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Linkfest

Good Saturday morning!  Another week of up/down/all around slamma/jamma trading. Markets did not have alot to show for all their exertions, ending pretty much where they began.  I guess we can thank China, Microsoft, Gentle Ben, Oil, Gold and Silver for our trials and tribulations this week. All in all, its been pretty nuts, and nothing sums it up better than this cartoon, Its now official . . . we have no idea what's going on.

Ahh, but enough frivolity -- once again, it is another gorgeous weekend in the North East, and rather than fritter away the time chitchatting, lets plow headlong into this week's linkfest:

• China tightened rates this week, and we were about to head into a nasty sell off. That was averted by Fed Chair Bernanke's dovish testimony to the JEC. The markets reversed on the phrase "even if in the Committee's judgement the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings;"  And thus, we keep getting reminded that It's the data, stupid;

• File this under Uh-Oh: After the prior week's big 200 point one day rally, I wrote (on April 19th) that the worst case scenario for the markets were a Pause/Resume scenario.  Guess what? That is precisely what the Fed Chair implied with that quote above; The Pause/Resume scenario is now increasingly likely;  Jim Jubak, writing before gentle Ben's testimony, explained why interest rates will march higher;

• In other economic news, the WSJ reports that GDP Up, Wages Stagnant (If no WSJ, go here). GDP and Durable Goods data are a perfect example of why you must look at the series, and not rely on a single data point.

• Follow the bouncing email: In a related but amusing item, a reader sent me the the Columbia Business School Follies clip for "Every Change of Rate," a terrific parody of Bernanke and Glenn Hubbard; I dutifully blogged it, the WSJ Marketbeat picked it up, I forwarded it to Kudlow's producers who put it on the show that night. The Columbia grad students ended up on Power Lunch the next day. I'm telling you, this email/internet thingie is gonna be big one day;

• As bad as things may be for Detroit, product remains the key to success in the car biz. Proof: the hot Ford Mustang;

• With Gasoline over $3 (blame Congress for the poorly thought out Ethanol plan), there were lots of interesting energy news: Some have proposed global cooperation as a way to bring prices down (Ha!). Some companies are allowing Telecommuting as a way to deal with High Gas Prices -- and it seems to be working; Business Week notes these are surprisingly dark days For Energy Efficiency; Its not only gasoline, but electricity too -- deregulation of electric markets is also pinching consumers;

• One of my favorite blogs looks at what it costs to fill up big SUVs in California (note: the prices are for regular, but many of these big trucks require premium); The NYT blames a Trading Frenzy" as adding to the oil price rises; 

• No wonder the WH is ahoppin: Charts from several sources (including our own Paul Kedrosky) note the correlation between Gasoline Prices & Presidential Approval; 

• After Bernanke's JEC testimony, I opined "I think Gold -- and most of the commodities -- just got a whole lot sexier;" We saw Gold jump almost $20 the next day, Copper is at record, (some think the cycle may last years), and the Silver ETF traded 2.342 Mln shares on its 1st day;   

• The longer cycle perspective comes from Marc Faber, who stated that "Gold May Rise 10-Fold If Dow Triples;" Or not: Veteran S&P beating fund manager Bill Miller warns that the sudden enthusiasm for commodities is very late in the cycle; it reminds him of the love of tech circa 1999;   

• Slate's Dan Gross notes that All this Globalization used to drive down prices; Not anymore;   

• Meanwhile, in the Middle East: it appears the military is in Iraq for the long haul. Iraqi Strife is seeping into the Saudi Kingdom; Troublesome Iran deals two blows to U.S. at global oil talks; 

• Cornell's Walter LaFeber has trained three of the last four Advisers for National Security, plus a top member of Dick Cheney’s staff. So I sat up and paid attention when he penned an article explaining Why Condi Rice's Foreign Policy Approach Is Flawed

• Over a dozen links and no mention of housing? Let's rectify that:

-Good overview from Waxchovia:  The Outlook for the Housing Market: The Music Has Not Ended, but the Beat Has Certainly Changed (pdf);

-Consistent with that: Strength in the Housing market has shifted to new regions;

-A look at the top 7 Coolest Real Estate Web 2.0 Sites;

-The Real Estate Journal continues to mull over whether we will have a Soft Landing or a Crash for the Housing Market?   

