Thursday, June 28, 2007

More Risk. Ahh, The Correction Is Over Said The Bull.

With the rally yesterday the bulls are still quite convinced of their continued glory. The Fed's decision to leave rates unchanged was just announced and the bulls are off to the races again. Complacency has reached a level so high that it's almost unbelievable. In a bizarre form of reality, I'm reliving 1999 and 2000 just a few short years later. Oh, how the fools have short memories.

I read the streaming chorus of cheers from the 1999 cheerleaders and wonder how people can be duped again. Westbury, Cohen, Kudlow and on and on. I see sentiment prognosticators using tomfoolery as their rationale for being bullish. And, I see relative newcomers who use their absurd analysis of the last few decades to justify why this is a reasonably valued to undervalued equity market. And they all chastise those who point to extreme risk in the markets. I find it ironic that those warning caution, even those who are bullish the majority of the time, are always laughed off of the stage until after the fact. Woe be to perma-bulls. For in the end, they will be the fools. I now walk alone. I now witness stupidity on a scale so enormous that any chance of a reasonable outcome is likely lost.

Below is a chart of the S&P from the start of this bull market in October of 2002. I want to see an actual crossover of the black doodad for a possible change in trend. Each time we've had a successful downward crossover since the bull market began, we've had a correction of some sorts. While it looks like small price movements on the chart, actually, the corrections have been relatively substantial at times. 15-40% in the Nasdaq, Russell 2000, semiconductors, commodities, etc. Typically about 20% for the Nasdaq. Nothing quite so severe in the S&P. It's interesting to note that we have gone a very long time without a meaningful correction in the S&P. Longer than the lead up to 1929 which was near the longest in history. This at a time when I've seen irrationally exuberant readings from many data points I never thought possible.

"In the fields of observation, chance favors only the prepared mind."
--Louis Pasteur


Click on the chart for a larger image
posted by TimingLogic at 2:28 PM links to this post

Wednesday, June 27, 2007

Update On Risk

From Bloomberg;

When asked on a conference call with analysts last week how a firm with a reputation for strict risk management could err in a market it dominates, Chief Financial Officer Samuel Molinaro said the asset-management arm is sealed off from the rest of Bear Stearns with a "Chinese wall."

"Clearly there are controls in place in the asset- management side too," Molinaro said on the call. "Obviously we didn't envision market dislocation of this degree."

I'm not sure I understand that statement. So, are you saying that you expected problems but you couldn't resist the opportunity to make money? Or, are you saying that you put up a wall so that any problems would be dealt with by a bailout from investors? (What is the loan Bear is giving the hedge fund anyway? A bailout from depositors or shareholders.) Or, are you saying that you put up a wall because you knew if things really got messy, the Federal Reserve and by implication the American people would bail out the mess while Bear kept the profits? I'm not really sure what the CFO is saying. If he reads this, maybe he could provide a less murky answer.

The trouble for the financial community hasn't even worked its way through the first inning. This is likely a precursor to significant upheaval. From a positive standpoint, that upheaval is necessary for the U.S. economy to get back on track as I've said before. From a negative standpoint, well, it's likely to get very ugly. This is one of many reasons I've written ad nauseum that the financial industry in the U.S. is peaking. First discussed here. Let's all hope Bear Stearns is successful in dealing with this mess. Not just for their sake but for everyone's sake. Of course, there is the economic theory that excesses should be left to fix themselves instead of being bailed out. Nice theory if jobs and people's savings weren't involved. That doesn't mean the markets won't make an example of the finance industry anyway. They will.

posted by TimingLogic at 12:16 PM links to this post

Tuesday, June 26, 2007

Homebuilder Lennar Posts Large Loss

Homebuilder Lennar posted a massive loss today. The earnings swing between this year and the same quarter last year was an incredible $550 million downward. This is from a company that reported about $3 billion in revenue for the most recent quarter. In other words, we're quite likely going to see our fair share of homebuilder bankruptcies before it is all said and done. Mostly small and medium regional homebuilders that don't have the cash or access to capital to weather the storm. A cleansing is in order after nearly twenty years of growth culminating in tremendous excesses. I wrote on here last year that homebuilders were a value trap. There was a massive amount of money that tried to shove homebuilders higher after their precipitous fall from their peaks over the last year. That rally is over for now.

For those who find the lure of homebuilder price-to-earnings ratios of 3-4 appealing, don't look now but there is no price-to-earnings ratio because there are no earnings. For those that find homebuilders attractive because of their price-to-book ratio, here's a little known fact I haven't seen elsewhere. There is historical precedence for homebuilding stocks to lose as much as half of their book value during difficult economic environments. Did Bill Miller of Legg Mason know that when he was loading up on homebuilder stocks last year? I don't know but low price-to-book ratios are cited as compelling reasons in the article link.

Below is a long term chart of the homebuilder Toll Brothers. Toll is a company I like to talk about because the CEO sold about $200 million of stock at the exact peak in the shares while saying publicly that business was good. Maybe that is technically true but it is hard to believe he didn't see trouble ahead while dumping that much stock. It's possible he just wanted to buy a new TV and needed some pocket cash.

