Posts tagged ‘technology’

Innovative Bird Keeps All the Worms

Source: Photobucket

As the old saying goes, “The early bird gets the worm,” but in the business world this principle doesn’t always apply. In many cases, the early bird ends up opening a can of worms while the innovative, patient bird is left with all the spoils.  This concept has come to light with the recent announcement that social networking site MySpace is being sold for a pittance by News Corp. (NWS) to Specific Media Inc., an advertising network company. Although Myspace may have beat Facebook to the punch in establishing a social network footprint, Facebook steamrolled Myspace into irrelevance with a broader more novel approach.  Rather than hitting a home run and converting a sleepy media company into something hip, Rupert Murdoch, CEO of News Corp. struck out and received crumbs for the Myspace sale (News Corp. sold it for $35 million after purchasing for  $540 million in 2005, a -94% loss).

Other examples of “winner takes all” economics include:

Kindle vs. Book Stores: Why are Borders and Waldenbooks (BGPIQ.PK) bankrupt, and why is Barnes and Noble Inc. (BKS) hemorrhaging in losses? One explanation may be people are reading fewer books and reading more blogs (like Investing Caffeine), but the more credible explanation is that Amazon.com Inc. (AMZN) built an affordable, superior digital mousetrap than traditional books. I’ll go out on a limb and say it is no accident that Amazon is the largest bookseller in the world. Within three years of Kindle’s introduction, Amazon is incredibly selling more digital books than they are selling physical hard copies of books.

iPod vs. Walkman/MP3 Players:  The digital revolution has shaped our lives in so many ways, and no more so than in the music world. It’s hard to forget how unbelievably difficult it was to fast-forward or rewind to a particular song on a Sony Walkman 30 years ago (or the hassle of switching cassette sides), but within a matter of a handful of years, mass adoption of Apple Inc.’s (AAPL) iPod overwhelmed the dinosaur Walkman player. Microsoft Corp.’s (MSFT) foray into the MP3 market with Zune, along with countless other failures, have still not been able to crack Apple’s overpowering music market positioning.

Google vs. Yahoo/Microsoft Search: Google Inc. (GOOG) is another company that wasn’t the early bird when it came to dominating a new growth industry, like search engines. As a matter of fact, Yahoo! Inc (YHOO) was an earlier search engine entrant that had the chance to purchase Google before its meteoric rise to $175 billion in value. Too bad the Yahoo management team chose to walk away…oooph. Some competitive headway has been made by the likes of Microsoft’s Bing, but Google still enjoys an enviable two-thirds share of the global search market.

Dominance Not Guaranteed

Dominant market share may result in hefty short-term profits (see Apple’s cash mountain), but early success does not guarantee long-term supremacy. Or in other words, obsolescence is a tangible risk in many technology and consumer related industries. Switching costs can make market shares sticky, but a little innovation mixed with a healthy dose of differentiation can always create new market leaders.

Consider the number one position American Online (AOL) held in internet access/web portal business during the late nineties before its walled gardens came tumbling down to competition from Yahoo, Google, and an explosion of other free, advertisement sponsored content. EBay Inc. (EBAY) is another competition casualty to the fixed price business model of Amazon and other online retailers, which has resulted in six and a half years of underperformance and a -44% decline in its stock price since the 2004 peak. Despite questionable execution, and an overpriced acquisition of Skype, eBay hasn’t been left for complete death, thanks to a defensible growth business in PayPal.  More recently, Research in Motion Ltd. (RIMM) and its former gargantuan army of “CrackBerry” disciples have felt the squeeze from new smart phone clashes with Apple’s iPhone and Google’s Android operating system.

With the help of technology, globalization, and the internet, never in the history of the world have multi-billion industries been created at warp speed.  Being first is not a prerequisite to become an industry winner, but evolutionary innovation, and persistently differentiated products and services are what lead to expanding market shares. So while the early bird might get the worm, don’t forget the patient and innovative second mouse gets all the cheese.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, AMZN, and GOOG, but at the time of publishing SCM had no direct position in BGPIQ.PK, NWS, YHOO, MSFT, SNE, AOL, EBAY, RIMM, Facebook, Skype, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

July 7, 2011 at 11:50 pm Leave a comment

Microsoft’s Hand Caught in Google Cookie Jar

Source: Photobucket

The globalized world we live in has become ever-more connected (see Globalization Train), and the recent events in Egypt where mass protests were organized, in large part by Facebook and Twitter, only goes to show the importance technology plays in our daily lives. As a result of our tight global links and the advancement of technology, product cycles have only become shorter and more competitive, raising the stakes for business success. The expanded field of cut-throat competitors in a digital age has also increased the value of intellectual property (IP). Increasingly, lawyers and judges are being forced to decipher the obscure realm of bits and bytes and vigorously defend unique IP from competitors.