-You know my views on the bubble issue, but I still found this interesting: Marching Through The Phases Of The Housing Bubble;

- The Global Association of Risk Professionals (GARP) looks at Deciphering Smoke Signals in the US Housing Market in Today’s Economy;

• Lots of news from China this week (notice a trend?)It seems that Google has a China Problem (and vice versa); Jon Markman thinks explains How China is winning the oil race; Finally, The International Herald Tribune looks at the huge imbalances in the U.S. current account withg China, in the amusingly titled Bubble, schmubble - foil or trouble;

• This week saw the long awaited return of the Apprenticed Investor series with Seven Steps for Handling Stock Tips; It was motivated by the ginormous spike in bulletin board volume; On a related note, the WSJ offers How to Tell if You're Going Too Far Taking on More Risk;

• A "Contrarian's contrarian" goes for the Incubators ICGE and CMGI;

• Earnings have been coming in strong, and lots of folk say that's the basis for their bullishness; Not Marty Zweig or Ned Davis, who quantifiably show what you can expect from Earnings and Subsequent Market Performance;

• Thanks to the real estate boom, a lumpy recovery, and the dividend/capital gains tax cuts, your percentage of after tax assets/net worth has likely changed significantly over the past 5 years. It depends upon where you are in the economic scale. I was surprised to learn that the bottom 25% had a negative net worh.

• Fascinating chapter in the book How People Learn about (available on their website)  How Experts Differ from Novices;  Experts think in terms of core concepts or big ideas, while Novices' are more likely to search for pat answers that fit their everyday intuitions. Consider the repercussions this has for Investors, and how they process information; 

• Moving to the world of Science, we learn that: Black Holes are Actually Green; (See this cool NASA Black Hole Simulation); Men and Women are Wired Different Emotionally (duh); and the Milken Institute's Not If, But When: The Economic Impact of the Coming Flu Pandemic;

• On the Tech side, some interesting reading: Bob Cringely thinks Apple will buy Adobe, and challenge Microsoft Office;  Peter Abilla discusses his interview & job offer from Google;  we should expect some cool stuff on Geodata from both Google and Microsoft;  With Sun's Scott McNealy stepping down from Sun, perhaps its time to get a grip 'hairball,' and other McNealyisms; Here are some Gadgets for the Lazy;  Lastly, the sexy fun geeky Women of Mac World Expo;

• Two interesting Food & Drink related items: The NYT lays out the explosive growth of Australia's YellowTail winery; (I'm a big fan of Australian and New Zelaland wines) Also, a Mediterranean diet may repel Alzheimer's;

• So much music related news: The RIAA sued a family that doesn't have a PC (more here); They lose their attempts to force a Guardian Ad litem; This blog covers all the RIAA's lawsuits; The Allman Bros and Cheap Trick sue Sony, claiming they are getting ripped off on downloads (how can the Labels claim "breakage" of downloads, as if they are not physical records or CD? What weasels!); The Canadian Music Creators Coalition warns the RIAA that "Suing Our Fans is Destructive;" The Consumer Electronics Association finds their voice, and finally asks: Who Are You Calling "Pirate"?  Lastly, in Cost Per Minute, we learn Compact Discs Are Not A Good Value;

• Bruce Springsteen hits the road once more, channels Peter Seeger on his new CD; (click through for video of the song John Henry); Arriving this week was my copy of the 30th Anniversary 3-Disc Set of Born to Run, which I will update you on in the future;

• The WSJ pegs In the Wee Small Hours as the Best Album Sinatra Made; While that's an impossible task, you can't go wrong with that album; Any of the discs he recorded with Nelson Riddle are terrific;

• I've liked Metacritic for years; Its a great way to get a sense of what is getting good critical reviews; United 93 scored very well;

• The Movie Timeline is the history of everything, taken from one simple premise: that everything you see in the movies is true, so long as it's reported in a movie somewhere...

• Hysterical:  Christian Rocker Dan "Southpaw" Smith makes a biblical parody of "Baby Got Back" (as seen on VH1's WebJunk)

• Sorta mixed reviews for James O'Shaughnessy Predicting the Markets of Tomorrow' (I'm still interested, having liked his prior What Works on Wall Street);   Also interesting:   American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury is getting good reviews (I have read not it yet);   

• Finally, via GMSV, two for the Sci-Fi buffs:  Spock gets his own My Space page; and Jedi Breakfast (which is not suitable for the easily offended)

I'm off to enjoy the great outdoors! You should too!

Sunday, April 30, 2006 | 05:30 PM | Permalink | Comments (2) | TrackBack (0)
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Are you a 'clueless' investor?

