The Durable Goods report for November was released on December 27 and markets were somewhat disappointed. Last month I wrote a post where I took a look at the implications for tech stocks based on the October numbers. I'd like to take the same approach here.
The primary category I look at is Computers and Electronic Products and the three sub-categories Computers and Related Products, Communications Equipment and Semiconductors.
First, I was surprised to see how the annual numbers stacked up. On a year-to-date basis, 2007 has barely kept pace with 2006. The Computers and Electronic Products category shows shipments up only 0.6% and new orders flat. In all three sub-categories, both shipments and new orders were down anywhere from 1.4% to 4.5% (note that new orders are not available for the semiconductor industry.)
This data seems in conflict with one of the major investing themes of 2007: tech stocks were strong while financials were weak. Hence the outperformance of the NASDAQ in comparison to the S&P 500.
Digging into the monthly numbers, we see some improvement in November compared to October. In fact, things look significantly better when comparing the November-October time frame to the October-September time frame. Except for Semiconductors, shipments, and especially new orders, had slipped quite a bit in the October-September comparison.
In an attempt to see what's next for tech, it is useful to look at new orders, a value which also contains unfilled orders. This number provides a mixed picture. For the overall Computers and Electronic Products category new orders came in at -1.2%. For Computers and Related Products it came in at +9.8%. That is quite a wide range but the strong numbers for Computers and Related Products probably reflects a successful Christmas selling season for PC vendors and resellers.
Based on this Durable Goods report, it seems clear that tech in general will not provide consistent across-the-board results. Some sub-sectors will show growth and some will not; some individual companies will show growth and some will not. This report seems to validate a post I wrote earlier in December titled "Tech stock outlook increasingly fragmented."
On a final note, looking at historical data it can be seen that December is almost always the strongest month of the year for Computers and Electronic Products shipments and new orders. The first months of the next year are often weak in comparison. If that pattern repeats and especially if December numbers are below expectations, we could see some real volatility in tech stocks. Keep an eye out for those next reports.
Source: US Census Bureau Manufacturers' Shipments, Inventories and Orders (M3)
Saturday, December 29, 2007
The Durable Goods report for November was released on December 27 and markets were somewhat disappointed. Last month I wrote a post where I took a look at the implications for tech stocks based on the October numbers. I'd like to take the same approach here.
Thursday, December 27, 2007
With SanDisk (SNDK) getting ready to announce earnings on January 28, this is a good time to review the investment case for company.
Back in November I wrote a post titled "SIA Forecast strengthens case for SanDisk." The main points were that the stock had fallen to a level from which it has twice rallied in the past and that semiconductor growth over the next few years was on the rise with the most growth by far in the flash memory category. With the stock at a depressed level and growth for its main product expected to be robust, it seemed like the stock could be a buy for patient investors.
Then, as now, the company's growth potential in terms of unit sales was not the problem. Memory chip oversupply and pricing issues were driving the company's shares lower as margins became increasingly squeezed. This concern continues to plague the company.
According to TradingMarkets.com, up until October, tight supplies had kept a floor under prices. But leading NAND flash manufacturers like Samsung and Hynix have improved their yields so much that when they started boosting production to meet the anticipated rise in demand for the year-end sales season, the market quickly flooded with NAND flash and the sense of tight supplies quickly faded.
Last week, Micron (MU) reported earnings and they were not good, to put it mildly. The kicker for SanDisk was the comment in the Micron release that indicated NAND flash average selling prices were down 30% in the quarter. SanDisk promptly sank on the news.
On the same day, iSuppli released a semiconductor forecast for 2008. The research firm believes that a slowing global economy will reduce the semiconductor growth rate to approximately 7.5% which, though it is still positive, will be less than the previously expected 9.3%. Their expectation is that the first half of 2008 will be weak and, with respect to NAND flash, they do not expect a rebound until the third quarter.
In further evidence of flash suppliers shooting themselves in the foot, DigiTimes reports that suppliers have been willing to compensate memory module manufacturers for the difference between the current contract price and the spot price at a later date. This has actually prompted some module manufacturers to dump more chips onto the spot market in hopes of getting larger compensation later.
Can SanDisk swim against this tide?
SanDisk does have a few things going for it. The company receives royalty payments for the technology patents it holds. These can amount to roughly 11% or 12% of revenues.
SanDisk has a strong retail presence. The revenues derived from their retail memory products (memory cards, music players, USB memory sticks, etc.) that are sold under the SanDisk name is nearly twice the revenues from their OEM channel. SanDisk is, therefore, more than just a chip vendor. Unfortunately, price-per-megabyte has been falling in the retail sector as well.
A major OEM channel for SanDisk is memory for cell phones. There have been predictions of slowing cell phone growth, especially in developed countries where high-end phones are more likely to be sold. Low-end phones will still show growth in developing countries where cell phone penetration is not as high. Even low-end phones need memory so SanDisk will still see some benefit.
SanDisk has been on a recovery trend since a very weak December 2006 quarter. Since then the company has effected some restructuring in order to reduce their expense base. Quarterly earnings so far during 2007 have been going in the right direction with the first quarter showing a small loss followed by the last two quarters showing positive growth.
Conclusion: It appears that the flash memory sector is beginning to turn into a commodity industry. SanDisk is positioned well to continue to be a key player due to their large existing market share and intellectual property. To raise themselves above the level of a commodity producer, the company is emphasizing its retail products and continues to see strong growth in this business segment. The outlook for flash memory is expected to continue to be robust as memory demands in most electronics products continue to grow.
On the down side, competition in flash manufacturing is fierce and oversupply not uncommon. As some of the Korean semiconductor companies seek market share at all costs, pricing pressure will more than likely remain a fact of life. At least one competitor, however, will not be ramping up so quickly. The Intel/STMicro joint venture to manufacture flash is getting off to a slow start with financing being stalled by the credit crunch.
If SanDisk can leverage its strengths it can stay ahead of the technology curve. They could command premium prices by being first to market with more complicated, higher density, smaller footprint products. They could increase margins by improving manufacturing processes, using larger wafers and generating higher yields. They need to continue to build the retail channel and capitalize on their name recognition.