If You Can’t Beat Them, Copy Them

Case in point is the current war of code-words between Google Inc. (GOOG) and Microsoft Corp. (MSFT). Google claims they have caught Microsoft’s hand in the corporate espionage cookie jar by watching Microsoft effectively steal Google’s algorithmic search code for the software giant’s Bing search service. How can Google make such harsh and direct accusations? Google claims to have set up “synthetic” searches, which were designed as digital booby traps. Based on Google’s story, Microsoft appears to have taken the bait…hook, line, and sinker.

You be the judge. Here was the synthetic search result for “indoswiftjobinproduction” when entered in Google:

Source: Search Engine Land

This is the response when the same search term “indoswiftjobinproduction” was keyed in on Microsoft’s Bing search service:

Source: Search Engine Land

Coincidence? Perhaps. Likely? No.

Well, maybe lightning just struck with the “indoswiftjobinproduction” search term gibberish – why not try another?

This is what Google’s search results created when “mbzrxpgjys” was entered:

Source: Search Engine Land

When the same “mbzrxpgjys” term was inputted into Microsoft’s Bing, here was the result:

Source: Search Engine Land

Hmmm, I seem to be detecting a pattern here.

Is Microsoft’s apparent copycat behavior illegal? The evidence for the moment doesn’t appear to be clear, thanks mostly to the fine-print legalese of confusing check boxes that nobody reads when downloading or using any internet service. Evidently, many Microsoft Internet Explorer (IE) users have unknowingly provided Google search information typed in through Microsoft’s IE browser, and the Redmond behemoth has been using this information to sharpen their search algorithms.

So if this behavior is not illegal, then should this activity be considered cheating? Here’s what Amit Singhal, a Google executive who oversees the company’s search engine ranking algorithm has to say about the issue:

“It’s cheating to me because we work incredibly hard and have done so for years but they just get there based on our hard work…I don’t know how else to call it but plain and simple cheating. Another analogy is that it’s like running a marathon and carrying someone else on your back, who jumps off just before the finish line.”

 

I’m sure this will not be the last we hear on the subject of technology and corporate cheating. As a matter of fact, in the field of intellectual property crimes, French-Japanese car giant Renault-Nissan recently brought the case of industrial espionage, corruption, theft, stolen goods, and conspiracy against three senior Renault executives. The allegations of selling crucial electric car information to the Chinese raised concerns to a feverish pitch in the tabloids because so much can be gained or lost by those involved in this estimated $2 trillion electric car market.  

The committing of crimes is nothing new, but the types of new crimes are changing. In a globalized world increasingly dominated by technology, perpetrators better think twice about committing these invisible crimes. Cheating may taste sweet, until you get caught with your hand in the cookie jar.

Read More about the GoogleMicrosoft Tiff

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and GOOG, but at the time of publishing SCM had no direct position in MSFT, Facebook, Twitter, Renault, Nissan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 5, 2011 at 7:31 pm Leave a comment

Winner’s Curse: HP’s Storage Prize

Congratulations HP (HPQ)…you are the proud winner of 3Par Inc. (PAR), a relatively small enterprise storage hardware and software company, for the bargain price of 125x’s 2011 earnings! Never mind that you were late to the game in your winning $2.4 billion bid against Dell Inc. (DELL), or that you paid more than triple the price ($33 per share) that 3Par was trading just 21 days ago (< $10 per share).  At least you have a storage trophy you can show all your friends and you don’t have to carry around all those heavy bills anymore.