Regular readers of this blog know that Behavioral Economics and Investor Psychology are two themes I frequently come back to. We know that Humans are far from the rational participants that many Economic theorists assume them to be; We also know that  these same Humans, when gathered together in a herd, engage in very specific behaviors that they wouldn't otherwise when acting alone.

Those observers who figure this out stand to benefit from this knowledge.

With that as a background, let's have a look at this straight forward analysis of investors, from Paul Farrell: 10 facts to reveal if you are a 'clueless' investor:

"Unfortunately, investors are still asleep: Most investors don't realize they're in denial. They still assume they're making rational investment decisions. Worse yet, most investors are not only clueless about being irrational, they're clueless about being clueless.

There are three reasons for this ongoing psychology of denial. First, many investors hate being irrational. Their weak egos need the myth of rationality. Second, Wall Street loves having investors trapped in the myth. A clueless investor is easy to manipulate when it comes to fees and commissions. The third reason is that most behavioral-finance books are dull, boring texts filled with jargon and cryptic formulas."

A bit harsh, but true. Farrell presents a 10-question behavioral-finance quiz that will determine if you aware, in denial, irrationa, or simply a patron of the casino. He calls the quiz "10 facts Wall Street would rather you continue denying."

See how many of the 10 you can accept:

1. Regardless of the facts, you cannot admit failure
"The greatest consistent damage to businesses and their owners is the result not of poor management but of the failure, sometimes willful, to confront reality." Same with investors and governments.

2. The market loves making fools of everybody
Ask yourself: Does 2006 look good because the first quarter closed with the best gain since 1999, or is it a sucker's rally? History's more important than quarterly reports. Looking back six years the market's a loser: the DJIA, Nasdaq and S&P 500 are still below 2000's record highs. In "Stocks for the Long Run" Jeremy Siegel studied history, the biggest up and down days from 1801 to 2000. His conclusion: Markets are random. There's no rationale for 75% of the moves that trigger most long-term gains or losses. Investing is unpredictable.

3. Optimism is the investor's worst nightmare
P/E ratios reflect optimism, your worst nightmare. Long-term, P/Es are still high. They've been under 15 most of the last century and peaked at 44.3 in 2000. They spiked over 15 twice before, once in the 1920s before the Great Depression. Again in the 1960s bull, before an 18-year sideways market. Today P/Es are 21.4, below the peak but still deceptively high. Are you overly optimistic?

4. America is like an addict who can't stop
Our savings rate is below zero so we borrow $67 billion a month to feed our addictive consumerism. We're insatiable, only crashing will stop us. If you're not saving 10%, you're spending too much.

5. Kids will rebel against their out-of-control elders
In "The Coming Generational Storm," economists Larry Klotnikoff and Scott Burns warn us about the massive debt we're piling on our kids: Social Security, Medicare, government deficits, trade debt, corporate pensions, mortgages, credit cards. Our kids will rebel against the $70 trillion legacy created by today's reckless out-of-control spenders.

6. We're selling our power to Asia and the world
Back in his 1997 "Megatrends Asia," John Naisbitt predicted: "the 21st Century belongs to Asia." Our egos still can't accept that we're giving away our power, mortgaging our future, selling key assets, self-sabotaging.

7. Failure to plan for crises guarantees failure
Failed societies are the ones whose leaders "focus only on issues likely to blow up in a crisis within the next 90 days." Sounds like Wall Street's fixation with quarterly earnings or Washington rebuilding Category 3 hurricane-resistant levees.

8. 'Greed is still very good" ... for Wall Street
The problem is obvious: Despite all the scandals, Wall Street is sinking deeper into a culture of greed, where investors come second. And unfortunately, Washington and Corporate America back Wall Street, not you.

9. God, oil and skyrocketing debt don't mix
Rome, Britain and others lost power following a convergence of three trends: diminishing resources, ballooning debt and militant religions. The mix creates a blind obsession for world domination, which ultimately self-destructs. Are we in denial, or is he?

10. You can't trust 'them,' they're lying to you
Begin with this assumption: You cannot trust anyone out there, not Wall Street, not Washington, not cable, not ads, nobody. "They" are all trying to control your mind, spinning and lying all day. Skepticism wins.

Farrel claims that "Anything less than eight and you're definitely clueless, trapped in denial, clueless about being clueless ... and easily manipulated by Wall Street."

His advice? "If you do see what's going on, then you can choose to either get out of denial and use the new concepts of behavioral finance to your advantage or continue letting Wall Street spin your cluelessness against you."