If you missed the exact top, there was a great entry point to short the shares with the circled crossing of two long term trend lines. Someone has a handsome profit over the last few months. The red line is simply a statistical "best fit" trend line over the last seven years. As you can see, the stock has simply returned to trend. Do the fundamentals support a "simply returned to trend"? As I said last year, homebuilder stocks will likely not reach new highs for a long time. Maybe a decade or more.


posted by TimingLogic at 8:23 AM links to this post

Monday, June 25, 2007

RISK

I went over to Wikipedia and found this engineering definition of risk:

Risk=(Probability of an Accident) X (Losses per Accident)

I like this definition because it's quite easy for everyone to understand. It's the reason you buy insurance for your car or your house. Doing so is a form of risk management that we all practice. Now, there are many that simply don't understand the concept of risk when it comes to investing. Maybe that is because if you did, you might pull your money out of mutual funds, hedge funds, private equity or other investments, thereby interrupting a very handsome fee structure for those in the investment community who are typically paid on how much money is under management instead of returns. In other words, as Paul Farrell has often said, (I'm paraphrasing) Wall Street wants to keep investors in the dark. Well, as I've said before, in almost every regard investments are at a much more heightened period of risk than in 2000. How are global investments protected in such a period of significant risk? What risk management practices are employed?

As we've all heard by now, Bear Stearns, a Wall Street icon, is bailing out one of its hedge funds to the tune of nearly $4 billion. If people actually believe Wall Street is managing risk properly, I've got some news for them. How about 1929, 1987, 1937, 1921, 1998, 2000, 1977, 1970, 1990, 2007 etc, etc, etc. As I've written before, Wall Street is always wrong eventually. They are very wrong this cycle. Much of what I model involves esoteric risk factors. In April, I witnessed a five standard deviation event in a long term and relatively normal distribution series. That data series measures risk appetite. What does that mean in English? That means we're basically experiencing a once in a life time event where risk appetite is incredibly strong. Yet, risk appetite should actually be very muted were companies practicing strong risk management. So, while I have written about a very significant top being put in this cycle, the measurable data points are unfolding which support such a position.

Is it really an epiphany that a financial institution revered for its risk management practices hasn't managed risk properly? The surprise is that people seem surprised. Last week I wrote that interest rates were likely rising because of risk and not because of inflation or growth. What does this mean for equities? Let's look at the flip side of something else I wrote last week. That growth companies are less prone to exogenous financial shocks and typically have less debt and therefore are less affected by interest rate changes. This cycle has been led by deep cyclical company out performance. As the markets start to price in risk, what will happen to companies that actually have increased their debt load this cycle or have substantial debt loads as deep cyclicals typically do? In other words, companies that may have not managed their risk properly. The corporate bond market has been extremely kind with very low credit spreads. That has contributed to artificially inflated earnings. What happens to earnings when risk starts to be priced into the corporate debt markets? Especially if earnings concomitantly peak? Even if rates don't go up? Indeed. If credit ratings are changed, the effect is the same; higher debt costs. In other words, we don't need to see a large rise in market rates just a rise in risk.

Risk=(Probability of an Accident) X (Losses per Accident)
posted by TimingLogic at 10:17 AM links to this post

Thursday, June 21, 2007

Today Is A Very Important Date For Financial Markets

Below is the Nasdaq 100 ETF over the past few months through yesterday, June 21. As you can see from the support and resistance channels on the chart, so far the bulls have been playing with the bears or so it seems. Each time we have hit resistance, we have a mild correction. Each time we hit support, we have a rally. Today is a very important day. Some say the summer doldrums have set in. That couldn't be the furthest thing from the truth. No one is going to the Hamptons with all of the volume in the equity markets and all of the wild and wooly happenings in the collateralized debt markets. Let's watch events unfold to see if anything exciting happens in the next few days. We might be getting ready to retest some recent lows.



Date says Thursday as I typed this up last night. "Today" is referring to Friday.
posted by TimingLogic at 11:22 PM links to this post

Waxman Attempts To Stop Blackstone IPO

We live in a bizarre world. I want to know how the Congress of the United States can stop a company from going public with no legal grounds for doing so. Are there any attorneys out there? I'm not saying private equity is a good investment. At this point, I don't think it is. Blackstone's IPO may be a contrary data point that the private equity boom is about over. But, there are no grounds under which the government can determine what company, assuming they are abiding by SEC regulations, is allowed to go public.

Re Bloomberg: "Under the Securities Act of 1933, the SEC can block an initial public offering only over concerns that a company's filings with the agency contain inaccurate or incomplete information or makes untrue statements."

If Congress wants to create new legislation for regulation of private equity, then have at it. As I've said on here before, when it comes to our savings, government oversight is not only appropriate but necessary to protect our savings from those who would take undue risks with it if allowed to. I believe additional transparency would be appropriate if they want to go public. But, pass the laws first.
posted by TimingLogic at 4:19 PM links to this post

A Few Quick Comments About The Market, Interest Rates, Economic Activity and Interpretation Of Data

Unfortunately, I am unable to get as many posts up as I'd like and there are some I've promised that are in the backlog but I wanted to get some general comments about recent market events yet this week.

