Gold at $500 - a mild inflationary signal

Scott Grannis, Chief Economist at Western Asset Management...

As the first chart (above) suggests, gold achieved a milestone of sorts yesterday with prices exceeding $500 per oz. It was only higher on a sustained basis in 1980, the year the CPI hit a high of 14.8%. But as the second chart shows, in inflation-adjusted terms (in this case I'm using the PCE core deflator) gold today is only modestly higher than it was 10 years ago, and only one-third as high as it was in January 1980. Simply put, $500 gold is not as scary today as it was in the past, thanks to the cumulative impact of inflation.


The second chart (above) also provides some quantitative support for the theory that gold is a good predictor of inflation. This theory (which is far from scientific, but is intuitive) holds that monetary imbalances show up first in the price of gold, then take awhile to work their way through to the general price level. If the Fed sets the funds rate at a level which is "too low," investors
a) sense that the purchasing power of the dollar may be at increased risk,
b) calculate that the odds of gold producing higher returns over time than their cost of borrowing are good, and therefore
c) seek refuge in gold,
d) borrow money (shorting the dollar) to buy gold,
e) are willing to pay higher prices for all tangible assets (e.g., golds, real estate, commodities) since they are likely to do better relative to the paltry real yield on financial assets that typically prevails in times of rising inflation, and
f) attempt to reduce their cash balances in favor of physical assets, thus increasing the velocity of money and supporting higher prices even in the absence of rapid money growth.

Conversely, if the Fed sets interest rates "too high," as it evidently did in the late 1990s, investors sell gold, sell commodities, buy dollars, increase cash balances, etc., and inflation declines.

If the second chart has any validity, it must of course be taken with a few grains of salt. Nevertheless, it does suggest that we are still in the presence of mild inflationary pressures, and that the core rate of inflation could drift up to 2.5% over the next year, a level somewhat above the Fed's 1-2% comfort zone. If the Fed were to return to a gold standard, this chart suggests that the Fed should target a gold price somewhere in the $300-400 range (in constant dollar terms) in order to achieve 1-2% inflation. Since a gold standard is highly unlikely, however, the next best thing, given that Bernanke is very likely to adopt a formal inflation target of 1-2%, would be to keep an eye on gold when deciding where the fed funds rate should be. After all, the Fed shouldn't wait for inflation to exceed its target before acting; it needs some method for predicting future inflation, and gold is as good as anything else out there.

The truth is out there -- somewhere

Can images of such an horrific war be considered simultaneously as art? You be the judge...

The Google Box

Robert Cringely, part 2 (part 1 here)...

"... The big question is what Google will get for its $3 billion bet? Last week we covered the idea of doing massive video streaming or downloading through parallel peering arrangements. We also covered the basics of reducing latency for network-based AJAX applications to compete with Microsoft. But there is a LOT more.

Once you have a data center at every Internet peering point, you also have a data center in or near every major city in the developed world. That suggests Google might be interested in using the portable data centers for Voice-Over-IP telephony. Sitting 2-3 hops from every telephone and having available Google's own fiber network and traffic shaping to give priority to its VoIP packets, Google could offer world-beating telephony performance, all for less than eBay is paying for Skype.

Another possible use for this parallel Internet is, if anything, more political than technical. The players in broadband Internet service - the telephone and cable companies for the most part - have as much to lose as they do to gain from the Internet. The telephone companies have at risk their voice service, which is already being undermined by VoIP. The cable TV companies are risking their video service as telcos get set to offer various DSL video channels. Each group realizes they can't stop the progress of technology yet on some level each group would like to try. By grabbing a big fistful of optical fiber and having data centers at very peering point, though, Google offers an alternative in case one party or another is tempted to undermine the system through technical tricks like altering the packet interleaving to mess with VoIP as I have written before. Google's success requires an open Internet and their presence and deep pockets guarantees that will be the case.

But the most important reason for Google to distribute its data centers in this way is..."

Read the entire essay here...

Too much capital

Fascinating essay by William J Bernstein...

During the dot-com mania of the late 1990s, the cost of capital came perilously close to zero, and now at the cusp of the twenty-first century, it is low indeed. As I write, modest single-digit real expected rates of return blanket the asset-class universe while investors frantically shuttle capital among stocks, real estate, venture capital, hedge vehicles, timber land, commodities futures, petroleum companies, and precious metals in a desperate attempt to escape the perverse entropy of frictionless intermediation on a wealthy planet... How to understand it all?

Continue reading here.

Are you an expert?

Legg Mason's Michael Mauboussin re experts, in which he addresses some basic questions, including:
• What is an expert?
• What characteristics do experts share?
• Where do experts tend to do well and where do they do poorly?
• Does the world of investing have experts?

Fascinating reading, as always. Read the complete essay here...

Catching up

I have returned from LosCon 32, manageably weary from the 600-mile round trip drive but energized from the Con itself. While there, I met many old, and made several new, friends, which means I failed to make it to a single panel presentation. (Despite forsaking the many panels, I still missed the skinny-dipping, alas!)

So, yes, although now at home, I find myself w a y behind on the to-do list. I hope to write and post late today -- more likely tomorrow -- a lengthy post re the market. Until then, however, some photos (click each to enlarge) of my weekend escapade...

Authors Greg Benford and Steven Barnes (with daughter, Nicki)

Lubov Yegudin (artist) and Steven Brust (author) enjoy the excellent chili during one of the many parties

Larry Niven (author) reaches for that awesome chili. Note the gleam in his eyes!