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Source:
Are you a 'clueless' investor? Tell us how you 'see' these 10 facts
Behavioral finance: a psychology of denial?
Paul B. Farrell
MarketWatch, 7:00 PM ET Apr 10, 2006
http://tinyurl.com/zutc3

Sunday, April 30, 2006 | 07:59 AM | Permalink | Comments (8) | TrackBack (0)
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How People Learn: How Experts Differ from Novices

Fascinating chapter in the book "How People Learn" about How Experts Differ from Novices;  It has significant repurscussions for Investors and where they get their information from.    

Consider:

1. Experts notice features and meaningful patterns of information that are not noticed by novices.
2. Experts have acquired a great deal of content knowledge that is organized in ways that reflect a deep understanding of their subject matter.

3. Experts' knowledge cannot be reduced to sets of isolated facts or propositions but, instead, reflects contexts of applicability: that is, the knowledge is "conditionalized" on a set of circumstances.

4. Experts are able to flexibly retrieve important aspects of their knowledge with little attentional effort.

5. Though experts know their disciplines thoroughly, this does not guarantee that they are able to teach others.

6. Experts have varying levels of flexibility in their approach to new situations.

Bottom line:  Experts first seek to develop an understanding of problems, and this often involves thinking in terms of core concepts or big ideas. Novices' knowledge is much less likely to be organized around big ideas; they are more likely to approach problems by searching for correct formulas and pat answers that fit their everyday intuitions.

Saturday, April 29, 2006 | 10:25 AM | Permalink | Comments (9) | TrackBack (0)
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GDP Up, Wages Stagnant

As expected, GDP was up nearly 5% in Q1 2006 -- the 4.8% rise comes on top of the "tepid" 1.7% gain in Q4.

Once again, many people wrongly reach concIusions from a single data point: With the aftermath of Katrina and Rita disruptions, the loss of shipping down the Mississippi, and the shutting down of refineries and off-shore platforms, the hurricanes and loss of New Orleans was the specific cause of the 2005 Q4 number.

Similarly, the pushing forward of production and consumption from Q4 into Q1 explains the big pop in Q1. If you want to know what GDP is actually, use some common sense and average the 2 quarters:  GDP is growing about 3.25%. Same for durable goods: It spiked at a 20.6% pace in Q1 versus plummetting at a 16.6% rate in Q4 '05. 

You should not need a Ph.D in Applied Mathematics to figure out what happened.

In a apparent surprise to economists -- but no surprise to readers of this blog -- wages were flat. As previously noted, there is inflation in everything but wages.

The WSJ noted:

"Despite the robust economic growth, a separate Labor Department report showed that compensation costs for employers rose only 0.6% in the first quarter -- the slowest quarterly gain in nearly seven years -- following a 0.8% gain in the fourth quarter.

Wages and salary growth was unchanged at 0.7% in the first quarter, and only 2.7% higher than a year ago. That came as a surprise to many economists as prevailing conditions suggest workers are in a better position to bargain for higher pay."

It was a surprise only to those model driven economists who do not have a way to validate their abstractions in the real world. Indeed, unless your skillset is very specific and highly quantifiable, your wage were flat. In Real terms, i.e., adjusted for CPI inflation -- they were slightly negative.

For the reality-based dwellers of the real world, put aside the CPI measured inflation fiction and consider actual cost of living increases: your purchasing power was down between 5 - 10%.

Ouch.

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Source:
Economy Leaps, but Wages Stagnate
GDP Increases by 4.8% In Biggest Rise Since 2003; Growth in Salaries Is Flat
CHRISTOPHER CONKEY
WSJ, April 29, 2006; Page A3
http://online.wsj.com/article/SB114622713718138689.html

Saturday, April 29, 2006 | 07:34 AM | Permalink | Comments (22) | TrackBack (1)
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Gasoline Prices & Presidential Approval

Lots of polling data out this week: Here are few separate charts of Presidential Approval rating of key polls (composite);  Prez Approval inapposite to gasoline; And then an inverse gas chart:

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WSJ Composite Major Polls

Source: WSJ/NBC

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If this was a stock, I'd advise management to revisit whatever they did in Q3 2001, and Q1 2003.  (Uh-oh.  Perhaps that explains the saber rattling versus Iran).

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The next chart comes to us via Paul Kedrosky's Infectious Greed:  Paul notes that "inverse relation between retail gas prices and President Bush's approval ratings is worth pondering."

Bush Approval and Gasoline Prices

Hardly spurious, Paul -- gas prices generate a visceral reaction, and the public wants to blame someone -- either the oil companies or the President.  (Hey, do you think all those SUVs you fat bastards are driving have anything to do with it?)

