Monday, July 31, 2006

The Oil Service Sector

Above is the Oil Service Sector ETF, OIH. I put this chart up for a specific reason. Jeff Saut, whom I view as one of the most trustworthy and savvy public figures on Wall Street has just been quoted on Bloomberg as still being an energy bull. Clicking on his name will take you to his regular commentary which I read when I get the chance. While I believe oil will eventually drop significantly or collapse, its appeal will likely not tarnish overnight. So, $10 oil isn't just around the corner. It might actually take years to collapse. But the oil stocks are a different story. So, what do you see on this chart? Anything unusual? Anything foreboding? Remember, patterns repeat. Patterns can be in equity markets or outcomes to certain economic cycles or your own behavior. Very few of us break the cycle of patterns in our own life so why would human behavior ever change? We use the past to divine the future because human behavior is the one constant in an ever changing world.

Later this week, I'll show you another view of OIH which will provide what I believe is alot of clarity.
posted by TimingLogic at 12:35 PM links to this post

Saturday, July 29, 2006

Ahh, The Lazy Days Of Summer

And what better way to spend the summer than watching a great summer movie: The Bad News Bears in your new Hortons', Toll Brothers' or KB Homes' living room. It's also a time to look at all of the squawking about the housing market. I've done a fair amount of that squawking myself.

So, the housing bears really have been full of bad news. The housing negativity is so thick I had a slice with my favorite pizza the other night. I'm quite confident there is alot more to go but at this pace, the home builders will be paying us to buy their stock soon. (I had previously posted that I expected a bottom in housing stocks based on some time series work to be in March of 2008.) Toll Brothers is down from $60ish to $22ish in a year. In another year Toll Brothers will be at -$22. I wouldn't mind Toll Brothers paying me $22 to buy their stock but, then again, that isn't going to happen.

There are going to be alot of value players who see a PE of less than five on these stocks and soon enough, they'll start nibbling or maybe even backing up the truck. It looks like some already are. Remember, investing is not about economics. It is about investing. It isn't what you think should happen, it's what is going to happen. I'm getting signs a pretty significant bottom wants to form around these prices. If I were a fund manager, I'd be taking some positions soon. I'm greedy so not quite yet. These stocks will not make a positive move until the market does and I'm still not seeing any signs of a tradable bottom yet. We might yet get it from these levels but so far this has the makings of a sucker's rally and is much weaker than the first attempted rally of a month ago. That said, maybe the market will get a testosterone injection and surprise me.

I don't believe the management teams are quite as sophisticated as many homebuilding CEOs started believing but these are generally well run companies who made many investors wealthy. They'll be back to buy on the way down just like people did with tech post 2000. Isn't now just a perfect time for a washout? Horton's CEO said demand fell of the Richter scale and there was no clarity for improvement. The stocks are covered in blood. Long term interest rates have peaked for now and that will help to put a bid under home building stocks. There are those who believe we will have a soft landing when the Fed quits raising rates and the sun, moon and stars are aligning for future economic growth. They are going to buy these stocks.

Remember, stocks are telling you what is going to happen six to twelve months from now. So, it's your job to look six to twelve months into the future and determine what the homebuilding climate will be. Will it be washed out? Will it be worse? Will the Fed be cutting rates? No one knows. But enough value investors are likely willing to place a bet on the long side at these prices.

So, enjoy your summer. It's likely getting close to summer nap time for the bad news housing bears.
posted by TimingLogic at 10:20 PM links to this post

Friday, July 28, 2006

Floyd Landis And Doping

Over the past few days I've read enough to become conversant in the topic of doping as it pertains to testosterone. There is a great doping article by the incomparable Malcom Gladwell which was written in 2001. This article is disgusting in its contents and accusations. The second half of the article discusses testosterone doping.

While it appears many sports medicine doctors have come to the defense of Landis, I believe we may never know the truth. It is interesting to note that the Tour De France has ratcheted down the 6:1 T/E ratio to 4:1 this year. So, did Landis test at 4:1 which may be explainable or did he test at 18:1 as the East German athlete did in Gladwell's article? Well normal is around 1:1 unless you have a natural predisposition to something a little higher, whatever that might be. 18:1 is a clear doper. 4:1? Well, the docs need to chime in on that one. It is funny that patches are mentioned as a smoothing method of cheating T/E tests and it seems to be common practice for biking dopers to use patches after bonking. While testosterone wouldn't obviously have much if any impact overnight, athletes will try anything for an angle.

So, if you thought your race was over after an awful stage at the Tdf, would you risk it for the potential glory of tens of millions if you could pull a miracle? Knowing you were having a hip surgery and this might be your only chance to achieve what you have trained your whole life for? Or, for those who say that alcohol may raise testosterone levels, what if Landis knew that, as he obviously would IF he were a doper. Would you drink alcohol in a public forum with witnesses while also using a patch after your bonk to provide an alibi? "Oh, I was drinking."

I want to believe he is innocent and I want him to have the fair shake he has not had, but I guess we may never know the truth.

UPDATE: It appears there is a test which will tell us if Landis indeed did cheat. It is the carbon isotope test and appears precise. It looks as though it measures synthetic epitestosterone ingested by dopers in an attempt to keep the T/E ratio within limits. But, the question arises if Landis's T/E ratio was elevated, did he actually take epitestosterone as well. Or, is there some way to determine if the testosterone is synthetic as well? Clarity is developing as more experts and doctors speak out. I hope he is innocent but I fear he is guilty if this T/E ratio was 11:1 as was leaked. More waiting.
posted by TimingLogic at 6:16 PM links to this post

Thursday, July 27, 2006

Rumors Of My Death Have Been Greatly Exaggerated

The title of this post is a quote taken from someone I admire greatly, Mark Twain. I am not referring to myself but of semiconductor giganticus Intel. It appears everyone has all but given up on Intel and proclaimed AMD the champ of chips. Indeed, AMD has captured a significant portion of the Intel compatible market over the last few years. But, in this battle of David and Goliath, one should not start the knockout count down just yet.

While AMD's stock has been totally decimated as of late, so have many other semiconductor stocks including Intel's. So, besides an economic downturn and dealing with tremendous manufacturing overcapacity, what is wrong with AMD? In three months it is down from nearly $45 to $17. Well, in order to understand this you need to meet AMD's best new friend. A friend like the friend you meet in prison. Someone by the name of Bubba. Here's the link to Bubba.

Now, I'm not sure which company has the best processor architecture and process technology. It might be AM, er, cross that out. It might be Intel or it might be IBM but it sure as hell ain't AMD. The best thing AMD has going for it is that they caught Intel at the right time and they are using IBM's process technology to manufacture their processors.

So, why did AMD fall so far so fast? Just at the same time people are squawking for Dell to dual source processors from AMD and Intel? Intel's super hot new Duo 2 architecture is hitting the market. And, Intel is likely to start a price war at some point if they already haven't. Intel is one of the most aggressive companies at defending their turf and they've got massively deep pockets to do it. So, should Dell be dual sourcing? I would say absolutely no way at this point. NO WAY. Clients may be asking for dual sourcing and the analysts may be writing up pretty papers for Dell to do so but that will likely pass. The cost to Dell is likely significant which is the reason they have not done so to date. 1) Dual design teams 2) More complex supply chain and procurement process. 3) Additional complexity in post sale support 4) Additional testing and quality assurance 5) A diluted marketing message 6) A loss of likely hundreds of millions in marketing dollars from Intel. There's likely other reasons but the costs need to be quantified versus the additional business at a time when Intel is back in the game.

The press says Dell is going to sell AMD systems. Dell is saying they will be selling AMD systems. I am saying they won't. What I believe we are seeing is Dell playing a game of poker with Intel. They want the best sourcing deal possible and sticking by Intel when others have bailed means they want another pound of flesh. Dell has leverage right now and they want to use it to their advantage. If Dell does source AMD chips, I would bet it is limited to server processors.

Intel was the king, is the king and will be the king for a long time coming. The King is dead. Long live the King.

Addendum. How timely.
posted by TimingLogic at 8:10 PM links to this post

Are Banking Stocks Safe?

With money moving into more defensive sectors, the banking stocks are in the spotlight. Banks are typically considered one of the defensive sectors because they are mostly high dividend yielding stocks. Some people call high dividend yielding stocks value stocks, some call them defensive stocks and some just call them great investments. For the past forty years quality value stocks, of which banks are a subset, have been the best performers for buy and hold investors.

