Thursday, August 30, 2007

Motorola Upgrade Questionable

Lehman Brothers upgraded mobile phone maker Motorola Inc (MOT) to overweight from equal weight, saying improvements in operating expenses should help the company's phone unit return close to break-even by the fourth quarter.

Operating expenses are important but so are compelling products and Motorola is lacking in buzz at the moment. Motorola does not have anything close to the iPhone, for example, and the RAZR, while still a good seller, does not have the cachet it once had.

If buzz isn't the strategy, then heading in the opposite direction and dominating the low-cost market sector is a viable alternative. Motorola has not been especially successful in this area either, having admitted it can't match competitors prices. To make matters worse, Sony-Ericsson is now entering this market and that will only make the sector more competitive and more difficult for Motorola. Given that growth is so strong in emerging markets where high-end devices are not necessarily in highest demand, this could be a serious long-term negative for Motorola.

Motorola is sandwiched in the mid-market with a product portfolio that is increasingly focused on the Americas. With the level of competition that exists in the mid-market sector, you can assume that margins are thin.

Motorola reported earnings in July that were dismal and indicated that its mobile devices unit will not be profitable in 2007. This is in spite of the fact that it is second only to Nokia in worldwide handset shipments.

Motorola did say they expected things to pick up somewhat in the second half and that seems to be confirmed by the Lehman analysis. Nevertheless, I can't agree with the Lehman rating and would advise anyone who felt compelled to invest in a handset manufacturer to look at Nokia (NOK), a company that has leading market share, turns a profit consistently and has an advancing stock price.

Disclosure: author does not own any of the stocks mentioned in this article



Wednesday, August 29, 2007

DRAM memory vendors to face tough times

Samsung, Hynix, Infineon (IFX), Quimonda (QI) and Micron Technology (MU) are among the biggest producers of dynamic random access memory, known as DRAM, the most common type of memory chips used in PCs.

Shipments up, prices down

Market research firm iSuppli reported that prices for DRAM chips will decline starting in September. This could wipe out the small gains seen by some of these DRAM manufacturers during a brief two month period earlier in the year when the pricing scenario was firmer. iSuppli sees the coming price decline hitting double digits.

Looking at 2007 in its entirety, iSuppli expects that it will be a strong year in terms of bit growth (81%) and unit growth (49%). Nevertheless, inventory overhang and pricing issues have made it difficult thus far for vendors to increase margins. iSuppli projections currently show lower bit growth (only 60%) for 2008 but double digit revenue growth, a significant improvement compared to this years' expected revenue growth of less than 2%.

iSuppli, however, has not been the only metrics firm to weigh in on the DRAM situation. IC Insights is reporting "cautious optimism" for 2H07 in terms of unit sales based on back-to-school and holiday demand as well as requirements for specialty DRAM related to new mobile devices. For now, though, the company is silent on the subject of future pricing.

Diversification helps but...

All the companies mentioned above are diversified beyond DRAMs but if iSupply is right, they will all feel the pain to a certain extent, especially Micron Technology whose name has been synonymous with DRAM for years. Memory products as a whole make up nearly 90% of Micron's sales. Two DRAM products alone, DDR and DDR2, were 45% of the company's total net sales in the third quarter of 2007. This price decline will hit Micron's already slim, single digit gross margin on memory products pretty hard and extend the weakness in the company's stock price.

Samsung is actually the second largest semiconductor manufacturer in the world after Intel. Of Samsung's almost $20B in semiconductor sales last year, over 80% is based on memory devices (Flash and DRAM). Luckily for Samsung, their strength in the growing Flash market will help to offset weakness in DRAM. Likewise, Hynix, who has buried the hatchet and entered into a joint venture with SanDisk (SNDK) will be able to rely on Flash growth to mitigate the problems in DRAM.

All told, this is a confusing picture for the DRAM suppliers with pricing problems appearing to overshadow robust unit growth. And it appears that this is not yet a good time to be buying Micron Technology on weakness.

Disclosure: author does not own any of the stocks mentioned in this article



Monday, August 27, 2007

VMWare - still the center of attention

After its much-discussed and over-subscribed IPO, VMWare (VMW) remains a subject of attention. Even when the topic is not VMWare, they become part of the story. Some of the items I have seen floating around the blogosphere include the following:

Citrix (CTXS) recently announced that they were acquiring XenSource, an open source server and desktop virtualization vendor. As one of the only competitors to VMWare that actually has viable products and customers, VMWare became part of the story.

In discussions of Microsoft's effort to develop and release their virtualization solution, it has been pointed out that Microsoft (MSFT) is devoting significant R&D funding but has not yet released the software and is said to be behind schedule. An interesting side note is that Microsoft and XenSource inked an agreement last year in which they would work together to ensure that Linux and XenSource software will operate with the Microsoft Veridian "hypervisor" virtualization engine. This is similar to an agreement Citrix signed with Microsoft years ago. What a tangled web is developing here.

There have also been some discussions of how server virtualization differs from desktop virtualization and how the expected increase in desktop virtualization may not favor VMWare. It's true, there is a difference, but both VMWare and XenSource offer solutions for the two alternatives. And Citrix, itself, offers a different flavor with its Presentation Server which offers a virtualized display off a central server. There are a couple of other players in this space but they are smaller and may not have the heft to compete with VMWare and Citrix in large scale data centers.

Some have made much of XenSource being an open source vendor that supports Linux as well as Windows. VMWare is not open source but they also support Linux and Windows, as well as Solaris and NetWare. As discussed above, Microsoft is making sure they can handle both Linux and Windows, too.

Finally, the newest VMWare killer is Pano Logic. This is a small start-up that has developed a device that replaces the PC entirely in a desktop virtualization scenario. The device allows all the functionality of a PC to be implemented on a server with only the keyboard, display and the Pano device actually residing on the users desk. Interistnly, the company's chief executive formerly worked at XenSource.

The bottom line after all this discussion is that, for now, VMWare is still by far the front-runner in the virtualization space. We know that Microsoft will be a formidable contender when they release their product. The only real change in the situation is that XenSource now has the deeper pockets of Citrix available to obtain more R&D funding. This should help XenSource become more competitive on a quicker timetable. And it may mean that Citrix will look to become the one-stop shop for all types of virtualization and application access and delivery solutions. This could make for an interesting alternative to VMWare. Large corporations, the kind most likely to adopt virtualization, will be very careful about adopting an approach as radical as Pano Logic's but it is worth keeping an eye on. As these solutions become more common, we will see the virtualization companies begin to compete on price. And here is where we may see VMWare's weakness emerge.

The only remaining question is whether VMWare merits a stock price over $70 per share. For now we'll let others argue about that one.

Disclosure: author does not own shares in any stocks mentioned in this article.



Sunday, August 26, 2007

Weekly Market Update - bulls trying for a comeback

Weekly Market Call

There is no doubt investors were more optimistic this week. All the averages put in strong showings with all but the Russell 2000 racking up more than 2% gains.