First off, the market. Internals remain strong yet this cycle has given no warning of impending corrections if one relies on generally available data. On an intermediate term, we are now more overbought by some measurements than we were in January of 2000 and much more so than at any time this cycle. That includes 2003 where we had returns on some indices approaching triple digits. With the many macro factors unfolding, we now get to see how the market digests its meal. One of the sectors I have said represents extremely serious risk, the utilities, has recently completed one of, if not the biggest blow offs in the history of the utilities averages. Is the utilities bull over? Well, that's hard to predict. I surely wouldn't be buying on the dips regardless of what happens. I would expect those seeking yield have pushed about as far as they can. The air is so thin for the utilities averages that only those with no concept of risk management would be buying utilities here.

Let's hit this economic re-acceleration topic. I see people talking about the Beige Book and ISM numbers as support of the Goldilocks' environment. That is again quite interesting. I guess it depends on how you want to slice the data. Today we get the Philly Fed survey but regardless of what the data points are, order data in the U.S., Europe and Japan remains very weak. It's not falling off of a cliff but the weakness is spreading. Some of the ISM data is expectational and some is based on quantifiable data. The order data is very soft and trending in the wrong direction in all three economic regions. Other hard data points are invalidating any noticeable pickup in manufacturing that many are expecting. China's industrial investment is still booming and that might be propping up global output to an extent, but since the supply chain is circular, ie industrial exports to China end up as consumption in the U.S. and Europe, that will likely be a lagging indicator unless China implodes first.

The recent interest rate move is really a blip. There appears to be two main points of interpretation, neither accurate in my estimation. One is that the 2-10 year bond spread is turning more positive therefore growth is re-igniting and the other commonly stated response is that inflation is rearing its ugly head again regardless of growth prospects. Again, look at the data. Bond yields of all sorts are rising. Bonds that have nothing to do with positive economic or inflationary prospects are moving briskly. Additionally, bank stocks are not responding to rate spreads so if economic conditions were improving, banks would likely be anticipating increased economic activity parallel to positive rate spreads. If the concern of inflation was rising due to economic output improving, then why are manufacturers reporting continued drops in employment hours? And, if employment hours are decreasing, then how is the economy and inflation picking up? Then why would companies be increasing their factory order rates? Additionally, if the bond market were worried about inflation, why did commodities have substantial short term moves to do the downside as rates rose? Commodities would have taken a jaunt north on the expectation of additional demand, improved economic conditions and/or subsequent inflation. I could go on and on but I won't. The market is more plausibly looking at risk and realizing it is mispriced in my estimation. Or there are undercurrents in the bond market caused by rejiggering or some anomalous event.

Let's take a moment and talk about the interpretation of data as that is some of what this post is about. Here's a little story about lies, damn lies and statistics as Mark Twain used to put it. We used to use an urban legend when talking to retail clients about data mining as a tool. Market basket analysis is a method retailers use to determine what items are purchased together or in baskets as the term states. These and other patterns may affect product placement or marketing programs to increase sales. Simple enough.

The story starts with a supermarket chain that noticed a large number of transactions where beer and diapers were purchased together. What do you conclude from this? The most obvious conclusion at face value is that babies were buying beer. The accurate conclusion was that dads were picking up diapers and a six pack. In other words, my point is that interpreting the data is much more important than the face value of the data. Anyone can tell you X data point has a value of Y. That's great. I can read too.

In psychology, confirmation bias is our innate desire to interpret data in support of our beliefs. This is especially true with successful people. More commonly you have a disagreement over facts and hear people say, "You believe what you want to believe.". Well, that is indeed scientifically true. Since most people aren't even aware of their predisposition to do so, do they even take the time to contemplate other possible interpretations? That's a little of "you don't know what you don't know." more commonly referred to as "ignorance is bliss.".

It's not always about being right. It's about being thoughtful in your process and considering perspectives you may be prone to discount. You might even practice defending a view you disagree with. I try to do that with most perspectives. It helps one create a defendable position. To wash out false positions. There might be truths one was heretofore blind to in doing so. The next time you have a disagreement with a friend, a spouse or your children, before you discount their point of view, consider that they might have a valid position or valid points.

While I have a strong view on the risks associated with today's environment, is it plausible there may be a solution that doesn't negatively impact financial markets? Sure. Have we been in similar situations in the past where positive events have come together and managed to have a positive outcome? Not in any historical data I have looked at. As I've said before, it's all about risk management. And, since financial markets don't seem to be doing it for you.........