But has history been kind to banking stocks in bear markets? Well, not really and sometimes they've actually punished banking related stocks. We've seen our fair share of financial failures in the US over the last one hundred years as well. In 2000 to 2003 many of the banking stocks were down over 50%. Do you really want to hold JP Morgan Chase from $55 to $14 as happened in the last bear plunge? I don't. Now, six years later JPM is close to its 2000 peak but how does one know the next drop won't take six more years to return to 2006 levels? Or, maybe ten years. Or maybe JPM may never return to current levels if it heads south. The point is that holding through a serious down draft presents many risks and JPM's 3% dividend yield, as and example, is a paltry sum for me to take that risk.

If housing does have a hard landing and consumers do quit spending and bankruptcies increase and on and on, banking stocks could be at significant risk for a substantial down draft. Their lending practices and risk management has been pretty poor from what I've seen. Some people argue we don't have a housing bubble but that we have a high risk lending bubble. Only time will tell but if banks have peaked and do fall significantly, the party has yet to start.

A little more pattern work. George Lindsay's work was first shown using the Morgan Stanley Cyclical Index a few weeks ago. Let's look at the Banking Index using the same "Three Peaks and a Domed House" pattern. For background on Lindsay's work, look back at my post dated July 18th. As usual, you may click on the chart for a larger view. Chart courtesy of the wonderful

posted by TimingLogic at 1:23 PM links to this post

Wednesday, July 26, 2006

GM's Announcement Today

GM announced some good news today. Losses weren't as bad as expected and revenues were unexpectedly strong. Excuse me for yawning. I've seen the movie Groundhog Day too many times and so has the management team at GM. ie, This is more of the same. GM has been in perpetual turn around mode since the Japanese starting assaulting them in North America four decades ago. We've seen cuts after cuts after cuts followed by market share losses and more market share losses. GM is cutting itself to profitability. Without revitalized brand strategies, strong product and the right product mix, that is a going out of business strategy. The same strategy which has cost GM over 50% of its marketshare while it continually cut its way to profitability.

While I am wrote on here a few weeks ago that I was long term bullish on GM, that is with respect to their business prospects, not the stock. Today, while good news, is not anything that hasn't happened a dozen times in the last forty years. Crisis followed by cuts followed by an improved bottom line while the top line market share losses continually crumble. Any better this year? Well, sales in North America are down 12% through June. In auto speak, those are crisis numbers. With massive fixed costs and overcapacity a major issue in the auto sector, sales drops that significant fall right to massive cash flow problems.

There is alot of smoke in todays numbers. First off, last year GM was paying people to buy cars in North America with the "Everyone Gets to Screw GM" discount plan more commonly known as the Friends and Family Plan available to anyone with a credit card. Removing these hugely discounted purchases, the year over year revenue comps are artificially inflated. Additionally, the profits are still from overseas and GMAC, which GM is foolishly offloading for cold hard cash they need to stay out of bankruptcy. Without GMAC's full cash flow at their disposal, GM is going to really be forced to get their act together in the car making business. That is a good thing long term but today's numbers are simply addressing the cost side of the equation. Product mix is still negative with weak high margin vehicle sales and with overall sales down significantly versus the competition.

With GM, it's all about cash flow. They can report all the top end numbers they want, if they can't improve their cash flow significantly, they will have to reorganize under federal protection. The auto industry eats cash like no other with the massive costs of R&D, development, plant upgrades, plant switchovers for new products, marketing, channel management, procurement and on and on and on. With negative or marginally positive cash flow, GM will burns tens of billions of dollars a year. While the product portfolio is improving, is it enough along with the cuts to improve cash flow substantially and sustainably? Lutz still gets a failing grade so far. His designs were too conservative for too long and his leadership has left styling and product mix still in shambles albeit he is recently redeeming his past mistakes with some tremendous designs. Maybe he's just a slow starter. If so, I can live with that.

GM still is short of cash and they are using their cash to buy out employees and will likely have to spend more cash buttressing the messy contractual obligations they agreed to when spinning off Delphi. They need to be using cash on new products but, unfortunately, buyouts have a positive long term impact and they are strapped to do both. The Delphi obligations could be astronomical. Only a legion of attorneys could figure out the obligations but they appear to be as high as tens of billions of more dollars.

Wagoner mentioned strong Saab sales today. Don't play games Rick. That is absolutely hilarious. GM's other units equivalently sell approximately the same number of vehicles in a day that Saab sells in North America in a year. Personally, Saab is the one brand that I wouldn't mind GM jettisoning as it is a rounding error and does not affect the GM brand in any meaningful way.

While GM has to start somewhere, Wagoner needs to feel more pressure to execute. Jerry York will provide that pressure nonstop. And while Wagoner and Lutz didn't create this mess, they have been too lackadaisical waiting till GM was on its death bed for the umteenth time to get focused.

The jury is still out as to whether Wagoner has what it takes to complete the turnaround but I'll give him some due credit. The product mix and product portfolio in North America are still very poor but at least the new designs coming out are some very hot vehicles. And, for those big fat profits, none is hotter than some of the spy photos of the 2007 full size pickups which will sell in droves regardless of the price of gas. And, what about the STS-V with nearly 500 horsepower. Give me a black one with some aftermarket 21 inch wheels and a AMG-type tuner kit and I'm talking more horsepower than an Indy car. Bob, you've got some winners but you need to push the envelope with more aggressive designs.
posted by TimingLogic at 11:46 AM links to this post

It Doesn’t Get Any Better Than This For India’s Outsourcing Boom

Is offshoring here to stay? Without a doubt. And, ultimately the pie will become significantly larger. That said, I wouldn't be surprised to see a slowing for some time as American and European economies experience wage and worker malaise. This will likely result in backlash manifested via anti-globalization and political pressures. I suspect India's pre-eminence has likely peaked. India has garnered nearly 50% of the global business process outsourcing market. This is a trend which simply is not sustainable. Labor costs are rising 15% annually and clients are starting to demand more than cost benefits and service level agreements. Some companies are actually pulling back on on offshoring for fear their brands may be tarnished. In that same vein some recent studies undertaken in America have shown consumers are as much as 75% less likely to do business with companies who engage in offshoring.

This is not to say I am bearish on India long term, or that their long term economic prospects are dim. To the contrary, longer term, I believe India will surpass China in economic prosperity and opportunity. The BPO market may still grow in raw size but comparatively, 50% share with such low barriers to entry cannot sustain itself. But, long term India is more closely aligned with democratic ideals and in the game of political chess, the US wants a counter weight to China's increasing presence. While I find the political shenanigans total nonsense, the way of the world will not change because of what I think.

Everyone has all heard the stories where India and China are graduating legions of computer programmers and engineers. The numbers quoted are absolutely silly. First, China's numbers for anything are hard to verify because their statistics across the board are a form of manipulation by a closed communist government still engaging in propaganda. A Duke University study sheds a little reality on the situation. First, China includes auto mechanics and a slew of trade school graduates in their numbers so it really draws into question the validity of anything China publishes. ie, An HVAC technician in America is counted as an engineer in China. This is a clear reminder that just as the Soviet Union used to publish manipulative data, so does Communist China. One must remember China still has a Minister of Propaganda whose job it is to spew all powerful gibberish regarding China's superior society. Secondly, China has tried to incent more citizens to attend college thus new universities have been popping up overnight for quite a few years. To say they are graduating engineers with the rigorous curriculum of the US, Japan, Europe, South America or Russia is highly suspect. This same point is also a significant issue in India. McKinsey has stated that somewhere between 10-25% of engineers and science professionals from India and China are able to participate in the global outsourcing business. Much of this is attributed to language barriers and educational quality. So, now all of a sudden, taking all parameters into account, India and China are likely not graduating as many four year degreed engineers as the US in a worst case analysis and a best case analysis the numbers are likely similar but the quality is significantly inferior.

In other words, America and Europe are not becoming back water nations only to be outsmarted by the intellectually superior masses of science graduates in developing nations as so many journalists and fearmongers would have you believe.

My point in all of this is to debunk a journalistic myth not to devalue what India and China are attempting to accomplish. I am a big proponent of global development and opportunity for all people of all nations and I support such efforts financially. I am highly encouraged that many developing nations are pinning their future on education. The world will be a better place with improved educational opportunities in China, India and other developing nations. Where education, free markets and political freedoms develop, wealth and improved opportunity usually isn’t far behind. So, we should celebrate global education and graduates in engineering, the sciences, medicine, the arts, finance and other areas of development.

Back to India's outsourcing miracle. Regardless of how many graduates India produces, they have a limited computer science labor pool of superior quality. Already, there is wage competition and employment competition for some very marginal talent similar to the marginal talent which found tremendous opportunity in the US leading up to year 2000.

