The Big Picture | July 2007

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Get Your Trading Tools Here

Tuesday, July 31, 2007 | 04:09 PM

in Derivatives | Markets | Psychology/Sentiment | Trading

Don't leave home without it . . .

Hat tip: Thanks, G!

How Microsoft Can Become More Innovative

Tuesday, July 31, 2007 | 11:15 AM

in Corporate Management | R&D | Web/Tech

How could I not love this page one WSJ article about Microsoft-the-innovator?

"Throughout its history, Microsoft has been slow to grasp some of the computer industry's biggest technology shifts and business changes. When it decides to embrace an innovation, the company has often succeeded in chasing down the leaders, as it did years ago with Lotus Development Corp. on spreadsheets that allow users to organize data, and a decade ago with Netscape Communications Corp. on Web browsers that transformed the experience of using the Internet. For years, this catch-up-and-surpass approach worked well.

Early this decade, however, companies such as Google Inc. and Apple Inc. exposed holes in the approach. Microsoft was slow to see the potential in Web search and online advertising, and despite heavy investments, has so far failed to catch industry leaders Google and Yahoo Inc. It also was late coming to market with its own music player, and despite a push, remains far behind Apple. Today, a host of Web-based software services from Google and others threaten to reduce the importance of Microsoft's personal-computer software."

What is the solution? Craig Mundie, the man designated to replace Bill Gates, has quite the challenge on his hands:

"Mr. Mundie says advances in technology that represent "fundamental change" or "whole new business opportunities" are "more disruptive, and so people aren't as focused on them" at Microsoft as they are on developing new features for existing products. "When they encounter them, they are naturally a bit more skeptical."

Microsoft's product groups -- business units built around products such as Windows and Office that produce much of the company's cash -- have long had enormous clout in its corporate culture. Star product-group managers, the company's so-called shippers, get the big, profitable products like Windows out the door year after year. For them, meeting deadlines is all-important; longer-term thinking about technology isn't.

Mr. Mundie is trying to help shift some clout to the company's long-term thinkers and to gain more attention for new technologies and businesses. He nurtures small groups in areas he considers promising long-term bets for Microsoft, such as health care, education and super-fast "quantum" computers. During the past year, to attract foreign talent, he has opened more than 50 small research centers in such distant locations as Egypt, Chile, Malaysia and Russia."

Essentially, the approach is to tear a page from the R&D wizards at Google, and encourage greater creativity from the non-product groups (product groups are Windows, Office, Internet services, X-Box, etc.) to anticipate the next major shift in computing technology.

In other words, Microsoft, in seeking to become more innovative, is copying Google's model.

How Classic is that!

Source:
Behind Microsoft's Bid To Gain Cutting Edge: A History of Catch-Up
Mundie Follows Gates As Long-Term Thinker;
ROBERT A. GUTH
WSJ, July 30, 2007; Page A1
http://online.wsj.com/article/SB118575380139081784.html

Case Shiller Housing Composite: Worst since 1991

Tuesday, July 31, 2007 | 09:54 AM

in Data Analysis | Real Estate

Pretty amazing: This data release (May 2007) marks the 18th consecutive decline in growth, dating back to December 2005.

As the chart below shows, annual returns of the Case Shiller Composite now shows continued negative annual returns -- an annual decline rate of 3.4%. These place the national market for real estate and single family homes at levels not seen since the summer of 1991. (The 20-City annual decline rate is 2.8%).

Excerpt:

“At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “Year-over-year price returns are continuing to either move deeper into negative territory or experience persistent diminishing returns. If there is any positive news in these numbers, it may be that in both May and April eight of the 20 markets showed positive monthly growth rates. This compares to only one or two of the 20 in the late winter and early spring. We need a few more months of data, however, to determine if this is the beginning of a national turnaround, since the national trend is still at a sharp deceleration.”

With Chicago now reporting negative annual returns, 15 of the 20 metro areas are now reporting negative annual price returns. In addition, 16 of the metro areas saw a decline in their annual growth rate compared to April’s data. Detroit continues to lead the metro areas in growth rate declines, down 11.1% from a year ago and has been in annual decline since May 2006 . . .

Pretty astonishing fall from the peak. And, based upon inventory levels and present sale rates, we are not remotely close to done.

Case Shiller Home Price Index

chart courtesy of Standard & Poors

Here is the break down via Tradition Financial Services, Inc. / TFS Derivatives Corp.