Update with the release of the Philadelphia Fed manufacturing survey:
.......most future indicators fell from their readings in May
posted by TimingLogic at 9:50 AM links to this post

Tuesday, June 19, 2007

63 Miles Per Gallon Midsized Car?

It's hard to sort out the facts of unannounced products but it appears from a few reliable sources that Honda is going to release a diesel Accord in the U.S. as early as next year. At the same time they will scrap the hybrid Accord but not their hybrid programs in other platforms. What's quite interesting is the car is rumored to get nearly 63 miles per gallon on the highway as well as meet California's diesel emissions regulations, the most stringent in the world. All of this in a very substantially sized car with significant horsepower unlike subcompact hybrids or diesels of similar mileage ratings. Again, not substantiated. While diesels have been mainstream in Europe for ages and have the pollution to prove it, (up to 100 times the particulate pollution of gasoline engines without strict emission standards) the U.S. has shunned diesels for a variety of reasons. Initially because GM dumped diesels on the public with main bearing failures galore in the last bout of high oil prices. By then the U.S. public had no taste for diesels of any make. But, those times are well gone and most of the people who bought those diesels are no longer alive or mainstream consumers. A new opportunity for clean diesel technology? Absolutely.

As someone who believes companies should always try to do what is best for mother earth where financially possible, while making a buck doing it, I find it ironic this is coinciding with the increased Big Three lobbying efforts to kibosh increased CAFE mileage standards in the U.S. Oh, and some auto maker executives comments that increasing CAFE standards would add incredible costs to American autos. Really? Maybe GM should tell that to Honda so they can add their quoted $5,000 incremental cost per auto to the 63 miles per gallon Accord. Want to bet Honda can manufacture that diesel Accord for incrementally less than adding the hybrid componentry to the inferior subcompact tin can Prius and get better efficiency while doing it? Or cheaper than GM can manufacture a full hybrid of a comparable auto? Hybrids have many additional components that add to the costs of procurement, engineering, manufacturing, testing and maintaining the car. In addition, their end of life disposal is very detrimental to the environment without a costly disposal program. Engineering elegance lies in simplicity. Personally, I believe current production hybrid technology isn't long for this world.

If the Big Three's philosophy was similar to long standing corporate ideals held at Toyota and Honda of integrating into the environment with minimal impact, they would be have been leading this effort proactively. To be fair, GM has announced production of a very advanced truck diesel with impressive statistics that also meets California emission standards. Ford deems diesels important enough to replace their procured truck diesels with a new in-house design. All of the large auto manufacturers have advanced diesel technology capable is meeting increased CAFE standards in the U.S. Part of winning over many consumers is not just about great styling and quality. American auto companies only started realizing this a few years ago and still don't have their product mix or styling right. In the end, social and environmental responsibility is here to stay whether oil is $10 or $100 a barrel.

Are you watching Ford stock? It's headed up.
posted by TimingLogic at 12:08 PM links to this post

Monday, June 18, 2007

Intel And Semiconductors As Investments. It's Time To Party Like It's 1999!

I wrote back in July of last year that Intel's demise was greatly exaggerated. That was at a time when tout TV in particular was prattling negatively about the company. Last summer a certain personality on TV was extremely bearish on Intel and quite bullish on AMD. Any time a comedian starts giving me advice on a semiconductor company, it's a good time to fade that perspective. At the time the stock was $17ish and today it is trading at $24ish. A nice 40% pop in the stock for those who are invested in technology. Of course, it all depends on where you bought. Intel's stock looks like a disaster over the last ten years. As I've said before, those recommending semiconductor stocks, sans a few niche plays, this past cycle should be viewed dubiously for their investing prowess.

A few days ago Intel announced a new price war with AMD and Intel's recent guidance has been anything but exciting. Yet, the stock and other semiconductor stocks are finally showing some strength. What gives? The economy is picking up? Semiconductor sales are getting ready to explode with a massive move in capital equipment spending? Now, that's funny. Believe it or not, many on Wall Street actually think so. (Doesn't it seem like Wall Street personalities are alot like professional sports coaches? No matter how bad they are, they just keep getting recycled to different teams.) Let's be realistic folks. All you need to do is look at the fundamentals to realize this thesis is absolutely absurd. Semiconductor sales in the U.S., Europe and Japan peaked nearly a decade ago and have been in a comparative ditch ever since. That sales would magically decide to explode with the macro factors surrounding today's global economy is about as statistically probable as me winning the lottery. I don't even play the lottery. It is very important to remember one point when it comes to investing and bubbles. Bubbles burst because fundamentals significantly change. Or bursting bubbles significantly change fundamentals. It's a very simple concept that people just don't seem to understand. The semiconductor game is over. Something may reignite the sector at some point but there comes a point that debating such a thesis of renewed demand is an act of insanity.

The reality of why semiconductors are moving? Remember that post last fall about pairs trading with semiconductors and oil? I really don't feel like digging through my posts to find it but you might go back and read it. This recent market weakness was the broadest short term dump we've seen in a long time. To the untrained eye, it was just another bout of weakness. Mister Market, the great deceiver. It's highly unlikely this technical bounce represents an "all clear" signal.

