Capitalogix

Jump Point: How Network Culture is Revolutionizing Business

This is a compelling book.  The title refers to a change in the environment, so startling that we have no choice but to re-group and re-think the future.

When it happens, everything changes and the old trusted rules of the road to go out the window.

The book hype says: The Web 3.0 world of “pandemic economics” is a new economy that will function outside the traditional laws of commerce, free from today's impediments to business growth, and in a world where every person is connected to each other. Jump Point will help you to challenge old assumptions, re-think your business models, and take advantage of this fast-moving, unfettered, and fiercely competitive environment.

When Does It Happen?

The economic history of the world is punctuated by Jump Points. The tricky part has been identifying them at the right time.

Very often, we mistake the arrival of a stunning new invention for the Jump Point.  It is easy to get mesmerized by a new innovation, and to think the world has changed the day a new technology leaves the lab. But that is rarely, if ever, the case. That is not the Jump Point.

Instead, technology revolution is a fitful process. New technologies take time to be absorbed, diffused and adopted. We are a curious species; it is human nature to tinker, and experiment, test, and play. And most inventions improve with application, adoption, and time. Therefore, most Jump Points occur well after the enthusiasm settles and the parade has passed.

Real Jump Points most often arrive after we grow complacent about that invention, when the technology becomes routine and unremarkable, after the novelty has worn off and the technology has gone mainstream. It is then that rapid change finally happens.  Interesting.

Jump Point: How Network Culture is Revolutionizing Business

The Rules Are Changing

Goldman Sachs lost money trading only one day last quarter, and only two days the prior quarter.

Come on, how could that be? Their boss does say that banks "Do God's work."  I'm not sure that is a sufficient explanation.  When a firm's trading performance challenges not only all preconceptions of realistic trading, but also of statistical distributions, it's worth looking into.

Here's what ZeroHedge has to say about it.  Here is a chart that demonstrates Goldman's YTD trading track record: out of 194 trading days in 2009, the firm has made over $100 million on 116 occasions! This alone accounts for at least $11.6 billion in revenue (and is likely much more).

Yves Smith, at Naked Capitalism, adds: maybe I am just hopelessly out of touch, or perhaps more accurately, the Fed has created such a ridiculously favorable environment for banks and traders that if you are moderately competent, making money is like shooting fish in a barrel. But a winning streak this consistent looks like a rigged game. Is this just, ahem, “information advantages”? Greater ease in pushing markets around that have fewer players? Just a function of those monstrously wide bid-asked spreads? I’m curious for a sanity check from people closer to the action.

The party line comes in the Financial Times:

The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.

Before the crisis, banks regularly recorded trading losses on several days in a quarter.

Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.

These figures were down from the second quarter, when Goldman reported record trading revenues and had 46 days with $100m-plus in profits. The smaller number of days with $100m-plus profits in the third quarter partly reflects the bank’s decision to rein in risk-taking in areas such as interest rates and equities.

There is a suggestion here that banks like Goldman might be taking advantage of the Fed and Treasury (although that might be by design, yet another hidden subsidy).

Let me know what you think about this.

Here is a how there stock is doing.

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View the full NYSE:GS chart at Wikinvest

Here is a link to a prior Goldman Sachs article worth checking-out.

Capitalogix Commentary 11/08/09

The best thing I can say about the market is that the current lack of sellers is giving investors a good long chance to take their bullish bets off the table.

Unemployment is above 10%, and at its highest level since 1983.  Here are a few economic signs.

What about the Market?

The chart below shows an upwards sloping trend channel on a chart of the S&P 500 Index.

1. Notice that the early part of the up-trend stayed above the channel's mid-line (indicated by the blue solid line); and
2. Notice the second half of the up-move stayed above the bottom portion of the channel (indicated by the green solid line) until recently;
3. Also notice that the market is recently rebounded to test the underside of this line. I highlighted that portion with an orange circle. This chart pattern is often called "kiss and say goodbye" because a failure to jump back above the lower trendline, back into the upward sloping channel, is often a sign seen at market tops.

On the other hand, jumping back into the upward sloping channel would be a bullish sign.

Bob Prechter Calls a Major Top Using the Elliott Wave Pattern.

If you are looking for Top-Calls, then Bob Prechter is not shy.  He says: "Stocks are topping out, commodities are topping out and the dollar is making a bottom". 

Prechter is a high profile market commentator who uses Elliott Wave as a framework for understanding the market.  So, I thought this might be an interesting time to re-visit this technique.

The premise is that the market doesn't affect sentiment.  Rather, it is the other way around;  collective sentiment affects the market.  And that while markets change, human nature doesn't ... consequently, predictable patterns play out over and over again. Prechter calls this "Socionomics".