David Gerrold (author) listens attentively...

John DeChancie (author) poses for his new dust jacket photo ;-)

Après-dinner:
Rochelle Uhlenkott, Teresa Cochran, James Taylor, Keith Kato, me, Scott (Merric) Anderson, and Chris Garcia

Googling For Gold

Business Week reports, "With a market cap in orbit and more cash than a small nation, Google's heft is altering the tech industry's behavior. But when does its long-awaited shopping spree begin?"

I think not soon. To this moment, Google/GOOG has shied away from making the "big deal" -- their desire is to grow organically rather than via acquisition. Moreover, the GoogleGuys admire talent and aptitude as much as, if not more than, technology itself. All the pieces of the puzzle must fit to make a whole. So the company likely will continue to seek companies such as Riya, which was the talk of Silicon Valley last week. (This purchase has yet to occur, however.)

However, one item the story has wrong, at least in part, is that both Google/GOOG and Yahoo/YHOO now act as VCs; they fund, if not purchase, start-ups that are little more than technology and promise. This creates the potential for a tremendous amount of Internet-based creativity -- and thus change. Perhaps the semantic web finally could be around the corner, after all this time and anent its promise.

Thanksgiving week... in Paris?

[Click to enlarge]

Claudine and Joke (my sister-in-law) tour Paris, France (for the umpteenth time! :-) And the sun shines brilliantly, making for an altogether glorious, if a tad brisk, mid-November day.

Happy Thanksgiving!

Thank you for a phenomenal 2005,

Turkey might be on the plates, but not in our portfolios -- gobble, gobble!

Christmas lights

Is this display of house Christmas lights the best ever...? (Turn on your speakers to complete the multimedia experience.)

Puzzle mania!

Do you like puzzles...?

Gold up, dollar up, bonds up?

The comments that follow are from Scott Grannis, Chief Economist at Western Asset Management...

Lots of contradictory signals of late. So far this month, gold is up 5% vs the dollar, reaching an 18-year high of $490; the dollar is up 2% vs. a basket of major currencies; and bond prices are higher across the board. In addition, the breakeven spread on 10-year TIPS has narrowed from 2.57% to 2.41%, and the S&P500 is up 3.5%. Rising gold prices are typically symptomatic of rising inflationary pressures, but that is contradicted by lower bond yields, lower breakeven spreads, and a stronger dollar. Rising gold prices in recent years have typically been associated with a weaker dollar, but the dollar has been strengthening all year long. Larry Kudlow theorizes that gold is up because of heightened global risk stemming from Iran's resumption of its uranium enrichment program, while higher bond prices and lower breakeven spreads simply reflect a stronger economy and Fed policy gaining traction. However, higher equity prices (the Nikkei is up a whopping 7.5% this month) don't really jibe with increased global tensions. Which one of these indicators is the odd man out?

Implicit in Kudlow's view of the world is the assumption that the TIPS breakeven spread is a better indicator of inflation pressures than gold. I'm going to disagree with one of my favorite mentors (our relationship goes back to 1980), however, and stick with gold. Gold has been in a rising trend almost from the day the Fed started lowering interest rates in early 2001. During this period the Fed has vowed to boost inflation from levels they considered to be too low, and they have succeeded. Consistent with this, gold has correctly forecast rising inflation pressures and rising bond yields (10-year yields are up 150 basis points since mid-2003, at the same time that core inflation has risen from 1% to 2%, and breakeven spreads are up 100 bps over this same period). Gold correctly predicted the rising inflation of the 1970s, and the rising inflation from 1987-1990. Meanwhile, the bond market's record of forecasting inflation remains dismal. Bonds chronically underestimated inflation throughout the 1965-1981 period, and they have chronically underestimated inflation for the past five years. That's why TIPS have been among the best-performing financial assets in the world. To bolster my case for inflation, I note that the JOC Metals index is within inches of an all-time high, and the CRB Raw Industrials Index is within 2% of its all-time high, and neither of these contain a drop of petroleum. If monetary policy were indeed tight, then higher oil prices would be pressuring other sensitive prices lower (as happened in 1999-2000), but that is not the case today.

How would I explain the stronger dollar, given that I think U.S. monetary policy is still accommodative? Since almost all currencies are falling against gold, the best that can be said about the dollar is that it is among the strongest in a weak field. The dollar has a lot going for it, in relative terms: It is undervalued on a purchasing power parity basis. The U.S. economy is demonstrably resilient and chronically dynamic, and it has become a magnet for capital. U.S. interest rates may not be low enough to contain inflation pressures, but they are among the highest of the industrialized world. The Fed is moving (albeit slowly) to address our inflation problem, while most other central banks are content to sit back and watch.

Gone fishin'

Medical intervention -- services and technology -- is the market sector that perhaps represents my favorite fishing hole for new opportunities. By and large, most companies of this ilk survive and even thrive throughout the market's full cycle. This occurs despite the many caveats and cavils: reimbursement policies from the government (Medicare) and private insurance (HMOs, etc) -- many times a negative reimbursement change impacts negatively the shares. Also keep in mind the potential risk of the sudden death or deaths due to an experimental procedure. Yes, many risks prevail in this particular sector.