The week was reasonably free of bad news so investors had an opportunity to focus on what good news there was: durable goods orders surged and new home sales for July surprised to the upside. Bank of America taking a stake in Countrywide Financial was looked at as a vote of confidence that the worst in the real estate sector might be over. The VIX eased and so did Treasuries.

This is not to say that there weren't some disappointments this week. There were more announcements of other lenders with liquidity problems (Thornburg Mortgage) and a number of financial firms closing their mortgage units altogether or announcing layoffs.

There was a bit of merger news to remind investors of the good old days. E*Trade and TD Ameritrade are said to be talks, Rio Tinto is still bulking up for acquisitions and the Dubai government is buying into the MGM Mirage.

It was a pretty good week but there is still considerable uncertainty and a continuing tug of war between the bulls and the bears. To help investors figure out the direction from here, we will see a big list of economic news released this week: Existing Home Sales, Consumer confidence, FOMC minutes to dissect, Initial Jobless Claims, Core PCE, Chicago PMI, Factory Orders and so on.

ETF Comments

Indexes: Using the TradeRadar software to look at the ETFs corresponding to the major averages (DIA, SPY, QQQQ and IWM), we see pretty much the same story across the board -- they all remain in the TradeRadar SELL zone. Looking to see if the recent upturn has been enough to generate a new BUY signal since the market peaks back in July, we see only very weak signals that under normal circumstances would not be actionable. It is clear that an up trend has not yet been firmly established.

Financials: XLF and KBE are deeper in the SELL zone than the major averages. KBE has bounced back sufficiently to generate a BUY signal that is weak but not as weak as those mentioned above. Is KBE getting ahead of itself or is it a leading indicator?

Real Estate: There is still no hope for the homebuilders and XHB shows little in the way of establishing a bottom. REITs have been somewhat firm, however, and we see IYR, though still in the SELL zone, sporting a weak but very sharp BUY signal when looking at the price action starting in February. According to our guidelines it is too weak to be actionable but it makes me wonder if it's time to take our profits in SRS, the inverse REIT ETF.

TradeRadar Stock Picks

Our bullish picks were mostly up and our bearish picks were down but not out. To see more detail on the portfolio of TradeRadar Stock Picks, please visit the Track Profit & Loss page at trade-radar.com



Thursday, August 23, 2007

Sprint - Why WiMAX?

I was somewhat surprised when I heard that Sprint Nextel (S) was building a separate network based on WiMAX technology. This is not a replacement for its 3G cell phone system but in addition to it. Why would they do such a thing given the scale, complexity and cost? Are they doing this in the hope that if they build it, they (customers) will come?

So first of all, what is WiMAX and why is it significant?

Technically speaking, it is a 4G wireless broadband network that uses the mobile WiMAX (Worldwide Interoperability for Microwave Access) IEEE 802.16e-2005 technology standard.

Why is that good? Because you can get high-speed Internet access with it for devices ranging from phones to PCs and devices we haven't thought of yet. And in this case, WiMAX "high-speed" is significantly faster than typical Internet access via current mobile phone technology. It will be a real data network, not a data pipe bolted onto a telecommunications network.

What could this lead to in the future?

Initially, Sprint is rolling out the product in the areas where it has the strongest coverage which, like most other cell companies, is centered on urban/suburban clusters. This will be a boon for those users who don't want to pay for wires, cable or fiber into their homes or businesses. It will allow companies, large and small, to string together Wi-Fi hotspots without running network cables. It will allow mobile workers, iPhone owners and others who want to take advantage of Internet services to access it anywhere in the coverage area and at speeds that allow for the enjoyment of video and music. It has the potential to finally make Internet access on hand-held devices a "must have" feature.

Another huge potential market for WiMAX, however, is in the rural areas in the US and elsewhere. The Millicom Cellular (MICC) model comes to mind. Where it is unprofitable to wire the environment, strategic placement of wireless towers can lead to high rates of adoption of the service. Sprint could get a first mover advantage in many parts of the country that have had no major telecom or broadband service.

As expensive as this initiative is, the fact that there is no need to cover the last mile to consumers' homes or businesses with wire or fiber is a large cost savings advantage that the cable and phone companies don't have. And the fact that users can be completely mobile should be a compelling attraction.

Sprint is looking to pull in $5 billion in revenue from the network by 2011, which is about what they estimate it will cost to build the system. If there is any reality to that estimate, it implies a pretty quick move to the break-even point.

If this really takes off, what other companies will profit?

Sprint has announced that they will be working with Intel (INTC), who has been instrumental in developing the WiMAX specification and WiMAX chipsets for PCs. They will also be working with Motorola (MOT), who could use another good source of revenue, and Samsung, who already has deployed mobile WiMAX in Asia.

Sprint has entered into an agreement with Craig McCaw's Clearwire (CLWR), who is also building a WiMAX network. This will allow customers to roam across both company's WiMAX networks much like cell phone users do.

Today, Sprint announced that they have chosen Zyxel Communications of Taiwan as its primary vendor for equipment needed to bring broadband Internet into customers' homes and businesses. BloggingStocks had a nice little post on the topic and why it was a smart move.

Conclusion

So, after looking into this, it appears Sprint is not so crazy after all. Nevertheless, given the cost of the initiative and the less than stellar performance turned in by the company lately, it is clearly a risky, bold move on the part of Sprint management. They might just be betting the company on this. As a consumer, though, I hope they succeed.

Disclosure: author does not own any of the stocks mentioned in this article



Wednesday, August 22, 2007

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to look for, then we'll list a few ways of finding information.

Needs and desires --

Observe how needs and desires change over time. Note that there is a difference between needs and desires. In either case, however, changes translate into new markets created and goods and services provided.

Desires can be thought of as tastes and preferences. Most people didn't need an SUV but many people preferred to drive an SUV. Is that trend changing now? What companies will benefit from the change? Everyone likes big screen TVs -- who makes them or the parts that go into them?

As for needs, it is clear everyone wants to be healthy. The baby boom generation will soon be retiring in droves. The elderly tend to have more health problems. This train of thinking leads pretty directly to the conclusion that it might be a good idea to beef up the portion of your portfolio devoted to health care stocks. Here is a case, however, where we have a very broad trend that we recognize. In this instance, it might be more reasonable to choose a health care mutual fund or ETF rather than try to identify the one or two stocks most likely to benefit.

Doing the right thing --

In general, people like to do the right thing. This might not always be true of certain companies but for most individuals it holds true. Trends based on doing the right thing often take quite a while to develop before achieving the critical mass that allows real markets to be formed to address these trends.

An example of this is the "green" movement. Individual consumers demand a cleaner environment and less waste. Companies eventually respond with fuel cells, solar panels, wind farms, new recycling techniques, etc. This trend has been around for decades but it is only recently that the largest companies started listening by developing hybrid cars, for example. The "green" market is just beginning to mature and keeping an eye out for companies that can take advantage of this trend will surely produce stock market profits.

What to watch out for --

Many stocks, especially small young companies, see their stock prices skyrocket based on a single product. Don't forget to ask yourself whether the company producing that product can sustain profits and continue to grow.