While I now look at Elliott Wave more as a way of understanding what the market has done (rather than a great predictor of what it will do next), I do believe it is helpful in getting a sense of the next likely swing. 

Here is a chart that shows the basic sequence and an example of the sentiment causing the move.

The next chart shows that a similar sequence often happens in both directions.

All this reminded me that I have a piece of software called the Advanced GET, which uses a pretty clever algorithm for identifying some of the simpler Gann and Elliott Wave trading patterns. So I dusted-it-off, fired-it-up, and started playing around.

Looking at a weekly chart of the Russell 2000 Index, it's very easy to envision a five wave sequence as follows.

Note that the wave five target is beneath the recent bear market lows. And that the wave four pullback takes us back to the top of the downwards sloping trendline ... and seems to have pretty clean Elliott Wave size, slope, and timing.

Again, I don't trade the Elliott Wave. Yet it fascinates me, and is something that I do pay attention to as a framework.  Add to all this that the daily chart of many US equity indices are stalled at their 50-day moving averages and kissing the bottom of their recently broken up-trendlines, and I'm certainly going to be wary of a pull-back here.

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

• Does Economics Violate the Laws of Physics? (ScientificAmerican)
• Fed Tests Tool For Reeling-In Money From Economy. (Yahoo Finance)
• Time for Companies to Justify Big Gains. (WSJ)
• How We Got Here: Bush Advisor Analyzes the Financial Sector Meltdown. (WP Carey)
• Smaller, Faster, Cheaper - The Enterprise Is Changing. (Forbes)
• Is the Dollar Losing Its Status as the World's Reserve Currency? (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Apple is the Outlier in this Recession. (Forbes)
• The Mortal Sins Of Chart Design, and How to Fix Them. (BusinessInsider)
• Will Airports Screen for Body Signals Instead of Bombs? (CNN)
• Can Men Breastfeed? Apparently, They Can. (MentalFloss)
• Why Some Sleep Better Than Others (Forbes)
• Are You Asleep? Exploring The Mind's Twilight Zone. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 11/01/09

Last week it started to feel like the markets were breaking-down.   Most of the major US equity indices broke down through their 50-day moving averages and also below their up-trend lines. Likewise, the Dow is back under 10,000 again.

The chart, below, shows that we are that an important support and resistance level that goes back to November of last year. In addition, we're back to price levels from late July. That means that we've had three months of rally, good news, and talks of "green shoots", with no real price advancement and a decrease of momentum.

From a technical analysis standpoint, this would be a good place to reverse and rally. However, longer-term charts and the sheer size of the recent rally suggests that we might have a little more market correction to go before the decline reverses.

A Rising VIX Often Means Falling Prices.

The CBOE Volatility Index  (better known as the "VIX") is a measure of the implied volatility of S&P 500 Index options, with very low numbers indicating extreme bullishness and very high numbers severe bearishness. It is also referred to as the “fear gauge” of US stock markets and is used as a contrary indicator as it moves inversely to equity prices. So a rising VIX often means falling prices.  As shown below, the VIX spiked to its highest level since early July.

I'm watching the VIX for clues about the direction of the next big move. If fear subsides quickly, then the rally will likely continue.  On the other hand, volatility will increase if the markets remain jumpy.

What's GDP Got to Do with It?

Going back to last week, Bears started jumping in on estimates that GPD would fall from 3.0% to 2.7%. Then GDP came in at 3.5%, and suddenly there were a bunch of headlines and news reports that the Recession was over.  As a result, the market blasts 2% higher in one day. My guess, that was more a result of massive short-covering, rather than actual bullish buying behavior.

It's worth noting that the GDP number was annualized. Real GDP growth for the quarter was 0.87%.

So far, the Stimulus spending/ Bailouts have cost the US more than WWI, WWII, and the New Deal combined… and we get GDP growth of 0.87% for Q3?    That's not a sign of a strong economy.

Longer Term: How Does This Compare to Other Bear Market Rallies?

Here is an interesting inflation-adjusted comparison of three Mega-Bear Markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

Something to keep in mind ... while history doesn't always repeat itself ... it often rhymes. If so, the next big move is down.