Nonetheless, I return to this sector time and again, and note the market leadership the sector and group (in particular, medical technology) again provides. For example, and to list several, Celgene/CELG, Cutera/CUTR (get it?), Genentech/DNA, Gilead/GILD, HoLogic/HOLX, Iris/IRIS, Lifecell/LIFC, Nurometrix/NURO, Palomar Technology/PMTI, Quality Systems/QSII, Stericycle/SRCL, Varian Medical/VAR, and many, many others. As I am already long many of these mentioned, in all fairness (and as previously stipulated), I want to bring to your attention one I do not yet own.

NuVasive/NUVA, a medical device company focused on developing products for minimally disruptive surgical treatments for the spine, announced today third quarter financial results for the period ended September 30, 2005.

Highlights:
* Generated revenues of $15.1 million - up 48.6% year-over-year
* Gross profit increased to $11.8 million - up 56.5% year-over-year
* Gross margin was 78.2% - up 400 basis points year-over-year
* Surgeons trained on MAS(TM) Platform totaled 99 - up 59.7% year-over-year
* Sales force exclusivity increased to 30%, up from 21% from the prior quarter
* Launched five new products within MAS Platform for a total of nine in 2005
* Acquired NeoDisc(TM) cervical disc replacement device
* Acquired dynamic stabilization technology and launched first product as ExtenSure(TM)

[click to enlarge]

Let us examine more closely this presumed base...

1) Note the duration of the base - now ~4 months;
2) Note the separation of time between the high trade and the subsequent low trade - almost precisely 3 months;
3) Note the diminution of the downtrend during the past ~5 weeks, itself a transition from left side (decline) to middle (base) of this pattern;
4) Note the potential (and probable) double bottom, which would be confirmed at a trade -- and preferably a close -- above $18.70 (each highlighted in the chart);
5) Note the looming breakout above the correctly identified trend line of declining tops, at ~$18;
6) Note the low and reversal on 8 November, which likely represents the turn from intermediate term decline to intermediate term rally.

These items I denote above showcase a stock close to its moment of reversal -- in both time and price; moreover, this moment likely represents a low risk, high return entry point. However, as this stock trades more thinly (less average daily volume) than I typically prefer, I will downsize accordingly my position interest. I will, however, purchase one lot today.

Questions...?

The Barbarians at the Gates of Paris

Do you find yourself wondering about the nature of the tinder for the firestorm that engulfed France? And whether that orgy of violence and rioting has extinquished itself -- or merely simmers?

This article, by one of my favorite writers, Theodore Dalrymple (a nom de plume), antecedes the riots by some 3 years; it not only explains the conditions that caused the rioting, it predicts the consequences of those conditions -- the riots themselves.

As weekend reading goes, you would be hard-pressed to find better.

"Just a search engine" part 2

The same follows for the rumor that Google, as a dark fiber buyer, will turn itself into some kind of super ISP. Won't happen. And WHY it won't happen is because ISPs are lousy businesses and building one as anything more than an experiment (as they are doing in San Francisco with wireless) would only hurt Google's earnings.

So why buy-up all that fiber, then?

The probable answer lies in one of Google's underground parking garages in Mountain View. There, in a secret area off-limits even to regular GoogleFolk, is a shipping container. But it isn't just any shipping container. This shipping container is a prototype..."

And with that, he's off! Robert Cringely again provides his intelligent and informed speculations re Google / GOOG. (Well, about as informed as anyone outside, and including many inside, the Googleplex can be.) Continue reading here...

In addition, Bill Burnham focuses on one small piece of the pie.

Of course, I welcome your comments...

Such talent!

Phenomenal. Why is it that I lack such talent as this?

Tilt!

Is it only me, or do you too suffer from Yahoo/YHOO's slow-as-molasses servers?

We previously broached this topic, and, based on the (whoppingly large) sample size of ~5 responses, it seems that despite location, ISP, or state of home computer, we all suffer. It matters not at all the Yahoo page or site we attempt to load (mail, news, Personals, etc) -- we wait, we wait, and we wait some more. The speed to connection has become less (read, worse) than dial-up.

Can this continue? I guess so, as when I reported this... this frustrating reality to my friend (the executive at YHOO/Sunnyvale), he only shrugged his shoulders (metaphorically; we talked via phone) and claimed it was my ISP or my computer or my whatever that causes the slow load times. Horse shit! (Excuse me, but I had to get that out.) Not one time did he (as an employee and representative of YHOO) take ownership of the problem. This 'situation' has rendered Yahoo as functionally corrupt, unusable -- at least for me. (Yahoo! Mail is perhaps the worst culprit. Please update my e-address to the GMail address.)

Thus, I propose a survey... If you use Yahoo in any form and your experience mimics mine (and even if it does not), please share your thoughts as a reply comment to this post. Include your
1) General locale,
2) Computer operating system,
3) Amount of RAM,
4) Browser version (IE, Firefox, etc),
5) ISP (cable, DSL, dial-up, etc),
6) The page(s) you attempt to view,
and any other items you believe germane. You could also include whether you are happy or disgruntled (as I am) with Yahoo's molasses-like servers.

Once complete (and I hope for many replies to strengthen the argument), I will forward this link to the mucky-mucks at YHOO, and then wait some more to learn whether they care about their users, their customers, us.

Thank you for your participation.

The post that simply refuses to post!