SanDisk still has a chance to show superior growth but the odds are getting longer. The key is the retail business. If they only had someone like Steve Jobs running the show...
Disclosure: author is long SNDK
Sunday, December 23, 2007
I'd like to look at the chart of the S&P 500 again this week and see if we can once again take the temperature of the markets.
Looking at the chart below we can see that SPX had a very good move on Friday, gapping up at the open and finishing strongly.
Moving Averages: As strong as this move was, it failed to clear the 200-day simple moving average. That level will in all likelihood provide some resistance to SPX as it tries to build on this week's gains. Note also that despite Friday's gain the 50-day simple moving average is just starting to cross below the 200-day SMA. This is often considered to be a seriously bearish indication.
MACD: Looking at the MACD, however, we are on the verge of a bullish signal but it has not quite made it yet.
RSI: In terms of relative strength, the RSI is neither oversold nor overbought but is at least moving in a positive direction on a short-term basis.
Resistance: 1490 on the SPX was previously a support level; now that we are below it, it acts as a resistance level. As can be seen, we did not quite reach 1490 on Friday but if we move over that level with good volume we could easily see a continuation to the upside. If we fail to get through 1490, indicators like MACD could fail to generate a bullish signal and the bearish crossover of the 50 and 200-day moving averages would be confirmed.
TradeRadar Signals: Using SPY as our proxy for the S&P 500, we see it remains in full SELL mode when looking at the daily chart starting from March 2007. Measuring the price action from the high in early October to the low in late November to now, SPY is still generating a weak BUY signal. Friday's upturn, however, at least lends a bit of strength to the positive outlook.
Sentiment and News: many of the news items this past week failed to spook the market. It appears that reports of strong consumer spending and the willingness of foreign sovereign wealth funds to invest in America's premier financial firms put investors in a mood to bid up stocks regardless of any other issues. This coming week, we will have few earnings reports but there will be other news that could move financial stocks in particular and the markets in general. There are reports on new home sales coming up. Due on Thursday are durable goods orders for November and the Conference Board's measure of consumer confidence. This weekend we saw news that credit card defaults are on the upswing. Don't forget that credit card debt is also securitized and no doubt sits on the books of numerous banks and hedge funds, just like all those CDOs and RMBSs backed by sub-prime mortgages. We'll see what investors think about that as the week progresses. Also on the down side, the news around bond insurers just seems to get worse and worse and that may also contribute to the market putting the brakes on the latest advance. Finally, we are starting to see SEC investigations and lawsuits looking into to various kinds of malfeasance related to sub-prime. I suspect it is too early for these activities to actually begin to influence investors right now but this could become a theme in 2008.
Conclusion: SPX is on the brink of recovering and beginning another bullish leg up. Note that I said it is "on the brink." There are still some hurdles to clear on the charts and with respect to sentiment. If we see positive follow-through during the Christmas week, and we probably will, then the potential bullish signs will be confirmed and we should easily see a return to around the 1520 level if not beyond. Then we will be evaluating whether the January effect is kicking in and we can expect further gains or whether the next downturn is upon us. As always, stay tuned.
Friday, December 21, 2007
Major averages finished the week on an extremely positive note and some analysts are talking Santa Claus rally. Related ETFs shared in the holiday spirit. For example, after gapping down recently, we see SPY gapping up on Friday.
Still, there are questions to be answered.
If the SPDR Financial ETF (XLF) gained only 0.93% on Friday why did the UltraShort Financial (SKF) fall 3.62%?
Three major Wall St firms reported earnings this week. Why did the ones that lost billions (Morgan Stanley and Bear Stearns) see their share prices increase while the one that executed well and turned a profit (Goldman Sachs) saw its share price fall?
Why isn't it a sign of weakness when so many financial stalwarts are seeking capital infusions from sovereign wealth funds in order to bolster their balance sheets?
Why was the market so hot to rally when Fed Ex, typically a bellwether for the economy, reported disappointing earnings based on high oil prices and falling demand for package deliveries? The Dow Transports have crossed below the Industrials. Isn't that a bearish signal according to Dow Theory?
Why was the market so overjoyed to see consumer spending up in November? Isn't that looking in the rearview mirror? Didn't the market notice in the same report that inflation is now creeping above the Fed's comfort range? Haven't we been hearing that, with the exception of consumer electronics and video games, December sales have been lackluster?
The VIX plunged and fell below 20. Is volatility suddenly a thing of the past?
Though the Advance/Decline line was quite positive Friday, why are we still racking up significantly more 52-week lows than 52-week highs?
Why did the market rally on the news that the facility intended to rescue SIVs was being abandoned? Doesn't that virtually ensure we will see more writedowns from big banks?
Why was an interest rate hike in China greeted with a rally in Chinese stocks?
I guess the answer to all these questions is that, for now, all news is good news. Those, like me, who have some bearish positions should be ready to suffer for our lack of optimism.
In any case, we did have some big tech names, Oracle (ORCL) and Research in Motion (RIMM), report excellent earnings this week and that certainly helped the market. Nevertheless, some analysts have written that Oracle should not be used as a proxy for the entire enterprise software sector. So is tech the place to be or isn't it?
Financials endured more bad news with a host of bond insurers being downgraded. Better late than never, I guess. Merrill Lynch is selling a piece of itself to an investment fund from Singapore as rumors abound of more big writedowns to be announced. The ECB and the Fed poured unprecedented amounts of cash into credit markets this week and we saw only slight improvements in interest rate spreads. Investors seem to believe that, despite all the problems, at least we will not see a major bank fail so everything must be alright now.
I am not in the camp with those who expect a recession but, given all the questions (and attendant uncertainty) I have been expecting stock prices to weaken a bit further over the course of the next few months. Market sentiment, however, seems to be swinging in the other direction. As many of the trading oriented blogs say: Mr. Market does what he wants to do and it doesn't necessarily have to make sense to you.
Yesterday the FTC released a set of proposed guidelines related to online behavioral advertising and how it impacts consumer privacy. Here are the major points as listed in the FTC release:
Concern: greater transparency and consumer control regarding privacy issues
Proposal: Every Web site where data is collected for behavioral advertising should provide a clear, consumer-friendly, and prominent statement that data is being collected to provide ads targeted to the consumer and give consumers the ability to choose whether or not to have their information collected for such purpose.