Lastly, have a look at this chart, which inverts gasoline prices.   

via Professor Pollkatz

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There is clearly a correlation -- is it causative, or are the same underlying factors driving both issues? I tihnk it may some of both . . .

Friday, April 28, 2006 | 01:27 PM | Permalink | Comments (25) | TrackBack (0)
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SUV fill up index

Tim rolls out the latest version of the SUV fill up index; Note that many of these high end trucks require premium fuel, which in NY is $3.59/gal:

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Ouch!

No wonder the polls for the WHite House and Congress are so low: No matter how many speeches, people fill up more than they can get spun. (I'll get some polling data up later).

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Source:
Can't ... Keep ... Up
Tim Iocano
The Mess That Greenspan Made, Wednesday, April 26, 2006
http://themessthatgreenspanmade.blogspot.com/2006/04/cant-keep-up.html

Friday, April 28, 2006 | 12:30 PM | Permalink | Comments (13) | TrackBack (0)
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Inflation Watch

Yesterday, based on easy Ben the inflation dove's JEC testimony, I noted that:

"I think Gold -- and most of the commodities -- just got a whole lot sexier . . ."

That didn't take long:  Gold miners are up 4% today, Gold (the metal) is up $18, and the Silver ETF (SLV) is up nearly 5%.

On K&C yesterday, Larry suggested that Gold's modest pullback was a sign there was no inflation. I disagree.

I guess you can say my views remain the same: except for all various items going up in price (oil, food, industrial metals, housing, medical, education, insurance, precious metals, wood, building supplies) there is no inflation. 

The market is speaking loudly on the same subject today . . .

Friday, April 28, 2006 | 12:07 PM | Permalink | Comments (23) | TrackBack (1)
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Instinct and Emotions in Investing

In Sunday's linkfest, I pointed to an interview with MIT economics professor Andrew Lo. Today, I am privileged to be quoted with the good prof in an article on Investor Psychology:

"Andrew Lo, Professor at MIT, has published an interesting and widely appreciated work called 'adaptive market hypothesis' where he argues that player behaviour in the markets is influenced by the ability to adapt and evolve to changing situations. Market behaviour could draw more from Darwin than from Adam Smith.

Investors tend to use tried and tested rules of thumb in markets [heuristics] until they understand the difference in the situation, and then they learn ways to work the markets. What they do is more about survival instincts, and constant innovation and evolution, than about cold-blooded mathematics and analytics.

In this game, therefore, the mindset of the player is pitted against the social structure of the market, and the learning and evolution can never be uniformly distributed. Also there is no conclusive evidence that one set of players evolves faster than the others in the market ecosystem.

Others who have actually taken the logic of evolutionary learning to the labs have found that large mammalian brains like ours are perhaps incapable of winning in the markets, as our innate survival instincts are pitted against skill sets needed to win. Barry Ritholtz presents interesting work that argues that we may simply not be capable of investing rationally, given our genetic make-up and our learning process.

What does this interesting body of work tell us? We are perhaps better off remaining closer to our innate preferences and choices until we learn to adapt. Making investment choices that are ill suited to our basic levels of cognition and understanding, and more importantly, our ability to cope, can be risky."

Very cool, and very nice company to be included in with!

 

Source:
Instinct, the best investment gauge
Uma Shashikant
Rediff.com India Limited, Outlook Money | April 24, 2006
http://inhome.rediff.com/money/2006/apr/24invest.htm

Friday, April 28, 2006 | 11:00 AM | Permalink | Comments (3) | TrackBack (0)
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Free Enterprise Action Fund ?

At Bloomberg the other day, I met Tom Borelli, one of two guys who manage the Free Enterprise Action Fund.

I was kinda surprised by their management style -- they are the “anti-sociably responsible” fund -- challenging corporate management that accept Global Warming as real. Sort of odd, given that alterantive energies and clean technologies are poised to be a huge growth industry for the next century.

Given my curiousity and perplexment by this, I did some homework. I found out some interesting things:

- The fund is tiny, managing only 6 million dollars after 1 year; (insufficient to generate  fees to pay salary for two fund managers)

- They own 390 individual stocks, a high number, given execution costs and slippage; 

- Neither manager has any experience running assets, but instead were lobbyists;

This raises some question right away: Why are managers with no experience running a fund? What do they actually do for a living? Here's their backgrounds:

- Tom Borelli was a former tobacco company consultant;

- Steve Milloy was a paid Exxon Mobil consultant, challenging scientific findings of global warming. He was on the payroll when he established junkscience.com, which attempts to discredit via disinformation established scientific findings of global climate change.