Winner’s Curse

In bidding wars and auctions, the victor of the price battle runs the risk of earning the “Winner’s Curse.” The curse falls upon those that bid a price that exceeds an auctioned asset’s intrinsic value. How can this occur? Well for one reason, the bidder may not have complete information regarding the value of the asset. Secondly, there can be emotional factors, or ego, that play a role in the decision and price paid. Lastly, unique factors, such as strategic benefits or synergies may exist that allow one bidder to offer a higher price than other auction participants. For example, consider an exploration and production company (XYZ Drilling Co.) that is bidding for drilling lease rights in Prudhoe Bay, Alaska. If XYZ Drilling Co. has unique existing drilling operations in the same area as the auctioned assets, XYZ Drilling Co. may be in a better position of making a profitable bid relative to its peers. 

HP vs. Dell – A Deeper Look

Let’s take a deeper dive into the HP bid of 3Par. While HP generates a lot of cash by selling printers, cartridges, and computers, the company doesn’t exactly have a bullet-proof balance sheet. Unlike let’s say Apple Inc. (AAPL), which has about $46 billion in cash on its balance sheet with no debt (see Steve Jobs: Gluttonous Hog), HP actually carries more debt than cash (about $20 billion in debt and $15 billion in cash). What’s more, HP has little tangible equity, once $42 billion in goodwill and intangible assets are subtracted from the total asset value of the company – leaving HP with an astronomically high ratio of 275x’s price to tangible book value. For most companies operating with a positive net cash position, making acquisitions accretive is not that difficult in this current environment – when cash is decaying away with a paltry 1% return. Unfortunately for HP, their accretive hurdle is higher than a cash-rich company. Their weighted average cost of capital is ratcheted significantly higher due to a net debt position (not net cash).

Here is the viewpoint on the deal from Ashok Kumar, senior technology analyst at Rodman & Renshaw LLC:

“It’s in excess of $3 million per employee. To put it in perspective, today 3Par has about 5 percent [market share] of the very high-end market and for these premiums to pay out, [HP] would have to expand their market share to about 25 percent or about $1.5 billion, which is 5x the projected growth rate. And all of that would come at the expense of incumbents [like] IBM, EMC, Hitachi.”

 

On the Bright Side

Although the price paid by Hewlett-Packard for 3Par is ridiculously too high, this deal alone is not going to break HP’s piggybank. HP is currently raking in about $8 billion in cash flow per year, so absent aggressive share buybacks or other large acquisitions, HP should be able to pay off the cost of the deal in a few quarters. Secondarily, HP does gain some synergies by integrating 3Par’s blocklevel data storage expertise into HP’s existing portfolio of other storage technologies ( i.e., StoreOnce and IBRIX). Thirdly, HP gains some strategic defensive benefits by keeping 3Par out of Dell’s hands, a potentially formidable competitor in the storage space, given the intensive overlap in customer bases between HP & Dell. Lastly, HP will no doubt be able to introduce and cross-sell 3Par products into Hewlett’s vastly larger customer distribution channels and reap the resulting rewards.

All in all, the 3Par acquisition by HP makes perfect strategic sense, however the price paid will turn out to be a much better deal for 3Par shareholders, rather than HP shareholders. HP ultimately shelled out a hefty price tag to become the victorious party in the 3Par bidding war, but rather than increasing shareholder value, HP ended up achieving the “Winner’s Curse.”

 Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in HPQ, PAR, DELL, IBM, EMC, Hitachi, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 7, 2010 at 12:20 am 5 comments

Living Large – Technology Revolution Raises Tide

It’s hard to believe that my kids will never truly know what it is was like to live without a microwave, VCR, GPS device, internet connection or many of the other modern day inventions. In my elementary school days, when I had to write a report about Alfred Hitchcock, I was forced to drag my mom to the public library, chase down some librarians, and comb through floors of book shelves, only to find the book I needed was already checked-out. Today, it’s amazing to watch my kid, barely old enough to pull the milk container out of the fridge, scamper over to the computer, type in a few search words on Google (GOOG) and access an endless pool of information for a homework assignment. Fortunately for my wife and me, my daughter has not discovered Facebook yet.

Rising Tide Lifts All

In the uncertain times we live in, many people lose sight of the incredible advancements achieved over our generation, and ignore the difficult challenges and problems entrepreneurs are solving today. And many of these advancements have trickled down to wide swaths of the population. The minimum wage worker, cleaning dishes at the local restaurant, may not be able to afford the new $500 iPad from Apple Inc. (AAPL), but technology advancements have benefited the less privileged in different ways. For example, similar computing power used in the iPad has also been used in the logistics and sourcing departments of retail chains like Family Dollar (FDO), thereby making goods cheaper for lower-income consumers.

