The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Ron Griess of The Chart Store looks at the market relative to GDP:

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click for larger graph

To put this decline in stocks into perspective and to highlight how relentless and extended the rally has been of late, a .7%+ closing decline in the S&P 500 today would be the biggest one day fall since late Nov.

Dec Housing Starts totaled 529k annualized, 21k below expectations led by a drop in the single family component which fell to the lowest since May ’09. Multi family starts rose. Permits were well above estimates at 635k vs the estimate of 554k. The gain again was led by multi family where permits issued rose by 68k (to highest since Nov ’08) vs a 23k rise in single family (to highest since Apr ’10). A secular decline in the home ownership rate and a fall in apartment vacancies over the past few q’s are certainly key factors in the multi family trend. With respect to single family and in the context of a still very over inventoried marketplace, we want lower starts notwithstanding the short term impact on the construction sector. A positive for construction employment is that permits are now above housing completions which implies workers can finish one project and more easily move to another.

Cool graphic from Alpha Scanner showing the phases of market.

This is fairly straight up Technical Analysis theory as to how the market moves over time.

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click for ginormous graphic

Hat tip Kid Lane

Source:
Friend or Foe? World Economy “Big Enough” for U.S.-China Partnership
Aaron Task
tech Ticker, Jan 19, 2011
http://finance.yahoo.com/tech-ticker/friend-or-foe-world-economy-”big-enough”-for-u.s.-china-partnership-altman-says-535826.html

There is nothing better than an earnings season to test the stock market of what’s been priced in to prices and what’s not. The S&P 500 is now up 24% since the Aug 26th close in response to a continued economic recovery but also its no coincidence the rally began the day Bernanke in Jackson Hole hinted at buying more US Treasuries on Aug 27th and admitted he wanted to give stock prices a kick in the pants. Following Apple’s outstanding quarterly results and with it being the 2nd biggest company in the S&P 500, today will be an interesting test for the broader market of what’s been priced in and what hasn’t yet. Granted, Steve Jobs’ health is an obvious issue specific to Apple and my question today of what the market has discounted may be premature and we may have to wait thru the next few earnings weeks to see.

Investment letter – January 11, 2011

THE RUNNING OF THE BULLS

As we begin 2011, there is a newfound optimism. The stock market finished 2010 strong and economists have been raising their estimates for GDP growth in 2011 to 3.0% and higher. Although the extension of all the Bush tax cuts was a small psychological positive, since it didn’t increase disposable income, the 2% cut in payroll taxes was a pleasant surprise. With more disposable income to spend, the average worker earning $50,000 will have an extra $20 per week to spend. Despite the anticipated improvement in economic growth in the first half of 2011, the Federal Reserve is maintaining its commitment to QE2 and will purchase $600 billion of Treasury bonds. The cover story of the December 20, 2010 issue of Barron’s revealed 9 of the 10 strategists from the largest investment firms on Wall Street were bullish, expecting an average gain of 10% for the S&P in 2011. The lone non-bull thinks the market will be flat. In other words, no one was bearish. The consensus is that a self sustaining recovery will take hold in 2011, as rising confidence spurs businesses to increase hiring and invest more and consumers returning to the shopping malls. A survey of 302 global money managers in mid-December found that those expecting stronger global growth surged to 44% from just 15% in October, and the percent forecasting better profits soared from a mere 11% in October to 51%. Nothing like a rising stock market to convince investment managers of all the reasons they should be bullish!

As we have discussed on a number of occasions, the stock market is not a discounting mechanism, which anticipates economic events, i.e. recoveries and recessions. The majority of strategists and advisors who truly believe this axiom can be compared to car drivers who navigate their way by looking in the rear view mirror. If the markets are consistent in at least once facet, it is that markets always take a long and winding road. When a majority of drivers peer into their rearview mirror and reflect on how lovely the drive has been, they won’t notice their car has left the road until it is airborne and in free fall. Of course, the opposite occurs at market bottoms. All the drivers see are potholes and ditches in the rearview mirror and feel as if they’ve been driving in Death Valley without air conditioning for like forever! At every market top and bottom, the market is wrong. At the top in October 2007, the market was not ‘telling’ us that the credit crisis would be contained and there would be no recession, as most strategists and advisors believed. And at the lows in March 2009, the market was wrong in suggesting the sky was indeed falling, and not surprisingly most strategists and advisors were negative.