Semiconductor stocks are actually one of the cheapest sectors and asset classes in the world being they haven't done much of anything except go down for almost a decade. In other words, since the bubble in 1999 and 2000, semiconductors have been about the worst investment on earth. Probably worse than the Somali stock exchange, if there is such a thing. Now that I think about it, a country without an economy probably doesn't have a stock exchange. Semiconductor under performance represents a comparative "value" safe haven or hedge for some. Additionally, "growth", if you can call semiconductors a growth business right now, is less tied to liquidity shocks. Growth companies typically carry less debt and are less affected by exogenous volatility in other financial markets as well. Or, should I say that is generally what is believed by market professionals and that is all that matters in the short and intermediate term. Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point. Then there is the big gap in Intel's stock price and it looks like someone is having some fun trying to fill it. With options expiration, there are alot of sometimes odd events that unfold. We thought stocks moved because of earnings? Well, okay, they do some of the time.

So, what does this mean from a fundamental perspective? The reality is it doesn't even mean the sector has to go up. I'd be surprised if we made alot of upward progress as there are no fundamental factors driving the sector. Remember, semiconductors have been in a bear market for seven of the last eigth years. The only anomaly was 2003 which was purely a technical reflex to three years of bloodletting. If you are still anticipating a pick up in capex after reading this, you might consider I read the capex expansion thesis in 2002, 2003, 2005, 2006 and they are printing a pickup in capex again in 2007. I guess the premise is if you wish hard enough, it will happen. More probable fundamental factors for this move? That is, if there even is any? At this stage in this cycle and in context of other factors unfolding, semiconductor out performance could mean a rush for quality in the final stages of the asset inflation party. Just something to think about if you are bullish.
posted by TimingLogic at 8:12 AM links to this post

Wednesday, June 13, 2007

I'm Fed Up With Delta Airlines

I was a frequent flyer for many years. Living out of a suitcase isn't the most exciting lifestyle. But, during that time I amassed a fair amount of frequent flyer mileage. I usually tried to fly Delta where possible and recently attempted to redeem some of my accrued frequent flyer mileage. Since the internet is the great equalizer and voice of humanity in a sea of corporatism and thoughtlessness, I thought I'd air some of Delta's dirty laundry. (Many large companies have people who scour the internet and blogosphere for negative news.)

First off, Delta's customer service has become an oxymoron. I've made four calls to Delta's main number over the past few months and have waited a grand total of three hours. Yes, I started timing my calls when it became ridiculous. Two of the times the person answering the phone was unable to help me and wanted to transfer me to someone else. Both times I declined after sharing my horrid wait times with the customer service representative and politely asked them to help me. While trying to find a ticket to redeem some frequent flyer mileage, I looked out until February of 2008 on every single day and there were NO flights available with SkySaver seats available between two of the largest cities in the U.S. Not exactly talking travel to Fargo, North Dakota. I became curious and tried searching multiple cities with the same results. Zero Skysaver tickets available.

Is Delta using underhanded tactics by forcing its loyal customers to spend nearly 60,000 miles per domestic ticket to redeem SkyChoice tickets in lieu of the standard 25,000 mile SkySaver tickets? Is this an attempt to remove the obligation of accumulated frequent flyer miles from their books by forcing higher redemption mileage? There must be some legal framework under which Delta has to run its frequent flyer program. Something simple like making travel available.

When I called customer service and asked them if there was a problem, they said no. When the representative was at a loss to explain the situation, I asked if there was a process for customers to file a complaint with a customer service agent that would eventually get to that Grand Poobah in the sky; the head of customer service. Her polite answer? No. To which I responded, "Are you serious?". Just a little bit different than the response I would have received at Southwest where their employees actually give a hoot. I guess there is a reason why Southwest has been profitable for something north of thirty straight years as I recall. Delta, you might try benchmarking your customer service processes against Southwest in an attempt to remain relevant with customers. You know, those people that pay your salary? I can't wait to buy Delta stock. That's going to be a real winner.
posted by TimingLogic at 5:29 PM links to this post

Monday, June 11, 2007

Apple iPhone M-A-N-I-A And Technology Investing

Chart of Apple 1997-present.

M-A-N-I-A. Webster's definition: excitement manifested by mental and physical hyperactivity, disorganization of behavior, and elevation of mood;

I've been sour on Apple, no pun intended, since about $89. The first time it hit $89. That's been quite a while. My timing was wrong but not the premise nor I am quite certain the end result. The delusionals are driving Apple into a once in a lifetime blow off. We are most definitely in the mania phase of Apple as we speak. That's the phase when the stock effortlessly slides through massive chunks of price in a very short period of time without pause. It appears almost as floating and it really quite amazing to witness. Incredibly, Apple is also at an important Fibonacci resistance level as I write this. Today Apple hit a major Fibonacci time zone resistance from its 2000 top. Similar to my S&P comments last week, this is the first time since 2004 such an event has occurred in Apple. Both could spell significant trouble for Apple. Global synchronized Fibonacci resistance across many markets? Is that bizarre? (See my Fibonacci post last week for an educational link or Google it.)