Avoid short-term ephemeral trends. An investor can end up chasing the flavor of the day rather than tapping into a long-term growth story.

Where to find ideas --

Many of the following have both print and online versions and it is often a good idea to subscribe to their RSS feeds or email newsletters.

  • Newspapers - the oldest media example but still useful. Newspapers are more likely to provide thoughtful, in-depth analysis than a simple blog post. I myself can't do without the Wall Street Journal. Others prefer Barron's or the New York Times. Read a paper and look for those articles that might give a glimpse of the future.
  • Magazines - Wired, for example, might be earlier at identifying trends than a more mainstream publication like Time magazine. Still, it pays to read widely and be curious.
  • Blogs - Gizmodo, LifeHacker and others are good at discussing the latest trends among the techies of the world. They often have blogrolls listing other similar blogs; surf a few and see what you find.
  • Marketing - eMarketer, for example, examines trends in Internet marketing which is something I happen to be interested in. There are other marketing web sites that address various kinds of industries and marketing approaches. They are often trying to latch onto the next big thing or understand the latest cultural goings on. Articles published on these sites can be early warnings of trends about to hit the mainstream.
  • Metrics - Nielsen is always trying to identify trends on line and off line. Some of their data is free. Look around for other measurement companies and data. This can sometimes tip you off when a trend is beginning to develop some critical mass.
  • Universities - I myself subscribe to the email newsletter from the Wharton School of Business at the University of Pennsylvania. There is usually at least one interesting article in each edition. Experiment with different universities known for their "talking heads" and experts; subscribe to feeds or newsletters. You never know what might pop up.
  • Industry web sites and publications - you don't always have to be a subject matter expert to be able to benefit from industry news and announcements. If you think an industry sector has something going on, visit company websites or industry association web sites and see what is getting the most attention.
Conclusion --

It is within the grasp of all of us to identify trends in business, lifestyle or culture. Being aware of what's going on around us and being able to apply some perspective should help us identify markets that are growing and hopefully avoid those markets that are shrinking. In today's global marketplace, it also pays to be aware of other cultures and countries and the trends taking place there.



Bank stocks may be getting ahead of themselves

With bank stocks rising for over a week now, we have to wonder whether this rally has staying power.

Looking at the KBW Bank Index ETF (KBE), for example, it's hard to believe that it is up almost 8% from its recent low, going from around $50 to $54. The more broadly based Select Sector SPDR Financials ETF (XLF) is also up around 7%.

Three news items I saw today put me in a cautious frame of mind.

First, it seems that the Fed's action to lower the discount rate has had the desired effect. The markets are calmer. The "flight-to-safety" bond rally is losing steam, even at the short end, as investors rotate back to equities. Nevertheless, the markets believe the Fed will further come to the rescue with a cut to its overnight funding rate by September 18 or sooner. As a result, investors are bidding up stocks across the financial spectrum. But why should the Fed cut? The discount rate cut seems to have achieved its objective. Cutting the Fed funds rate now could be construed as just saving Wall Street bonuses.

Second, the FDIC announced that bank earnings have fallen 3.4% in the second quarter. This was primarily due to mortgage defaults, increased reserves to cover loan losses, higher expense for non-current loans and lower investment returns. Though most banks remain in good financial shape, the FDIC says, some of these problems are hitting levels not seen
since the early 1990's. Keep in mind, though, there were no credit crunches in the second quarter, no hedge fund implosions, no stock market plunges. What might be in store for third quarter numbers given that we saw all those things happen within the last few weeks?

Third, the Wall Street Journal had an article today indicating that banks are starting to tighten lending standards not only on mortgages but also on other kinds of loan products such as credit cards, auto loans and personal loans. This serves to enhance portfolio quality but slows portfolio growth and consumer lending profits. Though not all banks are tightening everywhere, it is becoming more common in those same areas where the rate of mortgage foreclosures is highest. Securitizing and selling loans will be more difficult also due to lower loan volume and skeptical credit markets, further squeezing profits.

To sum up, chances of a Fed rate cut are receding, bank earnings are weakening and lending standards are tightening. At the risk of going against the tape, it seems to me the opportunity for bottom fishing in the financials may not be here yet.

With the after-hours announcement that Bank of America is investing in Countrywide Financial certain to cause another advance of stock prices in the financials, I feel like I am going out on a limb here. Still, I feel that caution should rule for now, not blind optimism.

Disclosure: author owns no shares in the stocks or ETFs mentioned in this post



Tuesday, August 21, 2007

BigBand Networks - sad to say, it's fairly priced at these levels

I have been a proponent of BigBand Networks (BBND) since I wrote a post that paired Cisco Systems (CSCO) and BigBand as a combined Pick o' the Month. In that post I described the networking powerhouse and the upstart and proposed that Cisco might someday buy BigBand.

Since that time BigBand has reported earnings twice as a public company. Both times have been a disappointment. The stock remains in the TradeRadar model portfolio under the assumption that it is an early investment in a company that will reward patient, long-term investors.

In the wake of BigBand's latest earnings report (and price decline), I thought comparing BigBand to Cisco might be an interesting way to develop an understanding of where BigBand stands at this time in its drive to become a company to be reckoned with. Clearly they are very different companies with one being huge and the other being small. So rather than looking at absolute numbers we'll focus on ratios.

Examining key ratios as provided by moneycentral.msn.com, we find the following:

Sales Growth Rate for BBND is more than double that of CSCO but then again, CSCO is a much bigger company and behemoths have a harder time putting up high growth numbers.

P/E Ratio for CSCO is a reasonable (for a tech company) 25.6 but for BBND it over 47. Depending on how it is calculated (BBND has been public for only two quarters) even 47 seems kind of low for a trailing twelve months given there have been some losses in past quarters.

At BBND's current price, around $9 per share, it has a Price to Sales ratio of only 2.48 while CSCO is up at 5.21, more than twice as high.

Looking at Price to Cash Flow, BBND is more than 30 and CSCO is around 20.

CSCO is doing a better than BBND in terms of Gross Margin but BBND is lagging the industry while CSCO is leading the industry by a small amount.

By the time we get to Net Profit Margin, we really separate the men from the boys. Where CSCO is doing a bit better than industry averages at 21%, BBND is way down the spectrum at 5.3%

Receivable and Inventory Turnover for CSCO are both over 9 but for BBND these two measures are down around 7 and 6, respectively.

On the plus side of the ledger for BBND, they are growing at a good rate. Looking at Price to Sales, it appears the stock is not over-valued. BBND's Gross Margin may not be great but is still pretty decent.

On the other side of the ledger, even though BBND's stock price is more than 50% off its peak, it still has an uncomfortably high P/E ratio. BBND is not turning over their inventory fast enough. The real problem, though, manifests itself in Net Profit Margin. This is where BBND really falls down and it is the result of expenses being higher than they should be. BBND is a small enough company such that modest changes have large repercussions. Besides R&D expenses being high, stock compensation costs have had a significant impact on GAAP earnings. Without revenues jumping sufficiently to offset the increase in costs, we see BBND in its current predicament where it is forecasting more or less flat earnings for the remainder of the year.

