Posts filed under “Investing”

Waking the Bear

This was in last week’s Barron’s but since I’m now on the high seas (and possibly without access to the web) you’ll have to make do with this terrific piece from last week.

You will note some of my very favorite marekt observers participate in this discussion:

"BYE BYE, BULL. HELLO, BEAR. THE MARKET DECLINE that began in early May could well signal the end of one of the longest-running cyclical bull markets on record.

That’s the conclusion of some top market watchers tracking technical indicators that have been strikingly reliable in the past. Supply-and-demand conditions have been deteriorating since last summer, and took a sharp turn for the worse in the past month: One index of investor demand, calculated by Lowry’s Reports of North Palm Beach, Fla., recently hit a 15-year low, while a related measure of selling pressure climbed to a three-year high. Forces like these have led to steep price declines and wild volatility — typical for the beginning of an end." 

Note: You can read my interview from earlier this year with Lowry’s CEO Paul Desmond for more on his methodology. Part I, Part II

"Rising interest rates, inflationary pressures, a weakening dollar and a negative savings rate all have conspired to bring this latest bull market to an apparent close. The tipping point, according to Venice, Fla.-based Ned Davis Research, came when the Federal Reserve’s discount rate hit 6%, mortgage rates reached 6.5% and the yield curve flattened.

It’s been a long time since the bear has shown his face. The current bull cycle began in October 2002, and since March 2003, has roared ahead without a 10% correction. Only the bull run from October 1990 through May 1996 was longer — 1,420 trading days without a 10% setback.

With the S&P 500 down 6% since peaking May 5, the end of the run could come soon. In fact, the tech-heavy Nasdaq Composite and the Russell 2000 small-cap indexes already are down by more than 10% from their highs in early May."

I’ve cited this statistic in the Cult of the Bear series, as well as here; Back to the discussion:

"We are in a bear market," asserts Paul Desmond, president of Lowry’s Reports, which tracks supply and demand in the stock market, using proprietary indicators developed more than 70 years ago. "It’s likely we won’t see a reversal for quite some time." He figures that the market may not bottom until the fourth quarter, or early 2007, coinciding with an historical trend of market lows in or just after the second year of presidential-election cycles.


The current decline is especially dangerous because many investors appear unfazed by the bearish signals: Investor sentiment remains positive, as expectations of a bounce or summer rally abound, leading investors to buy on dips. Hedge funds are still mostly bullish, as evidenced by a weekly survey conducted by Manhattan-based International Strategy and Investment Group. While less bullish than they were at the peak, hedge funds are still more optimistic than normal, despite the recent stock-market drop. Typically in a declining market, hedge funds would become less bullish than normal.

The Leuthold Group, a Minneapolis-based research outfit led by Steve Leuthold and best known for its historical and sector analysis of the market, alerted its clients recently that, based on more than 40 measures of investor sentiment it monitors, the market is "nowhere near oversold territory," despite the steep decline.

That’s a classic contrarian signal; the downturn could be deeper and more prolonged than is typical, precisely because no one seems concerned that the recent market upheaval is anything more than a passing storm.

Saying the market is "unhealthy" and in the "early stages of a new cyclical bear market," Leuthold warned clients in early June that a much higher level of investor "caution, fear and even some degree of capitulation" is needed before a bottom is reached. While not pinpointing a bottom, he suggests that a 5% decline in the S&P, to 1180, would bring the market to the "median valuation level" since 1957 — historically, a good level for buying. It would take a 15% fall in the Dow, and a 23% drop in small-caps, before a similar buying opportunity would present itself.

Waking the Bear
Barron’s MONDAY, JUNE 26, 2006

Category: Investing, Markets, Technical Analysis

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Microsoft is in crisis?

I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.

This is a good thing.

One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.

However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.

From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of  32 analysts rating them a "Buy" or "Strong Buy." (BRThat was 2 months ago; Its now down to 21 "Buy" or "Strong Buy," 10 "Hold," and 2 "Sell" or "Strong Sell." ) They
are widely owned by active mutual fund managers and closet Indexers.

Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.

Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds:  A history of the PC industry.

After Gates resignation, Cringely wrote this:

Pulp"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.

Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:

"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."

Fine, you say, but that was Microsoft more than 20 years ago. How about today?

Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.

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Category: Corporate Management, Investing, Markets, Psychology, Technology

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