Concern: data collected for behavioral advertising may find its way into the hands of criminals or other wrongdoers, and concerns about the length of time companies are retaining consumer data
Proposal: Any company that collects or stores consumer data for behavioral advertising should provide reasonable security for that data and should retain data only as long as is necessary to fulfill a legitimate business or law enforcement need.
Concern: companies may not keep their privacy promises when they change their privacy policies
Proposal: Companies should obtain affirmative express consent from affected consumers before using data in a manner materially different from promises the company made when it collected the data
Concern: sensitive data – medical information or children’s activities online, for example – may be used in behavioral advertising
Proposal: Companies should only collect sensitive data for behavioral advertising if they obtain affirmative express consent from the consumer to receive such advertising
The FTC has approved these proposals as guidelines for potential self-regulation. They are seeking comments on the policy. They are also seeking comment on what constitutes “sensitive data” and whether the use of sensitive data as described in the last proposal should be prohibited, rather than subject to consumer choice.
What are the impacts?
The common thread running though many of the proposals is consent. The concept of "opting in" is common on the web when it comes to receiving marketing email and the like. The proposals suggest that consumers have the opportunity to opt-in to allow their online behavior or "sensitive data" to be tracked and used for advertising purposes. Besides making the web sites and the user experience more complicated, one can only imagine how many web surfers will elect to opt out of being tracked.
If web site operators/advertisers are unable to collect behavioral information, it does not mean that advertising will diminish. What it does mean is that advertising will not be as effective and click-through rates will decline. This could reduce what marketers are willing to pay for online advertising. One can imagine this having negative impacts for Google (GOOG), Yahoo (YHOO), Microsoft (MSFT), Facebook, et al. For Google in particular, though, the impact might be more on DoubleClick whereas Google's search advertising and AdSense program would be relatively unaffected.
The FTC has not yet revealed what comments it has received but it is assured that the major web portals and online advertisers will not be too enthusiastic to embrace these proposals in their entirety. The FTC does realize that more precisely targeted advertising may actually benefit consumers and that it supports many online services that are otherwise free of charge. Look for a lively debate and lots of spin from advertisers.
Who might benefit? Maybe advertisers will return to newspapers, who knows?
Thursday, December 20, 2007
So NetSuite (N) went public today at $26 and the shares moved sharply as some IPOs tend to do, closing at $35.50. This is in spite of the fact that the price had already been adjusted upward twice before the stock came to market. The company is in a hot sector and Oracle Corp. (ORCL) CEO Larry Ellison controls a majority stake and this has contributed to the buzz around the stock.
So at $35.50, is the stock a buy?
NetSuite operates in the Software-as-a-Service (SaaS) sector. It provides business applications over the Internet so that customers do not need to install the software in their own datacenters. NetSuite offers an all-in-one solution that integrates accounting, sales, payroll, order fulfillment, purchasing, inventory, billing, CRM and more. It provides features that support eBay and offers a facility for users to create web sites that integrate tightly with the underlying accounting and inventory functions. Much like SalesForce.com, NetSuite has sales force automation (SFA) capabilities to oversee and manage the entire selling process including sales order entry, post-sale follow-up and support and up-sell opportunities.
So what does it cost to use the software? NetSuite Small Business starts at $99 per month per company plus $49 per month for each user. NetSuite starts at $499 per month per company and $99 per user per month. The NetSuite eBay integration is available as an add-on module for both NetSuite Small Business and NetSuite and starts at $99 per month. NetSuite CRM starts at $79/month for each user.
According to the SEC filing, NetSuite posted a net loss of $35.7 million in 2006, and in 2007 has so far lost $20.6 million for the nine months ended Sept. 30. Its accumulated deficit stood at $241.6 million as of Sept. 30.
Its revenue has grown steadily from $17.7 million in 2004 to $67.2 million in 2006. That trend continued this year, as the company took in $76.8 million for the nine-month period ended Sept. 30. NetSuite said it had 5,400 customers as of that date.
The company is offering only about 10% of the shares available.
Quarterly data was provided in the SEC filing and here is where I started to get wary.
Since the March 2006 quarter, revenue has been steadily increasing by roughly $2M to $2.5M per quarter. As an investor, I would rather see revenue accelerating instead of increasing at a linear rate.
Many analysts point out that, though the company remains unprofitable, losses have been decreasing over time. Yet it is clear from the chart below that NetSuite has had one quarter that showed great improvement, otherwise the company has been growing somewhat slowly.
Why such a good quarter? In the most recent quarter, ending September 30, it looks like expenses were significantly held in check compared to prior quarters. For me, it raises the question of whether this expense reduction is an artificial one-time event, part of an effort to make the IPO attractive. The SEC filing admits that product development costs are likely to remain high. This is one of the main expense drivers and it is one of the categories that showed the biggest expense reduction in the September quarter. In defense of NetSuite, however, I have to say that even if product development costs had remained flat, it would still have been a much improved quarter.
NetSuite is aimed at small to medium-sized businesses and, as discussed above, pricing is modest for the medium-sized companies and quite low for small businesses. It's sure going to take an awful lot of customers to justify the two billion dollar market cap the company attained today.
According to an article in InformationWeek, NetSuite admits its single data center is located in a third-party facility in an area of California that's vulnerable to earthquakes. It has no back-up facility that can be used as part of a disaster recovery plan. As customers begin to demand disaster recovery as part of the product package, this will become a significant expense for NetSuite.
Much like VMware (VMW), NetSuite offered a small percentage of shares to the public and the market cap has now ballooned to a point where the valuation can be questioned. Unlike VMWare, NetSuite has yet to show a profit and has significant competition in its market today. Just like BigBand Networks (BBND) registered one excellent quarter and went public, we see NetSuite doing something similar.
Though NetSuite is in a hot sector, SaaS, the company has a way to go before it can justify its current stock price. This does not mean, however, that investors will not push the price even higher before it begins to return to earth. The company has great promise but I would not be buying the shares at this time.
Disclosure: author has no positions in any stocks mentioned in this post
Wednesday, December 19, 2007
In a credit environment where CDO values are dropping like rocks and write-downs are sprouting all over Wall Street, one would think that Citigroup (C) would tread carefully when it comes to rolling out new debt products.
