Capitalogix

Capitalogix Commentary 01/31/10

We Do Live In Interesting Times.

The markets pulled-back a little last week.  To be fair, the correction was small in comparison to the size of the rally since last March.  In many cases where the recent trend has been bullish for so long, people use this type of weakness to add to positions.  So, an oversold-rally would make sense here.

However, some traders have doubts about the health of the market. 

There is a fear that things may not be what they seem.  For example, the GDP number came in higher than expected, but still resulted in selling.  OK, GDP didn't tell us useful things (this time) because the better than expected number was the result of accounting and statistics, rather than real economic growth.  Traders saw through that, and also see that there are still troubling data points coming in ... like that Durable Goods Orders and Weekly Unemployment Claims were both weaker than expected; and Consumer Spending continues to decline.  Still, the Markets sold "good news" again last week.  And even though the moves weren't violent or extended, I take that as a bearish indicator.

Is It Possible That the Market is Still in a Down-Trend?

Right now, the issue is whether price can get back above the down-trend line (marked by the red arrow) that started in October of 2007. 

Is that down-trend line really valid?  It will be if price fails to rally here.

What's Causing the Market to Wobble?

As you examine the markets, it is easy to become near-sighted.  By that I mean that it is easy to look at the ups and the downs, and to assign a cause based on what's happening in America (for example, the crisis of faith in Bernanke, Geithner, or even a jobless recovery).  However, it is harder to believe that any of those issues is the real cause after you look at the next chart (or collection of charts).

How Can The Economies Of This Many Countries React the Same?

A quick glance around the globe shows remarkably similar performance in many markets.

It brings up two questions:

1. Are each of these countries really doing the same things right and wrong?
2. Are world-wide expectations and responses really this similar?

To get a closer look for yourself, here is a link to the charts.  That brings up a third question: What's really causing the markets to behave so similarly?

HBR Shows that Countries Did Deal With the Crisis Differently.

The economic crisis will influence business long into recovery.  This Harvard Business Review visualization puts various bailout and stimulus programs in perspective. Calculating these interventions as percentages of GDP helps identify which economies will be stressed and which will have the resources to bounce back.

Is This Time Different?

Lots of people are reading Reinhart & Rogoff's book, This Time is Different. It examines the trend towards public debt that balloons in response to financial crises. Here is an excerpt from PIMCO's summary of the book:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
   
   
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
   
   
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

These examples tend to confirm that banking crises are followed by a de-leveraging of the private sector accompanied by a substitution and escalation of government debt, which in turn slows economic growth and (perhaps) lowers returns on investment and financial assets.

Business Posts Moving the Markets that I Found Interesting This Week:

• The Ups & Downs of Obama's 1st Year. How Did He Do? (CNN)
• Did the State of the Union Address Actually Change Anyone's Mind? (Slate)
• IMF Sharply Raises Global Economic Growth Forecast in Developing Countries. (Reuters)
• Is the Worst Yet to Come in VC? The Strong Will Survive. (WSJ)
• AT&T Reports 2.7MM New Wireless Users & is iPad's Sole US Data Carrier. (Forbes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• The Pope and Social Media: Give Us This Day Thy Daily Post. (NPR)
• How Technology Enhances Collaboration. (Forbes)
• How the U.S. Enabled the Chinese Hacking of Google. (CNN)
• U.S. Says Free Access to Internet is a Foreign-Policy Priority. (ZDNet)
• Will There be iLust for the Apple's New iPad? (Forbes)
• More Posts with Lighter Ideas and Fun Links.

Virtual PCs

Some technology is innovative and impressive, but doesn't serve a business need.  For example, you keep hearing about Cloud Computing. Yet, how likely is it that you're going to allow your business to put a bunch of your proprietary data out on the net anytime soon?

I'm not saying bad things about clouds, I'm just saying that there are a number of other recent advances that are interesting and perhaps more relevant.  Some of these advances promise to save time and money while making the computer environment safer and more robust.  An example is the class of solutions that take advantage of shared resources (like database clustering and virtualizing servers and desktops).

For us, one of the biggest changes in information technology, recently, has been the increasing use of virtualization.