I was hoping that this analysis would lead me to conclude that BBND's recent stock price decline was overdone. Unfortunately, it appears that the stock is probably fairly priced where it is at about $9 per share. It could take some real patience before current investors realize a significant gain.



Sunday, August 19, 2007

Fed saves the day, what about tomorrow?

The Fed's reduction in the discount rate on Friday turned what was shaping up to be another bad day in the markets into cause for celebration and hope on Wall Street. And, of course, it resulted in a big rally.

The Fed's action had two immediate benefits:

  1. It restored investor confidence and let Wall Street know that the Fed was willing to act to ensure proper functioning of financial markets and prevent damage to the economy
  2. It provided another shot of liquidity in addition to the billions of dollars that the Fed had already provided through a series of repos
These benefits are desirable and even necessary but are they enough to get the bull market back on track?

My worry is that the root cause of the market's problems has not been addressed. That root cause includes the sub-prime mess but is not limited to sub-prime. There has been a period where risk has been virtually ignored in all kinds of lending. We are seeing the worst of it in real estate but there are also many examples to be found in the financing for leveraged buy-outs, for example. Witness the proliferation of "covenant-lite" debt that has found its way into hedge fund and bank portfolios.

In this kind of situation, those investors who typically can be relied upon to buy the debt being offered from these various kinds of deals are now insisting on either higher risk premiums or tighter terms and conditions. This has analysts declaring a "credit crunch" is taking place. Some might simply call it prudent lending.

Two Questions --
  1. Will the Fed's increase in liquidity convince investors to go back to taking on risky, low-quality debt? Probably not.
  2. Will the Fed's increase in liquidity prevent low quality debt instruments like bonds based on sub-prime loans from losing value and causing investor losses? Again, the answer is no.
So my outlook on the market remains at an improved level long term but not overly optimistic in the near term. As described above, there are still problems lurking that will affect hedge funds and especially financial and real estate stocks. If the economy does slow, it would put further pressure on the many companies that have been taken private and possibly cause a downward reevaluation of their debt, as well.

I think investors will enjoy the Fed's liquidity move for another session or two and then begin to worry about the undiscovered debt bombs that are still out there. This will take the wind out of the market's sails and stall the recovery for a while.

A period of time with no bad news about hedge funds imploding or lenders going belly up is what is needed to restore investor confidence in the long-term ability for stocks to resume the bull market. Hopefully, we won't have to wait too long.



Friday, August 17, 2007

SmartAds should target email users

This month there have been a couple of interesting reports on Internet activity.

Nielsen/NetRatings provided July Internet usage statistics. Yahoo had 110,377,000 unique visitors. This was good enough to earn the portal 2nd place just behind Google as most trafficked site owner.

Also mentioned in this report is that Yahoo users spent way more time on the Yahoo suite of web sites (almost three hours) than users did on Google's (just over one hour). What are Yahoo's users doing during this time?

The answer can be found in an article at eMarketer .com that describes the most popular subdomains within each portal. 67% of Yahoo visitors are using email. This means Yahoo is getting a ton of traffic from the best kind of visitors: the ones who are registered at the site.

It seems clear that a good way for Yahoo to increase profitability is to get SmartAds deployed on the email subdomain. User's are spending plenty of time in this area of the portal reading and writing email, not jumping off to other sites. This translates into lots of ad impressions. As returning registered users, Yahoo should have been able to collect some kind of demographic information and hopefully some data on their web habits. This seems a perfect application for SmartAds: high traffic site where Yahoo has knowledge of the user base.



Thursday, August 16, 2007

Markets recover - is it time to celebrate yet?

Yesterday's post reviewed the situation on the charts of the major averages and came to the conclusion that there was a good chance we would see another leg down in the current correction.

For a while today it looked like we were going to see that decline immediately but at the last minute, the averages turned up and reduced their losses and in the case of the S&P 500 actually finished with a small gain.

The most significant development of the day was the resurgence of the financials. ETFs like XLF racked up 3% gains and REIT ETFs like IYR managed a 2.5% gain.

Still, I'm not sure this is a time to breath a sigh of relief. We have seen over the previous few weeks similar behavior where the averages would close with a flurry of buying that seemed to save the day. During this time numerous observers pointed out that the advance/decline numbers were troubling at best. The end result of this kind of market activity has been what we see now: the averages at or below their 200-day moving averages and most, if not all, of year-to-date gains evaporated.

Today was similar. The A/D numbers were dismal. On the NYSE, decliners were almost double the advancers. On the NASDAQ, it was more mixed but decliners outnumbered advancers by about 20%. On the AMEX there almost three times more decliners than advancers. These kinds of numbers don't generate much optimism.

Looking at New Highs/New Lows is also an unhappy exercise. There were literally only a few new highs on any of the exchanges but over a thousand new lows on the NYSE and over 300 new lows on both the NASDAQ and AMEX.

With these kinds of numbers it seems unlikely we will see the bull market resume any time soon. This is not to say we won't see some rallies but I expect we will see several weeks of volatility before a clear up-trend is established. Conversely, I suspect it is too late to take new positions in the inverse ETFs QID, SSO or DDM. Hopefully, readers have raised some cash that can be deployed when the next trend is revealed.

As for the financials, since there were no major changes in market conditions that would affect these stocks one way or the other, this rally is probably just a reaction to the feeling they were over-sold.

Dislcosure: author owns shares of QID



Sold Agnico-Eagle

Agnico-Eagle Mines (AEMLW) has been a member of the TradeRadar model portfolio since the middle of June. Just a few days ago we were up 48%. The last few days have seen the stock plunge. With this market looking so grim, I decided to preserve capital and take what profits could be had. I sold during yesterday's 10% slide at $22.52 and was happy to get that price as AEMLW closed at $19.99.

Frankly, I didn't even wait for a strong TradeRadar SELL signal. A weak one had been flashed a week ago and that, combined with the slide of the last two days, was enough for me. We ended up with a 27% gain and I'm not complaining.



Wednesday, August 15, 2007

Dominoes falling?

Today was a day when the markets started looking like they are ready for a new leg down. Let's take a look at what the charts are saying.

The Russell 2000 fell again today and confirms it is unable to move up and penetrate the resistance embodied by its 200-day moving average.

Today the S&P 500 fell below its 200-day MA for the second time in as many weeks. It is now down about 9.4% from its peak and has gone negative for the year. Back in the beginning of this month, the 20-day MA made a bearish cross-over below its 50-day MA, and the average has been stuck below both of these chart lines ever since.

The Dow also plunged today and ended up sitting right at its 200-day MA. A dismal forecast is developing, with its 20-day MA making a bearish cross-over below its 50-day MA, it could be moving down further. As of today, the Dow is down about 9% from its peak though it is still positive for the year.

That brings us to the NASDAQ. On the basis of strength in technology stocks, the NASDAQ has been under pressure but was not falling as rapidly as the other averages until lately. Today the NASDAQ fell below its 200-day MA for the first time this year and is down about 9% from its peak though it too is still positive for the year.