This is pertinent because various measures of investor sentiment reflect an excessive level of bullishness. The American Association of Individual Investors has reported an average of 30% more bulls than bears on a four week average for the last two weeks. The weekly Investors Intelligence Survey has recorded 35% more bulls than bears, for eight consecutive weeks. Sentiment hasn’t been this bullish since October 2007. For most stock market technicians this level of bullishness is clearly a sign of a top, and cause for a market decline. However, it isn’t so cut and dried in the real world.

Although we believe the current level of excessive bullishness is clearly a warning sign, it doesn’t automatically mean the stock market will suffer a meaningful decline right away. The reality is that most institutional investors don’t pay much attention to sentiment surveys. Instead, they are focused on how individual companies are performing in the space they cover, whether that is small cap, mid cap, or large cap stocks. They are far more concerned about the management quality of the stocks they own, and whether their profit estimates will be achieved. What they are not going to do is come into their office on a Monday morning and sell the stocks of companies they like and believe in, just because a sentiment survey or two is reflecting too much bullishness. If anything, a rising tide of positive sentiment makes them feel more comfortable. Most institutional money managers view cash as a negative, since it can lead to underperformance if the market and the stocks they own continue to rise. For most, it is a risk they do not want to take, which explains why most mutual funds rarely hold much more than 3% of their assets under management in cash. Currently, their expectation is that the economy will continue to improve and so will corporate profits. Until their outlook is seriously challenged, they won’t sell.

The lack of selling pressure has been a primary support for the market during November and December, and it has continued into early January. It doesn’t take much buying to push the market higher, whether the buying is coming from new bulls or short covering from trampled bears. We expected that the market would exceed the November 5 high at 1227, and likely grind higher into year end. This has occurred, but now the S&P 500 is approaching an important price level. A quick analysis of the pattern of the rally from the July 1 low will help explain this risk. From the S&P low on July 1, 2010, at 1011, the first short term high was reached on August 9 at 1129, a gain of 118 S&P points. This represents Wave 1, which was followed by a decline into August 27 (Wave 2). A strong rally into a high on November 5 at 1227 followed for Wave 3. Wave 4 ended on November 16, when the S&P bottomed on November 16 at 1173. The current rally is Wave 5, and would be equal to Wave 1 (118 points) at 1291.

A review of the NYSE chart on page 2 will show why the completion of 5 waves is often significant, especially when it is accompanied by an extreme in market sentiment. In February 2009, we thought the market was near a low because the market was completing 5 waves down from the October 2007 high and sentiment was overwhelmingly bearish. In April 2010, sentiment was fairly bullish and 5 waves up from the March 2009 low were completing. In the April 20 letter, we advised becoming more defensive in anticipation of a correction. Between late April and July 1, the NYSE fell 16.7% and the S&P 500 lost 17.2%. With the market now completing 5 waves up from the July 1 low, and sentiment overly bullish, the market is now vulnerable to a correction. Will it be a garden variety dip of 4%-7%, or something worse?

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The latest spasm careening through the blogosphere tangentially referred to a minor rev share offer from Seeking Alpha, one of the major blog aggregators.  We saw the usual hand wringing discussions of “blogonomics,” as well as an article discussing the challenges of blogging (its hard).

Pretty much, most missed the point (though props to Abnormal Returns for getting the philosophy right: Blogging: a means not an end).

I can think of many reasons why someone might start and maintain a blog:

Blogs? Yeah We Got That

1. You have something to say

2. You enjoy the craft of writing

3. You want to figure out what you think, and do so in public

4. You want to be part of a larger community of like minded individuals

5. You have a hobby or interest that you are really, really into

6. You want to maintain a presence on the Intertubes

7. You have an expertise and you want to share it

8. You have an eye for content (text, graphics and video) and you enjoy leading other people to them

9. You want to create a permament online record of what you are reading, looking at or thinking about

10. You like engaging in debate with total strangers

That’s off the top of my head.

Note that each of these bullet points begins with YOU. Blogs are about what YOU want to produce, regardless of how many readers shows up. The Big Picture would more or less be the same content with 100 or a 100,000 daily readers.

People are often surprised to learn that I write for me, not for the readers. That keeps it honest (as opposed to the SEO-driven content-farm material). It also helps to quiet the voices in my head.