What is Virtualization?

Several years ago, I needed to purchase a big and powerful computer to run certain in-depth tests. Yet, only a small percent of the tests we run require a machine that big. Some of our other testing took a long time, but didn't require many of the computer's resources. In both cases, we were dramatically under-using the machine a majority of the time.

With virtualization, you can take a big powerful machine and divide it into smaller less powerful machines when you need to. 

That means you can use all of the machine's capacity for one purpose some of the time. While other times, you can load a configuration optimized for a different type of test, which lets you create more virtual machines.

So, if you are running a test that might take one computer 24 hours to run (but didn't use much of the computer's processing power), you could use virtualization to split the computer into four virtual computers.  The result is that it might only take you six or seven hours to complete the same task.

That is a simple example, but hopefully it gives you an idea of what is possible.

There are two main players in this space, Microsoft and VMware.

Virtual PCs Move to the Desktop.

That same technology has moved to the desktop.

For example, Windows 7 comes with Microsoft's Virtual PC. This makes it easy for you to create a clone of the computer (running inside your computer) but that doesn't affect the primary operating system.

You can use a different operating system in the Virtual PC. So, even though you might use Windows 7, you could setup the Virtual PC to run with Windows XP or even Linux (for compatibility or testing reasons).

Another use of a Virtual PC is as a "sandbox" that lets you install and try software that you wouldn't otherwise try on your main computer.

For example, Microsoft just came-out with a beta version of its Office 2010 product.  I asked some of our IT staff if I should install it on my PC to try.  When they stopped laughing at me, the answer was "absolutely not", because it might hang, damage something or create the need to re-install the computer.  A Virtual PC, however, is a great place to try something like that without risking your primary work environment.

Give it a try.

Resources:

• Here is a link to Microsoft's page for Virtual PC
• Here is a link to a tool to make a Virtual PC from a live Windows install.
• Here is a link to VMware's page for the Desktop Player.
• Here is a link to a tool to make VMware images from an operating system.
• Here is a link to an open source solution from Sun called Virtual Box.
• Here is a link to Virtual Box Images

Capitalogix Commentary 01/24/10

Last week several news items caught my eye as potential "sign-of-the-times" indicators.   With markets still near recovery highs, the amount of fear and loathing is surprising.  Here are some examples.

1. Bernanke's 2nd term confirmation ran into opposition. The magazine cover curse strikes again.
2. Kennedy's Senate seat went to a Republican.This was not the change Dems hoped for.
3. Harley-Davidson posted its first loss in 16 years.  Also,
4. Google was down even though its profit quintupled. Selling good news is bearish in my book.

Let's Look at the Market.

For a number of weeks, the rally was holding-up even though there were a number of signs indicating underlying weakness.  That means buyers bought the dip.

Well, last week price finally broke beneath the trend-line from the March lows.  It is a bearish sign, unless price can get back above the trend-line quickly.

 

Currently, price is still above the support level marked by the orange dashed-line.  A move beneath this level would be another bearish sign.

The next question is whether the move will find the selling power that has been so noticeably absent during the rally?

Perhaps A Little Bit of Fear Will Be a Good Thing for Trading Volume.

The CBOE Volatility Index (VIX), often thought of as the market's fear gauge, capped its biggest three-day run-up since February 2007.  Recently (until last week) it was more of a complacency gauge.  Here is a chart showing the steady decline, and then the surge.

So, short-term, we'll see if that shakes-out some Bulls who are questioning their conviction.

Rembember, however, that market rallies often happen after a fear spike subsides.  So if we don't get selling volume, the next question is whether Bulls will buy the dip?

At this point I am watching the VIX, because while the spike of fear was big ... it came when the VIX was at an extended low.  Fear and Greed (or Bears and Bulls) collide, here, as a result of the conflict between the short and longer term views of the market.  Which side wins will likely have big consequences, because a move higher in the VIX will likely coincide with a bigger move down in the markets.