To sum up, we have all the major averages at or below their 200-day moving averages, a level where many analysts and investors feel the trend becomes bearish. Two of the four are now negative year-to-date. We have just about fulfilled the requirements for a full-fledged correction.

It has been my feeling that we would get to about this level and the market would spend some time backing and filling and then begin to move up again. Now I'm beginning to think we may overshoot and move lower still. The way the market used to move up on every announcement of a new merger or buy-out, the market now seems to move down with every revelation of a hedge fund in trouble or a mortgage lending institution unable to continue in business.

One average after another has rolled over, it's like watching dominoes falling.



Tuesday, August 14, 2007

The Kids Portfolio

Every once in a while it's a good idea to check in with the kids and see what products and companies they like and respect. This is always a fun exercise and, with the market looking so grim lately, it's something I thought might cheer us up.

The following list is filtered through the sensibilities of a 13 year old boy who knows what he likes. In no particular order, here is the Kids Portfolio:

Zumiez (ZUMZ) - probably the strongest stock in the bunch, the Zumiez store is a favorite destination. Already up around 25% or so this year, the company seems to have avoided the weak same-store sales problems encountered by its competitors. This stock is worth a look.

Volcom (VLCM) - my kids really love the skater chic but the company has missed earnings targets and the stock has wiped out.

Billabong (ASX:BBG) listed on the Australian exchange, Billabong has lots of attitude but it may not be easy to get the shares in the US. Then again, you might not want to as the stock price recently took a dive and the stock is slightly negative YTD.

Abercrombie & Fitch (ANF) - struggling to stay above water, the stock is currently trying to move up above its 200-day moving average (we have a weak TradeRadar BUY signal so ANF might be worth watching)

American Eagle Outfitters (AEO) - my kids might like the clothing at American Eagle but apparently other kids are staying away in droves. The stock has rolled over completely this year and is off about 30% YTD.

Nike (NKE) - always a favorite in our house from sneakers to clothing to golf clubs. And the stock has been a steady performer. Though there has been some volatility lately, NKE is still up around 12% YTD.

Apple (AAPL) - iPod is ubiquitous, iPhone is all over the media and who doesn't like iTunes? Stock has started coming back to earth but still a strong company at the top of its game.

Adidas (ADDYY.PK) - popular sportswear, footwear, etc. Stock is still hanging on to a gain so far this year. Company has turned in good earnings numbers but is being held back by problems in Reebock which it acquired in 2005.

Aeropostale (ARO) - some kids (not mine) like the clothes but investors don't like the stock. The chart is dismal.

Electronic Arts (ERTS) - video games are a serious part of life for lots kids and adults. ERTS is the major player in the sector and the stock has been perking up a bit lately (currently flashing a weak TradeRadar BUY signal, another stock to keep an eye on)

Google (GOOG) - number one for search among kids, too. Stock is still up around 8% so far this year. It's hard to go wrong with an investment in the GOOG.

Yahoo! (YHOO) - the stock has taken a dive this year but kids like the free email and other kinds of content like the games, weather, etc.

Guitar Center (GTRC) - this stock is a pretty good performer, up around 20% YTD. Selling the dream of rock stardom has an irresistible appeal to lots of kids and adults, too, I might add (yes, I still have my stash of guitars and keyboards).

Quiksilver (ZQK) - cool surf and skate clothing but the chart is all over the place. Problems with rising expenses and the burden of owning Cleveland Golf, a mismatched acquisition, will hold the shares back in the near term.

Conclusion

It looks like we have a few winners here and a few that might fit on the watch list. Among the winners there is Zumiez, Guitar Center, Apple, Nike and Google. The watch list population might include Electronic Arts, Abercrombie & Fitch and Adidas. Not a bad group of investing ideas and to think they came from a 13 year old. As the Who would say, "The Kids are Alright"

Disclosure: author owns none of the stocks listed



Monday, August 13, 2007

Qualcomm advances on lawyer's resignation

This weekend I wrote that Qualcomm's stock price would bounce should the CEO be replaced. Well, that didn't quite happen but it was announced today that the general counsel, Lou Lupin, resigned. The stock did indeed bounce, though only about one point.

So, is Mr Lupin the scapegoat or is he taking responsibility for the legal mess in which Qualcomm finds itself?

It's hard to know how much Paul Jacobs, the CEO, set strategy for the legal team or whether the legal team provided bad advice to the CEO. Someday, someone should write a book on this debacle.


Disclosure: QCOM is part of our model portfolio



Sunday, August 12, 2007

Qualcomm - should you buy on bad news?

The old saying is that you should buy on bad news and sell on good news. Qualcomm (QCOM) has been pummeled with bad news lately.

A judge has doubled punitive damages in one of the patent infringement cases Qualcomm is embroiled in with Broadcom (BRCM). Apparently Qualcomm offered inaccurate testimony which also served to earn the judge's antipathy.

The White House failed to overturn the ITC ruling banning imports of handsets containing Qualcomm chips that infringe on still other patents held by Broadcom. To get around the problem, Verizon (VZ) broke away from the pack and inked an agreement directly with Broadcom.

The latest issue to crop up comes to us via Nokia (NOK). Qualcomm has been battling in the courts with Nokia for years over the level of royalty payments. Qualcomm licenses its CDMA 3G cell phone technology to Nokia who just happens to be the supplier of approximately 40% of the handsets sold worldwide. Nokia has just announced that it will no longer be manufacturing its own chips. It is selling its chip business to STMicro (STM) who will, in turn, supply the chips to Nokia. This expands STMicros business with Nokia substantially. In addition, Nokia will also bring on as suppliers Broadcom and Infineon (IFX) as well as continue its relationship with Texas Instruments (TXN). Note that Qualcomm is not included in this privileged set of chip vendors.

As a result of these developments, Qualcomm's stock has taken a beating, falling to $37.89 this week. It's chart is horrible with the stock falling below it's 200-day moving average and a bearish crossover in place as it's 20-day MA has fallen below the 50-day MA.

Sounds pretty cut and dry -- Qualcomm is a stock to sell or avoid, right?

Qualcomm's strength is, and continues to be, its patent portfolio. It owns the core patents related to the CDMA technology that many feel will eventually dominate cell phone technology. No matter who makes Nokia's CDMA chips, somebody ends up paying Qualcomm something.

Patent infringements should be considered a temporary blip. Qualcomm has already provided software work-arounds for some of the patents at issue with Broadcom, thus allowing the contested phones to be imported. This is not surprising. A good engineering staff can usually redesign or rework components to avoid patent issues if that's what needs to be done.

The call is starting to be heard for Qualcomm's chief executive, Paul Jacobs, to step down. I believe I read it first on the 24/7 Wall Street blog and I couldn't agree more. Someone who will get the legal issues behind the company is what is needed now, not a pitbull.

So what to do about the stock? Qualcomm could have further to fall, especially in the volatile market we are seeing lately. But I believe it will be a buy sooner rather than later. It recently reported good earnings and provided good forward guidance. And if its CEO is replaced, look for a big pop in the stock price.