That, apparently, is not the case. The following is from Bloomberg:
Citi will also invest in the lowest ranking, or equity, portion of the CDO along with International Finance Corp., a unit of the World Bank, according to Fitch Inc. Microlenders make loans to low-income borrowers in developing countries who may struggle to get credit from local banks.
The CDO will consist of six portions of debt, the highest is rated AA."
What the heck is Citi doing rolling out CDOs based on loans to people who wouldn't qualify for a sub-prime loan in this day and age? Is there a significant risk of default among the underlying loans? Isn't the risk further elevated given that micro-loans in developing countries are seldom secured by collateral?
Default risk is a critical part of any lending decision and microfinance or micro-lending is no exception. Micro-lending has a reputation as having historically high, some might say unexpectedly high, repayment rates. The information to support this, however, is limited.
Typically, companies get involved in supporting micro-finance as part of their corporate social responsibility (CSR) initiatives. To its credit, Citi has been active in helping many companies that provide micro-loans. It is understood that lenders like to securitize loans in order to receive an immediate return on the capital that has been disbursed to borrowers. Still, it is hard to understand why Citi feels the need to create this kind of CDO at this time. There must be other ways to support these microfinance lenders and provide aid to aspiring business people in developing countries.
In my view, now is when Citi should be demonstrating a more conservative investment philosophy. They have a certain amount of credibility to restore; billions of dollars worth of credibility, one might say. It makes you wonder if they've learned anything from the market turmoil seen in recent months.
Disclosure: author is long C in a retirement account
Monday, December 17, 2007
Yesterday I wrote a post describing my opinion on the direction of the markets. I focused on the S&P 500 and, after reviewing the chart situation, came to the conclusion that the most likely direction was down.
Today we opened with gap to the downside and the index never recovered. The gap is clearly visible in the chart below which shows what happened to the S&P 500 SPDRS (SPY) ETF.
Shortly after I saw the gap, I decided it was time to nibble on a few shares of the ProShares UltraShort S&P500 (SDS) ETF. Purchased at $55.13, SDS closed today at $56.08 for a quick little 1.7% gain.
The chart now looks worse than it did Friday. Today's sell-off came on decent volume but not extraordinary volume. This implies we have not yet seen the kind of capitulation that marks a bottom. Note also how the MACD on the chart above is on the verge of confirming the bearish direction. It looks like SPY might have a bit further to fall.
Disclosure: author is long SDS
Sunday, December 16, 2007
After three good weeks, markets reversed course and closed significantly lower this week. Expectations of a Santa rally are looking less likely and skepticism seems to be the order of the day. This week the Fed cut rates and announced a lending facility to inject liquidity into the credit market. Investors were less than impressed. Inflation reared its head in the PPI numbers as price increases were larger than expected. In spite of good news on retail sales and jobs, all the major averages finished the week down over 2% with the Russell 2000 down a whopping 4%.
For a while now, Treasury bond prices have been going up every time stocks have gone down. This week we saw a turnaround in the bond market, with the smell of inflation causing bonds to sell off in lock-step with stocks. Seems like there was no place for an investor to hide this week.
Comments on the S&P 500
In trying to gauge the market direction, it is hard to ignore the fact that the S&P 500 closed down 2.4% this week and, in another bearish indication, is below its 200-day simple Moving Average again. Looking at the SPDR S&P 500 (SPY), you will see that the ETF's 20-day exponential moving average approached but failed to cross above the 50-day EMA as the ETF tumbled along with its underlying index. In the chart below, the simple moving averages are nowhere close, with the 20-day still well below the 50-day. MACD has not quite rolled over yet but is getting close. Relative strength is clearly weakening.
Looking at the TradeRadar signals, SPY is in full SELL mode when looking at the daily chart starting from March 2007. The recent rally attempt, measured from the high in early October to the low in late November to now, is still generating a weak BUY signal but it is in danger of getting weaker and reversing. In the near term, the charts overall look more like we are going to see another leg down.
Where is SPY going from here? SPY will probably go wherever the financials lead. This past week financials tanked on Fed actions and, as usual, the news from Citigroup didn't help, either. Lehman did better than expected but coming up this week we have earnings announcements from three major brokerages: Goldman Sachs, Bear Stearns and Morgan Stanley. Bear could disappoint but lately Goldman has been regarded as the smartest shop on the street. To further darken the picture, Moody's has warned that ratings on four leading bond insurers could soon be downgraded. Stay tuned, it could be another interesting week...
Comments on the TradeRadar Portfolio
Two of our recent bearish picks, SKF and SRS, hit stops and were sold a week and a half ago. This week they have both recovered nicely. I am seriously thinking of jumping into SKF again as the ETF looks like it is on the rise and financials are dragging the markets down again.
Let's look a little closer at one of our other bearish picks, ProShares UltraShort FTSE/Xinhua China 25 Index ETF (FXP). This double short ETF rises when the FTSE/Xinhua China 25 Index ETF (FXI) goes down. We'll examine the chart of FXI to see what might developing.
As can be seen in the chart above, 20-day simple moving average remains stubbornly the the 50-day MA. MACD has already turned bearish and relative is weak. The ETF is trading below both these shorter term MA's but after such a strong showing earlier in the year it remains well above its 200-day MA.
The TradeRadar signal is still SELL on the daily chart and the recent rebound has not qualified as a short-term BUY signal. The weekly chart tells the same grim story.
So the charts look gloomy but what about the fundamentals? It appears that the rate of growth in China is slowing somewhat. Note that I said the "rate" of growth. With inflation and energy costs increasing, U.S. demand potentially moderating, the Chinese government trying to put the brakes on lending, international pressure to let the yuan appreciate, it is clear that the Chinese economy is facing some headwinds. Nevertheless, China is in no way in danger of recession; there are still too many positives at work. Growth will continue; it just may not be as strong as we have seen over the last couple of years. Still, with financial and credit problems playing out in some of the developed countries that play such an important role in creating demand for Chinese manufactured goods, there is the danger that a slowdown in the West could indeed impact China.