The U.S. Dollar might also provide some clues to market direction.  The Dollar and equity markets often move opposite each other.  Currency speculators increased bets against the Dollar in the latest week, according to Commodity Futures Trading Commission data released on Friday. The value of net short positions in the dollar rose to $3.12 billion in the week ending Jan. 19, from a net short position of $2.7 billion the previous week, according to Reuters calculations. 

The Markets Are Oversold in the Short-Term.

This chart shows the percent of stocks in the S&P 500 Index that are trading above their 10-day moving average (in other words, what percent are in an up-trend on a short-term basis?).  Right now, less than 10% are.

As you can see, we don't get extreme readings like this often ... and when we do, the market tends to bounce.  To see an interactive version of this chart with an overlay of the S&P 500 Index (so you can see how often the overbought and oversold readings work) click here.

Business Posts Moving the Markets that I Found Interesting This Week:

• Obama Takes the Fight to Rein-in Big Finance on Wall St. (WSJ & TDB)
• Goldman Earned $4.95B in Q4 - That's Almost Real Money. (NYTimes)
• Bernanke's Burn Notice: From Man-of-the-Year to Scapegoat. (NYTimes & EWave)
• Op-Ed Piece: Obama's Power-Outage On the Edge of the Abyss. (TDB & Newser)
• Surprise, Everyone at the Barron's Roundtable is a Bull. (Business Insider)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Can Strategic Alliances Help Us Innovate Our Way Out Of Recession? (Forbes)
• The Rise of Machine-Written Journalism. (Wired)
• One Step Closer to the Jetsons: Skype In Your TV. (NYTimes)
• Netflix Expects to be Mailing DVDs for Another 20 Years. (Business Insider)
• Bacteria Offer Insights Into Human Decision Making. (PhysOrg)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 01/17/10

On the surface, the markets still look pretty good.  However, last week something happened that I consider a bearish warning sign.  The Market sold-off on good news.  Although Intel announced strong results, it looks like the market priced-in the good news already.

In addition, the tech-heavy Nasdaq Composite Index has lagged the S&P 500 recently.  Clearly, it is still in an up-trend.  However, price has pulled back to test the trend-line.  If the trend is to continue, this is where buyers should step-in.

There is key support at the 2,200 level.  No alarms, yet ... Just a reminder to stay vigilant.

Is the Rally Losing Momentum?

The rally has lasted longer than I expected.  And each time we've been at a tipping point, recently, market corrections haven't succeeded in triggering sellers.

However, the rally has lost some of its momentum. There are many signs (like poor volume or increasing negative divergences) that point to underlying weakness.

Is there an Unseen Hand?

Some believe the rally is orchestrated by the government, and supported by various plunge-protection initiatives.  I find that hard to fathom.  It's a free market, and there are simply more buyers than sellers.  It doesn't matter if there are only a few buyers ... price will continue to go up as long as buying pressure is stronger than selling pressure.

Nonetheless, recent trading has stayed in a relatively narrow range.  From my standpoint, this is probably a result of a fundamental disagreement between the Bulls and the Bears. Let's look at some of the major areas of contention.

Here are some of the reasons Bulls think the Market is still cheap enough for valuations to be attractive. 

• The green-shoots of growth may be a sign that the economy is getting stronger.
• Corporations are starting to invest, and M&A activity is picking-up.
• Perhaps most important, though, is that government stimulus continues, while the Fed remains accommodative. 

In contrast, Bears are warning that we may be at an important longer-term top.  Here are things they are watching.

• Whether there is growth, other than from government stimulus?
• Whether spending starts to loosen-up and grow?
• Whether the credit crisis gets worse?
• Whether real-estate has another leg down?
• Whether employment numbers start to improve?

Time will tell, and so will the charts.

The New Bailout.

Finally, I thought this was funny.

Business Posts Moving the Markets that I Found Interesting This Week:

• Bubble Warning - Markets Too Dependent on Government Stimulus. (Economist)
• JP Morgan Analyst Optimistic about 2010. (Business Insider)
• Divergent Views on Signs of Life in the Economy (NYTimes)
• Tech's Winners & Losers for 2010 from John Dvorak (MarketWatch)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Sony Pins Future on a 3-D Coming to Your Living Room. (WSJ)
• A New High-Tech Battle - Which 3-D Glasses Are Best? (NYTimes)
• Data Pack Rats: Why Storage is Becoming a Bigger Issue. (Forbes)
• 24 Job Interview Questions You Don't Want To Be Asked. (Business Insider)
• More Posts with Lighter Ideas and Fun Links.