Disclosure: QCOM is in our model portfolio



Saturday, August 11, 2007

A step closer to correction

Last week I wrote a post where I took the position that stocks were headed for a correction and that we were nearly there. I haven't seen anything this week that would change my mind.

Even though the major averages managed to end this week a bit higher than last week, I find it hard to be optimistic. The markets started the week off moving upwards nicely but took a pounding on Thursday that nearly erased the previous days gains. We were incredibly lucky to see the averages close with only small losses on Friday after starting the day off with downward gaps.

This week central banks around the world injected cash into their banking systems in an effort to keep credit markets functioning. CDOs backed by sub-prime mortgages have been blamed in England, Germany, France and Australia for hedge fund problems. It is amazing to me that so much sub-prime debt even exists and is held by investors in so many different countries.

Charts continue to look awful. In an interesting divergence, we see that the S&P 500 closed right at its 200-day moving average but the SPDR ETF (SPY) actually closed below its 200-day (and for the second time). The Russell 2000 finished the week in a confusing manner with the MACD starting to turn up but with the 20-day moving average making a bearish crossover to move below the 200-day. The Russell 2000 remains about 2% below its 200-day MA which is considered definite bearish territory.

The major averages are pretty much all off their highs about 6% so we are more than halfway to the 10% mark that commonly defines a correction.

What worries me about the current situation is that problems in other countries are impacting markets in the US and vice versa. This is not unusual in today's financial markets but the linkage this week seemed especially telling. It goes without saying that it is hard enough to predict the direction of local markets without global impacts to worry about.

The wakeup call from this week's market action is that the financial problems we have been grappling with in the US are now rippling across the world. As new financial instruments have been used to spread risk across many investors, we now see larger numbers of investors beginning to feel pain all at the same time. If they all decide to sell at the same time or, worse yet, many of them have to sell at the same time, we could see markets tumbling like dominoes. I don't really expect that kind of disaster but, as noted above, we are only a few percentage points away from a correction. And that correction seems rather likely now.

By the way, I notice that we don't have so many pundits saying sub-prime problems are "contained" and that the "contagion" won't spread.



Friday, August 10, 2007

REITs trying to establish a bottom?

With the overall market plunging over 2% yesterday, I was surprised to see REIT ETFs remain firm throughout most of the day.

The two ETFs that I watch are an admittedly small sample of the REIT universe but they both acted very similarly yesterday: they were down only fractionally which was a sign of strength compared to many other market sectors. The iShares Dow Jones US Real Estate (IYR) and iShares Cohen & Steers Realty Majors (ICF) ETFs both fell less that 0.2% which means they held on to most of the gains they made on Wednesday.

Of the two REIT stocks that I watch, their performance was completely divergent. Ventas Inc. (VTR) just announced earnings that beat expectations and its stock prise actually rose over 2% yesterday. Health Care Properties (HCP) lost about 2%.

Among other well know REITs, the same divergence was observed. Duke Realty (DRE), down 3%. Boston Properties (BXP), up almost 2%. Taubman Centers (TCO), down less than 1%. Acadia Realty Trust (AKR), up almost 2%. Archstone-Smith Trust (ASN), down almost 1.5%.

The conclusion is that the picture for REITs remains cloudy. Some real estate sectors will continue to see problems such as those involved in residential real estate. The office and industrial sectors appear stronger. Still, defaults and delinquencies have been on the rise and it will be harder for REITs of any kind to grow by acquisition with liquidity contracting as it has been lately. Yields are getting better but are still not sufficient, in my mind, to cover the risk of owning these stocks at this time.

In my opinion, it is still too early to move back into REITs. But it might be a good idea to start watching them closely at this point for signs of a reversal.

Disclosure: I own no shares in the stocks or ETFs mentioned in this article



Wednesday, August 8, 2007

Cisco wants to be more than Cisco

The markets just jumped on the back of a good earnings report and good guidance from Cisco . John Chambers has described how the company has become more than just a networking company. The vision he has put forth ranges from Internet infrastructure, enterprise networking, consumer products, TV set-top boxes, various kinds of software and more.

It has been noted that Cisco has invested in the VMware IPO. It is less well known that Cisco has plans for taking over the datacenter itself. Cisco envisions the eventual replacement of local devices with shared network resources. This is a trend that is underway already with the advent of storage area networks and network attached storage, both essentially comprised of banks of disk drives that can be flexibly deployed as needed. Server virtualization as implemented by VMware and others has become the next major advancement in abstracting datacenter devices into a resource pool configurable by software.

Cisco has begun to define the capability to control resources in the datacenter by looking inside the packets of data that are flowing between devices. In this way, management software can more precisely determine what specific piece of hardware is being utilized. With their networking expertise, Cisco has developed deep capabilities around data packet processing.

As a first step, Cisco has released the VFrame Data Center, virtualization management software that is supposed to be able to control network, server and storage resources as virtual services. The product has an API that developers can use to extend its capabilities. In many ways, it looks like Cisco is competing with both EMC and VMware.

Ultimately, it appears that Cisco is looking to extend the paradigm of distributing processing resources across a network fabric. It has already been done with storage, the final step is distribute CPUs and memory across the network.

Cisco is working to extend their reach from the "plumbing" between devices to making good on its promise that the "network is the system". In this new world, discrete servers will be obsolete and network appliances will be combined and configured to create processing capabilities on-demand. And Cisco will be in the middle of it.

Disclosure: CSCO is in our model portfolio



Tuesday, August 7, 2007

McDermott Intl earnings soar

For those of you who read the second post in the series on how to unlock stock market profits you may remember McDermott International (MDR).

As part of our discussion on using stock screeners we worked our way through three different web sites, finally ending up with a short list of stocks derived from the Zacks.com screener. McDermott was one of them and we focused on the company as one of the most interesting on the list.

Today McDermott announced blow-out earnings. Their profit tripled, they exceeded analyst expectations and announced a two-for-one stock split. The stock gained 4.2% today.

I hope readers will continue to experiment with stock screeners. Today's news on McDermott shows screeners can point you to some top-notch investments.

Disclosure: I own no shares of MDR



Monday, August 6, 2007

Unlock Stock Market Profits - Key #3

This is the third in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this third post, we will continue further along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. This post will focus on using lists of new highs or new lows to find investing ideas.

Key #3: New highs and new lows can point to stocks with momentum or stocks ready for reversals.

Looking to ride an existing trend? Know a good stock that is being unfairly punished?

New highs lists can identify stocks in a strong uptrend. If you believe in momentum, the ability of a stock to continue to move in the same direction until some event causes it to reverse, then lists of new highs can identify stocks with further upside.

New lows can help you identify stocks to watch and wait for until they begin to turn around. The patient investor can keep an eye on the list of new lows and identify good companies with the potential to pull out of a nosedive.

Looking at New Highs

At Quote.com, they provide lists of yearly highs and lows and, of benefit mostly to day traders, very short term highs and lows (within the most recent 15 minutes during the trading day).