	S&P/Case-Shiller Index - May 2007
	May 06	Apr 07	Apr 07R	May 07	Apr07 v May07	Apr07 v May07	May06 v May07
Bos	178.61	169.60	169.60	170.95	1.35	0.80%	-4.3%	Bos
Chi	166.61	165.87	165.87	165.68	(0.19)	-0.11%	-0.6%	Chi
Den	138.31	134.86	134.86	136.32	1.46	1.08%	-1.4%	Den
LV	234.39	226.65	226.65	224.79	(1.86)	-0.82%	-4.1%	LV
LA	272.12	263.36	263.36	263.19	(0.17)	-0.06%	-3.3%	LA
Mia	278.68	273.53	273.53	269.52	(4.01)	-1.47%	-3.3%	Mia
NY	215.57	211.65	211.89	210.69	(0.96)	-0.45%	-2.3%	NY
SD	249.15	232.64	232.64	231.80	(0.84)	-0.36%	-7.0%	SD
SF	218.37	211.47	211.47	210.89	(0.58)	-0.27%	-3.4%	SF
WDC	251.07	235.29	236.17	235.15	(1.02)	-0.43%	-6.3%	WDC
Comp	226.00	218.93	219.01	218.37	(0.64)	-0.29%	-3.4%	Comp

Source:
Late Spring Numbers Bring Chilly Returns According to the S&P/Case-Shiller Home Price Indices
S&P, July 31, 9:00 AM EST
PDF
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_May1235.pdf

Triggers & Tipping Points

Tuesday, July 31, 2007 | 07:23 AM

in Economy | Investing | Markets | Psychology/Sentiment | War/Defense

Futures are higher this morning on positive earnings news, strength in Asian and European bourses, and a dearth of any new credit disasters. (It is also the last day of the month).

As we mentioned yesterday, investors should watch the quality of this overall bounce, keeping a close eye on volume and breadth, to determine the next move beyond this week.

While there was plenty of teeth-gnashing angst over this very minor correction, I have not seen the sort of capitulatory panic that typically marks the end of a major selloff.

Some commentators have pointed to Thursday as a 90/10 day -- more than 90% of the volume was to the down side -- but historically, that marks a bottom only when it comes after a long decline. A 90/10 down day within 5% of a high has never been shown to be a reliable buy signal.

Considering that we have yet to see a 10% SPX or Dow correction in this 5 year old Bull, what might actually cause that major dislocation? MarketWatch's in-house curmudgeon, Paul Farrell, gives us a menu to choose from:

1. War/military defense budget busting

2. Real estate bubble raging

3. Foreign trade imbalance, trillions new debt

4. China's economy overheating

5. Private-equity credit imploding

6. 'Homeland Insecurity' failures

7. Hedge funds hurting retirement plans

8. Oil rocketing toward $100 a barrel

9. Weak U.S. dollar keeps sinking

10. Federal budget deficits

11. Social Security entitlements

12. Medicare's massive deficits

13. Health-care-insurance deficit

14. Climate change fuels global wars

15. Personal savings shortfall

16. Consumer debt surging

17. Corporate pension defaults

18. Local government pension deficits

19. International credibility deficit

20. Washington politics in endless gridlock

I find 7 of these (in italics) that represent serious threats, some short term, some long term.

Which of these are real threats? Which are hyped up and already discounted by Mr. Market? What unknowns have been omitted from the list? The comments await your insights . . .

Source:
New contest: Pick one big tipping point
You decide: which of 20 triggers will end 'aging bull'
Paul B. Farrell
MarketWatch, 7:54 PM ET Jul 30, 2007
http://tinyurl.com/yo264y

Teeth Clenched, While Buttocks Remained Firm

Monday, July 30, 2007 | 03:30 PM

in Financial Press

Nipples rose dramatically, while small bits of tin consolidated:

Hat tip: Mike Covel

Credit-Market Tremors

Monday, July 30, 2007 | 11:00 AM

in Credit | Derivatives | Finance | M&A | Markets

Another good piece from the public WSJ on "How Credit-Market Tremors Have Affected Junk Bonds, LBOs and Hedge Funds." Its sortable by clicking on the top of each column.

SCORECARD: DEBT DILEMMAS
click thru for full size table

If I keep promoting the WSJ, I am gonna have to ask for a piece . . .

Source:
SCORECARD: DEBT DILEMMAS
How Credit-Market Tremors Have Affected Junk Bonds, LBOs and Hedge Funds
Annelena Lobb, Cassandra Vinograd
http://online.wsj.com/public/resources/documents/info-BondTurmoil0707-sort.html

Media Appearance: CNBC's Morning Call (07/30/07)

Monday, July 30, 2007 | 10:45 AM

in Media

This morning, I'll be on CNBC at 11:00am, discussing the market volatility last week, including sentiment issues and defensive rotation with Dylan Ratigan.

Also on the show -- Noel Lamb, CIO at Russell Investment Group will be on as well. In addition to Dylan, we guest hosts Liz Ann Sonders and John Carey from Pioneer Investments will be grilling us.

On today's agenda:

-Our quantitative ranking system had an average group rank of the 275 industry groups we follow was 70 (out of a possible 100) -- Now, its 48. There are many more groups weakening, which suggest this is the first leg of a more significant correction.