Similar to internet stocks in 2000, this is an extremely risky investment. When I see the activity in the stock, there is no doubt weak hands are involved. Alot of odd-lot action in the stock which means main street investors and the clueless are buying. Or, more likely, the stock is being transferred from strong hands to weak hands. If anyone is still recommending Apple to new investors, you may want to lump them into the same category as the internet savants in 2000. Apple could always go higher but just like the bubble in 2000, this is going to end badly. Last week a pretty decent chartist made the comment he had a hard time believing this market correction could amount to anything because Apple was making new highs. Plausible. What would that perspective mean for short term traders watching the same action? They would likely be drawing the same conclusion and may have been piling into Apple last week when the market was experiencing weakness. Then what happened? Apple didn't participate in Friday's or today's rally. Fool's feint upward? There are many other technical sell signals on Apple as well. Then there are the fundamental valuations. Apple is priced at a level of incredible absurdity. Of course it was at $89 too and we are now nearly $40 higher.

Apple's stock looks very similar to the Shanghai Index but worse. In fact, if you do a little phase shifting, the movements in 2000-2001 peaks to the bear market lows till today are perfectly correlated between the two. Without labeling, you could mistake the Shanghai Index chart for Apple's stock or vice versa. The only difference being Apple's mania is much more substantial. Why should that surprise anyone? The same intermediate term macro factors are driving both assets. As I've written on here, China's business cycle is tied to the American consumer cycle and so is Apple's. This brings me to a favorite quote posted on my blog. It is from a man who just so happened to know a little of what he was talking about as it came to success and failure as he had plenty of experience with both.

"Success is not final. Failure is not fatal. It is the courage to continue that counts."
--Winston Churchill

The key part of that quote I want to focus on as it pertains to technology investing is "Success is not final." Those who are believers in the new Apple should be extremely cautious in their conclusion. With investing, conclusion is determined by the point at which one takes a profit. Paper profits are not profits at all. Profits are the result of wisdom to take money off of the table. There are many today who are as enamored with Apple as others were with China as recently as a few months ago. In fact, many are one in the same. Investing is not a popularity contest or measured by how much you love your iMac or the success of a point in time product like the iPod. If that were the case, Apple would have been a great investment over the last twenty five years. Instead, Apple significantly underperformed the broad market in the bull run from 1982 to 2000. Reading the tea leaves of Apple's stock alone would have me draw the conclusion the American consumer is just about ready to take a hiatus from supporting the global economy for quite a while. Blow offs like this typically happen at the end of very long term fundamental trends. We'll just have to see.

There are many macro factors which will affect Apple's stock in the future. Today, much of Apple's gains have come from valuation expansion. From investor's false clarity of vision and from a belief that Apple has achieved some type of transformational change of their business. First off, Wall Street has no historical precedence for understanding technology stocks. The ten most popular or fad technology stocks of the late 1960s were no longer listed in the early 1970s. Similarly, how many have disappeared from the scene since the internet bust? This cycle of misunderstanding will be repeated until the end of time because the majority of investors and money managers don't understand technology. We are in an age where everyone fancies themselves as a technologist. Here's a simple test everyone can take. If you can read Ray Kurzweil's books and explain the technical details of the how's and why's of what he is talking about, you might classify yourself as a technologist who can predict trends. Otherwise, stick to changing the disk drive on your Ameritrade PC as the extent of your technical abilities when it comes to investing. You'll save yourself alot of money. Need more evidence? Ask Warren Buffett. He hates technology as an investment. Do you want to own Apple for the long haul because you think the iPod will transform the world or make money like Warren Buffett?

Technology is a powerful investment thesis and presents outsized opportunity for return but only if one recognizes the limitations. One of which is the lack of appreciation for and understanding of what technology is and isn't. Technology investing is not like banking or insurance. Technology is a destructive tool. Innovative destruction is a right of passage to any successful technology company. Therefore, by definition, Apple must destroy its existing products in hope of maintaining future relevance. One must recognize no one knows what the future holds in Apple or any technology stock but it will not be what is here today. Do investors clearly understand this statement by looking at the chart above? Hardly. They believe Apple has achieved some type of nirvana. They are already discounting future profit and growth through the action of the stock. The innovative successes of today are never the successes of tomorrow. That is a very different premise than buying toothpaste, food, insurance or banking stocks. It is an extremely simple fact yet so many simply don't think about it or get it. That doesn't mean Apple or other technology stocks don't have staying power or can't achieve longevity as a business. But, it does mean if you are riding technology momentum, you are going to get seriously burned if you think it will last. The only thing that is constant in technology is change. The only thing about investing in technology that is constant is that one needs to understand that and change as well.

Please remember this is not an Apple bashing session. This is about reality. I admire Apple for the creative branding, great customer experience, great customer support and great industrial design of their products. But. As a generalization we've seen unprecedented investment flow into consumption based investments this cycle. In the end, as an investor it wouldn't even matter whether Apple has achieved transformational change. Investment monies and asset expansion are cyclical. Apple's stock will eventually be shunned in favor of investment not consumption. Read that sentence again and again if you believe Apple's stock will deliver superior returns over the next cycle. It is a key to investing success. It has always happened this way and it always will.