Looking at the list of yearly highs, we find a company well know in my home state of New York, Paychex (PAYX), whose founder has run for governor. Here is a stock that hit a high around $42 in February, fell back into the mid $30's in April and started an uptrend in April. PAYX has added over 21% since that April low and is now over $44. Looking at a long-term 5-year chart of PAYX, you will see that it has essentially been slowly trending up the entire time with a series of higher highs and higher lows. Perhaps the strategy would be to buy on a pull-back and then ride that long-term trend upward.

Looking at New Lows

Checking the list of yearly lows isn't as much fun but for a really good selection of screens for stocks that are in the doldrums (as well as stocks that are on the upswing), we will use Shaeffer's Stock Screen Center. Here we not only have stocks that have hit 52-week lows but also stocks that are high-volume losers and stocks that have fallen below 50 and 200-day moving averages. In other words, there is a wealth of depressing stock news.

For these kinds of stocks, there are two strategies: (1) look for stocks getting to the end of their decline or (2) look for stocks just getting started on their decline.

(1) Sifting through beaten down stocks to find the ones that have the potential to rise again can be a profitable enterprise. Indeed, watching stocks making new lows will eventually give you the first glimpse of when they are finally engaging in a reversal and turning up again. Putting these stocks on your watch list when they are making lows ensures you will not be chasing high flyers. Buying after a serious decline will hopefully reduce risk.

(2) You can also find stocks that have further expected downside and, using various options strategies, (buying puts, for example) , you can find ways to profit as these stocks continue their descent. If you are interested in this approach, the lists of stocks falling below their 50 and 200-day moving averages would be the best places to look as this would indicate the decline is just getting going and there is further room to fall.

Currently, all these new low lists are dominated by stocks involved in real estate, either builders, lenders or mortgage insurers. Doing some due diligence on the strength of these companies and their ability to weather the storm in real estate could give you a good idea of who will survive the downturn. For example, Hovnanian Enterprises (HOV) is a large, well-known home builder currently hitting lows and showing up on all these lists. Yet it is rumored that Warren Buffet is looking into buying a piece of the company. Buffet knows value when he sees it. Maybe he watches these lists, too.

The TradeRadar list of sites featuring new highs and lows:

Many of the same sites that provide unusual activity or stock screeners also list stocks making new highs and lows. Here's our list:

Quote.com - This is a good place to find ideas among stocks that are showing unusual activity: gainers and losers, unusual volume, yearly highs or lows, stocks with unfilled gaps, most volatile, etc.

Shaeffer's Stock Screen Center - Lots of pre-built screens based on Bernie's Put/Call Open Interest Ratio analysis techniques. Options are a focus on this site, often to use as a guide for analyzing stock performance. Sometimes, a contrarian point of view is expressed and that is useful as a counterbalance to the accepted market wisdom of the day.

StockCharts.com Predefined Scans - Screens based on technical indicators, candlestick patterns and point and figure patterns. Includes stocks on major indexes (including Canadian) and mutual funds.



Saturday, August 4, 2007

Markets are in a correction now

Markets have been down three weeks in a row now. For those of you who use the TradeRadar software, I'm sure you're seeing SELL signals all over the place.

I often check ETFs to gauge the health of various sectors as well as the overall market. After this run of bad news it seems like a good time to take a more comprehensive look at the markets.

SELL signals everywhere

Today I looked at ETF performance over two time periods: from the June-July 2006 low point to the present and from the early-March 2007 low point to the present.

The ETFs corresponding to the major indexes (DIA, SPY, QQQQ, IWM) are all showing TradeRadar SELL signals with about 80% strength over the longer time period and about 70% strength over the shorter time period.

I consider 80% signal strength to be pretty significant and 60% to 70% modest.

I keep reading that tech is holding up pretty well so I checked a group of tech ETFs. Networking: IGN and PXQ -- modest SELL. Semiconductors: IGW, SMH and PSI -- not quite a SELL signal yet. Software: IGV and PSJ -- modest SELL. Broadbased tech ETFs: MTK, XLK, IYW and VGT -- outright SELL with XLK the worst of the bunch. Even the global tech ETF IXN is flashing the SELL signal.

I don't need to go into detail to describe how financials (XLF, KBE) and real estate (IYR, ICF, XHB) are absolutely buried in the SELL zone. They have been down for months.

How about energy ETFs? Both US (XLE) and global (IXC) ETFs are flashing a modest SELL signal. Equipment and services ETFs (IEZ, XOP, OIH) are showing a weak SELL. This is in spite of the fact that USO and DBE have been trending up. Even the "green" and alternative energy ETFs (GRN, PBW, PZD) have been suffering.

Healthcare? IYH and XLV are also showing modest to strong SELL signals.

Retail? Consumer Discretionary (XLY) and Consumer Staples (XLP) are also flashing the SELL.

I could go on but you get the picture. There seems to be no place to hide in this market with all the indexes and most sectors rolling over. TradeRadar is not the only indicator flashing SELL. Pretty much all the ETFs listed above have fallen below their 20-day moving averages and most have fallen below their 50-day MAs as well.

More Concerns

Another area of real concern is the fact that two major market averages have now fallen below their 200-day moving averages and, to make matters worse, for both indexes the 20-day moving average is now crossing below the 50-day moving average.

First the Russell 2000 broke down. This week, Friday saw the S&P 500 actually close below its 200-DMA.

These negative technical events will trigger some traders to begin taking defensive actions which could easily include selling stocks, which would push the averages down even further. The only saving grace is that with the S&P only about 1% below its 200-DMA, there is a good chance the majority of investors will take a wait and see attitude. This is the fifth time the S&P 500 has dipped below its 200-DMA during the last four years. Previous times it recovered and moved on to new highs. What will happen this time?

Three Potential Scenarios

There are a three scenarios that could play out now.

1. Bear Market

Scenario -- the fact that two major averages are engaged in bear moves and many sectors look nearly as bad may indicate the market is heading significantly lower.

Likelyhood -- LOW: There are signs the economy is slowing but on the whole, it doesn't look too bad. Core inflation is still under control, joblessness hasn't ticked up significantly, the consumer is still shopping. The stock market doesn't look like it is exhausted from a big buying binge. We seldom get bear markets after the markets have climbed a wall of worry as they have been lately. Though markets have fallen recently, most of the averages are still positive for the year.

2. Correction

Scenario -- We are now well on the way to a 10% pullback, the common definition of a correction. Issues in the credit and bond markets will eventually clear themselves up without crippling the economy and the market will resume its rise after a few months with some of the buy-out related excess shaken out.

Likelyhood -- HIGH: The Russell 2000 has already fallen 10% from its highs and the S&P 500 and the NASDAQ have fallen more than 7% already. The Dow has only fallen 5.8% from its high. We could see the markets drift lower over the next month or two as the other averages give up some more ground. The reasons that make me believe we won't see a bear market (signs the economy is slowing but not too much, core inflation under control, jobs OK, consumer still shopping) are the same reasons why I think that a correction will occur followed by the market moving to new highs. In addition, the international economy remains robust and US companies that are exporting or otherwise doing business overseas will continue to benefit.