One person who has not lost sight of these advancements of productivity is Mark J. Perry of the Enterprise Blog. In a recent article, Perry compares what a consumer working 152 hours in 1964, earning an average wage, could purchase versus an average consumer today (46 years later) working the same 152 hours. Beyond the average wage of $2.50 per hour increasing to $19 per hour, Perry shows the unbelievable increase in the quality and number of products.

Perry places the continuing technological revolution in context by stating:

“Americans today can purchase low-priced electronics products that even a billionaire in the past wouldn’t have been able to buy.”

 

Another person that knows a little about technology, Sergey Brin (Co-Founder of Google Inc.), put recent technology advancements in perspective in the company’s 2008 annual report:

“Our first major purchase when we started Google was an array of disk drives that we spent a good fraction of our life savings on and took several car trips to carry. Today, I walked out of a store with a small box in my hand that stores more than all those drives and cost about $100. Similarly, the processors available today are about 100 times as powerful as those we used in 1998.”

 

Advancements in our standard of living are not only limited to electronic gadgets and internet searches, but also tangible benefits continue to be realized in the most important elements of our human survival. A picture says a thousand words, and these charts speak volumes about our standard of living:

Lives are Extending and Food More Affordable

Obviously, everything is not a bed of roses and some of these improvements have come at a cost. Our country has lost millions of jobs over the last few years, and globalization has significantly increased foreign competition in broad areas of our economy. But before you succumb to the devastation rhetoric of the nay-sayers, please do not forget about the almost imperceptible rising tide of technological innovations that are allowing us to live better lives, even in uncertain times.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and AAPL, but at the time of publishing SCM had no direct positions in RSH, FDO, Facebook, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

July 13, 2010 at 10:24 pm 7 comments

Revenge of David: Technology Empowers Small-Fry

The garage tinkerer’s canvas is manifested through these relatively new 3-D printers.

What happened in the virtual world with software and operating systems over the last 15 or so years is now happening in the bricks and mortar world. Linux, a free open source software operating system, was designed in the early 1990s and initially registered its trademark in 1994. The no cost system takes advantage of charitable brainpower by using programming prowess from others around the globe.

The same phenomenon is happening in the real world, and critically acclaimed Wired writer Chris Anderson wrote about it this trend in a recent article, In the Next Industrial Revolution, Atoms Are the New Bits. With the help of a laptop, free design software, and a few mouse clicks to a manufacturing plant in China, Anderson shows how a small fry entrepreneur with a good idea can become a successful micro-factory in weeks. This same process might have taken traditional manufacturers years in the past. Accelerating production from novel idea to output reality are new 3-D printers, robotic-like equipment that can build real time prototypes from molten plastic (see picture above). Sounds expensive, but these former six-figure devices can be purchased for less than $1,000 thereby allowing state of the art products to be made with relatively little capital and inventory. In other words, the small fry entrepreneur David now has the ability to become a fine tuned Goliath with the help of democratizing technologies. The high barriers to entry have been toppled down by creative, risk-taking entrepreneurs.

In describing this manufacturing marvel, Anderson highlights Local Motors, an open source car company that managed to produce a car in months what would have taken legacy automakers years to build. Rather than hire a host of expensive engineers (the company only had 10 employees), Local Motors relied on a global community of volunteers (also called “crowdsourcing”) to design the original “Rally Fighter” automobile. Utilizing a ratio of 500-to-1 volunteers to employees has allowed Local Motors to leverage the power of atoms to bits. What Anderson calls “garage tinkerers” are slowly taking over the world.

Building Your Dream

On the surface, the micro-factory concept sounds fairly straightforward, but how does one practically pursue this strategy? Anderson has five steps to building your dreams:

1)      Invent: Come up with idea and check U.S. Patent and Trademark office to make sure idea has not been used before.

2)      Design: Use 3-D design tools to model out your idea.

3)      Prototype: Upload your design to a 3-D printer and watch prototype idea grow into reality.

4)    Manufacture: Find manufacturing partner online through sites like Alibaba.com (1688.HK).