Notice what I specifically did not list as reasons to blog:

1. building a business;

2. developing a brand;

3. monetizing content;

4. getting media exposure;

5. Getting a book deal;

6. Getting bought by a larger company.

While all of these things may come about through a blog, they are not, and should not be, the purpose of writing a blog. Instead, if you happen to produce outstanding content and have great insight, then these things might occur (emphasis on might).

If you want to pour your thoughts out on a daily basis because you find the process helpful and gratifying, then by all means, have at it. If you seek fame or fortune through blogging, be aware of the long odds you face: Very, very, very few people manage that.

I find the process very worthwhile. I’ve been doing it — first on (the now defunct) Geocities, then Typepad, and now WordPress — for about a decade.

If any of those first 10 factors apply to you, than give it a whirl. No pressure, you never know what might happen.

If your motivations are in those half dozen reasons not to blog, well then good luck — you are going to need it . . .

Okay, so fewer than two weeks after the Arizona massacre, when America is still reeling from the look in the mirror the violence provoked, a look that caused even Roger Ailes to suggest his network tone down some of the invective, Esquire publishes a profile of Fox News’s presiding genius.

This should be good, right? Juicy subject; fraught moment. But what we get from Esquire’s lead writer, Tom Junod, is such a mannered, over-written piece of nonsense that we’re reminded again how much the world of writing and reporting has been changed by the internet.

I’d quote from Junod’s piece to make my point, but I can’t because you’ll never finish reading the post. Let me describe an example of the problem: Junod takes nearly 700 convoluted words to tell us that Ailes doesn’t have a Blackberry because he got into too many email fights with angry members of the public. That’s great bit. But Junod buries it in so much vamping that you never get any of the good details.

Giving Junod some allowances for having written the story long before the shootings, it’s still an inflated, rambling, backwards-talking attempt to cover the fact that magazine and writer have little to say about Ailes.

The best insight we get is a good summation of Ailes’s strength as an uber-producer. He pays attention to every detail of the product and finds talent that can perform and fit his objectives: creating an idealized universe of pretty and pumped-up news readers who sell a seamless worldview.

Here’s Junod quoting Columbia Journalism school’s Dick Wald:

He used to be the president of NBC News. He likes Roger Ailes. And if you ask him the secret of Mr. Ailes’s success, he’ll say it’s pretty simple: “Roger, in many ways, is just more competent. He just does it better. The anchors are better. The crispness of the reporting is better. The anchors don’t interrupt, the shows move along, and the point of view is clear. It’s just a good product. Roger found an area in which he could reach each audience member individually. That’s the big difference between Fox and CNN.”

Wald’s points are fascinating. But Junod misses the big question. Ailes is the acknowledge master of making news fit a political point of view. He really is just better at making television news more entertaining than anyone who worries about journalistic neutrality.

So why then is his business channel the opposite of everything Wald describes about the Fox News? What works on Fox News undermines Fox Business. Why? Is it Ailes’s lack of interest in the subject matter, he simply doesn’t have enough to drive his competitive metabolism? Or is it that business is already inherently closer to Fox’s world view and Ailes’s version of the realm cannot gain contrast?

I’d say the problem lies in the nature of business news, especially a channel that follows the markets. Prices are too fact-based for Ailes’s mastery of spin. One can argue about political remedies for the economy but the day-to-day news of the markets can’t be re-written. In other words, business is immune to Ailes’s alchemy and the constituency has to face reality. (You could add that CNBC has already done everything possible to make the markets seem like a conversation rather than numbers floating in space.)

Facing reality is the problem that bedevils Esquire too. Junod’s piece is a classic bit of magazine writing. Lots of stylized writing and a hip tone. Isolated in an issue of Esquire, it might read well. (Yes, where something appears affects how it reads.) But on the internet, it just seems lazy and irrelevant. Worse, over-taken by events, it seems a wasted opportunity to ask better questions about Ailes’s pugnacity. We’re back at those emails again.

In our spin-saturated world, it’s pretty hard to get a leg up with snark. The web, twitter, all flavors of cable news positioning make what Junod does with words here in Esquire not only redundant but boring.