So the question is: given the economic backdrop, are current stock prices justified? With FXI up 47% so far this year, even with the recent downturn, should we expect more appreciation in this ETF? Or should we expect FXI to seek a level commensurate with the current risk and the remaining underlying strength in the Chinese economy? What might that level be?
FXI has fallen 21% from its peak at the end of October. It is my feeling that FXI has further to fall; maybe not a lot but enough to justify holding a position in the ultrashort FXP for a while longer.
Friday, December 14, 2007
On December 13, Microsoft (MSFT) provided a press release, with a nod to the holidays, entitled "Microsoft Unwraps Virtualization Surprise."
The surprise is that the long-awaited virtualization solution from Microsoft is going into public beta. It is available as part of the download of certain versions of Windows Server 2008. The new product, now named Hyper-V, provides some of the same server virtualization functionality currently offered by VMWare and XenSource which is now owned by Citrix Systems (CTXS).
Some notable features are that Linux integration is available in beta today with other operating systems coming in future releases. This means that the Microsoft solution is not limited to running only Windows as a virtual environment. This takes away some of the advantages of VMWare (VMW) and XenSource which can virtualize Windows, Linux and Unix.
Hyper-V is now included by default in Windows Server manager, which means enabling virtualization is as easy as installing any other role. Microsoft is making it extremely easy for server administrators to just dial up Hyper-V and not have to worry about installing other companies products to enable virtualization.
As users begin to put the beta release through its paces, we will hear more on how well Microsoft's solution actually works. No doubt, there will be some kinks to work out.
In the meantime, it is clear that VMWare has a reason to begin looking over its shoulder. Competition is coming and it is no wonder the company's stock was under pressure yesterday.
Disclosure: author owns no shares of VMW, CTXS or MSFT
Thursday, December 13, 2007
As the credit crunch has unfolded, we have seen municipal bonds fall in value as bond insurers have weakened and concern mounts that mortgage problems will impact the ability of municipalities to collect tax assessment revenues.
Merrill believes this is somewhat overdone and that the entire municipal bond sector has been tarnished though only isolated instances of problems are likely to occur. Without more precise risk assessment to identify those municipalities that will or will not suffer, investors will be throwing out the baby with the bath water. This implies that national muni closed-end bond funds are selling at deeper than average discounts to their net asset values.
The chart below shows the yield ratio between AAA-rated municipal bonds and 10-year Treasuries. The ratio is currently at a multi-year high. Merrill expects the 10-year Treasury yield to fall to 3.5% by mid-2008, supporting an expectation that the relative yield of munis will remain at a higher than average level.
Other than buying bonds outright, the traditional way to invest in munis is via mutual funds or closed-end funds. There are many choices in these vehicles and all the financial portal websites provide extensive information.
Less well know is the fact that there are a few ETFs available in this sector.
VanEck offers the MarketVectors Intermediate Municipal Index ETF (ITM). It is a national muni fund based on the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index. This index is a market value weighted index designed to replicate the price movements of medium-duration bonds (6-17 year maturity). Other characteristics of the index: bonds are rated investment grade, are AMT-Free, have an outstanding par value of at least $7 million, are issued as part of a transaction of at least $75 million and are fixed rate. This ETF was only launched this month so there is little history. Volume is very light and yield has not been provided. You can read more about it here.
BlackRock Municipal Bond Trust (BBK) has been around for a while but it is allowed to invest in lower quality bonds, less than AAA-rated. A brief description can be found here.
PowerShares is in the process of rolling out a selection of new ETFs based on two muni indexes created by Merrill Lynch. One is an insured portfolio, the other isn't. Otherwise, both will track tax-exempt long-term debt publicly issued by U.S. municipalities in the U.S. domestic market, will exclude single- and multi-family housing bonds, tobacco bonds and all securities subject to AMT (Alternative Minimum Tax). Read more about them here.
If you're looking for yield with moderate risk, now might be the time to look into muni's.
Tuesday, December 11, 2007
As the title of this post says, the tech stock outlook is becoming increasingly fragmented. For much of 2007, a simple investment in a couple of broad-based ETFs such as the QQQQ or XLK would have brought an investor double-digit gains. Now, as we get later in the cycle and the economic backdrop becomes somewhat questionable, doubts emerge in some tech sub-sectors.
The following illustrates the "hot and cold" nature of the current tech environment.
IT spending slowing
From IDC, we have the following prediction: "Worldwide IT spending will grow at a slower pace in 2008. Economic uncertainties and downside risk will dampen IT spending growth in the U.S. and elsewhere. As a result, worldwide IT market growth will be a moderate 5.5-6.0%, down from 6.9% in 2007."
From InformationWeek, we have the following quote: "In the most recent survey by the Society for Information Management, less than half of 130 CIOs and IT managers who responded (49%) predict their IT budgets will be larger next year than this year. Almost a third (30%) say their budgets will stay the same, and 21% say they'll have less IT dollars next year. In comparison, 61% say their 2007 IT budgets were greater than their 2006 budgets, 17% say they were the same, and 22% say they got less this year than last." InformationWeek conducted their own survey with similar results.
Slowing IT spending always impacts the business software vendors. As written in Barron's, we may have one exception this time: Oracle. According to Cowen, Oracle looks to continue its strong growth trend into 2008 but analyst Peter Goldmacher advises investors they shouldn't take Oracle as a proxy for the whole software industry.
Also victims of slowing IT spending are the hardware manufacturers. Where IBM may be well diversified, a company like Sun, still working in turn-around mode, could be in for trouble.
Telecom spending a bright spot?
Cisco, in their latest earnings announcement, almost single handed initiated the most recent downturn in tech stocks by indicating "lumpy" sales into automotive and financial IT shops. A very recent report that AT&T will be buying Cisco core routers is a new positive for Cisco and could be an indication that demand remains strong from telecom companies. AT&T explained their expansion plans by noting that Internet traffic had doubled in the last couple of years.
Consumer electronics are hot!
Consumer electronics are selling well. Apple has made gadgets sexy again and this benefits most other gadget makers and the specific semiconductor companies supporting them. Sony and Apple, for example, are both seeing strong sales thus far during the holiday shopping season, especially on "Black Friday". Apple shares are hitting highs and the company is sitting on $15B in cash.