5)   Sell: Market your product online to reach the masses.

If you look back in time, the industrialization of America squeezed out the little guys because small time citizens did not have the capital or expertise to keep up with the big boys. Thanks to the internet, the playing field has been leveled and the small-fry David can not only compete with Goliath, but can also defeat him.

Read Chris Anderson’s Famous The Long Tail Article from 2004

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in Alibaba.com or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

April 30, 2010 at 1:37 am 2 comments

Decade in Review

We laughed, we cried, we kissed another ten years goodbye. It is virtually impossible to cram ten years into one article, nonetheless I will attempt to chronicle some of the central and silly events that bubble up in my memory bank.

2000

Capture of Elian Gonzalez

  • Technology-heavy NASDAQ index peaks at 5,132 before completing its -78% decline by late 2002.
  • Y2K (Year 2000) fears do not materialize and technology orders begin downward slide.
  • AOL buys Time Warner for $164 Billion in hopes of converging media and internet worlds.
  • Al Gore Democratic nominee for the Presidency wins popular vote but loses election to George Bush after effort for Florida recount fails.
  • Elian Gonzalez, six-year old boy returned to Cuba.
  • Reality TV show Survivor finishes first season with Richard Hatch winning prize.

2001

Enron Logo at Headquarters

  • Apple introduces iPod digital music player.
  • Enron files Chapter 11 bankruptcy.
  • Wikipedia online community encyclopedia launches.
  • 9/11 attacks occur pushing economy further down.
  • Alan Greenspan starts 1st of 11 rate cuts  in 2001.
  • China joins WTO (World Trade Organization).

2002

 

  • Severe Acute Respiratory Syndrome (SARS), an atypical form of pneumonia, rears its ugly head in the Guangdong Province of China. 
  • SEC files charges against WorldCom and Tyco international in connection with accounting irregularities
  • United Airlines files for bankruptcy.
  • American Idol television singing contest begins first season.
  • Guantanomo Bay detention camp is opened.

2003

  • Federal Funds rate reaches a 45 year low at 1.00% – fuel for future credit bubble.
  • $350 billion in tax cuts approved, spanning a ten year period.
  • Iraqi Gulf War II commences with “shock and awe” military campaign.
  • Space Shuttle Columbia disintegrates upon attempted reentry into the Earth’s atmosphere.
  • Broad stock market recovery (>90% of stocks in S&P500 climb), including a +50% rise in the NASDAQ index.
  • Martha Stewart indicted for using privileged investment information and then obstructing a federal investigation.
  • Arnold Schwarzenegger, movie star, becomes governor of California.

2004

  • Google (GOOG) goes public with IPO at $85 per share.
  • Mark Zuckerberg unveils Facebook and people begin “friending” each other.
  • Comcast makes failing unsolicited bid for Disney. K-Mart buys Sears with aid of Eddie Lampert
  • Ronald Reagan, 40th President, dies at 93.
  • Janet Jackson and Justin Timberlake experience “wardrobe malfunction” on Super Bowl halftime show.
  • Boston Red Sox win their first World series since 1918.

2005

  • P&G announces $57 billion acquisition of Gillette. Conoco Philips buys Burlington Resources for over $30 billion. Bank of America buys credit card company MBNA.
  • Ben Bernanke is nominated as new Federal Reserve Chairman.
  • Hurricane Katrina overwhelms New Orleans as 80% of city becomes covered with water.
  • North Korea announces its nuclear weapons arsenal.
  • YouTube starts sharing online videos before Google Inc. eventually buys company.
  • Lance Armstrong wins 7th consecutive Tour de France.

2006

  • Inverted yield curve turns out to be an accurate leading indicator for 2008 recession despite markets advance.
  • Internet activity accelerates: Google buys YouTube after News Corp buys MySpace. Twitter is introduced.
  • Playstation 3 (PS3) and Nintendo Wii unveiled.
  • Merger & acquisition activity reaches $3.79 trillion worldwide, surpassing previous 2000 peak (Thomson).
  • Options backdating takes center stage. United Health and technology companies were among those dragged into controversy.
  • Housing market peaks.