Apple is still a PC company. PCs more than ever are legacy products. That includes laptops. The technology is comparatively ancient. Even the processor is comparatively ancient technology. Putting more circuits on a single substrate is always advancing and incremental changes in architecture are ongoing but the PC is not a showcase of any leading technologies. In addition, Apple will never crack the corporate market to any large extent. I won't go through the lengthy explanation but it isn't going to happen under today's constructs. If the constructs change, there is an extremely low probability Apple would be the leader anyway. That leaves Apple with an attempted growth transformation into the consumer electronics space. It is a business Apple will find difficult to lead over a sustained period of time in my estimation. Consumer electronics is a bloody, high volume, low margin business and most fail. Even for the successful there are many failures or marginally successful products with a few major successes in between. Apple has no experience in delivering a large stream of innovative products on a sustained scale as their consumer electronics competitors have for decades. For them to be successful with their current business model means they will have to do something no consumer electronics company has ever done; get all of their future product launches perfect. Or, they will have to bring more products to the market in hopes of maintaining some level of success. Doing so will likely dilute the Apple brand with failures. Think that won't happen? Think again. Apple's past is littered with them. This isn't the staid business of Louis Vuitton making hand bags. We aren't even at the starting line for the great race of future innovations so declaring Apple the victor with this massive stock run is very unwise. They may be one of many victors but the iPod will be extinct soon enough and what will be the next innovation? What are the chances it will be led by Apple?

Niche or premium consumer brand? Maybe. But, that's what they have been for decades. In the end, it still doesn't matter. Investment monies will rotate out of consumption and valuations will return to trend or worse. Apple's stock will have a very serious decline at some point.
posted by TimingLogic at 12:35 PM links to this post

Friday, June 08, 2007

Innovative Business Processes At Ford

Ford has announced a significant and positive change to its development processes. Basically, if you can't get rid of the leviathan of bureaucracy, make it powerless. What will all of those bureaucrats do now without meetings to attend? I suspect they had better focus on something productive or they'll be finding something less inviting in their mail box. Doing this is an attempt to refocus and empower innovation while giving development a fighting chance to succeed. A novel concept. Allow people to do what they were hired to do. Unfortunately, large companies are typically focused inward unless there is a core company principal against it.

Can you-yes you reading this-explain in clear terms what you do that is of benefit to your customer and if your job no longer existed how customer satisfaction would be adversely impacted? If not, you had better figure it out and refocus or start looking for a new job because you are expendable.

It might be amazing to hear but I know people at large companies that spend 20-40 hours a week in internal meetings. I have had similar experiences and eventually required a meeting questionnaire regarding objectives, if the pre-work was completed to allow the meeting meet the objective, etc be filled out before I attended. It is incumbent upon each person to transform their own piece of any business and do so in a positive fashion that is focused on the customer. That can be accomplished quite effectively by removing barriers around you. Be a positive agent for change before your competition forces you to change. When you've reached the point of being forced, the personal impact is typically less positive so be proactive. It is the best form of job security.

I have said repeatedly that Ford and GM were quite possibly the richest companies on earth as it pertains to intellectual capital and that a key to their turnaround was to unleash that ability on the market place. Empower the team. This isn't such a radical concept for a customer-centric company but it is terribly radical for a staid monolith like Ford. Continuing to facilitate free thinking, productivity and idea creation while maintaining focus on business results is key to the success of any business.

What have you done for you customer today?
posted by TimingLogic at 1:13 PM links to this post

Thursday, June 07, 2007

Congratulations To The Kiwis!

The New Zealand team is back in the America's Cup finals after trouncing the Italian team the the Louis Vuitton Cup finals.

I'm a big fan of the America's Cup. Not because I am an avid sailor. I'm not. I've never been on a sailboat. Although if given an opportunity, I'd love to. In many regards the America's Cup competition is the embodiment of human achievement. It's a showcase in excellence, teamwork, commitment, leadership and good old fashioned hard work. All are attributes many seek in their own lives. (The American team gets an "F" on its teamwork and leadership report card. Actually weak leadership set the stage for poor teamwork as is typically the case in an organization.)
posted by TimingLogic at 1:14 PM links to this post

Wednesday, June 06, 2007

Is Leonardo Fibonacci Awakening The Three Bears?

I'm out of commission with some type of bug so I'm going to throw up a relatively quick post. I see alot of bullishness from prognosticators quoting bearish sentiment readings. As I've said on here time and again, sentiment is but one leg of successful investing. It also has the potential to be the weakest unless at tremendous extremes such as existed in 1982. Many of these same prognosticators were yammering about negative sentiment in 2000 as well. Yes, many sentiment points at the very peak of the largest bull were indeed bearish causing many to expect higher prices. Sentiment has and always will fail those using it at many key moments in time. In addition, sentiment is typically a coincident measurement to price and many times simply another way of measuring the same data. In other words, it is not typically an independent variable but rather a function of price. Very few people seem to get this simple point. It seems some of the more qualified on Wall Street are starting to figure this out. Finally, I recently read a rational explanation of put/call ratios which came to the conclusion it was a coincident indicator and really a function of price.

Be it options ratios, Rydex ratios, short interest, futures data points through COT reports, oscillators, sentiment surveys or anything else, they are typically measuring the same thing or are misinterpreted. And, as history has shown time and again, they work until they don't. Think you found the Holy Grail of sentiment? Think again. It will eventually fail in a big way. Guaranteed.