A recent theme in the semiconductor industry has been growing overcapacity. Overcapacity has two effects. First, it holds down prices of certain types of semiconductors thus squeezing margins of chip manufacturers. Memory chips are a prime example: DRAM and NAND stocks all encountered big sell-offs this year as unit prices fell due to oversupply. Second, until the overcapacity is absorbed, it will tend to weaken demand and impact sales in semiconductor equipment, thus negatively affecting another tech sub-sector. Indeed, Gartner sees a 4.4% decline in capex in 2008, instead of a previously predicted 4.8% increase, and a flat equipment market (0.3%) vs. anticipated 6.2% growth.
There is still strength in tech but it is not across the board. Some sectors will do well (consumer electronics, telecom suppliers), some not so well (semiconductor equipment). Within sub-sectors, there are individual stocks that may continue to do well (Oracle) while the rest of the sub-sector struggles. International results may provide a boost for some companies but not for others. 2008 will require a much more careful approach to tech stocks to achieve superior results.
Sources: IDC, InformationWeek, Barron's, BusinessWeek, SolidStateTechnology
Sunday, December 9, 2007
A contrary stock market indicator that has been humorously written about is the "magazine cover" indicator. For example, when a mainstream magazine writes about a big bull market in stocks, you can bet a correction is coming.
A few days ago I was catching up on reading some RSS feeds that I subscribe too and I was struck by the list of bad news in the Financial feed from MarketWatch. It just seemed like one after another item described some negative development for one financial firm or another. A rough tally indicated that fully three fourths of the news items were negative. It gave the definite impression that financial stocks are still in a tailspin.
It occurred to me that when the number of news items start skewing more toward the positive, maybe then we can say the bottom in financial stocks is behind us. With tongue in cheek, I call it the "RSS News Indicator" and it can give a quick sentiment indicator based on a snapshot of the recent news stream for the sector.
With some investors like Bill Miller, Citadel and Goldman Sachs starting to nibble at downtrodden financial assets, perhaps the bottom is not so far off.
Saturday, December 8, 2007
Markets staged a strong rally on Thursday that accounted for most of the gains seen this week. Interestingly, part of the impetus for the rally was an employment report from ADP that most analysts felt was largely overstated. The other incentive for investors was the announcement of the rescue plan for sub-prime homeowners by President Bush and Treasury Secretary Paulson. I am not sure why this was such a strong catalyst for a rally when nothing that wasn't already known was presented. Markets took off anyway and we now have two weeks in a row where the major averages achieved gains.
In other news that had an unexpected effect, OPEC held production steady and the US government reported a large draw-down in crude stocks. Instead of rallying, oil actually fell and finished the week down slightly.
The anxiously awaited Labor Dept. payrolls number was announced Friday. Expected to be market-moving news, especially in light of the ADP number, the actual numbers indicated continued slight growth in the economy. Friday the markets went nowhere and attention is now on the FOMC meeting next week. With payrolls showing no threat of a recession, does the Fed cut 25 or 50 bps? or not at all?
TradeRadar Portfolio Update
It has actually been two weeks now since I last wrote about the TradeRadar model portfolio. It has, once again, been a volatile two weeks and stops have been hit.
First, let's look at what was sold during this time.
ProShares Ultra Short Real Estate ETF (SRS)
ProShares UltraShort QQQ (QID)
ProShares UltraShort Financial ETF (SKF)
Here is what we are still holding (and a motley crew it is):
PowerShares DB Oil ETF (DBO)
Generex Biotechnology Corp. (GNBT)
ProShares UltraShort FTSE/Xinhua China 25 Index ETF (FXP)
Wednesday, December 5, 2007
Back in July I wrote a post that investigated whether companies with the most patents ended up with the best stock performance. It turned out that the answer was "no" but in looking at some of the companies in our sample set, we came across Digimarc (DMRC). The company is in the news again today as Nielson announced a partnership with Digimarc to implement what amounts to a DRM system on Internet video.
An excerpt from the announcement Nielson made today follows:
Nielsen Digital Media Manager will use digital watermarking and fingerprinting to establish an industry-wide rules-based solution to copyright security and to assure copyright compliance. By providing a more reliable way to track content, the service will help clients realize the value of their digital content, promote the expansion of Internet-distributed media and facilitate a number of revenue streams, including ad-pairing, e-commerce, royalty reporting and others."
(Click here to read the entire company news release)
It is no surprise to see Nielson attempt to wade into this contentious area. While restrictions have been in place on music files in the form Digital Rights Management or DRM for some time now, there hasn't been a corresponding industry-wide movement in the realm of Internet video. Nielson says it already encodes 95% of national television programming so it has a leg up on competitors. As Viacom sues YouTube, it can be said that there are definitely customers out there waiting for a service such as Nielson plans to offer. Expectations are that the system will be available in mid-2008.
Naturally, I have a few comments on these developments.
First, it appears that no one has learned from the experiences of the music industry. Consumers have developed tremendous antipathy to various DRM schemes interfering with usage of digital music content. One has only to look at the falling sales volume of (often DRM-protected) CDs to see that consumers are happier with soft copies (MP3s) and that they demand the right to share content they have legally purchased. It appears that the Nielsen Digital Media Manager will allow digital video content owners to hound consumers in much the same way that the RIAA has done to music consumers.
Second, Nielson makes a point of using several interesting phrases including "ad-pairing, e-commerce, royalty reporting." After the initial police-the-Internet approach runs into consumer resistance and backlash, the revenue-related aspects of Nielson's system may assume greater importance. And here is where Nielson may really have a significant concept to exploit. If Nielson can actually provide ad-relevancy to video, that would be a major step forward. As Google has proved, relevancy is one of the most important predictors of ad effectiveness. Simplification of copyright issues related to legal file streaming or file downloading would also be a benefit to the industry for both content creators and content distributors. Unfortunately, these aspects of the system will not be available initially.
What about Digimarc?