2007

 

  • Markets continue multi-year rally with three major indexes holding single-digit gains. Emerging markets build on previous year gains – Shanghai composite +97%.
  • Monoline insurers MBIA and rival Ambac become early canaries in the coal mine given the greater than $1 trillion in exposure on insuring securities.
  • Apple presents the iPhone – part phone, part music, part computer.
  • KKR (Kohlberg Kravis Roberts & Co.) and TPG complete $44.4 billion buyout of Texas power company TXU Corp.
  • Microsoft Vista operating system introduced after five years of development.
  • Housing decline accelerates as Countrywide Financial announces 12,000 job cuts (20% of its workforce), New Century Financial (#2 subprime lender at one point) files Chapter 11 bankruptcy, and two Bear Stearns mortgage based hedge funds go under.
  • Chuck Prince, Citigroup CEO, steps down.

2008

 

  • Bank of America agrees to buy Countrywide mortgage company for about $4 billion.
  • JPMorgan Chase agrees to buy Bear Stearns for $2 per share in a sale brokered by the Fed and the U.S. Treasury – eventually bid revised upwards to $10 per share (~$1.1 billion) to appease angry shareholders.
  • Lehman Brothers goes bankrupt.
  • Bank of America agrees to acquire Merrill Lynch for about $50 billion.
  • Government takes over AIG after providing insurance company $85 billion loan.
  • Goldman Sachs and Morgan Stanley become bank holding companies to improve access to capital.
  • Washington Mutual Inc. is seized by FDIC and sold to JPMorgan Chase in the biggest U.S. bank failure in history.
  • Wells Fargo & Co., agrees to purchase Wachovia for about $15.1 billion, trumping Citigroup’s bid.
  • $700 billion TARP (Troubled Asset Relief Program) eventually approved by Congress to stabilize financial system.
  • Eliot Spitzer resigns after prostitution scandal.
  • Michael Phelps wins eight gold medals at the 2008 Beijing Summer Olympics.

2009

 

  • Barack Obama inaugurated in as 44th President of the United States. Healthcare reform bills pass in both the House and Senate.
  • GM and Chrysler declare bankruptcy.
  • Recession ends as stimulus kicks in and inventories rebuild. Government announces new PPIP and TALF programs.
  • Warren Buffett pays $26 billion to buy Burlington Northern Santa Fe. Other announcements include: Oracle /Sun Microsystems; Pfizer/Wyeth; Merck/Schering Plough; and Pulte Homes/Centex.
  • Commodities and emerging markets rebound. Gold tops $1,000 per ounce.
  • Signs of housing bottoming as low mortgage rates, tax credits, and declining inventories create a more constructive environment.
  • Madoff goes to prison after he was convicted for a $65 billion Ponzi Scheme.
  • Chesley B. “Sully” Sullenberger successfully carries out the treacherous crash-landing of US Airways Flight 1549 into the Hudson River.
  • Dubai debt debacle forces Abu Dhabi to lend support to calm global markets.
  • Tiger Woods admits transgressions after car crash pushes him into spotlight.

2010 ???

Time will tell what the new year will bring. Stay tuned for some iron clad 2010 predictions coming to an Investing Caffeine blog near you in the not too distant future!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and BAC, AAPL, and GOOG, but did not have any direct positions in the following stocks mentioned in this article at time of publication (including AOL/TWX, VIA/CBS, NWS, TYC, UAUA, MSO, CMCSA, DIS, SHLD, PG, COP, Nintendo, MBI, ABK, MSFT, C, JPM, AIG, MS, WFC, GM, Chrysler, BRKA, ORCL, JAVA, PFE, MRK, PHM, BNI, LCC, GLD, and NKE). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 29, 2009 at 1:00 am 1 comment

Back to the Future: Mag Covers (Part II)

In my most recent article, I went Back to the Future  to examine the role magazine covers play as a contrarian indicator in fear-driven markets like we experienced in the 1970s (see previous story). Investing is both an art and science. While measuring the scientific aspects of the market can be more straight-forward, the behavioral and emotional sides to investing are more subjective. Magazines act as sentiment sensors to gauge the fear and froth pulses of the general investing public. Since last time we explored fear, let’s check out some froth from the 1990s technology boom.