Tonight's Gonna Be a Good Night ... in the Market

The length and staying power of the recent market rally says something about how crowds work, and why the majority of traders are often wrong at turning points in the market.  The following video makes the same point, a different way. 

This video was filmed during a live taping of Oprah. It shows the Black-Eyed Peas, performing "I Gotta Feeling". It starts with a lone dancer (and I suspect some of it was planned). Yet, it is fascinating to watch what happens when other people feel the urge to get in on the fun ... and it doesn't take long until the animal spirits spread through the mob.

Pretty cool ... 

Here is the original version of that music video.

Related Info.

• Here is a link to the band's website.
• Here is a link to other Black-Eyed Pea Videos.
• Here is a site that has some song samples.

Capitalogix Commentary 01/10/10

Now that the New Year is here, everyone has to get back to work.

What About the Markets?

The rally continues.  While volume hasn't been that impressive, price continues higher.

After taking a break, the Financial Sector has picked-up some relative strength and is leading the market higher.

Unemployment Still Factors Into the Equation.

The jobs number came in worse than expected, with continued cuts and unemployment still above 10%.  Yet, the market reacted better than I expected to that news.

Joking aside, here is an interactive graphic to dive a little deeper into these numbers.  Click on the picture to change the settings yourself.

Efficient Market Hypothesis: The Meltdown’s Biggest Casualty

Here is a video from BigThink about whether the market is as efficient as some economic theory paints it to be.  Alan Greenspan said he was shocked "that market players turned out not to be able to take care of their own interests."  Perhaps the takeaway of the recent crisis is that individual players (pursuing individual interests), collectively, will not always create an outcome which is good for the collective (or even for those individual players). Consequently, Chrystia Freeland, U.S. Managing Editor of the Financial Times, argues that the Markets needs someone or something to protect the collective interests and outcome.

Now for something a little lighter ...

Here is a Preview of Next Year's Review.

Business Posts Moving the Markets that I Found Interesting This Week:

• Ten 'BreakOut!' Business Ideas Of 2009. (Forbes)
• Four Reasons to Remain Wary About an Economic Recovery. (WSJ)
• Will U.S. Home-Sales Data Temper Belief in the Government's Powers? (WSJ)
• John Mauldin's 2010 Forecast - The Year of Uncertainty. (InvestorsInsight)
• Decade Over – Here are 10 Huge Questions that Remain. (Forbes)
• Comprehensive List of 2010 Investment Predictions & Outlooks. (PragCap)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Read This Later - How to Combat the Natural Tendency to Procrastinate. (Economist)
• Taming the Digital Distractions That Make Your PC a Time-Waster. (NYTimes)
• Amazon Sold More Kindle Books Than Physical Books On Xmas. (Business Insider)
• Innovation: Where Next for Social Networking? (NewScientist)
• Google Unveils News-by-Topic Service called "Living Stories". (NYTimes)
• More Posts with Lighter Ideas and Fun Links.

Waving Goodbye to Last Year

As you start making progress on your New Year's Resolutions and 2010, I thought I'd share these two videos to put last year in perspective and chronicle some of its happenings.

One of the new technologies to generate a buzz last year was Google Wave. Even if you don't understand what it can do, you can appreciate how it's used here.

Finally, JibJab brings a little humor its retrospective.

Best Wishes and Good Luck in 2010.

Tap the Knowledge of People in Your Network

Have you ever had a question that you just didn't know who to ask? There's a new website designed to help you. 

Aardvark is a new kind of tool that lets you tap into the knowledge and experience of friends and friends-of-friends.  Think of it as a crowd-sourced (or human powered) knowledge engine. However, instead of just storing the answers, it tries to figure-out who to ask your question to in your network of contacts.

Send Aardvark a question (from the web, email, Twitter, IM, or iPhone) and you’ll get a quick, helpful response.