Last July before the mega cap rally and the China blow off I wrote on here that mega caps, Chinese equities and energy were the likely remaining assets yet to be shoved even more. So, what has outperformed since that comment? Mega caps, Chinese equities and energy. Was I using the latest sentiment gadget to make this call? Hardly. All I need to know is how to model human behavior reflected through price and a clear understanding of the Wall Street herd's behavior. The only sentiment doodad you need is price. Therefore, the best time to aggressively load up on stocks as overvalued as today is when prices have collapsed. What do you think Wall Street sentiment will be then? Small caps down 50-70% or more? The Wall Street engine will have ground to a halt, asset allocation models will have low equity allocation, there will likely have been large layoffs in the financial sector, most hedge funds will have lost their appeal, Mad Money will be off the air, etc. That's a good time to buy. At this point in time, waiting for a 10% dump or waiting for some four year cycle bottom which was supposed to happen last year yet is still being called the four year cycle is more yammering. Real money for most is made by catching the majority of market moves over many years or decades. In that respect, catching the exact top to a major wave is rather meaningless. What is important is to miss the mess. In other words, we aren't going to get a ten percent correction then start another five year run which triples today's prices. That is, unless the dollar collapses and the Fed destroys the dollar through its actions. I doubt that will happen. If it does, I'm moving to Switzerland to live on cheese fondue and chocolate.

This levitation process we are seeing is not generally bullish. We've made next to no progress in the last six or seven weeks in the major averages yet marginal new highs have happened nearly every day. So much so that the action has caused many who would be otherwise cautious to change their view. Even though on a percentage basis the gains have been almost imperceptible in the big picture. The market tends to do that to people.

As of this past week, we have possibly put the final pieces together in achieving a very high risk point in nearly every asset market globally. Let's cycle through a few that are relevant to US investors as a matter of convenience. Energy stocks and energy futures are retesting very strong Fibonacci resistance levels with much less sponsorship. Gasoline spreads are at very unsustainable levels. Many other late stage industrial commodities are in a similar situation including uranium which hit a four decade resistance level as well as the new semi precious metal, copper. The last of the supply chain commodities, milk, has had a massive move recently potentially signaling the end to the commodities game. The three equity bears are awakening from their slumber as well. Dow bear, the leading major index in this run has hit a major Fibonacci resistance level. NYSE Composite bear, the most encompassing earnings bubble index this cycle has hit a major Fibonacci resistance level and small cap bear, the biggest valuation mess in the US has hit major Fibonacci resistance. And, the biggest baddest bear of them all? The S&P has hit a major Fibonacci resistance level and more importantly a Fibonacci time zone in the S&P has hit this week. That time zone from the 2000 top in equities is the first one reached in two calendar years. Every sophisticated Fibonacci trader on earth knows these points and there are lots of Fibonacci traders. Unfortunately, they aren't going to telegraph it to the general public either.

Now, before I close, let's go back to a comment I made earlier this year. Many have been saying we need a massive spike higher in a blow off top for the major market to end this cycle. I used a historical example of a similar cycle to prove that is absolutely not true. Now, I used an example rather than an explanation but if you think about it, I'm sure you can figure out why this is so. Those who are making such a statement don't understand market dynamics and what really drives various bubbles. This cycle is going to end at some point, likely between here and September, and when it does, it will most likely end with a whimper in the S&P. For an explanation of Fibonacci analysis, click here.
posted by TimingLogic at 12:05 AM links to this post

Friday, June 01, 2007

Bond Sales At Record High

Bloomberg's article this morning confirms some of what I stated a handful of weeks ago when I said corporate balance sheets weren't as pristine as many are leading us to believe with such out-of-bounds profits.

A quote from the article: "What's driving corporate bond issuance has been the funding of acquisitions, stock buybacks and special dividends. That will continue as long as the cost of debt remains relatively low compared to the cost of equity. Earnings growth is allowing companies to borrow money to finance 'shareholder-centric policies' without significantly changing their ratio of debt to earnings before interest, tax, depreciation and amortization according to S&P"

Impressive. Did he go to college to learn that? I tend to believe it will go on until it no longer goes on as opposed to the comment above. Well, given earnings are at levels only seen a few times in the last one hundred years, I would venture to say that debt to EBITDA ratio is a little misleading and unsustainable. Maybe the author of that comment should be slicing the data using a more fundamental and less cyclical metric given that fact. Did they teach you that in college?

Record debt issuances, record low investment and record "shareholder-centric policies'? How is record low investment shareholder friendly? Or, how is issuing debt to buy back stock shareholder friendly? Do you feel more friendly when you issue personal debt to help your bank? Or, how about when you borrow money to pay a special dividend to your family in the form of a spending spree of their choice? Personally, I feel a great satisfaction when doing so. Is there any difference? By the way, if you are in Europe, don't think companies in your back yard are any different. The European bond market just surpassed the US bond market in overall size. We all get to play the same game. Isn't that fun? Who said the US and Europe weren't on the same wave length anymore? The comradery is back!
posted by TimingLogic at 9:53 AM links to this post