What follows is an expanded version of my comments post from the Faster than your high beams thread that just would not post no matter what I did or tried...
~~~~~~~~~~~~~~~~~~~~~~~
Lest you think I am some sort of masochist (due to my frequent and public moans and groans), I should state I really do want to help. To help you, however, requires you [to] help me. So some history...

Trading/investing is an insular pursuit; I believe it is akin to being an artist (writer, painter, sculptor, etc). That is, I work for myself, by myself -- and alone. This pursuit has both advantages and disadvantages. Many of the advantages are obvious. For those, I refer to Michael Shropshire's always-excellent (and, in this instance, timely) comments from his site, Innerworth:

All By Myself and Loving It

As a trader, the bottom line is the amount of money you make on your trades and pocket. It doesn't matter how you go about doing it, and it doesn't matter how long it takes you, or how hard you work, for that matter. For the seasoned, talented trader, it may take as little as an hour to make a thousand dollars, but for the novice trader, it may take a month to take home a thousand dollar profit. That's the advantage of trading. You're completely free to do whatever you want, whenever you want. As a trader, you don't need to please anyone but yourself. You are on your own, and if you are like top-notch traders, you relish the independence.

Top traders are carefree and independent. They don’t care what others think of them. The only opinion that matters is their own. Many people forget about the advantage of working for themselves, however. They can't shake the idea that they have to please others. They act as if someone is constantly looking over their shoulder, waiting to find a mistake, and quick to offer criticism. But the nagging feeling that you must please others isn't going to make you a profitable trader. It is vital for success to realize that when it comes to trading the markets, it is just you, the markets, and no one else. You should enjoy your freedom.

Trading is one of those rare professions where you can be socially incompetent, yet still be successful. It's much like being an eccentric artist. Successful trading has nothing to do with getting along with people, trying to persuade them to do what you want, or assuaging them. As long as you can develop a winning trading strategy and implement it flawlessly, you will be profitable. This isn't the usual state of affairs, though. Throughout our lives, parents, teachers, and supervisors have told us that unless we obey the rules, we'll get in trouble. When we break a rule, we feel guilty. Some people never learn to stop thinking that someone is looking over their shoulder, trying to find fault. Even when no one is looking, some people actually make up a type of pseudo-parent to guide them. They pretend that there is someone out there, an omnipresent overseer, ready to punish them if they don't follow the rules.

Why would anyone want to make up a pseudo-parent or supervisor? It provides solace. When people work a typical job, they feel security in believing if they perform their job duties well, then they will be paid well. Most people prefer structure and regularity. It is nice to believe that if we follow the rules, we will be rewarded. But the trading world doesn't work that way. It's not like a 9-to-5 job where you put in your 40 hours and get a paycheck. As a trader, you could put in 10 hours and get a big bonus one week, and put in a grueling 80 hours the next week, and get nothing. If you like structure and certainty, you may feel uneasy about the uncertainty of it all. But if you enjoy your freedom, trading offers a way to express your creativity and reach your potential. Enjoy your freedom. As a trader, you can express your independent streak. You may be all by yourself, in the end, but you are also free to do whatever you want. You might as well enjoy it, work hard, and take advantage of unlimited market opportunities on your own terms.

I agree with everything Michael states; heck, he is the professional. Leave it to me, however, to focus on the disadvantages, specifically, the (my) diminishing skill of socialization -- how to be with and around other people. Use it or lose it. My address book thins as my wallet thickens. Alas, what a swap this is; I reckon it as my loss, a losing trade. This is my reasoning why I have made all these efforts to be more public, to give of myself, beginning 6 1/2 years ago with my posts on George Gilder's forum, the email circular, Our Piazza, the newsletters, and now this blog. (It also is why, perhaps unbelievably, I seek employment; I prefer to be around other people, office politics and all.)

Through it all, I wrestled with how much to share. Did readers prefer "buy, sell, or hold" ideas or did they prefer lessons on how to fish for themselves? I chose to provide the latter. In that objective, I admit that I could be sometimes oblique, gnomic, allusive, even "perplexing"; my goal was to 'teach' you how to think for yourselves re investing not to create an army of epigones. I wrestled continually with how much to share and how best to share it; the combination proved sometimes toxic when my inability to know how to get along with other people was added to the admixture.

I suspect my obliquity frustrated many readers, scathing critic included, and when coupled with my "rare ability" to foresee market action, readers became that much more frustrated. My talent, such as it is, comes from years of difficult and solitary work. I have tried to share it, but to little success, it seems; I note the extremely incisive comments from the original respondent. In sum, this talent might not be transferable, no matter the quantity (or quality) of information, understanding, or perceptions [that] I might share.

For example, during my more "gnomic" days, I suggested the market would nosedive (year end, 1999) and that JDSU and QCOM would soon crater. (One writer in this thread already noted these long-ago comments. For more recent 'predictions', read the archives.) After those 'predictions' became fact, the universal response was, "Please, do not be so oblique; your track record is so phenomenal that I will pay them heed no matter my opinion!" I believe that, even were I to grab the investor by the lapels and shake hard, shouting all the while, "BUY XYZ!", he or she simply prefers lassitude to action. The market provides to each of us precisely that which we seek. (I seek profits; however, not every investor does.)

I can think of no better example of this attitude in recent action than my many, many recommendations to "Buy Google/GOOG! It is a Singular Opportunity(TM), an opportunity like this comes along only once in a generation", etc. Guess what... Many people, including readers of this blog, did not buy Google/GOOG. (Surprise, surprise.) Also included are those who stated they would act upon any clear signal from me. Certainly, I could not have been clearer re Google/GOOG.