How to Invest in the Hottest Market Ever

Hottest Market 2000

Seeing the forest from the trees can be difficult when you’re trapped in the thick of it, but the March 2000 issue of Money magazine’s “How to Invest in the Hottest Market Ever” is a classic example of the mentality that reigned supreme in the late 1990s technology bubble. Objective, fact-filled articles that challenge the status quo are not necessary to generate sales, but articles and magazine covers that pander to the raw emotions of fear and greed keep the cash register ringing. If you don’t believe me, just read the sensational headlines at your local grocery store explaining how swine flu will kill us all and how there are millions to be made in melting gold coins and jewelry (read gold article).

I love some of the quotes from the article, especially from Pam, the 51 year old divorced New York City art museum volunteer who bought AOL, Microsoft, and Qualcomm (which rose +2,621% in 1999) who dismisses diversification: “I feel pretty safe now.  I think we are in a new paradigm now.” Yeah, a “new economy” that catapulted Yahoo to a Price/Earnings ratio of 400x’s earnings; Cisco 109x’s earnings; and Sun Microsystems practically a bargain basement steal at 88x’s earnings. For reference purposes, the S&P 500 index currently trades for about 14.6x’s estimated 2010 earnings and 19.5x on 2009 estimates.

GetRich.com

GetRich.com

Another landmark masterpiece I love is the September 1999 Time cover, “GetRich.com.” Never mind the unabated technology boom (excluding a brief hiccup in 1998) that inflated the bubble for a decade – Time still managed to unearth the “Secrets of the New Silicon Valley.” The article goes onto to express the get-rich formula:

“Can’t program a computer? Not a techno savvy? Not a problem. If you’ve got a hot Internet business idea, Silicon Valley’s astonishing start-up machine will do the rest.”

Like a drug dealer pushing heroin on an addict, the article goes on to entice its readers to question “Why have a boss when you and three buddies can build your own publicly traded company in two years? Windows this big don’t open very often.”  

A Few More Favorites

BW Boom 2-14-2000

Great timing on this February 2000 cover…a month before the crash!

Everyone Rich 1999

This July 1999 cover captures envy. Everyone's getting rich!

As we saw during the technology boom, media outlets have no shame in shoveling greed inducing slop to the hungry general public. Like all historical events that end tragically, valuable lessons can be learned from our mistakes. Developing a discerning palette for the news we digest is a critical quality to generating an informed investment decision process. With the 1970s and 1990s behind us, as the last of my three part series, we’ll use time travel to another period to see if modern magazine editors fare any better in market timing as compared to their predecessors. Please excuse me while I jump in my time machine.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

 

DISCLOSURE: Sidoxia Capital Management (SCM) or its clients has a long position in CSCO and QCOM at the time this article was originally posted. SCM owns certain exchange traded funds, but currently has no direct position in YHOO, MSFT, or JAVA. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 12, 2009 at 2:20 am 6 comments

Technology Does Not Sleep in a Recession

Hibernate Bear 

Our economy may be coming out of a long economic hibernation; however technology does not sleep through a recession. Gordon Moore, co-founder of Intel Corporation, has proven this trend true through his groundbreaking piece written in the April 1965 issue of Electronics Magazine. In the article Mr. Moore predicted transistor densities would double about every two years (“Moore’s Law”).  Transistors can be thought of as the brains of electronics devices, and the industry (Intel and other semiconductor manufacturers) has been boosting the brain power of electronics for decades. How far has the industry come? The number of transistors contained on a chip has gone from 16 in 1960s to over 600 million today – now that’s what I call progress!

These achievements have been nothing short of revolutionary, and many people consider the introduction of the transistor as the greatest invention of the 20th century.  According to many industry experts, Mr. Moore’s forecasts have been shockingly accurate and many believe “Moore’s Law” will hold true for years to come – despite challenging technological limitations.

Source: The Financial Times

Source: The Financial Times

We may curse at our computers (I absolutely despise Vista), but there is no arguing with the huge productivity and standard of living improvements we have experienced over the last forty years – since the introduction of the transistor. Many take their GPS, Tivo, WiFi laptop, iPhone, and HiDef TVs for granted, however I for one thank Gordon Moore and those diligent engineers for making my geeky tech dreams come true.