-The 90/10 day we saw last week is a bottom signal only AFTER a long run down. Whne it comes so close to a new high, it is NOT a cathartic punctuation.

-The nominal bounce we got today is disappointing

- The Russell is now in the red 1.7%, year-to-date. The defensive rotation is well underway.

- All sectors have been broadly hit -- but in particular Banks, Energy, Reits, Real Estate, and Home Builders. The only strong SPX group has been the Internet Retailers, and that is most likely because of Amazon.

Should be fun!

Is the Bull Market Over, or Are Stocks Cheap?

Monday, July 30, 2007 | 06:51 AM

I am a news junkie.

I think that's fairly apparent to readers from the weekend linkfests. And, despite the fact that I have warned in the past that reading the news is hazardous to your investment returns (see Lose the News), I do occasionally like to Use the News -- but for other reasons.

I find it quite interesting to see how different financial publications respond to market turmoil. Sometimes, it can be incidentally revealing of the psychology of the moment.

Consider these two articles: One is a Bloomberg piece which came out over the weekend, and the other is on the front page of the WSJ.

The WSJ article is a balanced look at two different schools of thought regarding last week's action. Its starts by asking "Is the bull market over?". However, it outs itself by describing the Dow's 4.23% sell off as "stock-market carnage." Students of market history will derisively snort of a four percent weekly drop as carnage.

Here is an excerpt:

"There have been some signs of a roof forming lately. Markets have seen a series of records, with big stocks beginning to lead the way and fewer stocks showing gains. When the Dow industrials hit their record just above 14000 on July 19, many second-tier stocks didn't join them; indeed, after a strong start, small stocks are down for 2007. Meanwhile, money managers who were skeptical for much of the past year showed signs of greed, setting aside doubts and jumping into the market.

At the same time, until last week, middle-size stocks had been holding up better than small ones, and the gradual topping out hadn't gotten very far. Financial, consumer, telecommunications and health-care stocks, as well as real-estate stocks and utilities, all had turned down, but technology, energy, basic materials and industrial stocks all were holding up well. Market interest rates had risen, but not heavily. Moreover, even after last week, the Dow's worst in more than four years, the index remains up 6.4% in 2007 and 18.2% in the past 52 weeks."

The author, E.S. Browning, manages to raise many technical and fundamental issues without taking a stand on either side. It is a nuanced, balanced piece, characterized as lacking any shrill emotional elements.

The Bloomberg article is far less balanced: It starts by claiming "Investors are preparing to snap up shares of telephone, health-care and computer companies after last week's $2.1 trillion global stock market rout left U.S. equities the cheapest in 16 years." The key identifier to the tone is this quote: "The window for buying is starting to open."

The rest of the article mostly quotes bulls, who say the market is cheap. The one note of caution is Ryan Beck's market strategist Kevin Caron. He is "defensive'' and plans to keep 35 percent of his clients' assets in cash.

My takeaway from both pieces -- alternatively neutral or bullish -- is that neither reflects any sort of mass fear or panic. They are relatively bloodless columns; no one is running around with their "hair on fire."

It may only be anecdotal, but neither of these suggest capitulation.

~~~

Finally, consider this unscientific WSJ online survey: About an equal number of voters expect a big rebound as a big decline (18/17%). While 36% expect a small bounce back, almost as many (29%) expect a small decline or a sideways week.
>

WHAT WILL HAPPEN IN THE STOCK MARKET THIS WEEK:
courtesy of Online WSJ

>
My wholly unscientific read of this poll -- lets call it anecdotal evidence -- is that there is hardly the sort of rampant fear one associates with a true and lasting bottom . . .

~~~

Bottom line: Watch for the market bounce, keeping a close eye on volume and breadth.

Sources:
Analysts Debate If Bull Market Has Peaked
For Some, Charts Warn Hurricane Is Forming; Will Storm Pass Over?
E.S. BROWNING
July 30, 2007; Page A1
http://online.wsj.com/article/SB118575324077581751.html

Cheapest Stocks in 16 Years Entice Investors
Lynn Thomasson and Eric Martin
Bloomberg, July 30 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4tg9V99WLjU&

Linkfest Week-in-Preview (whackage edition)

Sunday, July 29, 2007 | 06:30 PM

in Financial Press

Yesterday, we looked at the week that was (Yikes!). Today, we preview the upcoming week.

Markets will attempt to stabilize after last weeks shellacking. While we don't yet know if a bounce of a further whack is forthcoming, we do know that investors will be surfing choppier markets, as we have seen big increases in volume and volatility.

The coming week has plenty of other events to focus the minds of wary traders. This week sees plenty of economic releases. Starting Tuesday, we learn Same Chain Store Sales, the Employment Cost Index, Personal Income and Outlays, Construction Spending and Consumer Confidence. We