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

• 2010 Economic Forecast: Don't Hold Your Breath for Fast Growth. (WP Carey)
• U.K. GDP Numbers Worse Than Most Thought - Down about 5% this Year. (WSJ)
• Bank Failures Hit 106 Year-to-Date -  Most Since 1992. (MarketWatch)
• Will Retailers Top Last Year's Holiday Sales? (WSJ)
• The Good, Bad & Exaggerated in Michael Moore's New Film 'Capitalism'. (Wharton)
• Venture Firms Making Bets On Forex Start-Ups. (WSJ)
• Ten Odd Economic Indicators: From Hot Waitresses to Men’s Underwear. (Time)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Ten Things Every Good Business Plan Must Have (Forbes)
• Google, Microsoft Intensify Search Rivalry with Music. (WSJ)
• E Pluribus Tunum: How Not to Price Online Music. (Economist)
• Online TV Leader Hulu Won't Remain Free, Official Says. (WSJ)
• Why We Lie to Our Spouses? (WSJ)
• White House's Fox News Boycott Prompts Network Revolt (HuffingtonPost)
• Secrets of the Centenarians - Life Begins at 100. (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

Capitalogix Commentary 10/25/09

Traders are starting to sell into strength.  That is something to watch.

This Heat Map, from FinViz, shows that last Friday was a tough day in the markets.  Most everything was red.  However, Amazon was up almost 27%.  And Microsoft had a pretty good day too.  Realize that the averages would have been even weaker without those outlier performances.

 

But big up-moves on big down days are another sign of volatility, confusion and disagreement.  These are simply things I've learned to notice. 

Price is still the primary indicator.  So keep an eye on the trend-line of your choice.

Items In the Rear-View Mirror May Only Be Half as Big as They Seemed.

Why isn't the world beating a path to our markets, driving-up prices and volume?  Perhaps because they don't see our market the same way we do. 

This next chart caught my eye because it shows our 20% rally (since May) is less than a 10% rally, when it is measured in Euros instead of Dollars.

 

A similar phenomena is playing-out with Gold too.

Venture Capital Charts are Eye-Opening ... But Not Wallet-Opening.

The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That's the fewest number of firms to raise money in 15 years; and it's the smallest amount of money raised since Q1 2003, says the National Venture Capital Association.

How tough was it?  Venture Capital funding fell 42% through the third quarter compared with last year, and had an 81% drop quarter-to-quarter from a year ago.

 

The more I think about this, the less it worries me.  There is a lot of money sitting on the sidelines, and I believe that we just aren't in the stage of the cycle where late-majority money flows to speculative investments.  There is a similar situation going on in the M&A cycle too.

When the longer-term economic recovery gets moving, so will the money.

The Jobs Flu.

The real virus affecting the economy is unemployment. 

For example, Sun says it is about to cut 3,000 jobs.  Frankly, I hear chatter from a number of companies planning to reduce headcount in meaningful and painful ways.  Bottom Line: Without a clear path to more sales, the pressure to make numbers is driving further reductions.

It seems several things are thinning the workforce.

President Obama declared swine flu a national emergency.  Officials described the move as similar to a declaration ahead of a hurricane making landfall; though perhaps it was more a "call to action," like how they hand out Nobel Peace Prizes.

 

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

• What Happens When the Fed's Buying Binge Ends? (WSJ)
• McKinsey Says Global Capital Markets Entering a New Era (McKinsey)
• Sharp Drop in Start-Ups Bodes Ill for Jobs & Growth Outlook. (WSJ)
• Bank of America Lost $1 Billion in Q3, & It's Now Testing Support. (NYTimes)
• Great Chart of Google's Long Road Back To $500 (BusinessInsider)
• Nokia Slaps Apple with Lawsuit about Wireless Patents. (Forbes)
• Some Reasons Not to Care about Dow 10K. (CuriousCapitalist)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• A $1 Million Research Bargain for Netflix, & Maybe a Model for Others. (NYTimes)
• Forbes Lists the 50 Most Influential Management Gurus. (Forbes)
• Does Social Media Mark the End of the Email Era? (WSJ)
• 54% of CIOs Forbid Use of Social Networks at Their Companies. (WallSt&Tech)
• Gout: The Missing Chapter from Good Calories, Bad Calories. (Ferriss)
• Study - Touch Money And You Feel Less Pain. (CreditCards)
• Disney Offers Refunds on Baby Einstein. (TDB)
• More Posts with Lighter Ideas and Fun Links.

New Version 4 of Shift Happens Video

Last week I wrote that my son (and his generation) won't communicate the way we do.

For example, he used 9,827 text messages and 564 MB of data on his phone this month.

I'm not going to pretend that I understand how I would use that many messages ... But I'm beginning to understand that he does.

A decade ago, I couldn't have conceived the way we use trading technology today.  The scope and scale of what's possible would have seemed like an improbable science fiction plot.

And that is the point.  Some things seem like nonsense (or magic), until they become science and way things are done.