The whole situation seems a bit off . . . to quote a friend, they are more like a "lobbying organization masquerading as an asset-management comp."

Odd. No wonder they barely have 5 Million after a year -- sounds  like a money loser . . .

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UPDATE: May 6, 2006 9:49am

Slate's Dan Gross has the specifics about the fund's performance:

"Judging by the early returns, these free-marketers are failing the test of the marketplace. The fund has attracted a paltry $5.2 million in assets as of March 31. Returns have lagged the S&P 500 badly. In its first 10 months in business, the fund returned 2.32 percent while the S&P 500 rose 4.72 percent...

FEAF's managers also don't appear to be very interested in making money. Assembling a portfolio of 392 teeny positions (111 shares of Federal Express, 60 shares of Tiffany, etc.) is an incredibly inefficient and costly way of trying to mimic the S&P 500. Asset managers get paid based on the assets they manage. At FEAF, the Adviser (Milloy plus Borelli) receives a fee equal to 1.25 percent of assets. Five million dollars in assets throws off about $62,000 in fees annually, which is nowhere near enough to pay the salary of a professional money manager.

Page 17 of the annual report shows that the fund incurred total expenses of $302,117, a whopping 6 percent of assets. But the prospectus promises that fees won't eat up more than 2 percent of total assets each year. And so in 2005, the adviser (i.e., Borelli and Milloy) waived his entire $44,727 management fee. What's more, the adviser reimbursed some $185,616 in trading, administrative, and legal expenses to the fund. If the fund's assets rise sharply in the next few years, the adviser can theoretically recoup these waived payments and reimbursements. But in the short term, it looks like Borelli and Milloy are essentially paying the fund for the privilege of using it as a platform to broadcast their views on corporate governance, global warming, and a host of other issues."

Sheesh! Thats not a fund -- its a thinly disguised lobbying effort. Regardless of your political affiliation, investors are strongly advised to steer clear.

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Sources:
Mr. Immelt, Explain Yourself, Fund Says      
Amity Shlaes
April 5 2006
http://www.bloomberg.com/apps/news?pid=10000039&
sid=af2YTlE9STiM&refer=columnist_shlaes

Free Enterprise Action Fund            
http://www.freeenterpriseactionfund.com/index.html

Analysis: Free Enterprise Action Fund                  
Center for Media & Democracy                           http://www.sourcewatch.org/index.php?title=Free_Enterprise_Action_Fund

Friday, April 28, 2006 | 09:00 AM | Permalink | Comments (20) | TrackBack (0)
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A few words about Microsoft

There is an old market saw about how the leaders from one bull market are not the leaders in the next bull market.

That's true for a number of tech stocks: Dell, EMC, Cisco, Sun -- and its especially true about Microsoft: 

I have never been a big fan of the Mister Softee. From a tech standpoint, their products are kludgy and unimpressive; Their strong suit is not Innovation -- it is relentless, incremental improvement, eventually leading to a decent if underwhelming product. What they end up producing are the lowest common denominator bloatware that can be easily managed by a corporate IT staff.

It is a great cash flow machine. Its the monopoloy, stupid.

From an investment perspective, there are 2 key issues to observe: first, they are a mature company whose fast growth days are well behind them. They are too big to be responsive, too expensive to be a value stock, too slow growing to be a growth stock. In short, they are in the process of morphing from the software PC leadership company to nice, quiet, money machine. I would expect a good entry purchase (i.e., from lower levels) could throw off gains of 10-15% a year, including dividend.

The second thing to observe -- and all too many investors overlook this -- is that the money is in the monopoly products. Except for Windows and Office, pretty much everything else is 3rd rate money-loser, with SQL as the exception. They have a few products that have slowly began to move up the scale, and their hardware products aren't bad, but note where the lion's share of their revenue, and nearly all of their profits come from:  the Monopoly.

They continue to lose market share to Google in search (Don't believe the vaporware hype); Their blogging product is a 4th rate ghetto; MSN continues to lag, losing share and money; X-box is a multi-billion dollar loser (no one else would have/could have thrown so much cash at merely hurting Sony);  They keep pushing back Vista -- thats a function of how sprawlingly large and apparently disorganized they have become as an institution; Oh, and I am still awaiting their iPod killer, first mentioned by them about 30 months ago.