Success drives competition and there are many countries which want a piece of the outsourcing business. With the strong English speaking skills- the dominant language of international business- in South America, Russia and Eastern Europe, competition is already heating up. In addition, South America also has the ability to handle the bilingual outsourcing requirements of North America. Hence, the wave of outsourcing growth in Central and South America. Just as importantly, eastern Europe has tremendously talented computer science and engineering talent which has the ability to fill the multi-lingual outsourcing requirements of Europe.

In the end, India's largest services companies which have gained critical mass will likely continue developing into global companies. In other words, the miracle of India's IT industry will likely face tremendous global competition on one hand. Yet, on the other hand, its leading IT businesses will likely become even more successful global players via expansion into Europe and South America, thus supplementing their Indian based businesses with solutions able to meet an even broader customer base.

posted by TimingLogic at 7:33 AM links to this post

Monday, July 24, 2006

An Update On Sentiment

I had to laugh at reading these two posts separated by one business day at Yahoo Finance. Both were authored by but by different authors. I guess they are covered either way the market moves. If it goes up, they called it right. If it goes down, ditto.

Why Last Week's Price Action Is Bullish

If You're Bullish, You Must Be Smoking Something

The reality is they both make legitimate points. Steenbarger is correct that the market was under accumulation on both Thursday and Friday. And yet, as Landry points out, the charts look like we are ultimately headed lower.

It is important to remember the old adage that "It's always darkest before the dawn.". Or, more accurately, since that statement isn't literally accurate, "It's always darkest when it's dark.".

That said, there's alot of bulls touting very bearish sentiment. One has a report titled, "The Third Time Is A Charm" on his web site. That's because he has called the bottom two other times in the last few months only to be excoriated. Now let's get this straight. Bearish sentiment is far from being at all time highs. By one sentiment measure I follow, sentiment is at the highest level it has been in 21 years sans one other time. That time was followed by much wailing and gnashing of teeth.

I've said before that what people say and what they do are two different things. A survey is less than accurate unless you are in a bull market and picking off a relatively minor correction. At that point a sentiment survey may be of assistance in timing an addition to your capital in a bull market. Today, some shorter term sentiment readings are negative enough to fuel a substantial rally of 5-15%ish in certain market conditions. The question is if this is one of those times.

Remember, AMD, as an example, is down from about $44 to about $17 in a matter of months. If it goes down at this rate for the next fourteen months or so, and that is what I am using as a guide for the ultimate bottom, AMD will be paying us to buy the stock. ie, The price will be negative. Ditto with Broadcom, Qualcomm, eBay, etc. At some point value will be seen and buyers will come in to support these stocks regardless of whether they ultimately decline another 50% or more and regardless of whether sentiment is very awful, just awful or marginally awful. ie, Markets seldom go straight down for a long time.
posted by TimingLogic at 10:23 PM links to this post

Sunday, July 23, 2006

Why IBM Attracts Value Investors

That is the title of an article posted on in the last few weeks. Well, obviously no one can predict the future but I believe there is a better way of doing so than the author of this article. First off, let me say that IBM is indeed a great company. Investing has nothing to do with being great or investing in great companies in my estimation. Valero, which I highlighted a few days ago, was also a great company well before 2003. Yet, its stock had languished for years. Since 2003, the stock is up about 1,200%. Is it a better company than it was just a few years ago? Not hardly. You get my point yet you may disagree. That's a topic for another post which I will address at some time.

It is not often you will find one of the largest companies in the world being "mispriced", as CNNMoney would have you believe, without a reason. Every morning all financial managers, advisors and mutual fund managers wake up and see IBM across their screen. At $90+ billion dollars in sales, they have every opportunity to think of and buy IBM. Yet, the compression of its valuation and its underperformance for six years have not improved at all.

Yet, CNNMoney lays out a compelling reason IBM is a "value" play. Low PE, services growth, expected growth higher than the S&P 500 and on and on and on. Or should I say blah, blah, blah and more blah. Well, I guess it has to be a value play because its performance cannot be classified under any other category. I find this repeated group think on Wall Street as hilarious. When a darling falls out of favor, it must be a value stock. To a certain extent, this is also true of Dell which I wrote of yesterday. Yet, there are long cycle behavioral reasons why I would potentially be more bullish on Dell. Without writing a thesis I will keep it to one topic. It is outsourcing. Should we enter a significantly difficult economic environment, I believe outsourcing will lose its vigor as the public becomes more vocal in its economic standing. This leaves IBM very exposed to its major source of revenue and profit. Additionally, IBM is betting very, very big that offshoring is a long term trend with the hiring of 50,000 programmers in India and a major shift of much of its global software strategy to India. While betting on global growth over time is a good strategy, this particular bet was a major mistake the last time we had similar economic circumstances in the 1970s. During a similar period of malaise and international competition, the long term outcome was a major shift to reinvestment in America by not just US companies but international companies. There are many more reasons but that's too much typing. In both of these situations, this would be revenue neutral to revenue positive for Dell.

Back to IBM's stock. The stock is significantly underperforming and shows no signs of improving. I am quite confident, although not clairvoyant, IBM is headed for a retest of its cycle low of approximately $50. That's another 33% haircut from here and about 65% off of its 2000 high. So, six years after 2000, we are looking at an investment that is likely headed south. There are things about longer term patterns on IBM which lead me to believe IBM could actually drop to the mid $40s or mid $20s. Before you fall out of your chair, IBM was in the mid $20s just ten years ago. Given cyclical patterns, this behavior has actually repeated before in modern history so you do not need to be a doom and gloomer to believe it is possible.

So, remember, value is best defined by Benjamin Graham's parameters or something which does not stray too far from his ideals. Value is not defined by a low PE and a paltry dividend in a market which already has amongst the lowest dividend yields in the last one hundred years. Below is a buying pressure chart for IBM over the last twelve years. Does this look like something you want to own?

posted by TimingLogic at 10:18 AM links to this post

Saturday, July 22, 2006

A Contra Perspective On Dell

It seems there is no lack of Wall Street experts giving us their opinion on Dell. People buy less PC's. The future is one of portable devices. Dell's business model doesn't work any more. Dell is getting beaten by HP. Dell's customer service is a wreck. I've heard them all on CNBC. How about a reason to consider buying Dell?

Dell may sell alot into the consumer market, but the margins and profits are much greater in the corporate markets. In the corporate market, Dell typically provides excellent customer service and coddles its customers, the likes of which include gargantuan companies such as Motorola, Wal-mart, Kroger and Ford. Those customers don't call an 800 number for help. They have an assigned team of sales and consulting executives who live day to day with their client to anticipate their every whim. People are buying less PCs? Well, Dell's top line number showed good growth for a $60 billion goliath dealing with the law of large numbers. In 2001 there an estimated 500 million PCs in use globally. By the end of 2007, that number is estimated to grow to 1.2 billion. That doesn't even include the regular upgrade cycle corporate customers must undertake to stay current with their ISVs, networking requirements, issues of compatible, break/fix costs, support costs, etc.

Without belaboring the point, Dell's business is not going away and neither is Dell. By most measurements, Dell is the largest hardware manufacturer in the world. Larger than HP and much larger than IBM which are both more diversified in their revenue streams. Now, during a downturn, Dell's stock will obviously take a hit as it has. But, before everyone starts squawking about Dell's demise, maybe they should look at all technology. Apple, Broadcom, AMD, Qualcomm and others are being crushed. From a business perspective, what happens during a downturn? The strong get stronger and the weak go under. Dell has nearly $10 billion in cash, gross profits of $10 billion, no debt and is the largest computer manufacturer in the world. It has nearly $5 billion in free cash flow and an enterprise value/free cash flow of less than ten. Instead of squawking why Dell is finito, the smart money is likely backing up the truck here or will soon be. I believe there is more downside but don't confuse any of this with a threat to Dell's business and don't listen to Wall Street.

Finally, a general note about consumer and small business customer service in the PC business. The facts are they are all awful compared to what one gets in a corporate environment. Here's the problem. Someone buys a PC from Dell or HP or Lenovo or Sony or whomever. The margins are likely less than $50 bucks unless you load it up with options. You can either choose to upgrade your warranty for a few hundred bucks or stay with the standard warranty. Then you go out and buy an Epson or HP printer, load up software from a thousand different companies, install peripherals from a hundred different companies, install the third party drivers for all of this and then use your Netgear router to hook it all up. So, you call Dell with a problem and ask some guy to fix it over the phone for $50 bucks profit? Huh? What do you want? A magician? The expectation levels are set too high and the business model is a losing proposition. They can help with general set up issues but people want them to solve every problem involving their PC including those which have nothing to do with the PC. Now, how does Apple get around this? Everything is made by Apple or approved to work by Apple. It is a closed system. No fiddling and no fussing. It is also the reason why Dell sells more systems in a few weeks than Apple sells in an entire year. People want choices.