3. Snap-back Rally

Scenario -- the bad news from hedge funds and the credit market eases, the Fed says some kind words about economic growth and the market engages in a snap-back rally from what are clearly oversold conditions.

Likelyhood -- DOUBTFUL: there is too much fear in the market about what the next round of bad news from hedge funds, banks or ratings agencies will be. Credit is tightening. The market is weighed down by the under-performance of the financial and real estate sectors. It is unlikely the Fed will deviate from their inflation fighting stance with food and energy prices at worrisome levels.

Conclusion

Look for sectors that have the best potential to bounce back when the correction runs its course. Tech still looks good to me. Is there an opportunity in the beaten down financial sector? Keep an eye out for a reversal there. With continued strength in energy prices, we could also see those ETFs rise from current levels.



Thursday, August 2, 2007

IWM not pointing the way down

The iShares Russell 2000 Index ETF (IWM) is once again below its 200-day moving average. This is the sixth time this has happened since 2004. To make matters worse, there has been a TradeRadar SELL signal generated on IWM. Other major averages and their corresponding ETFs have also fallen though not quite so far.

Should we be worried?

Currently, IWM is only about 1.3% below its 200-day MA. None of the other major averages or their corresponding ETFs are below their 200-day MA. Things look shaky but we are not getting a serious bearish confirmation from the other indexes.

This looks like more of a confirmation of what some analysts have been saying: there is a rotation out of small caps and into large-caps.

There is also a greater sensitivity to risk sweeping the markets these days. Traditionally, small caps, which make up a large part of the Russell 2000, have been regarded as inherently riskier investments than their large-cap brethren.

On the plus side, earnings season is winding down and earnings weren't too bad. As usual, companies provided conservative guidance and many managed to beat expectations.

Economic news has also been reasonably encouraging except of course in the area of real estate which is pulling the financials down with it. Inflation is under control, jobs are holding up, manufacturing is OK.

I do not believe the tough times for IWM can be considered predictive for the market as whole. IWM is not pointing the way down for the rest of the market.



Google phone is a reality - cat's out of the bag

I have been intrigued with Google's strategy of extending their reach to cell phones. I have written a couple of posts about the topic already. In the first post, I wondered if Google was thinking of leveraging their GoogleTalk application to provide instant messaging and VOIP services on cellphones and partnering with wireless carriers. In the second post, I suggested, but dismissed as unlikely, the idea that Google might offer what I dubbed the "gPhone". It is clear that I was not nearly bold enough in my predictions.

Today's much quoted article in the Wall Street Journal ("Google Pushes Tailored Phones To Win Lucrative Ad Market") confirms that Google is indeed looking at bringing a phone to market.

In fact, there has been considerable work done on prototypes and specifications have been developed encompassing hardware and software -- Google software, of course.

There are two important aspects to this: open platforms and open access.

Google, to their credit, is taking the path where they are offering the specifications to multiple carriers as opposed to trying to sell a handset and forcing carriers to adopt it. Offering the specifications allows carriers to customize their offerings, tailor them to their own network technology and, more importantly, it provides a flexible platform for innovation that will not lock the carriers or consumers into a particular form factor or set of features. On the other hand, if a carrier doesn't want to invest in developing a device from the specifications, they can use the hardware Google has developed essentially as is. Google wins on both counts.

Secondly, Google is an advocate for wide open Internet access from mobile devices. They have come out strongly against the limitations some carriers have imposed on which web sites cell phone users are allowed visit. Though the Google phones will come loaded with Google software, you can bet there will be no limitations on which sites users can visit. Google is positioning itself to serve ads on mobile phones. Unless a user can click on an ad and actually get to the advertiser's site, Google won't be able to charge for those ads. As a result, open Internet access is a benefit for both Google and consumers.

These two themes are what drove Google's interactions with the FCC in regard to bidding on the 700MHz wireless spectrum. The "openness" argument that Google was making in announcing the possibility of their joining the bidding served to bring attention to exactly the kind of environment Google is looking for in order to launch their mobile initiatives. The FCC's decision in favor of "openness" makes Google's success likely, at least in that part of the spectrum. As for existing wireless networks, Google's success will be dependent on their negotiating ability as they try to put agreements together with the various wireless carriers.

As a final nod to consumers, I hope Google aims for a significantly lower price point than that of the Apple iPhone. Not all of us want to spend $499 for a phone, even if it does have enhanced Internet access.

Google is reportedly not seeking licensing fees from carriers or hardware manufacturers. I wonder, though, how much the carriers will want to charge Google for the privilege of serving ads over their networks?



Wednesday, August 1, 2007

Two paths to targeted marketing - Google and Yahoo

Yahoo has been attempting to move toward what some advertisers regard as the ultimate manifestation of marketing: ads tailored to the individual. With the announcement of their SmartAds product, Yahoo is claiming that they can target narrower groups of individuals and target ads more directly to the characteristics of that group. By analyzing users past web behavior combined with what a user is currently doing, Yahoo says they can more accurately determine the kinds of ads that a particular group of users should see. Yahoo's new technology will then cobble together the appropriate pieces to present a complete banner ad tailored to that group.

Google has chosen to pursue a different path and has announced that they do not intend to pursue behavioral targeting. They have opted instead to refine their flagship technology around search ads. The enhancement they are currently testing includes the previous search terms as well as the current search terms to determine what ads to show to users. This approach requires no knowledge of the user's past behavior on the web and uses only the user's current session. The benefit of this new approach is based on the contention that a user will do several searches to research a subject area. By addressing ads to the "theme" the user is searching on it is anticipated that the ads will be more relevant for that user.

Google has been working hard to maintain a consumer-friendly posture. This approach to ad targeting is being touted as preserving user privacy and to a great extent, it does. Clearly, it does much more to maintain user privacy than the recently announced policy of setting cookies to expire. (The cookie announcement has been criticized in the blogosphere as not really accomplishing much.)

Why the two approaches to targeted marketing?

Each company is playing to its strengths. Google is undisputedly the dominant search engine. That has created a powerful revenue stream from search-related advertising. Continuously refining the technology behind search ads is a logical progression. Using the lessons learned in search advertising probably allows tuning of the AdSense process whereby ads are served based on the content of the pages where they are hosted.

Yahoo's strength is content; as opposed to Google, Yahoo has more traffic that comes for the content as opposed to search. Building a new strategy around configurable banner advertising makes more sense than trying to beat Google in search advertising. Because there is more variety of content around which to place ads, Yahoo can benefit from the new style of behavioral targeting as well as the old style of behavioral targeting where ads were placed on sites that expected traffic from users with specific interests (placing car ads on sites for car enthusiasts, for example). Meanwhile, the Panama technology for search advertising that Yahoo recently rolled out at least keeps them in the game though not on a par with Google.

With all these different methods of serving ads and all the visitors that they get, why can't Yahoo be more profitable?

With search ads, and by extension AdSense (both can be considered contextual advertising), Google just sticks to core functionality and grows market share and earnings.

Where would you put your money?

Disclosure: I have no positions in either Google or Yahoo




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Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.




 
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