I remember the days when the mere mention of Microsoft moving into a product area would disrupt the competition, force delays in other company's purchases, and crush competitor's stock prices. The vapor announcements have lost their punch; that strategy is no more.    

Outside of the monopolies of Windows and Office, there is SQL Server database software -- which has been garnering more share -- and not a whole lot more. Lest you think I exaggerate, go read their quarterly statement.

While I have no faith that management can aggressively boost future sales outside of their monopoly products, it almost doesn't matter. If you buy it now, your biggest risk may be death by boredom.  This will eventually become cheap enough to buy where it will be reliable if boring old money machine; I just don't think we are there yet . . .

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Update: April 28, 2006 9:33am

I wrote this up yesterday while awaiting Microsoft's earnings;  MSFT opened down 11% to make a new low $23.60; I would be a buyer in the high teens/low 20s (technically, $22- $22.50) -- so we are not quite there yet . . .

Also, see David Pogue's NYT column on the new Internet Explorer, who notes that the product hasn't been upgraded in over 5 years!

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Update 2: May 5, 2006 12:38pm

John Dvorak discusses 8 signs that the software giant is dead in the water in The Microsoft malaise

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Update: April 28, 2006 11:38am

Cramer joins the Microsoft skeptics . . .

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Microsoft 5 year chart

Friday, April 28, 2006 | 07:23 AM | Permalink | Comments (29) | TrackBack (1)
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Media Appearance: Kudlow & Company (4/27/06)

 

This is the regular gig:  Today's Kudlow & Company, is on CNBC today at 5pm. I'm scheduled to be on from 5:00 to 6:00 pm.

Also on is Marketwatch’s Herbert Greenberg, John Rutledge of Rutledge Capital, and Cody Willard.

Topics will include the fed Chief's testimony, Earnings, the Market Rally, Housing, and Gold and Oil. 

See our earlier posts on what Year-over-Year earnings produces in terms of subsequent market performance, and our previous discussion of Bernanke's commentary. . .

I also want to see if we can get CNBC to play yesterday's Bernanke/Sting parody, "Every Change of Rate," via students at Columbia Business School. 

Thursday, April 27, 2006 | 03:15 PM | Permalink | Comments (3) | TrackBack (0)
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Pause/Resume Scenario Increasingly Likely

As we previously observed, the Fed Halt is now baked into the cake; Going forward, we need to watch for what we previously viewed as the worst scenario for the markets:  The Fed appeases the markets, halts tightening, and gets behind the inflation curve. After letting inflation get away from it, they subsequently resume tightening, and its a debacle for the markets.

On the scale of hawkish/dovish past Fed Chairs, Bernanke clearly sits near "easy Al" Greenspan end of the spectrum, and far far away from the tough Paul Volcker / William McChesney Martin inflation hawks. So much for that vaunted muscularity we were going to see.

Ben Bernanke is now the Neville Chamberlain of Inflation Fighters . . .

I think Gold -- and most of the commodities -- just got a whole lot sexier . . .

Thursday, April 27, 2006 | 12:20 PM | Permalink | Comments (39) | TrackBack (2)
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Its now official . . .

. . .  we have no idea what's going on:

Thursday, April 27, 2006 | 09:00 AM | Permalink | Comments (16) | TrackBack (1)
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Earnings and Subsequent Market Performance

Someone on Kudlow's show misquoted me on Monday (Larry?), and I wanted to get this specific data correct and distributed.

The year-over-year earnings indicator is based on the work of Marty Zweig; Its something I have mentioned for several years now, and it has proven to be an accurate and reliable tell. Its based on data since 1927, and includes the great crash, as well as recent bull markets.

Specifically, double digit earnings growth are not a Sell Signal. What they have historically signified, however, was a future period of market underperformance.

Nor are really awful earnings a buy signal. Very bad numbers lead to major market losses.

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Market Performance
Let's start out assuming an average SPX return of about 11%; we can make that number higher or lower depending upon which time periods we use, whether we reinvest dividends, etc., but for this illustration, lets work with 11% as out average annual market return.

Next, we breakdown earnings returns into 5 separate groups of Year over year percentage gains or losses. They are:

Gains Above 20%

Gains between +10 and 20%

Flat +/-10%  (between losses of10% and gains of 10%)

Losses between -10% - 25%

Losses worse than 25%

Let's review these:

The best year-over-year earnings gains of over 20% produce only mediocre subsequent market performance -- over the next 12 months, S&P 500 gains on average a mere 1.9%. Rather underwhelming. It is not a sell signal, but it does suggest that other asset classes might be preferable.