How can I help you become successful investors? Thus, my frequent call for your questions and comments; the more interactive this venue, the more we help each other. (And, yes, I crave community.) So, thank you for your past and future comments on this topic, and others.

My New Year's Resolution -- this blog entry will represent the final post on such a private matter. From this post forward, this blog returns to its avowed goal: to worship Mammon... er, make that, "How to make money in the markets."

Portable Media

A friend, J Kent Hastings, has created a website entitled Nevada Portable Media. The following comments are his explanation...

I've been fiddling with "themes" (skins) for the Wordpress software for a while and I'm just starting to make entries to the blog. Given the site's name, it's appropriate that the first serious entry is about the first Portable Media Expo.

The next entry will be a comparison of three software podcast production tools such as Castblaster. I've run Castblaster, which has been in beta for months, and saw demos for the other two at the Expo. I like one of the other ones because the audio editing is superior and unlike the other two, includes automation for the tags used by iTunes (where 3/4 of the audience is) and supports LibSyn hosting. But I digress...

Kent is very much an early adapter of new technology. If you too are 'into' new technologies or podcasting as much as Kent, plan to visit his site often.

Another article re...

"Google is now at $6 billion a year in revenue and $7.6 billion in cash, employing 5,000 painstakingly chosen people. Schmidt and other insiders believe they may have found a world-changing way to run a company. (Then again, nothing Google does, in its own view, is ever average.) Most firms still look like the refining and manufacturing businesses of Rockefeller and Ford. Google founders Larry Page and Sergey Brin, children of the Internet, have built a world where a well-chosen elite accommodates flexibility, shifting roles and, above all else, urgency."

This article reads as somehow incomplete, but nonetheless shares interesting information; thus, it qualifies as worthy of your time.

Google: "Just a search engine"

That comment (this post's subject header) was made by another investor and a very smart person. Unfortunately, he is wrong.

"Sergey Brin and Larry Page have ambitious long-term plans for Google's expansion into the fields of biology and genetics through the fusion of science, medicine, and technology. Their goal -- through Google, its charitable foundation, and an evolving entity called Google.org -- is to empower millions of individuals and scientists with information that will lead to healthier and smarter living through the prevention and cure of a wide range of diseases. Some of this work, done in partnership with others, is already under way, making use of Google's array of small teams of gifted employees and its unwavering emphasis on innovation, unmatched search capacity, and vast computational resources."

"Google is not averse to contributing to the scientific efforts of others. It teamed up with Stanford several years ago to provide computing power for a scientific project that focused on unfolding proteins. The process of protein folding is one of the keys to understanding biology, yet very little is known about how it works. It is believed by some that when proteins fold incorrectly, it can lead to serious diseases, ranging from Alzheimer's to Parkinson's to many types of cancer. The Stanford project utilized idle computer time from the PCs of individual volunteers and organizations like Google that agreed to apply excess computational power to the gargantuan effort to simulate the protein-folding process in 3-D. Google also made it easy for individuals who downloaded its search toolbar to sign up for the Stanford program, so that while they were away or asleep their computers could be utilized in the cause of science. The extra computing power accelerated the simulation and analysis of protein folding. "Modeling even the simplest of proteins can be computationally very, very challenging," Brin said."

"Among the other innovations that Sergey Brin and Larry Page would like to see Google and other firms achieve in the future is the production of affordable, clean-burning fuel that does not harm the environment. The source for this power is likely to be the sun. This area of research is important to Page, who for years has focused on the enormous quantities of electricity needed to power Google's network of hundreds of thousands of computers."

I have stated for the past several years, and well before this blog's existence, that Google/GOOG is not just your average, run-of-the-mill company. I also have stated its shares represent a singular opportunity(TM), that it -- the company and its shares -- are sui generis. Certainly, the shares would not qualify as such if the company itself were not the same.

This article explains why Google/GOOG is more than "just another search engine", and does so in exciting fashion. Read the article -- really, the chapter of a new book, [to be] published tomorrow. Then tell me what you think.

Faster than your high beams

Criticism -- perhaps justified, perhaps not -- has been levelled recently at both my motives and me.

At the risk of pissing (blank) off, I will explain David. You (along with the rest of us) can't understand much of what he says because that is just as he intends it.

He is a genius at pattern recognition and prediction of price movements in the financial markets. He really IS brilliant, but... He presents his case not so that you will truely understand it but so that all who read will see and recognize his genius. He feeds on the positive feedback from those who recognize his amazing abilities. While he professes his desire to teach the "commonweal", he realy only teases and tantalizes. How does David know what he knows and wouldn't you like to know too? He dangles the keys that unlock the puzzle just out of reach. In truth, if he could teach us all how he does it, we wouldn't need him anymore and his adoring audience would go away to make mountains of money on their own. That wouldn't serve his purposes. There have been rare occassions when he lets slip real nuggets of wisdom, but if intentional, it is only to keep the weary from wandering. He is subtle, but over time the message is obvious: he can count on one hand those who can use technical analysis to predict future price movements, he is one of them and the rest of us never will be. "Sorry Charlie, only the best can be Starkist". I think he is certifiably insane.

My initial reaction to these comments was surprise, even after considering their source. (The writer and I have a history; he views as insufficient the amount I share re the markets. I suspect, however, that no amount for him would be enough.) My second reaction was to respond in some fashion. But I too want to learn, so I asked another regular reader to offer his insights, after reading the withering criticism of yours truly.

Gee. I wonder what he really thinks!!