New Version 4 of Shift Happens Video

Fascinating presentation of facts, stats, and insights about how technology (like the internet) has been changing the world. Some of the tech that we take for granted is now at an inflection point because of the sheer mass of late-adopters.

It is worth watching and thinking about ... as someone living in these changing times ... and in terms of how these changing times shift the game and create a whole new set of opportunities.

While similar to the post on how Social Media is changing everything ... this presentation focuses on the bigger picture and has a more general business tone. 

I like the new design and the added content; yet, found the music a bit distracting.

We are moving forward more quickly than ever.  What you thought you knew about the economy, technology, innovation, and the world are probably out-of-date. I can't wait to see what comes next.

• Here is a link to a transcription of the presentation.
• Here is a link to the author's blog.
• Here is a link to the Shift Happens Project.

Capitalogix Commentary 10/18/09

Dow 10,000 - Version 2.0.

SNL made a joke that hitting Dow 10K was different this time.  The difference was that 15 million unemployed Americans cheered while they watched CNBC on their couch in their pajamas.

 

The U.S. Equity Indices continue to perform well.  The economy, however, is sending mixed signals.  At this point, some would argue that any positive economic signal is a welcome signal.

Mixed Signals: Two Charts Giving Us Different Views Into a Potential Economic Recovery.

The first chart shows that unemployment is still growing faster than new job growth.  Recent readings show six unemployed people for each potential job opening.  A glance at the chart shows that ratio is usually 2:1 (rather than 6:1).  I'll be watching this indicator, and will take even a small improvement as a positive sign for the economy.

 

Speaking of positive signs of economic recovery, the next chart does show a hopeful turn of events (based on increasing Capacity Utilization).

 

Utilization has increased for three straight months, and is up from the record low set in June (the series starts in 1967). Capacity Utilization had decreased in 17 of the previous 18 months.  An increase in capacity utilization is usually an indicator that a recession is over.  Let's hope it keeps up.

When In An Up-Trend, Like This, Don't Fight the Fed.

I was reading "A Dash of Insight" and saw this investment hypothesis: "The government is on a mission.  You may not like the policies, but as an investor, you fight it at your peril."  In other words, don't fight the Fed.

Recently, that has been a painful lesson to Bears trying to short the rally.  The result, a dramatically declining short interest.  Here is a chart from Bespoke, illustrating that point.

 

At a certain point, the lack of sellers becomes the contrarian indicator that we are near a top.  Again, in trending markets, too much thinking is dangerous.  Just consider this another indicator to watch when the up-trend finally breaks.

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

• Impacts of High-Frequency Trading - Manipulation, Distortion or Improvement? (Wharton)
• Blue Chips Top 10,000 for the First Time in a Year. (WSJ)
• Loose Monetary Policy: When Will Wall Street's Biggest Gravy Train Slow? (WSJ)
• Goldman Sachs Sees a "Perfect Storm" for M&A. (StreetInsider)
• Venture Capital Exits Dallas and Other Places Outside of Silicon Valley. (WSJ)
• Pessimistic Commentators Remain Anything But Convinced by the Rally. (Economist)
• Bloomberg Buys BusinessWeek From McGraw-Hill. (StreetInsider)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Mossberg Gives Windows 7 a Good Review. (WSJ)
• White House Tells Fox Network News to Take a Hike. (Newser)
• Patent Auctions Offer Protections to Inventors. (NYTimes)
• Facebook Has a Happiness Index Drawn From Posts. (NYTimes)
• Anthropologist: Modern Male Is 'Worst' Man Ever. (Newser)
• Un-Tapped Potential: Autistic Savant Draws Cities from Memory. (Wiltshire)
• Cool Chart of Apple's Path To 2 Billion iPhone App Downloads. (BusinessInsider)
• More Posts with Lighter Ideas and Fun Links.

Sparks of Innovation

Here is a video reminder that a small insight can make possible radically different results.

Was this just a proof of concept ... or will it be the catalyst to more.  To some it might be little more than science fiction ... to others it may have been the open door to something completely new and different.

Thoughts Do Become Things. 

Here is an example where a simple text-book idea really transformed lives.  And it is a good story.

William Kamkwamba, from Malawi, is a born inventor. When he was 14, he built an electricity-producing windmill from spare parts and scrap, working from rough plans he found in a library book called "Using Energy" and modifying them to fit his needs. The windmill he built powers four lights and two radios in his family home. Now it is changing his homeland.

Here is a link to more about William Kamkwamba and his TedTalk Videos.

Here is a link to the book: The Boy Who Harnessed the Wind: Creating Currents of Electricity and Hope.