I was a little skeptical; however, when I tried it, I got good answers very quickly. Finally, a business use for social networks (other than marketing).

I recommend that you give it a try.

Other Resources.

• Here is a link to Aardvark's Blog Page.
• Here is a link to Mahalo (another answer service).
• Here is a link to Expert-Exchange (great for tech answers).

Capitalogix Commentary 01/03/10

The rally continues.

Individual Investors Enter the New Year with Confidence.

The weekly sentiment survey done by the American Association of Individual Investors (AAII) measures the percentage of individual investors (who take the survey) that are bullish, neutral and bearish.

The chart below shows that retail investors are getting quite confident and that the percent of bearish investors is unusually low.  While that sounds positive, typically, this is a contrary indicator.  Said a different way, turning points often happen at confidence extremes.  Consequently, traders watch for bearish moves to happen at this level of bullish sentiment.

 

Consensus in the marketplace is rare.  If everyone truly believed the same thing, no one would take the other side of your trade.  However, when investors behave as a herd, it is usually because they are emotional about something. And, as we know, greed and fear are the most prevalent emotions in the market.

• Major market tops are typically accompanied by extreme levels of bullish euphoria.  The crowd grows frenzied with greed -- its enthusiastic lust makes stocks attractive at any price.
• Major market bottoms are characterized by widespread pessimism and despair.  Here, a fear-induced panic makes most issues less attractive -- regardless of price or value.

Contrarian analysis, of course, is based on the simple notion that the majority is rarely right about the stock market's direction, especially at market turning points.

Do Headlines Signal the End of Trends?

Likewise, conventional wisdom holds that magazine cover stories are contrary indicators - by the time a success or failure reaches the cover page of a major publication, the story is so well known as to be completely reflected in the market.  While simplistic, the magazine cover indicator now has the support of recent academic research. This research found that cover story headlines on Business Week, Fortune and Forbes tended to indicate that the mood (bullish or bearish) of the story was about to change in the market.  Moreover, when an economic issue makes the cover of a general market publication (like Time), it's guaranteed to be already very late in the game.

Consequently, I hear a lot of traders joke that Time Magazine's selection of Ben Bernanke as their "Person of the Year" will be the straw that breaks the bull-market's back.

An Old Pro Summarizes the Year for Traders.

Here is a brief interview with Art Cashin, the director of floor operations for UBS, and a frequent CNBC commentator.  He is an old pro who does a nice job explaining what happened this past year and providing some perspective.

For more video from Art, click here.

Business Posts Moving the Markets that I Found Interesting This Week:

• Economic Statistic of the Decade Award. (Innovation & Growth)
  
• What will the Next Leg Down In Housing Look Like. (BusinessInsider)
• Will Commercial Real Estate Trigger a Double-Dip Recession? (OfTwoMinds)
• 91% of Magazines Show Decreased Ad Revenue this Year. (BusinessInsider)
• The Mystery of Money - Both Sides of the Coin. (Economist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Innovation: Why Failing is Practically Required Success. (MaddockDouglas)
• Readability - a Browser Tool that De-Clutters & Transforms Web Pages. (Arc90)
• Coffee May Reduce Risk of Deadly Prostate Cancer. (Bloomberg)
• A McDonald's Burger is Safer Than Your Kid's School Lunch. (Slatest)
• U.S. Virtual Goods Revenue Ready to Explode. (BusinessInsider)
• More Posts with Lighter Ideas and Fun Links.

Past Performance Doesn't Limit the Future

How will history view the past decade?

In my holiday greeting, this year, I chose the phrase: "I hope that you are grateful for the things that are great in your life, that you choose what you can use from the things weren't great … and that you invest those lessons in your future."

We can learn from history, so we don't have to repeat it (unless we choose to).

For Your New Year, Here is an Old Irish Blessing.

Here's to the bright New Year,

And a fond farewell to the old;

Here's to the things that are yet to come,

And to the memories that we hold.

May God be with you and bless you.

May the best of this year be the worst of the next.

May you be poor in misfortune, rich in blessings.

May you know nothing but happiness.

From this day forward ...

Happy New Year!