Source:
Why Does Roger Aile Hate America? (Esquire)
by TOM JUNOD
Esquire; January 18, 2011
http://www.esquire.com/features/roger-ailes-0211-2#ixzz1BPQ7oLbb

The announcement yesterday that Steve Jobs is taking a leave of absence from Apple is one of those events that leads to a reflexive  spasm of half thought out commentary. The mad rush to publish something often leads to some pretty silly statements making the rounds.

As a long standing Apple fan, I deferred piling on yesterday, waiting until I after a few hours of quiet contemplation had passed.

Thus, I have some thoughts to share with you:

1. Timing of the announcement: I heard a few accusations from the tinfoil hat crowd that this was a purposeful holiday release. I doubt that was the case here. I suspect that in response to some triggering event over the weekend (Saturday) — a medical test, a doctor’s advice — Jobs reached out to his COO and the Board (Sunday).  The next day was when the announcement was made.

Consider the alternative — had they waited a day until the market was open, the delay itself could have been an SEC issue. And, the chance of a leak from outside Apple (i.e, the medical side) was a distinct possibility. (Note: The sleaziest corporate announcements are late Friday afternoon on a 3 day weekend. Those are, by design, attempts to bury bad news) .

2. Apple has a deep bench: It may come as a surprise, but the world’s largest Tech company is not a one man operation.

-Jonathan Ive:   Chief Industrial Designer If you love the looks of your iPad, MacBook or iPod, Ives is your guy.

-Ron Johnson: Retail Honcho ex-Target guy, the brains behind the Apple Stores

-Bob Mansfield: Mac Hardware Engineering Oversees products like iMacs and Macbooks. Reports directly to Cook

-Scott Forstall  iPhone Software Designer Developed the simple (yet revolutionary) iPhone  user interface

There’s lots more talent at Apple behind Jobs.

3. Why Wouldn’t you use Jobs?   Someone asked “With all this talent, why didn’t Apple trot out these guys more often?”

Let me phrase it this way: If you owned/managed a Consumer products company, and your CEO was a cross between PT Barnum and Henry Ford, why on earth would you ever use anyone else?

4. Apple needs a 10 Year Plan:  No, Apple does not, as one analyst suggested, need a 2-3 year plan. Apple has managed to place itself at the nexus of media, consumer gadgets and technology. What made Jobs contribution so brilliant was his ability to see just beyond what was possible today to conceive of things for mass consumption devices.

Regardless of the outcome of this recent scare, one day, Apple will have to operate without Jobs. They need to continue identifying products that are both just possible to create as well as highly desirable. How they can do that without Jobs remains a valid concern.

5. The Bigger Risk in Apple Remains that Momentum Traders Fall out of Love:  Back out the cash, and Apple trades at a reasonable P/E.  That’s why fundie guys like David Einhorn own it. But when you see the list of less fundamentally-driven Hedge funds that own Apple, there can be little doubt that momo players are big in the name. The risk to stock price is that they simultaneously fall out of love. If that happens, and the stock gets hit, some of the shine could come off of the Apple halo. THAT is never good for sales . . .

6. This introduces a new Uncertainty: Not to be morbid, but when Jobs first got ill, we learned what the various parameters were of his ailments. The latest claims of uncertainty are silly.

We know what Pancreatic Cancer survivor tables look like, we know what Liver Transplant survivorship math is. The longevity tables for a liver transplant recipient/pancreatic cancer survivor are not unknown. My point is, there isn’t a lot of uncertainty here

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See also (some of the less hysterical coverage of Apple):

• Without Jobs it’ll be Apple 4.0 (Fortune)

• Apple’s Comeback: 3 Reasons Stock Has Bounced From Lows  (Marketbeat)

• The CEO’s previous leaves have not had a long term negative effect on the stock (Alphaville)

• Top Hedge Funds That Own Apple (AAPL) (Marketfolly)

• Apple Is More Than Just Steve Jobs (Forbes)

• Bizarre: Christopher Bonavico says Apple “is destroying value by sitting on its cash hoard” (WSJ)

• Buying Blind: Should Jobs Disclose More to Investors About His Personal Health ?  (Slate)

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Previously:

Popular or Best? (ATPM January 1998)

Analysts Still Underestimate Apple (Real Money, Jan 13, 2005)

Is Disney/Pixar the sequel to Apple/NeXT ? (January 30th, 2004)

Apple morphs into a Consumer Electronics Co (April 25th, 2004)

Apple to Music Industry: Monetize Your IP (April 28th, 2004)