The Game Is Changing

Mergers and Acquisitions are likely to increase before the next big bull run.  This chart shows that we aren't there yet.

 

We're at the point in the economic recovery cycle where a lot of companies have folded, or will soon fold. On the other hand, the survivors are starting to see the clearing ... or at least the light at the end of the tunnel. Consequently, I expect to see more merger and acquisition activity at the next pull-back.

This will help the strong get stronger ... But it will also serve as a catalyst to new growth and new leaders.

M&A Isn't the Only Way.

This is a great environment to incubate what comes next. During downturns, some people lose their money, business, or hope. During that same period, other people recognize and seize the opportunity to create something great.

There so much talent on the street right now looking for work ... yet there is even more looking for something that inspires them.

At the same time, technology continues to get better. And that just means it continues to get cheaper and easier to implement great ideas and scalable businesses.

Consequently, I think a lot of talent is going to switch from the confines of corporate America to more entrepreneurial ventures. Bright minds will shed cost-cutting cultures and management-by-committee for virtual teams of talented individuals looking to innovate and operate more nimbly.

Something Old is New Again.

Sometimes new things come from familiar faces.  There are many successful entrepreneurs who have been to the brink, and back. What's interesting is that they tend to succeed faster, later in their careers. It makes sense if you think about it; losing money or facing a setback doesn't take away the other skills that they had ... so their next venture is easier for them simply because they are more experienced and better seasoned.

Nonetheless, I'm confident that we will soon see a new wave of the business leaders emerge. I'm curious who you think the likely winners will be?

Capitalogix Commentary 10/11/09

This was a good week for bullish traders.  Sure volume was light for the rally.  But selling was even lighter.  In a trending market, thinking too much can be detrimental to your wallet.  And from March until now, the trend points up.

What Does the Bigger Picture Show?

A weekly chart of the SPY, which is the ETF for the S&P 500, shows price coming into a cluster of resistance.  There are three things that jump out at me.  First, we are at the 50% Retracement of the October 2007 to March 2009 downswing.  Second, price is also are trying to break through the long-term downtrend line from that bear swing.  And third, there is a significant Gap (which often acts as resistance) at that same level from last October.

The good news is a move above this level would be quite bullish.

Can We Move Higher?

The market does not directly reflect the economy.  So price can go higher, even without a real economic recovery.  For traders, the question is how long the rally will be sustainable?  The answer is simple; it is sustainable until price breaks the trendline. 

It is a little tricky, here, because we have the battle of two trendlines. 

What About the Economy?

As for the economy, consumer spending has been weak, so expect that corporate revenues will continue to drag. And companies straining to realize their inflated expectations for 2010-11 earnings will continue to focus on cutting costs, which translates into cutting jobs.  Unfortunately this likely results in even less consumer spending ...

Where Are Consumers Spending?

This chart from the New York Times tells an important story.  It shows where consumers are spending ... and where they aren't.  Last year, consumers pulled back on spending and the retail sector suffered. But not all retailers are faring worse than they did a few years ago. 

Against a baseline of spending levels in 2003, sales in computer stores have continued to rise. Restaurant and liquor-store sales are at much higher levels, and purchases at warehouse stores are up nearly 50 percent.

Still, in major retail divisions like home furnishings and clothing, sales faltered in 2007 and are now below their levels of 2003.

Does a Weak Dollar Matter?

This chart series from Bespoke highlights one reason that a weak dollar matters.  While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros or Yen.  This indicates that the strength is a function of a weaker dollar rather than a real increase from demand.

The same logic applies to the recent market rally.  If the dollar gets stronger, expect the market to move down.  Consequently, many traders are watching the dollar as it tries to bottom.

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

• What's Luck Got to Do With It? The Math of Gambling. (NewScientist)
• Women, Testosterone & Finance - Risky Business? (Economist)
• Private Equity's Return Dilemma - Hope Dwindling for a New Buyout Boom.(WSJ)
• Please Do Feed the Bears - The Financial World Needs Its Pessimists. (Economist)
• Return of Day Traders Drives Volume; But Who Is Sitting-Out? (WSJ)
• Uncommonly Clever Economic Indicators. (Forbes)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Microsoft Offers Free Security Essentials Anti-malware Package. (InformationWeek)
• More Cases of Autism in U.S. Kids Than Previously Realized. (CNN)
• A Credible Kindle Killer? Competitors Team-up to Take on Amazon. (Forbes)
• Tracing the Origins of Human Empathy. (WSJ)
• Allocate Hours for Maximum Productivity in Your Perfect Day. (ETR)
• Samurai Mind Training for Modern American Warriors. (Time)
• More Posts with Lighter Ideas and Fun Links.