The result of all this should be positive for Digimarc. It raises their profile and provides needed revenue. Financial terms have not been disclosed, but Digimarc said the contract "is expected to significantly contribute" to the company's financial performance in 2008. This couldn't come at a better time. Digimarc CEO Bruce Davis just presided over an earnings announcement where he delivered the bad news that the company would not be profitable in 2007 and that 2008 could be a difficult year due to uncertainty around the government's Real ID identification program. If the Nielson Digital Media Management system runs into resistance it could be a tough year for Digimarc.
Disclosure: author owns no shares of DMRC
Monday, December 3, 2007
Starting in November, Generex Biotechnology (GNBT) has been quite volatile. That's about the time the company announced that its Oral-Lyn product had been licensed for commercial use in India. In October, a similar license was obtained in South Africa. The company is in the process of securing approvals to market the product in various Middle Eastern countries, as well.
In mid-November, Wall Street Strategies, an independent stock market research company, published a report on the company. They pointed out that the India news was a distinct positive for GNBT and that the stock is a buy. In addition, their analyst provided a further opinion as follows: "Currently, Oral-lyn is in phase III testing in North America. We expect that approval would automatically make this a $5.00 stock, but once sales begin we think the stock could move even higher." This sounds good but investors should be aware that Generex has retained Wall Street Strategies to provide investor relation services.
Earlier in the year, the stock jumped on a number of news events. There were various patent awards and license agreements in the US and other countries such as Lebanon, Armenia, Georgia, etc. The company began testing of a cancer vaccine in China with early signs of success. Positive analysis from Rodman and Renshaw briefly gave the stock a big boost. GNBT also announced that the number of retail chains in Canada and the United States that are carrying its proprietary Glucose RapidSpray(tm) product has expanded.
Without fail, however, the stock always falls back after a big event. Now, we are approaching an earnings announcement. The stock had over a 7% gain today. What are investors expecting?
Based on the last four quarters, revenues have been minimal and operating earnings negative. Are we actually going to see Generex begin to reap the benefits of some of the recent patents and license agreements? Essentially, GNBT is still a development stage company. Even as Generex gets closer to delivering on the promise of its Oral-Lyn product, it is unlikely that actual profits will be forthcoming this quarter. Investors may need to be prepared to see the stock swoon yet again.
Disclosure: GNBT is in our model portfolio
Sunday, December 2, 2007
I just wrote a post looking at the charts of the ETFs that track the major averages. In this post I'd like to look at the ETFs that track REITs, financials and technology using the TradeRadar software and traditional technical analysis.
iShares Dow Jones US Real Estate ETF (IYR)
- Daily Chart / Sell Signal: with the Window Start set way back at the low made back around 5/23/06 we still have a clear TradeRadar SELL signal. There is no hint of it moving out of the SELL zone yet
- Daily Chart / Buy Signal: with the Window Start set at 2/7/07 there is a BUY signal almost formed but the peak has not yet made it into the BUY zone. With the Window Start set at 10/7/07 and the filter set to 4 days there is a better BUY signal that is just moving into the BUY zone though with somewhat weak signal strength.
- Weekly Chart / Sell Signal: with the Window Start set back in June of 2006 the SELL signal is still strong and solid
- Weekly Chart / Buy Signal: with the Window Start set at 2/12/07, this ETF's all-time high, there is no hint of a BUY signal developing. With the Window Start set at 10/1/07, there is still no BUY signal though with the filter set to its minimum there is a signal starting to partially form but it is far from actionable.
- Moving Average Analysis: 20, 50 and 200-day moving averages are all pointing downward. The 20-day has recently moved below the 50-day, a typically bearish signal. The ETF remains well below the 50-day and the 200-day MA. IYR has just barely moved above its 20-day MA. No actionable signals here except maybe for a very short-term trade.
- Support / Resistance Analysis: the first area is around $72 and the second is around $74.50. With the ETF currently at $70 it has not even reached resistance after a huge runup in the market and and an uptick in IYR itself
- Trend Analysis: IYR is still well below its long-term downtrend that started in February 2007. There is also a short-term, steeper trend line made up of the points at 10/11/07, 10/31/07 and 11/14/07. IYR is still just a bit below this trend line. Still no actionable signal here.
Select Sector SPDR Financials (XLF)
- Daily Chart / Sell Signal: with the Window Start set way back at the low made back in June 2006 we still have a clear, really strong TradeRadar SELL signal. There is no hint of it moving out of the SELL zone yet
- Daily Chart / Buy Signal: with the Window Start set at 5/31/07 there is a BUY signal with the trailing edge 0f the peak just barely making it into the BUY zone. The signal strength, however, is weak. With the Window Start set at 10/4/07 and the filter set to 4 days there is a better BUY signal that is deeper into the BUY zone though with a somewhat weak signal strength.
- Weekly Chart / Sell Signal: with the Window Start set back in July of 2006 the SELL signal is still strong and solid
- Weekly Chart / Buy Signal: with the Window Start set at 5/29/07, this ETF's all-time high, there is a hint of a BUY signal developing but it is nowhere near complete. With the Window Start set at 10/1/07, we have the same story: partially formed BUY signal that is far from actionable.
- Moving Average Analysis: just as we saw with IYR, 20, 50 and 200-day moving averages are all pointing downward. The 20-day has recently moved below the 50-day, a typically bearish signal. The ETF remains well below the 50-day and the 200-day MA. XLF has made a nice move above its 20-day MA with a gap, no less. Still, no reliable actionable signals here except maybe for a very short-term trade.
- Support / Resistance Analysis: XLF is currently at $30 and the first area of resistance is around $31.50, the second is around $32 to $32.50 and the third is around $33.50. With the ETF currently at $30 it has not even reached these resistance levels despite a couple of good jumps with gaps.
- Trend Analysis: XLF is still far below its long-term downtrend that started back in June 2006. There is also a short-term, steeper trend line made up of the points at 10/11/07, 10/31/07 and 11/14/07. XLF finally jumped above this trend line on Friday.
Select Sector SPDR Technology (XLK)
- Daily Chart / Sell Signal: with the Window Start set to 8/16/07 there is a moderate-strength SELL signal. It remains deep in the SELL zone.