I disagree entirely with the motives he has attributed to you. But I do agree with some of his observations -- absent the motives. You are, in fact, incredibly good at pattern recognition (witness how quickly you got a high score on that puzzle game you sent me: a score I still haven't been able to match after several days) and that many of your observations elude most of us. They certainly elude me. Your skill is an incredibly difficult one to explicate or for us to replicate, there being so much intuitive in what you do. In a sense you see something when you recognize (let's say) that AAPL is about to go aggressively bullish while still in it's base building period. Now recognizing that it is building a base is not so difficult, but recognizing that, unlike dozens of other attractive stocks that are building a base, AAPL is the one ready to accelerate upwards is quite difficult. You can point to the specific series of points, sub-patterns, volume surges, etc that drove your decision, and once pointed out, these too are simple to recognize, but for us to recognize it is a form of fallacious backwards pattern fitting, kind of like starting with a result and searching for a best-fit explanation of why it happened. It is not such for you because you recognized it in a predictive fashion, but it is for us.

What we lack are two things: We have great difficulty differentiating the events surrounding the real end of a base-building process, as opposed to the dozens of head fakes that probably took place within that base-building process, and, even more importantly, we lack the ability to differentiate, IN ADVANCE, the differences between an impending end of a base building process and the action of dozens of other stocks that are building, and potentially ending bases, at a given period of time. Without the ability to differentiate and discriminate it is hard for us to do what you do in a predictive manner.

That doesn't mean that what you offer is useless. It isn't to me, though I use the insights you've given me in a way that would probably frustrate you. Namely it tends to allow me to avoid big mistakes, of which I used to make many and which I rarely make now. Why? Because while the signs of an imminent move up or down may be hard for me to spot, it is not difficult for me to differentiate between a stock that has obvious signs of danger - heightened volatility, big volume on down days, etc. It is also not hard for me to recognize a pattern that has some potential and needs to be watched. But what it doesn't give me is something to differentiate it from others having similar characteristics but which may yet remain mired in it's base for many months and perhaps ultimately give signs of suddenly breaking down. So I often tend to wait to your endless frustration. It has also taught me to pay much more attention to the pattern before committing to a company whose business plan I like: that there is a difference between liking a company and knowing when the odds favor a purchase. Selling is another story. Selling losers is easy, many times much too easy. But selling winners is something I've yet to master and I've found little in your work or the work of others that can help me sell winners before they start to decline (at least I no longer suffer the full extent of the decline and that is extremely useful.)

The difficulties most people have with pattern recognition is why systems like O'Neil work so well for many. They are relatively simple and unambiguous. They provide clear buy and sell rules and they allow most people to follow a discipline that has a net positive return and avoids the worst outcomes. Do they offer anywhere like the gains obtained from correctly purchasing stocks during base building? Of course not. But it does beat a mechanism that buys stocks in bases without understanding when and how they are going to break out of their bases to the upside.

So, I come to the final point I want to make. There is a big difference between knowing and teaching. Teachers do not often come from the best practitioners. The clearest case I can think of is mathematicians. There is a field with hard and fast rules. The experts are those who understand the rules best and know perfectly well how to apply them. Yet, almost invariably these expert mathematicians make absolutely horrid teachers. Why? Because they have forgotten what it is NOT to know. They simply do not understand why someone wouldn't understand such an obvious self-evident thing as a mathematical theorem. After all, it is nothing but logic.

Teaching is largely about removing obstacles to understanding. Such things as misconceptions, misapplication of fundamental principles, failure to understand what differentiates one case from another, are the things that keep students from advancing, and experts almost always have little tolerance for and little understanding of these blockages and misconceptions. They tend to become easily frustrated by what they come to believe must be the dullness of their students and they fail to understand why their students could possibly not understand something that has already been explained.

In fact it has always been my contention that the very best teachers come from people who understand more, but not too much more, than their students. Why? Because they still remember what obstacles hindered their own understandings and what insights allowed them to advance beyond them. Teaching involves endless repetition, extreme patience, and an ability to understand what a student isn't getting and devise ways to circumvent and overcome those blockages.

By and large, despite what I believe is your honest desire to share your abilities, the qualities of a great teacher are not your best points. You are, in general, impatient, hate repeating something you've already said, and have little interest in why someone is getting things wrong. You are only interested in them getting it right. All this would probably be true regardless of the subject, but unlike math, which is fundamentally obvious, you seek to impart a skill that is inherently arcane. It is a skill that requires intuitive insight, and whose results are nowhere near infallible, only more positive than negative, thus imparting to the student negative reinforcement as well as positive reinforcement.

I actually think your blog is a much better venue and approach than was your newsletter. A newsletter has more of a temporal context than a blog. The inherent assumption of an investment newsletter is that it contains actionable intelligence. It implicitly says: here is the situation and you need to act now. On your blog, you've been much more able to focus on the developing situation of a stock, alerting people to a potential opportunity with a trigger point that lies in the future. However, it won't necessarily wind up teaching lots of people to act as you do.

Here's a suggestion that might help, though I think it would still require you to become much more interactive with your readers and to commit to "understanding their misunderstanding" and helping them, basically one on one, to overcome them. Instead of focusing solely on an emerging pattern that holds opportunity, take the time to simultaneously point out a similar situation that doesn't offer potential and explain the difference. That's a lot of work, but it would help some people do a better job of differentiating between bases and bases with opportunity.