However the cost of further advancements is becoming pricier. As line widths (the ability to add more transistors) narrow, the costs of building fabrication plants (“fabs”) with the necessary equipment are running in the multi-billion range. The Financial Times (FT) article talking about semiconductor trends mentions a $4.2 billion state-of-the-art factory in upstate New York that is just beginning construction. The FT notes that only two players (Intel and Samsung) have firm plans to build 20 nanometer fabs. For comparison purposes, one nanometer is equal to one-billionth of a meter and a human hair is 100,000 nanometers wide. In other words, a nanometer is pretty darn tiny. To further illustrate the point, Intel has managed to fit up to 11 Intel Atom processors – each packed with 47 million transistors – on the face of an American penny.

Source: The Financial Times

Source: The Financial Times

As the chip making industry become more costly, fewer semiconductor manufacturers will be playing in the sandbox:

“Intel argues that only companies with about $9bn in annual revenues can afford to be in the business of building new fabs, given the costs of building and operating the factories and earning a decent 50 per cent margin. That leaves just Intel, Samsung, Toshiba, Texas Instruments and STMicroelectronics.”

 

The economy may still be in the doldrums, but the $60 trillion global economy (as measured by Gross Domestic Product) never sleeps – technologies created by Gordon Moore and others continue to propel amazing advancements.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 24, 2009 at 4:00 am 4 comments

Calamos Still “Growing” Strong

Calamos

Calamos Investments recently came out with their quarterly Market Review and Outlook.  John P. Calamos, Sr., the Company founder, began investing his family’s money over 50 years ago and is well known for their successful “growth” style of investing. Calamos founded Calamos Asset Management in 1977, and won BusinessWeek’s best manager for 2003 and 2004. Over the years, the company diversified from its bread and butter convertibles into equity, enhanced fixed-income, global and international, core bond, cash management and alternative strategies.  Overall, the newsletter offers a fairly sobering outlook (“Longterm Scared”); however there are some excellent investing nuggets, especially when it comes to the firm’s current positioning:

“Because we are not in a secular bull market, investing discipline is even more important. We believe these are the rules for today’s environment”:

1. Washington D.C. is the new growth city

2. Valuations will not get as stretched in the equity markets and growth expectations will be revised down considerably

3. Old-fashioned dividends mean something

4. G7 competitive devaluations and protectionist legislation will become the norm

5. To grow, emerging nations must become consumption driven and attempt to become independent of the developed nations

6. Knowledge is free, but capital may be much harder to get

7. Real returns after tax will take on new meaning

8. Baby boomers will reprioritize spending

9. The rules will change often!

Technology Exposure: For those that have followed my writings in the past, you are familiar with my positive bias towards technology. The technology sector is littered with land mines and risks. Nonetheless, through technology, our country has and will continue to innovate new products and services that will improve our standard of living. The “Technology Revolution” is not only benefiting our society, we are exporting the fruits of our discoveries to developing countries across the world. Take Intel Corporation (INTC) for example – it garnered about 85% of its revenues in 2008 from international markets.

Here is what Calamos has to say about their “Significant Overweight” exposure to the Technology sector:

“Productivity enhancement and cost controls should help technology spending.”
  • We see consumers remaining willing to purchase certain “special” products such as iPhones, laptops and flat-screens.
  • We have found software companies offering stable revenue streams, strong balance sheets with lots of cash, and products that offer solutions for cost reduction and productivity.
  • The sector will also benefit from global infrastructure stimulus spending.
  • Stock valuations are attractive and the risk/reward is compelling.
  • The sector may be re-establishing its leadership position in the equity market for the first time since last decade’s collapse.”

Materials and Energy Exposure: Developing countries are joining the party too, albeit later than the rest of the partygoers.  The price of admission to the party is access to valuable commodities. Calamos has other reasons to be overweight the Materials and Energy sectors:

  • Muted recovery implied in stock valuations.
  • Further U.S. dollar devaluation and global stimulus spending should help boost commodity prices.
  • The small capitalization of this sector and volatility of commodity prices will again make it prone to large price swings.
  • U.S. dollar devaluation should help support energy prices.
  • Mid-East turmoil adds to the attractiveness of this sector as it can hedge unforeseen energy price spikes.
  • Stock valuations appear reasonable but government intervention will make this a difficult sector to value.

 

Like all great managers, Calamos has taken his lumps, but through it all his firm is still “growing” strong.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

July 29, 2009 at 4:00 am 1 comment

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