While others are talking about the demise of Dell, if I were a buy and hold investor, I'd likely have been tempted to buy hand over fist on Friday at $18. There is a high probability this was a capitulative short term bottom or close to it.
posted by TimingLogic at 10:05 AM links to this post

Friday, July 21, 2006

Bottom Pickers Galore

Ok, forget about my last post. Let's talk about reality instead of a hypothesis the buyers might step in here. I will know when the buyers step in. There is some buying today but we'll just have to wait and see. Let's talk about something I wrote of in June under the post "Market Sentiment And Why A Trusted Indicator Will Likely Fail". Pavlov's dog. The learned behavior when people are rewarded by buying dips with eventually higher prices. That is, until they are rewarded no more with the onset of a bear market. Who are these people? The bottom pickers.

For the past month, there have been bottom picker after bottom picker telling us the market is oversold and has hit a bottom. Many are respected Wall Street personalities and newsletter authors and many are deer-in-the-headlight mutual fund managers who appear to use a Ouija board to make risk management and sector allocation decisions. The smart ones have only been jerked around a few times and now they are "in cash" with their shorter term trading decisions. That's a secret code word for "I've screwed up and rather than screw up again and lose even more of my client's money, we'll just hang around and wait for a bottom". That is fear of trading and lack of conviction in their models. It is a common psychological problem in all but sociopaths. (Yes sociopaths make great traders. More of that some other time.) When you lose money on a trade fear of making a new trade develops so you sit back and wait awhile while you eat a "wish" sandwich. It's called avoidance. You learned it as a kid when you stuck a paper clip in the electrical outlet or put your hand on a hot stove. You have an unpleasant experience and you retreat from such experiences. Hence, trading fear.

Time for them to hire a trading coach because in the mean time they are missing all of the short sales opportunities and generating underwhelming returns. I'm sure clients are probably wondering why they are paying for advice to be in cash when stocks are imploding. They should be short! This situation is especially true with equity hedge funds which are supposed to be sophisticated enough to be long/short. Frankly, that's what hedged loosely means yet most are simply hiding behind the guise of being mostly long funds not any different than the average mutual fund. But, then again, mutual funds don't get 2% fees and 20% of the profits. So, why not open a hedge fund and basically be long only and get the 20% of the profits mutual funds don't get? Greed is good. All of this likely means their trading algorithms are weak, they are likely long term underperformers as managers and a sign that anyone with a desire is now a hedge fund manager. As much as I disagree with some of Jim Cramer's advice, I'd rather have him as a hedge fund manager because he appears ruthlessly willing to make trades. And, as the old adage goes, showing up is half the battle.

More on the bottom feeders. Late last week a mutual fund manager on a financial channel said he liked Illinois Tool Works, emerging markets and AMD.

Now, let's be fair. AMD has only lost about 65% of its value yet they liked it before it lost 65% of its value so they are bathing in blood. How about paying for that advice? Hell, I can lose money for free. I don't need to pay a fund manager for such an atrocious call. You could all live with a 65% loss if you purchased earlier in the year when the bulls were telling you to load up the truck. (That isn't a question, hence no question mark.) AMD just shot through a lot of congestion near 97, 02 and 04 tops in the stock. Will it quickly recover and find support at 21ish? Illinois Tool Works, well, that chart doesn't look so bad. If you were smart enough to buy it at the exact market bottom in early 2003 or late 2002, depending on the index you were watching, you are up about 60% still as it has only dropped about 20% in the past few months. But, buying any time other than that in the last eight years means you are likely up alot less than that and have taken alot of Alka Seltzer during that time frame. Emerging markets, well, we've talked about what I think of emerging markets. Many are in bear markets already defined as being down greater than 20% for some period of time. I'd rather commit seppuku than invest in emerging markets right now.

Now, I see a few days ago respected technician Rick Suttmeier is out calling on a buy of the semiconductor stocks. To quote Rick, " My model assumes that when stocks decline to quarterly, semiannual and annual value levels, bad news has been factored into share-price weakness. There certainly has been plenty of bad news lately in tech stocks, which may make it difficult to believe that now is a time to buy, but that is what my model indicates."

Using such a level of logic would have meant buying homebuilders about 50% higher than here and you'd have a blood bath on your hands. Additionally, using said methodology would have meant you would have bought the Nasdaq when it made its first quarterly low in 2000 only to suffer a decline of 80% over the next few years. I guess using such a method makes marginal sense in a bull market. Yet, are we in a bull market? The semiconductors are in a bear market using the generally accepted definition of a bear market. Why would you want to buy just because a stock or group of stocks makes new lows? Maybe Rick knows something I don't but I wonder about all of those on Wall Street who have made decisions counter to what my models were telling me. Maybe I need a new career. Yo Rick! Semiconductors are down another 5-10% since your bottom fishing expedition.

Now, let's be fair. Rick is a very sharp man. I don't know much about his work but he may be vindicated eventually. I'm simply trying to make a point. To catch a falling knife is a dangerous game without any supporting evidence that the big money is accumulating for a rally.

Have a great weekend!
posted by TimingLogic at 12:16 PM links to this post

Are We Setting Up For A Temporary Bottom In Tech?

This is against my better judgement to post but the technology carnage setting up today is atrocious. I'm sure the bulls would like to try to rally the market before October. This is the kind of SHORT term carnage in tech in which people could be dumping to get out at any cost. An exhaustive push down? Could this be the day where we see a temporary wash out? I don't have any confirmation yet but the air is thick with an exhaustive dump in Dell, Broadcom, AMD, etc. If we aren't near a bottom, we are likely setting up for one absolutely terrible economic future because energy and some of the other leaders are only starting to correct.
posted by TimingLogic at 9:34 AM links to this post

Thursday, July 20, 2006

Turn Out The Lights, The Party Is Over

Ok, I'm going to date myself but when I was much younger, "Dandy" Don Meredith was a preacher at the church I attended. The church of Monday Night Football. Don would start howling this ridiculous song whenever there was a blow out game.

Well, the Wall Street scam on "peak oil" is likely over as well. America has more oil in the system than at any time in the last ten years. That includes when oil was $10 a barrel. We have plenty of oil and traders have convinced each other and the public of many fallacies. One is that all of this Middle East tension could or what if Venezuela does or what about China, blah, blah, blah. There's been global tension and global growth since the beginning of time including when oil was $10 a barrel. By the way, China needed nearly as much oil as when it was $10 a barrel. It's all hogwash. Wall Street fell in love with a story and there are more traders pushing up the price of oil than anyone could ever imagine.

I also stated that the Wall Street traders and hedge fund traders would drive oil up until they killed the economy. That outcome appears to be coming to pass as we speak. Will oil go back to $10? I don't think any time soon but I could see a day many years from now when it is under $20. Regardless, it doesn't matter. A slowing economy has the potential to take oil stocks down quite hard. Above is the three year chart of Valero, one of the biggest energy darlings on Wall Street. It is up over 1,000% this cycle. Overlaid on the pricing chart is buying pressure. Well, it appears there is less and less buying pressure the higher Valero climbs. Smart money is likely liquidating their positions. That's not a good sign. I believe Dandy Don is going to start singing quite soon. Turn out the lights............
posted by TimingLogic at 3:36 PM links to this post

The Greatest Single Day Cycling Performance In Decades

After bonking yesterday, Floyd Landis put it one of the greatest performances in sporting history today to close to within 30 seconds of the lead at Le Tour De France. Landis made back over eight minutes in one of the toughest mountain stages in professional cycling. His former team director, Johan Bruyneel, declared yesterday that Landis was finito!

A bit of trivia. Landis is a Mennonite as is one of my closest friends. Mennonites and the more conservative Amish typically do not have electricity, use horse and buggy as transportation, are schooled in German, grow up to be farmers or skilled tradesmen and lead a life dedicated to humility. I remember reading a few years past that Floyd had to ask permission of his minister to wear biking shorts. Some people turn to the dark side and leave their community as Landis did. lol. The world would be a lesser place if Floyd had not pursued his dream. Next is the final individual time trial which Landis will be expected to win.
posted by TimingLogic at 11:35 AM links to this post

Wednesday, July 19, 2006

Elliott Wave Confirmation That The Bull Market Is Over?