But, to return to what I'm sure is your main concern, I think the writer's attack on your motivations is entirely wrong and mean-spirited, though I have no idea why he/she said it.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This response is brilliant. Could I have said it better, or even as well? (Probably not.) The entire letter is phenomenal; the second paragraph alone is worth the price of admission.

My stated objective is to share my insights into how the markets work, how to perceive opportunity, and even share a specific recommendation or two. I think I have done that: AAPL, HANS, SBUX, the homebuilders, and of course GOOG. (And excluding many, many others.) To a one, I believe I have been extraordinarily clear -- what, when, and how to buy (or sell).

But I am human, after all, and make errors with the best of them... from which I try to learn. When the respondent states, "You are, in general, impatient, hate repeating something you've already said, and have little interest in why someone is getting things wrong. You are only interested in them getting it right.", I can only nod my head in agreement. I am impatient, with me as much as anyone else. I do detest the necessity to repeat myself... although I realize with new readers coming aboard all the time I must do precisely that.

Contrary to the first writer's belief, I prefer questions and interactivity, not some fawning sensibility. I cannot recall a time in this blog's history that I ever responded to the embarrassing lyrics of gushing thanks. What response can one make? Questions, however, are a different matter; in fact, my requests for questions are so copious and regular they are nigh on pleading. Of course, I prefer to answer questions that would help all readers not solely the writer.

I seek interactivity. From interactivity comes community. And from community can come the alerts that help us all. I recall, for example, AP's intelligent comments re YHOO, thus alerting us to that opportunity, and many more examples.

This blog is as much your home as it is mine. If I fail you, as the first writer attests, then I fail me; my objective recedes faster than I can drive -- even with my high beams on. Please help me help you. Your questions and comments are always welcome... and desired. On this topic, or any.

I am going to pull off to the side of the road now, and read each letter once again (at least); the criticism and its solicited response. I perceive each as critical to my successful development as an investor, as a writer, as a pedagogue... and, yes, as a human being. Thank you for joining me on this excursion.

What Lurks in Google's Soul?

Fascinating article that serves up good background information of the company, including some items of which even I was unaware...

"Google's colorful childlike logo, its whimsical appeal and its lightning-fast search results have made it the darling of information-hungry Internet users. Google has accomplished something rare in the hard-charging, mouse-eat-mouse environment that defines the high-tech world -- it has made itself charming. We like Google. We giggle at the 'Google doodles,' the playful decorations on its logo that appear on holidays or other special occasions. We eagerly sample the new online toys that Google rolls out every few months. But these friendly features belie Google's disdain for the status quo and its voracious appetite for aggressively pursuing initiatives to bring about radical change. Google is testing the boundaries in so many ways, and so purposefully..."

World time via Google Maps

GChart is a cool Google Maps mashup that pinpoints the precise time for any location in the world. Double click anywhere on the map to obtain that locale's current time...

A loss of curiosity?

What can I say, but that this essay speaks volumes to me -- and my goals for this blog...

"In our increasingly complex world, the amount of information required to master any particular discipline -- e.g. computers, life insurance, medicine -- has expanded geometrically. We are forced to become specialists, people who know more and more about less and less."

and

"Unfortunately, this new freedom has sucker punched the notion of the educated person who is esteemed not because of the size of his bank account or the extent of his fame but the depth of his knowledge. Instead of a mainstream reverence for those who produce or appreciate works that represent the summit of human achievement, we have a corporatized and commodified culture that hypes the latest trend, the next new thing."

Do these two snippets make you sufficiently curious to read the essay in its pithy entirety...?

Cellstik

An interesting new technology that just might save your life... er, well, at least the address records on your cell phone!

Mark your calendar; plan to attend!

[Flyer created by DoubleM Graphics. Click image to enlarge]

The abstract of Wil McCarthy's presentation...

QUANTUM DOTS AND PROGRAMMABLE MATTER

Electronic devices are rapidly shrinking to the nanometer scale, where quantum mechanics dominates and particles become waves. Here, the distinction between chemistry, mechanics and electronics begins to blur. Case in point: the quantum dot, a device capable of trapping electrons in a space so small that they form "artificial atoms" whose size and shape and charge can be controlled in real time. Historically, the properties of matter are determined at the time of manufacture, through careful mixing and processing. But now we find ourselves at the dawn of a new age, where substances exist whose optical, electrical, magnetic and even mechanical properties can be adjusted at the flip of a bit.

In a 50-minute lecture, engineer, Journalist, Novelist, Wil McCarthy discusses the state of the art and explores the future social, technological, and science-fictional implications of this "Programmable Matter."

Yes, I will be at this event; in fact, I would not miss it for the world. I hope to see you there...!

US$ strength is relative

All comments (below) are from Scott Grannis, chief economist at Western Asset Management...

The dollar has gained almost 15% versus the euro so far this year, and it is up 13% against a broad basket of currencies. This is certainly welcome news for Americans travelling abroad, but it greatly overstates the true extent of the dollar's strength. As the second chart attached shows, the real story this year is that all currencies are declining relative to gold, and the dollar is "strong" only because it has declined by less. Year to date, gold is up 6.3% in dollars, 22.2% in euros, and 21.7% in yen. This year all currencies have lost purchasing power relative to objective standards such as gold, energy, most commodities, and real estate.

