

in Media

A quick heads up: I just got tagged for Kudlow & Cramer tonite, 5:10 pm, CNBC.

We will be 2nd up on the show. The subjects will be all the usual things: Today's comment, including the Presidential Elections, the Economy and of course, the Markets.

Let’s Get Technical!

Thursday, July 22, 2004 | 01:54 PM

in Finance

We use technicals as a key component of our market timing model. Although the charts very much color our thinking about where the markets are and where they may be going, we spend very little time discussing them in much detail, as we long ago have learned to recognize that glazed over look in people’s eyes when we discuss support and resistance, breakouts or retracements.

Today’s missive will focus on a developing pattern – the Head & Shoulders consolidation formation (see chart nearby). While it’s a technical no-no to buy or sell in anticipation of a pattern yet to be formed, it is valid to consider how the market might be developing.

With that caveat in place, lets look at how the S&P, Dow and Nasdaq have been trading. After the 2003 move up, the indices clearly established a major up trend. After peaking on January 26 of this year, the indices saw 3 major sell offs. The first two enjoyed a substantial bounce – each of which failed at the forming neckline. The most recent sell off appears to be testing the last bottom made on May 17th. Any subsequent bounce from here will complete a Head and Shoulders continuation pattern.

The seminal book on Technical Analysis (Magee and Edwards) notes: “Occasionally, prices will go through a series of fluctuations which construct an inverted head and shoulders picture, which in turn, leads to continuation of the previous trend.” If that is what is forming here, it is indeed bullish in the short term, as the market should follow the prior pattern, bouncing off these levels.

For the longer term, a high-volume penetration of the neckline bodes well for the intermediate term – about 6 to 18 months.

For now, the technical short-term downside risk, in our opinion, is at 1 to 3% (I tend to be a bit early). The upside is a possible bounce of 10% or better, towards that H&S neckline. I would limit my downside to 5% if you are buying indices here for a trade – in case we are wrong and we experience a cascade sell off.

Right here, I am looking for an oversold bounce, taking us back to the recent highs of late June and late April. If that neckline gets penetrated to the upside – a possibility, to be sure, but in no way a sure thing – we could see a full-blown year-end election-year rally. If in the event that occurs, upside targets would be 11,200 on the Dow, 1220 on the SPX and 2320 on the Comp.

Chart of the Week: Nasdaq Head & Shoulders Formation?

Thursday, July 22, 2004 | 12:39 PM

in Finance

All the major indices appear to be on the verge of tracing out a major continuation pattern: The Head & Shoulders. While often thought of as a reversal pattern at tops or bottoms, H&S is also a continuation pattern.

Nasdaq (1 year chart) Head & Shoulders Formation?
click for larger chart

Source: StockCharts

If the indices manage to break through all of the resistance at the neckline, it provides both an upside impetus, as well as a “count” or upside target.

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Quote of the Day:
“It’s not that I am so smart; It’s just that I stay with problems longer”
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Rumor Control

Thursday, July 22, 2004 | 09:53 AM

in War/Defense

Dan Gillmor points to a new National Security blog: This Is Rumor Control

Here's their self description:

Welcome to This Is Rumor Control, a new blog dedicated to original reporting, commentary, and discussion of security and foreign policy issues. Over the last several years, we have watched U.S. foreign policy drastically shift to an extreme and dangerous place, breaking historic traditions and principles solidified by decades of diplomacy. In discussions with colleagues and friends, who are current and former intelligence, military, and foreign service officers, we learned how severely off-track our policies have become. We have participated in debate after debate in the media, as well as in our own circles, only to be dismissed or criticized for our willingness to challenge the current strategies aimed at curbing terrorism and anti-Americanism.

If you follow geopolitcal issues, this may be a worthwhile blog to watch . . .

Media Appearence: Cavuto on Business (7/21/04)

Wednesday, July 21, 2004 | 03:03 PM

in Media

A heads up: I'll be appearing on on Fox today (Cavuto on Business @ 4:30pm EST).

I'll be appearing with Tobin Smith, and Mr. Lahiji, a 19 year old stock picking phenom. Of course, you already know my views on how much market timing impacts stock selection.

The topics will be the Microsoft's dividend, the election, and (of course) the markets. Should be . . . interesting.