Charts courtesy of You may increase the size of either chart by clicking on them

First off, even though today was a massive upside day, there were many things that happened today which are still extremely troubling. This market is a very risky market.

A little more on pattern recognition. Elliott Wave Theory is a source of analysis used by many professional traders to determine market direction. The Reader's Digest overview of the theory is that upward moving or bull markets are comprised of three major pulse waves separated by two corrective pulses. These movements are actually rooted in the behavioral responses shown time and again by individuals. And, since human behavior never changes, these patterns are repeatable or so the theory states.

EWT is the most loved or most hated tool out there. Some swear by it and some swear at it. While the theory has been around for the better part of a century, one man, Robert Prechter, made it famous in modern times. Prechter called the beginning of the great bull market starting in 1982 and lasting until 1999 or 2000 depending on your frame of reference. The problem was Prechter became bearish not long after his 1982 call and he missed the entire bull market.

EWT is not a trading tool in my opinion. What I mean is that this alone should not be used to commit money to any market. Many people use this as their only method to make trading decisions. Robert Prechter was obviously not a trader. He was a book writer and t-shirt salesman for his theories which are valid in many instances. But, my point is he was focused on making money off of his subscribers rather than using Elliott Wave as a trading tool. That is why his return was a compounded -18% when he missed the entire bull market in stocks.

Another point worth mentioning is that one needs to know when and how to apply EWT. Most people simply don't know how to determine where a pulse ends and a corrective phase begins. If you ask ten people to draw an Elliott Wave pattern on a chart, you might get ten different charts. I believe this misuse of EWT is part of what gives it a bad reputation with some people. That said, almost every serious trader in every market, be it commodities, bonds, forex or equities heeds its warnings and, at a minimum, uses it anecdotally. Some people have used doodads like Fourier transforms and fractal mumbo jumbo to make it appear their EWT work is more sophisticated to the mathematically challenged. ie, It sounds sophisticated to the average mutual fund manager or nonscience oriented investor. Frankly, I've had Fourier, LaPlace and Z transforms coming out of my ears from control system design work and I'm not impressed by using such big words with EWT. It's hocus pocus marketing. One final statement. I don't make my investment decisions surrounding EWT but it is one form of confirmation which may be beneficial.

So, the charts above are based on some work I did in March and April of this year. They include Phelps Dodge, a commodities mining company and the New York Stock Exchange Index. I won't include the mathematical calculations surrounding the Fibonacci ratios in this work (another lengthy topic) because I don't want to type myself to death but you may draw your own conclusions from the visual representations. The Charts are weekly and are similar to patterns exhibited on the Broker/Dealers Index, the Transports and many other stocks. It might also be worth noting that Phelps Dodge, a very mature company in a very mature industry that has been around for half a century or more was trading 5-8 million shares a month pre year 2000. We ended up trading up to 150 million shares a month recently. That is a 30x increase! This isn't Microsoft or Cisco doubling revenues every year. It's an old fashioned commodity copper miner. This is surely a sign of euphoria and a confirmation of the Elliott Wave patterns in my opinion.
posted by TimingLogic at 2:30 PM links to this post

Tuesday, July 18, 2006

Three Peaks and a Domed House - Pattern Recognition And Cyclical Stocks

The Morgan Stanley Cyclical Index is something you might want to watch closely for keys to the future. The companies included in the index may be found by clicking on the link above. It is important to realize economic and stock market movements are highly cyclical. Thus, there are companies whose fate is closely tied to good times and bad. ie, They tend to perform very well in good times and, well, not so good in bad times. These companies are typically very sensitive to economic turns and are labeled as cyclical.

The chart of the MSCI is a weekly chart starting in October of 2002 which is generally considered the start of this bull market. I have annotated the chart to show what I believe is a clear "Three Peaks and a Domed House" pattern made famous by George Lindsay, a famous forecaster of times past. Even the congestion before the Domed House is a perfect representation of George Lindsay's original work.

To learn more about a George and his pattern work, I would highly recommend clicking on the link above and visiting Carl Futia's blog. While I don't know Carl personally, he appears to have the ability and competency of finding visual patterns in trading. While some may discount pattern recognition, I would not be so quick to do so. Patterns are all around us in nature. They can be experienced through any of our sensory perceptors and include things as simple as your behavioral patterns.

So, if this pattern does develop, what would be the target price to the downside? Well, visualize an x-axis around the base of the peaks and flip the upper part of the pattern below. The x-axis is at approximately 650 and the peak is approximately 900. Thus, the downside target would be approximately 400 or a retesting of the 2002-2003 bear market lows.

posted by TimingLogic at 12:25 PM links to this post

Monday, July 17, 2006

Google & Yahoo - Time For A Haircut?

First, it's important to realize some technology stocks have been totally beaten to a pulp. AMD is down from the mid forties to twenty dollars a share in a few months. At this rate, AMD will be to zero in two more months. That simply is not going to happen so some of the selling in technology has to abate at some point. Selling never lasts forever. But, it is important to heed the signals when they are given. Technology may rally but it appears a rally to new highs is a lows odds probability. Yahoo and Google have changed. Their persona is now one of biding time. The charts for both are below. First Yahoo then Google. Buying pressure is plotted against the price of both company's stock. Notice that both stocks are searching for direction. The prices have not collapsed but buying pressure surely has changed.

So, they are biding time for what? Another large move up? A resumption of a bull market? A brave new world where the economy explodes forward along with the price of both companies? Or a move down? Both companies have exhibited reduced volatility to the point where price volatility in Yahoo is at its lowest level in six years. With weakening sponsorship in the market and earnings this week, does it really matter or has the stock market already made up its mind? Longer term, I expect Google to test $170ish unless it makes significant new highs within the next few months.

posted by TimingLogic at 5:52 PM links to this post

The State Of Corporate Governance

Today, SEC Chairman Cox announced charges will soon be filed surrounding the options timing scandal. In my opinion, this conflicts with SEC Commissioner Atkin's statement that spring loading options may be beneficial.

The net is we go through economic cycles of excess and then corrective phases where the excess is removed from the system. That excess is not simply reflected in overpriced stocks but is also reflected in our lifestyles, our ability to assume more risk, our appetite for taking on more debt and our ability to let certain behavior slide. This options scandal is a reflection of the go-go 90's when we were in the final phases of a tremendously positive economic cycle. CEO behavior at the end of this cycle was full of excesses and now the general public wants a pound of flesh for losing money, losing confidence and seeing the type of inexcusable extravagance which took place.

I believe corporate governance is in need of a major overhaul. To say that CEOs can benefit from options granted before announcement of news is absolutely the same thing as insider information. It is an illegal and unfair advantage given to an investor. Option grants to a CEO are no different than me purchasing options with unfairly gained information. In such a situation, I would be accountable to the laws surrounding insider information so why isn't a CEO or the CEO compensation committee held to the same law? It is also no different than a CEO dumping shares before bad news gained by simply being the CEO and we all clearly understand this is illegal. The bottom line is these are all forms of investment and CEOs should be held to the same level of accountability as all investors. Now, if the laws are unclear, let's make them clear and make those CEO's give their entire booty back to the corporations of options granted under such methods.

This type of behavior along with all of the "foot noting" of corporate details needs to end. All investors absolutely need more transparency into the dealings of the CEO compensation packages, financial shenanigans of companies and independence of boards.

I am most terribly disappointed at the chummy nature of the typical CEO/Board relationship. We need a new way of nominating and electing board members as well as holding them accountable because right now the majority are simply a rubber stamp for the CEO and, likely, were nominated at the request of the CEO because he/she knew that person would support the CEO's agenda. Being a board member should be taken with more seriousness. Improved oversight and shareholder rights would help to focus many of these members with their fiduciary responsibility.

I want an independent thinking board which will question where necessary and challenge when appropriate. And, if the CEO is not performing, I want the board to put together an improvement plan, which, if not met, means the CEO is removed in a timely fashion. Receiving a large stipend for an honorary rubber stamping position is not in the best interest of shareholders, employees or customers.

More direct involvement by shareholder rights laws would clean up alot of this foolishness. Enron was allowed to happen because of the lack of transparency. GM has gone from a million employees in the US to one hundred fifty thousand while losing 60% of their market share because of lack of independence of the board. Yet, the GM CEOs have made billions during this forty year hemorrhaging.