- Daily Chart / Buy Signal: with the Window Start set to 11/6/07 there is a very, very weak BUY signal. It is so weak as to be nowhere actionable
- Weekly Chart / Sell Signal: with Window Start set 7/17/06 there is a solid SELL signal in place
- Weekly Chart / Buy Signal: with the Window Start set to 10/29/07 there is a peak forming but it is incomplete, weak and noisy
- Moving Average Analysis: XLK is trading in a range between its 50-day and 200-day moving averages. In this case, the 50-day is above the 200-day. A negative is that the 20-day MA has recently moved below the 50-day, a usually bearish move.
- Support / Resistance Analysis: XLK just failed to break through resistance around $27. There is more resistance in small steps around $27.70 and $28.25
- Trend Analysis: XLK failed to break through the downward sloping trend line formed by points of 11/1/07 and 11/6/07. As a matter of fact, on Friday it just about touched the trend line and fell back, closing with a loss. With respect to the long-term trend, it is still clearly moving upward; however, XLK recently fell below the trend and, though it is now a bit above the trend line it is threatening to fall back below it.
Disclosure: author owns none of the ETFs mentioned in this post
Saturday, December 1, 2007
I'm looking at the charts and also trying to use the TradeRadar software to make sense of what this market is doing. Here is what I am seeing in the ETFs used to track the major averages.
Examining the Diamonds Trust Dow 30 ETF (DIA), what can we say about the Dow Jones Industrials?
- Daily Chart / Sell Signal: with the Window Start set to 3/2/07, TradeRadar still shows DIA deep in the SELL zone
- Daily Chart / Buy Signal: with the Window Start set to October 9, the most recent high prior to the current downturn, we actually get a BUY signal on this short term chart. With the filter set to 4 days, the signal strength is still a little weak but otherwise the indicators look pretty good.
- Weekly Chart / Sell Signal: with the Window Start set to the week of March 5, a moderate SELL signal is flashing
- Weekly Chart / Buy Signal: not enough data points to generate a signal based on a Window Start set to the week including October 9
- Moving Average Analysis: for three days now, DIA has managed to close above its 200-day moving average after spending close to two weeks under this important MA. The 20-day MA is still below both the 200-day MA and the 50-day MA. The ETF remains below its 50-day MA which is still pointing slightly down.
- Support-Resistance Analysis: DIA is just a small fraction above the resistance level (about $134) established by the low of October 22, the high of November 14 and by several days back in August/September.
- Trend Analysis: DIA has been on a very steep short-term downtrend since 10/31/07. It has clearly broken through that trend to the upside. It has not yet reached the more moderate downward trend line formed by the peak on 10/11/07 and the peak on 10/31/07. With respect to the long-term trend, it hasn't really crossed above the positive trend line initiated at the lows of July 2006.
Examining the SPDR ETF (SPY), what can we say about the S&P 500?
- Daily Chart / Sell Signal: with the Window Start set to 3/5/07, TradeRadar still shows SPY deep in the SELL zone. The signal strength remains relatively strong
- Daily Chart / Buy Signal: with the Window Start set to October 9, the most recent high prior to the current downturn, we get a BUY signal on this short term chart, also. With the filter set to 4 days, the signal strength is still a little weak but otherwise the indicators look pretty good, especially the AOA and Trend Difference angles.
- Weekly Chart / Sell Signal: with the Window Start set to the week of 7/17/2006, a moderate SELL signal is flashing
- Weekly Chart / Buy Signal: not enough data points to generate a signal based on a Window Start set to the week including October 9
- Moving Average Analysis: SPY has spent only one day above its 200-day MA and that was Friday. It remains below its 50-day MA
- Support-Resistance Analysis: SPY has made what looks like a clear break above a resistance level of about $148
- Trend Analysis: SPY had been on a very steep short-term downtrend since 10/31/07. It has clearly broken through that trend. It has not yet reached the more moderate downward trend line that was initiated on 10/11/07 and that also touches peaks on 10/19/07 and 10/31/07. With respect to the long-term trends, it is still following the up-trend initiated at the lows of July 2006 and is well above the gentler up-trend line established back in April 2005.
Examining the PowerShares QQQ ETF (QQQQ), what can we say about the NASDAQ?
- Daily Chart / Sell Signal: with the Window Start set to 3/5/07, TradeRadar still shows QQQQ deep in the SELL zone. The signal strength remains relatively strong
- Daily Chart / Buy Signal: set the Window Start to October 31, the most recent high prior to the current downturn but weeks later than the day when DIA and SPY began to fall. In this case, there is no BUY signal to speak of.
- Weekly Chart / Sell Signal: with the Window Start set to the week of 7/10/2006, a moderately strong SELL signal is still flashing
- Weekly Chart / Buy Signal: not enough data points to generate a signal based on a Window Start set to the week including October 31
- Moving Average Analysis: QQQQ never fell below its 200-day MA but it has failed to move above its 50-day MA. It's 20-day MA recently fell below the 50-day MA, typically a bearish sign. Still, both the 50 and the 200-day are still trending positively, though ever so slightly.
- Support-Resistance Analysis: QQQQ has stalled at what seems to be strong resistance in the area of $52
- Trend Analysis: since the high of 10/31/07, the ETF has not really established much of a short-term trend. With respect to the long-term trend, it is still following the up-trend initiated at the lows of July 2006.
Conclusion: The markets are not out of the woods but the charts show great promise, at least for DIA and SPY where we have TradeRadar showing the beginnings of short-term BUY signals. We have mixed results when performing traditional technical analysis. Some of these ETFs are above long-term trends, some below. The moving averages reveal markets in a state of flux. We have certainly seen a great deal of volatility. There are still resistance levels to be broken through to confirm a return to the bull market.
In terms of the fundamental background, the news related to sub-prime, SIVs, CDOs, etc. is beginning to moderate. It is still clear that their are more losses to be unearthed but investors are now taking solace in the fact the Fed and the Treasury are being pro-active to moderate the negative impacts of the continuing issues in the credit and mortgage markets.
All in all, this is a market that still deserves caution. One event could tip things in the negative direction again. If Treasury Secretary Paulson, for example, runs into trouble establishing his plan to freeze payments for homeowners in danger of default, we could see the averages begin to slide back down. I would feel more comfortable maintaining a "wait and see" attitude for a few more trading sessions.
Disclosure: author holds none of the ETFs mentioned in this post
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