Conversely, when earnings are at their worst -- when they fall 25% or more -- subsequent market performance is the worst of the group. Markets are down nearly 30% over the ensuing 12 months. Ouch.

When earnings are between 10% and 20% -- where we are today -- the subsequent market gains are positive, but are  historically mediocre -- about 5.8% over the next 12 months. Compare that with the risk free 10-year Yield of 5.1%, and again, you can see why this is underwhelming.

The remaining two groupings produce good, and excellent returns: When earnings are plus or minus 10% from flat year-over-year, we get subsequent returns of 9.3%. That's pretty close to our historical average. One would expect these types of gains in the early to mid part of the business cycle.

The best market performance is in a negative range: down 25% to down 10% earnings; Subsequent market gains are a fabulous 28.6%.

I never like to rely on a single variable, and my work with the present cycle of P/E multiple contraction implies that we may be looking at numbers somewhat below thes average market performance.

Hence, why I am so unenthused by double digit year over year earnings gains.   

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Why Do Earnings Gains Forecast Market Performance?

My explanation for this is simple: Earnings reveal where we are in the broader market cycle, and also provide some insight into market psychology. I hope to have more on this issue soon . . .

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Here's the same info, in chart form:

 

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Sources/Prior References:

The Sweet Spot ?       
http://bigpicture.typepad.com/comments/2004/02/the_sweet_spot_.html

How to Use Earnings as a Buy Signal                     
http://bigpicture.typepad.com/comments/2005/02/how_to_use_earn.html 

Earnings and Subsequent Market Gains                      
http://bigpicture.typepad.com/comments/2004/02/chart_of_the_we_2.html   

Earnings or Multiple Expansion?                
http://bigpicture.typepad.com/comments/2005/08/earnings_or_mul.html   

Single vs. Multiple Variable Analysis in Market Forecasts            
http://bigpicture.typepad.com/comments/2005/05/single_vs_multi.html

Thursday, April 27, 2006 | 06:54 AM | Permalink | Comments (5) | TrackBack (1)
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TSCM

Back in November 2004, I mentioned that The Street.com was takeover bait, following the Dow Jones purchase of Marketwatch. I wanted to write it up for The Street, but their internal policies prevented it. I mentioned TSCM stock again this past February.

Since then, TSCM stock has rallied; Recently, on good earnings, it has gone vertical.
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TheStreet.com 3 year chart

Source: StockCharts
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Astonishing. The only question is whether this is yet another sign of speculation in the markets . . .

Wednesday, April 26, 2006 | 10:50 AM | Permalink | Comments (13) | TrackBack (0)
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"Every Change of Rate"

"Every Change of Rate" is an utterly hysterical parody of the black & white Police video "Every Breath You Take," as done by some Columbia Biz School students; Its an amusing take on the Ben Bernanke, the newly appointed Fed Chief.

My favorite bit are the lyrics during the second verse:

"First you move your lips,
Hike a few more bips,
When demand then dips,
And the Yield Curve Flips
I'll be watching you"

Too funny !

click for Windows Media video

 

Its a bit harsh on Ben Bernanke, who after all has only been in office for one FOMC meeting. Still, the overall effect is quite amusing!

Here's the video source:   Columbia.edu/students/follies
http://www0.gsb.columbia.edu/students/organizations/follies/media/EveryBreath.wmv

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UPDATE: April 26, 2006 4:15pm

The WSJ's Marketbeat was just as amused as I was by this:

Glenn Hubbard: King of Pain

Today's best four minutes of the day: an uproarious parody of the Police's "Every Breath You Take" by students at Columbia Business School, which purports to show the school's dean, Glenn Hubbard -- and, no, that is not Mr. Hubbard, the school confirms, but a look-alike student -- taking Fed Chairman Ben Bernanke to task for monetary policy mistakes (in a fit of jealousy over not getting the position). It's hard to resist the charm of any attempt to poke at the Fed, especially one that includes the couplet "Hope your models break/bet that beard is fake." The real Mr. Hubbard was traveling and could not be reached for comment.

Wednesday, April 26, 2006 | 10:03 AM | Permalink | Comments (8) | TrackBack (4)
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Existing Home Sales Data (California Real Estate: On Sale!)

Continue reading "Existing Home Sales Data (California Real Estate: On Sale!)"

Wednesday, April 26, 2006 | 06:45 AM | Permalink | Comments (26) | TrackBack (1)
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