And, while we are at it, how about a few changes I would like to see. Let's make any stock or option grants to CEOs exercisable only when they leave and have achieved the outlined performance measurements. There's another pet peeve of mine as well. It's being positively compensated for cutting tens of thousands of jobs. A CEO has a mandate of shareholder return and to their employees. There is seldom any strategy which does not encompass both and is long term positive. I'm tired of CEOs being positively compensated for failed policies resulting in massive layoffs. And make no mistake about it. Wholesale layoffs, while cheered on Wall Street, is nothing more than an admission that current CEO performance is a failure. These policies would allow a CEO to be compensated by their cumulative performance, not the sentiment of the moment on Wall Street.

posted by TimingLogic at 4:53 PM links to this post

Sunday, July 16, 2006

Housing Report

The PMI Group has published a quantitative report on the housing market. It is available here. The report is definitely worth the read if you are interested in the state of the housing market. If you live in nearly any global market, housing should be a concern as real estate has had a "bubble" type run in the last five years in nearly every country.

PMI has done a risk analysis of all markets in the U.S. and there are few surprises as to which markets may possibly decline. The thing I find interesting is the most overheated markets have only a 60% of declining based on their modeling. While I find this highly optimistic, one most take into consideration that housing is not the same as stocks and rather than a significant drop in prices, we could simply see a flat market over a period of years until wages catch up. ie, There are two ways to achieve more affordable housing and declining prices is only one. Personally, I tend to think we will see significant price declines in some markets as wages would need to rise well beyond historical norms to rectify the affordability problem. Regardless, it appears to be somewhat of an unbiased attempt to scientifically quantify the risks and probabilities of a topic on nearly everyone's mind.

In a few days I will post another study which tends to be more encompassing of the probabilities in the housing arena.
posted by TimingLogic at 7:09 PM links to this post

Saturday, July 15, 2006

The Greatest Car Company On Earth

The movie Grand Prix is on today. The 1966 movie about Formula One, or F1 as it is called, is considered a classic by car enthusiasts. If you love the sound of horsepower, this is a must see movie. A major character in the movie, Izo Yamura, is the fictitious representation of Soichiro Honda, founder of Honda Motor Company. His character is representative of the maniacal efforts of constant improvement so ingrained in Honda. In Japan that dedication is called Kaizen. In the U.S. we could loosely interpret it as closed loop process improvement with a twist. A method of constantly refining a process, method, product, etc. When was the last time you saw a GM, Ford or Chrysler product which appeared as a maniacal effort at perfection?

If you've never heard the sound of a Formula One engine, click here. Being an avid racing fan and being to many CART and Indy Car races never prepared me for the deafening whine of an F1 engine. You could hear the engines from a mile away. When we got to the track, I was wondering why they were selling ear plugs. It soon became apparent. The engine whine was so intense, I felt like my ear drums were going to explode. It was impossible to be near the track without them.

In real life Honda went to Formula One in the early sixties and shook the elite open wheeled series by winning just three years after making their first automobile. If General Motors and others weren't so arrogant, they would have taken Honda and Japan Inc. seriously after such a herculean effort. Forty years later the tables are turned and the tiny Japanese company has become a global force pumping out nearly four million cars a year.

While most view Toyota as the best run car company on earth, I have always felt it was Honda. There is one thing which is undeniable. Honda is and has been the best engine builders on earth for decades. Any racing series they enter, they eventually dominate or have dominated. From F1 to CART to the IRL to Superbikes to Motocross and on and on.

Bloomberg Markets has an excellent piece of work on the current CEO of Honda, Takeo Fukui. As someone who admires excellence and passion in all aspects of life, it is hard not to have tremendous admiration for a company which espouses excellence in everything they do.
posted by TimingLogic at 6:30 PM links to this post

Thursday, July 13, 2006

The Illusion Of Wealth: Never Has The Prosperity Of So Many Been Reliant On So Few

For the first time in history, we have the majority of the world's population experiencing unprecedented economic opportunity and wealth creation. With China, Russia and India joining the world's economies in some level of free market reforms we now have the majority of North & South America, Asia and Europe participating in global growth. Even many of the economies which are yet to really embrace reform are enjoying the wealth created by a industrial commodities and energy boom. I would estimate off the top of my head that approximately five of the six billion people on earth are enjoying some type of new or continued prosperity. So, why worry? Things are great!

Are they really? Today the economic miracles of developing countries are less than miraculous in my opinion. They are more of a mirage. The miracle is really one of America's ability to consume so much of the world's output. Today, America consumes over $1.4 trillion dollars worth of goods produced outside of the United States according to statistics provided by the U.S. government. We are the largest trading partner for nearly every major economy on earth and we run a current account deficit with all of them. ie, We are the world’s consumer. Even if we aren’t everyone’s largest trading partner, we likely are in the final analysis. As an example, China has replaced the United States as South Korea’s top trading partner. But, since China’s economy is almost exclusively reliant on exports to the U.S. for its continued success, China is just a mid stream stopping point for South Korean investment on the way the U.S. Ditto with Germany, Japan and even the U.S. selling technology and infrastructure into China. It is being used to modernize their infrastructure that, you guessed it, is eventually the platform for more exports to the U.S. (Although most of that investment is by non Chinese companies taking advantage of cheap labor as opposed to Chinese companies becoming dominant international players.)

So, the American consumer has spent and spent and spent for decades without much of a break. People say never bet against the American consumer. I tend to agree with a few exceptions. Historically, we have not faired well when stocks and homes were falling in value. There are studies that have been done which show Americans cumulatively spend 3-4% less when the stock market is dropping. The range is very similar as it pertains to home values. So, if both start dropping due to overvaluation or an economic slow down, Americans could cumulatively spend 6-8% less? Where will that drop in spending come from? Education for their kids? Gasoline for their cars? Heating for their house? Food for their family? Insurance for their investments? More likely, the spending will be less for imported discretionary goods from China, Japan, Korea and on and on. What if the economy really slows and consumers cut off spending by 10-20%? Or, what if Americans truly are overextended and start saving instead of spending much at all? Some surveys show they already are cutting their spending. None of this takes into account a weakening dollar which, if that trend continues, will work to cut off demand for foreign goods by making them more expensive and possibly leading to more inflation. This might cause the Federal Reserve to raise interest rates even higher.

What has really changed to cause the economic miracles called Venezuela, Brazil, Mexico, Indonesia, Saudi Arabia, Russia and others who are benefiting from the commodity boom? Not a lot. What really happened is American and European liquidity has looked for a home with American and European stocks overvalued from a big run ending in 2000. So, where did it go in the last four years? It went into commodities and hard assets which were comparatively cheap. So, what reforms did Russia or Mexico institute to stimulate their economies? Uh, nothing. Hot money drove commodity prices up creating a perceived wealth in countries that were rich in raw materials. So, what happens when those assets become overvalued and likely collapse or significantly correct as they have every single time in history? Were those countries as rich as they thought they were? Not likely. More likely that they will once again become the same marginal economies they were before unless they undertake significant domestic reform. Will the consumers of these countries keep spending when their wealth is threatened by weakening demand and weakening prices for their raw materials? Or, what if you are a Chinese citizen and you see reduced demand for goods made in your country? If you are a citizen of China or India or Brazil where there has been tremendous instability, if your paycheck goes away (exports to America or American liquidity driving commodities dries up) are you going to keep spending? For that matter, was the wealth you felt actually wealth at all? Or was it simply a mirage that was the reflection of America’s appetite? An appetite that will likely be replaced with a reversal of trend and a return to savings in the U.S. Something good for us but bad for all of those countries relying on us spending indefinitely. Marginal countries have not transformed their economies into domestically driven consumer based economies because they thought they had found the pot of gold at the end of the rainbow in the form of the American consumer. Why undertake painful reform when things are going so well?

We are seeing this global economic boom through the entire supply chain. The end of the supply chain for the entire global expansion ends with the American consumer. With China, India, Europe, Canada, Mexico, Japan, Korea, Vietnam, Cambodia, Taiwan, Thailand and a few others all expecting to provide the US with finished goods (In addition to American companies) and Brazil, Russia, Australia, Canada, Mexico, Malaysia, Venezuela, Saudi Arabia, Kuwait and Indonesia providing the raw materials to all of those countries to make their finished goods to sell to the US, is there some slight chance someone along the line is overbuilding capacity? Are we being realistic here? What does overcapacity lead to? Inflation or deflation? To much supply means prices go…………down? Throw in the inflated global real estate froth and commodities at one hundred year highs. Any chance asset prices may go down?. Any deflationary pressures there? Any chance that is why long term interest rates might be so low when everyone is squawking about inflation? Any chance we can't buy all of the garbage from every country on earth gunning to supply us more and more and more? With real estate slowing or worse, the American economy slowing and stocks falling, will the global boom continue? Trends never last forever. I’m quite confident this one is about to change and because the developing countries have been too busy printing money and not busy enough getting their own houses in order, they will likely suffer disproportionately. The only question is how much. There is ample evidence much of their wealth was created on a bubble and those situations don’t end very quietly.

So, what does all of this mean? I believe many of the best performing international markets are fraught with tremendous risk. Just at the time all of the financial advisors are telling people to invest overseas. Gold is to be printed in international investing. Indeed it has been a good investment for the last four years. That is because the American consumer was still spending heavily and their homes were exploding in value. Remember, many of these countries have historically had corrupt governments, lax business controls and Enron type blow ups as a way of life. Are they really a safe haven for your money? High quality, high dividend “A” rated companies in Europe, maybe. Mexico, Brazil, Russia, China, Indonesia? You must be kidding. In times of high risk, would you put your money in Enron?

How does this all end? When the liquidity is withdrawn or even destroyed, where is the inflation? There likely isn’t any. With hard assets all at very elevated and long term unaffordable levels, short term liquidity driven inflation fears could be superceded by longer term deflationary pressures soon enough. The future may not have a worst case outcome but even a best case outcome is awfully risky for the global population.

The real question is if 140 million working Americans can support the economic well being of 5 billion people indefinitely. Well, can they? Never has the prosperity of so many been reliant on so few.

posted by TimingLogic at 12:39 PM links to this post

Wednesday, July 12, 2006

How's The Consumer?

You be the judge. Above are the price charts (You many click on the charts for a larger view), courtesy of for

@Toll Brothers - a national home builder (As a shareholder would you be happy to know Robert Toll, the CEO, sold $230 million dollars of stock when it was near $60? He was on CNBC many times last summer saying how bullish he was on his company. A year later the stock is down 60% and he made a killing selling near the top.)

@Brunswick - a boat builder

@Coach - a luxury hand bag and accessory maker

@Polaris Industries - a motorcycle, all terrain vehicle and snow mobile maker

@Home Depot - the largest home improvement retailer. (As a shareholder would you be happy that the Home Depot CEO made $22 million dollars last year? What did you get for that? A stock making multi-year lows.)

@Apple Computer - a consumer centric technology company

At a time when the financial media is generally telling you the economy is fantastic, does it look that way? These stocks are in crisis. Will they recover? Likely at some point we will see a rally of some sorts. But don't expect them going to new highs any time soon. ie, Possibly years before that happens. Remember, stock prices are discounting mechanisms. They are telling you what the economy is going to look like in six months to a year.

This ties into my next post for Friday. "The Illusion Of Wealth: Never Has The Prosperity Of So Many Been Reliant On So Few"
posted by TimingLogic at 2:51 PM links to this post

Tuesday, July 11, 2006

General Motors

Those two words draws up images which likely cause Alfred Sloan to roll over in his grave. What do I think of when I think of GM? The worst management this side of the Berlin Wall. Cars only rivaled by those made in the former Soviet Union in their ugliness and, at times, quality. Two of GM's finest are pictured above. The Buick Roadmaster wagon and the Pontiac Aztek.. Two cars of many that are a total embarrassment. The utterance of General Motors used to cause fear in every corner of the globe. A dominant empire and sign of America's technological and manufacturing might.

I actually worked for GM as an engineering co-op in college and am an avid automobile enthusiast who hopes for the day GM gets its act together. During my stint, only the best could dream of working for GM. Well, except for co-ops which explains my situation. lol. In fact, GM had their own technical college, GMI, which was one of the most prestigious engineering schools in the world and extremely difficult to get into. Today, it no longer is affiliated with GM and thus the prestige and reputation have diminished. It is now Kettering University. At one time, its reputation was akin to MIT or Stanford as a degree from GMI held significant weight regardless of where you worked.

What happened? In a nutshell, they were insulated from competition and truly did become something akin to the monolithic car makers of the Eastern Bloc. The high volume automobile business is not something which has historically drawn alot of new competition. The engineering, plant, dealership and capital equipment costs are mind boggling. The cost of developing a single new platform can be as high as $3-4 billion dollars. General Motors, Toyota, Ford, Volkswagon, Honda and others cumulatively spend so much money in new product development that it is mind boggling. Large companies launching 10-20 new or refreshed designs a year on a global basis requires some serious cash. GM, as an example, has nearly $300 billion in debt and before the recent rise of its stock, its market capitalization was about $9 billion. You want to buy GM? No problem. You want $300 billion in debt to go with those fries? You want to enter the high volume automobile business? No problem. Got a cool fifty billion to bet on chance? The Japanese, Korean and Chinese governments did. Frankly, that is how all of the Asian automakers got started. Government cash and government protection.

GM first ceded the small car market believing they could move upscale and let the Japanese build low profit small cars. Soon, it was apparent the Japanese were using small car profits to fund designs of larger cars. So, GM decided they would modernize. Robots, robots and more robots. One of the worst CEOs in American history, Roger Smith, spent something like $60 billion modernizing GM to compete with Toyota. Instead of spending that money to modernize, GM could have bought Toyota, Honda and Nissan for that same amount of money. And, what did we get for that investment? Well, I had a buddy who worked at the GM Hamtramck plant where robots were to do everything including eat Toyota's lunch. The end result was robots welding other robots and GM ripping much of the automation out. When this didn't fail to stop the market share losses, GM decided it would get into other businesses so it bought EDS and then Hughes Aircraft. But, the market share losses didn't stop and GM found out building missiles wasn't the same as building cars. So, after spending billions of dollars to buy these companies, they were sold.

So, we've seen GM retreat from market after market as the small Japanese manufacturers used profits and superior quality to move from subcompacts to compacts to midsize to luxury to sport utility to pickups. All the while, GM's market share dropped from 60% to about 24% today. Of that 24%, how many sales are to low margin auto rental businesses and to GM employees, supplier employees, dealership employees, family of GM workers, etc. Does GM actually sell anything to someone not affiliated with GM? If that isn't enough, GM bet its business on SUVs and full size pickups AFTER the attack of 9/11. No thought was given to hybrids, moving up small car or midsize car programs with better gas mileage or any thought that oil, at $10 a barrel would rise due to global demand or risk now baked into the terrorist dilemma. Hello, is anyone home at GM?

And, for all of this, GM executives have made billions and billions in compensation over the last thirty years while GM has gone from being the biggest employer in the US with over one million employees (going from memory) to less than 150,000 US employees today. GM is attempting to cut its way to prosperity. Maybe GM can finally compete with bold and innovative designs when they no longer have any employees. At this rate, it shouldn't be too much longer before we find out if that is the case. GM now complains healthcare costs account for $1500 per vehicle. Yet, if they would have maintained their market share, it would be $650 per vehicle. How much is it for Daimler or Honda? I don't know but it isn't zero whether it be the cost of national health care in Germany or Japan or healthcare costs for their US employees. Let's say it's $500. So, even with a $1000 higher cost per vehicle today, you mean to tell me GM can't differentiate their cars with innovative products are superior designs such that a consumer would be willing to pay $24,ooo for a breathtaking GM design versus $23,000 for a ho-hum competitive design? If so, GM needs a new marketing team. Well, the Wal-mart approach to marketing is another GM problem but I can only write about this topic for so long before I become infuriated. GM must be more aggressive with their designs and their entire turn around plan. GM must not be as good as the competition, they must be better or they will never get a satisfied Honda or Toyota customer to consider a GM product. The old saying goes that a lost customer or new customer takes ten times the effort to win over or win back than an existing customer. Do you think Honda and Toyota understand this? All too well.

The automobile industry isn't exactly known for its innovation. We still have transportation with four rubber tires, four doors and the same relatively crude drivetrain after one hundred years. Auto manufacturers are nearly impossible to kill off because they have historically been shielded from alot of competition. For most of GM's history, there were only a couple of companies which competed with it. So, GM shoved whatever kind of garbage out the door they saw fit. And, as a consumer with limited choices, you ate it or you didn't eat anything at all to a certain extent just like consumers in the Soviet Union. While barriers to entry are still high, that began to change significantly about thirty years ago. Now there are twenty major manufacturers vying for your spend and GM has lost market share nearly every year during that period of time. An unimaginable but true statistic. Unimaginable because if this happened in any other industry, GM would already have gone the way of the Dodo bird. ie, Extinct. If GM had the market share of thirty years ago, it would be a half a trillion dollar company and still the mightiest company on the planet. Instead, today, it is a declawed, whimpering shadow of its former self. Yet, inside of GM, the arrogance continued during this period of time. That arrogance has led to a crisis which will likely be resolved in only one outcome. Bankruptcy. Regardless of what GM does, because their mass has dimished into a smaller comparative company, they are now saddled with a disproportionate retiree burden which is likely unsolvable without a massive restructuring of those agreements. Did it need to be this way? Of course not. But it is and that is all that matters.

Let's look at automotive innovation. General Motors has spent more money on R&D in the last twenty years than America spent developing whole new technologies and whole new industries in the Apollo moon program. Much of everything you touch today was influenced by advances in the Apollo program. I can honestly say that was one government program that significant commercial benefits to American companies and consumers. So, America's entire investment for the Apollo program was approximately $100 billion. Last year GM spent $7 billion on research and development. So, for hundreds of billions in R&D we get cars with fuel efficiency 5-15mpg better than they were during the OPEC oil crisis of the 1970s. A 5.7 liter V8 truck gets a combined 14 miles per gallon today. In 1974 it was 10mpg. The Chevy Chevette got nearly 30mpg in 1975. Today, the Chevy Aveo gets a combined 30mpg. What gives? You mean to tell me $7 billion in R&D last year and GM cannot produce a car with better powertrain technology?

Let's be fair. Honda, BMW, Daimler, Toyota and others aren't much better. Cumulatively, the global auto companies have likely spent in excess of half a trillion dollars on R&D over the last few decades. Innovation and the automobile industry are pretty much mutually exclusive. Yes, engines burn cleaner. Yes, smaller engines develop more horsepower. Yes, we have better creature comforts. Yes, the quality has improved substantially. But real innovation, especially in power trains? Fuggedaboutit. So, why didn't GM or Toyota come up with this twenty years ago? They will tell you it was because customers didn't want it. Or because there was no demand for it. We could argue till the cows come home but new industries, ideas and products are created daily which have no existing demand. Latent demand is everywhere. You don't know you need something until it is invented. Did you say you needed Google before its invention? A cell phone before it was invented? The auto industry is highly resistant to change and spends millions lobbying your government to make sure it stays that way.

Yet, we are likely to see a huge change in the automobile business. It will not be led by GM, Toyota or other traditional manufacturers. They will profit from it but the innovation leaders will be entrepreneurs, small flexible startups, innovation companies, university researchers and government led efforts at transformational change. I tend to think of it as a mini-revolution in transportation technology. It is not predicated on the high price of oil. I believe that is old news. The problem has been defined and that is the starting point for invention. The problem is energy independence so we don't have to spend $1 trillion on another Iraq War defending oil or $80 billion a year meddling in Middle East politics and, secondly, it is a new awareness our gluttony is destroying the planet and if we want a better place for our children we need to get our shit together as it pertains to waste, global warming and other ecological efforts. By the time it is all said and done, we may even be presented with many new transportation manufacturers. With advances in productivity, design capabilities, off the shelf componentry, virtual organizations and flexible manufacturing technology, it is conceivable boutique transportation manufacturers could be profitable with relatively low run rates. Today there is even a small American company which can retrofit a pickup to achieve 85 miles per hour top speed and 120 miles between charges using Lithium Ion battery technology. The recharge time? Ten minutes. Howsa about a recharging station? With technological advances such as this, that is not such a pipe dream. All of this is done with a vehicle cost of $40,000. How low could that price be driven in volume by Toyota or GM? Why is this important? Our electricity can be derived from clean coal technologies, natural gas and nuclear power which does not come from unstable regions. ie, Electricity powered or assisted cars can help achieve energy independence and may help reduce emissions. Battery and energy storage technology is making rapid advances as are many other options now that we have clearly defined our mission.

What must GM do to be successful in its turnaround efforts? Well, more than I care to type but here are a few major areas GM must focus on.

1.) GM has lost entire generations of customers. Those customers may never come back. GM needs to focus on the genXers as Toyota and Honda focused on the baby boomers. Studies have shown young kids have a positive opinion of GM. Yet, what do they offer that a genXer wants? A Suburban? A Cadillac DeVille? Does GM even know who its customers are? Anyone who pays Tiger Woods big bucks to be a spokesman for Buick, a car purchased by 70 year old men, doesn't get it. Do you think Tiger Woods drives a Buick Rendezvous? I don't care if Buick drivers play golf. GenXer Tiger Woods fans or yuppie Tiger Woods fans don't drive Buicks. Bold Cadillac V-Series or trimmed out Escalades? Yes. Buick? NO. Tiger Woods would drive a 500 horsepower Escalade or V-Series. And, just as his arrangement with TAG Heuer, Tiger Woods could be a boon to GM if used properly.

2) GM needs bold and innovative designs. Robert Lutz was brought in as Vice Chair to get GM back on track with bold and successful designs. To date Lutz has failed. Not because his designs are not significantly improved but because they are too staid. There are signs of life with the Solstice, Aura, Cadillacs and coming pickups but the majority of GM designs aren't even best in class let alone good enough to maintain market share.

3) GM needs to upgrade its interiors. GM interiors are the worst in the business. Some of the new designs are drastically better but they simply are not competitive with best in class as of yet except for the Cadillacs.

4) GM needs to build better relationships with its suppliers. GM has abused suppliers so long that in times such as today, suppliers are not willing to extend GM much leniency. Purchasing in the auto industry is by far the biggest expense and cost controls are extremely important but GM working as a partner with suppliers as opposed to an adversary will yield long term benefits for both. Partnering, GM actually has the ability to think more strategically with a partner and, if necessary, help their suppliers improve their efficiencies through common business processes, integrated design methodologies and shared technological/productivity advances.

5) GM must find every possible means to cut costs, conserve cash and share common platforms globally. Today, GM simply does not have the cash to spend on new development that some of the more healthy competitors have. This may actually act to quicken the demise of GM if they cannot keep their designs new and fresh while others are able.

6) GM needs to find a way to use their global design and engineering centers of excellence more effectively. Today GM is building small car expertise in one region, pickups in another and midrange offerings in another as examples. Instead GM needs to find a way to have Asian, European and American engineering teams working effectively un unison on the same design. A twenty four hour cycle of development. ie, Should development work be done on a next generation product in the US, it will be done in eight hour days. Should engineering be shared by a global team, work could be done in Asia, then as the sun sets, work is started in Europe then the US. Development is done on a 24 hour a day basis which speeds innovation and drives the competitive advantage few other car companies have.

7) GM needs to rebuild faith in its brand within the US. Whether this is done with extended warranties, by improved dealer experiences, a transformation of how it services customers or by direct marketing is irrelevant. GM needs an all encompassing full court press on the American consumer and it should start now.

8) GM should be the innovation leader in next generation transportation technology. GM is a powerhouse of technology, creativity and brain power that simply needs unleashing. GM is surely capable of driving new technology into the market place before anyone else. Whether that be hybrids, clean diesel technology, safety, the driver experience or efficiency. Innovation in itself would do much to transform GM's brand images.

9) GM must develop a culture of risk taking, responsibility and empowerment. GM has "big company disease". A common ailment that is usually rectified by active boards or shareholders or competition which forces change. A company in such a staid industry has been able to survive for forty years with no focus and nearly total apathy. GM is internally focused, has no idea who its customers are and has no sense of urgency. It uses its heft to maintain its existence rather than innovation, quality or breathtaking designs. That is why, forty years later, companies such as Nissan, Honda and Toyota now rival GM in global scale and size. They, on the other hand, have been consumer focused and maniacal about winning in the market.

10) GM must define its brands and who its customers are. I look at some of these products rolling out of GM and wonder who are they targeting. First off, no one in their 20s. Most in their 50s, 60s or even 70s. After dominating the luxury segment, GM has all but forfeited that arena to a dozen manufacturers. What are my choices if I'm 35, single, well heeled and want a sporty car? A Grand Prix? A Buick Lucerne? A Chevy Malibu? Huh? What if I'm 25 and want something that is a reflection of my youthful independence or individuality? My point is that GM has not had a cohesive brand management strategy in forty years.

There is much more GM needs to do but the customer experience is the most important focus for GM. Whether that is pre-sale, post-sale or as part of ownership experience. And so is innovation. GM must be viewed as the innovation leader. With all of the intellectual capital within GM, that would not be a problem with the right leadership team.

It has yet to be determined whether GM has reached the threshold of pain necessary for its revival but if this is not the time it soon will come. One thing I am certain of. When the pain is severe enough, GM will finally emerge as a formidable foe. Ford as well. Crisis creates opportunity and brings about change which otherwise is not possible. As difficult as it may be to fathom, GM will once again drive fear into all those who dare to cross paths with The General. The only question is if Rick Wagoner or another will be the one able to deliver the goods.
posted by TimingLogic at 10:00 PM links to this post