So while dollar strength versus other currencies is always better (for the U.S.) than weakness, the gains this year must be taken in the context of other, and larger losses. It is not unreasonable to think that the dollar's gain relative to other currencies owes much to the fact that the Fed has raised short-term interest rates 175 bps while most other central banks have been idle. The Fed has moved from an outright accommodative posture to a more neutral posture, and on the margin this is definitely good. But neither the Fed nor most other central banks can be said to be "tight." At least not yet.

The other implication of this year's developments is that non-dollar currencies have weakened by all objective standards. They've now "caught up" to the dollar, so in that sense inflation risk is now more evenly distributed among major countries. Since U.S. interest rates are now higher than those in every major country, with the notable exception of Australia, the dollar could enjoy further gains going forward relative to other currencies.

Updating Hansen/HANS

It was only 1 week ago today that, in this post and with the shares at $50.52 (the prior day's closing price), I again recommended for purchase the shares of Hansen Natural/HANS. Today, the company reported its Q3 earnings -- and they are a blow-out. From Briefing.com...

Hansen Natural/HANS beats by $0.23, beats on revs (56.70 )

The company reports Q3 (Sep) earnings of $0.83 per share, $0.23 better than the Reuters Estimates consensus of $0.60; net sales rose 100.2% year/year to $105.4 mln vs the $87.6 mln consensus. CEO cites higher sales of its Lost energy drinks along with Hansen's apple juice and juice blends, sales of Joker energy drinks, and Rumba energy juice, Hansen's children's juice drinks in aseptic packaging. Sales increase was partially off-set by lower sales primarily of smoothies in cans, natural sodas and Hansen's energy and functional drinks".

In pre-opening activity, the shares last traded at $66, +~$10 from yesterday's close! One reader had asked (with the stock then at $59.50) at what price I would buy more shares; my reply was a pullback to $55-53. Yesterday's low was $54.12 before reversing. Great trading, for anyone who took either recommendation!

Addictive game

Go here to test your skill...

The Best of Hubble

Some great photos here. The music is eerily appropriate.

Productivity and Inflation

The following comments are from Scott Grannis, Chief Economist at Western Asset Management...

The other day while riding the tube, I noticed an article in the FT that raised the issue of whether "core" measures of inflation (ex food and energy) were still relevant in these days of ever-rising energy costs. I have been questioning this as well, and have come to believe that "core" inflation that ignores years of rising energy costs is only relevant if it is also the case that other prices (non-energy prices) are falling, since that would be an excellent sign that monetary policy was not allowing higher energy costs to be passed through to the general price structure. The chart below suggests to me that monetary policy on the contrary is allowing the general price level to rise. The GDP deflator is ultimately the best long-term measure of inflation that I know of, and it is in a rising trend, albeit still a modest one.


For years I've been tracking the relationship between inflation and productivity. Most people think that strong productivity leads to low inflation, since it implies lots of competition and plentiful supplies of goods and services. I've argued instead that low inflation leads to strong productivity, since the absence of pricing power is a powerful incentive to cut costs; if you can't raise your prices the only way to make more money is to work harder and smarter. A few years ago as it became apparent that Fed policy was quite accommodative and inflation pressures were rising, I therefore expected productivity to decline. And indeed this appears to be the case. The gradual return of pricing power has dampened the incentive to be productive.

Having said that, the government announced today that productivity in the third quarter jumped to a 4.1% annual rate. But it is only up 3% in the past 12 months, and up only at a 2.6% annualized pace over the past two years. As the second chart shows, productivity has demonstrably slowed in recent years from a 4% pace to a 2.5% pace, and inflation has risen to levels not seen since the early 1990s. Last quarter's productivity surge was most likely an aberration on the high side.


Unit labor costs fell 0.5% last quarter, in what was also probably an aberration on the low side. As the third chart shows, unit labor costs over the past year have risen by roughly the same as underlying inflation, after several years of virtually no growth at all (i.e., when labor productivity was high).


Going forward, I would expect inflation according to the GDP deflator to be 3% or a bit more, and productivity to be 2.5% or a bit less. That would imply a CPI of 3.5% or a bit more, and real GDP growth that is still in a 3-4% range.

A reader writes again

I am way behind on my reading, including email messages. Thus, I miss timely and interesting notes such as the one that follows. At this point, the writer's questions and comments are past their shelf life, so I will not comment. Do note, however, this embedded insight... "the other losers were more than compensated for by these big winners."

That comment is important: you need not be profoundly correct on each and every investment; your objective however is to seek continually the long term winners. Some investments will lose money, big or small, and some investments will make small profits; it is the one class of investments -- long term, hugely profitable winners -- that you seek. Keep trying (investing); failure (being wrong) is part of the process.

The note...

At your convenience, could you please elaborate on the term 'trader's break'? I can see that AAPL may needsome rest here after a big run, but the $50-54 range seems to be a strong support zone, and the 50-day SMA,which is currently at 51.21 and still sloping up, also lies within that range.

I'm speculating that AAPL may, at worst (if the market doesn't tumble), get a $5-6 'haircut' by falling backto support at the 50d SMA. The day after its most recent earning report, it gapped down well below, but closed well above the 50d on huge volume, and the big run the next day was also on very high volume, which showed evidence of great institutional support. A $15 'discount' means it would have to fall all the way back to the vicinity of the 200d SMA, and that seems to be a much more remote possibility at this point, in my opinion.

The caveat is that I'm discussing these numbers relative to the current stock price and its corresponding 50d and 200d SMA levels. I understand these levels will change with time, and also depend on the nature of the decline (gradually vs. abruptly), so please don't take the statement "fall all the way backto the 200d SMA" literally. The point I'd like to emphasize is that, with my limited knowledge on TA, I just can't see how a leader such as AAPL pulls back 15 points from its recent high, unless the market is really lousy, or some bad news comes about.

Given the current 'darling' status of AAPL among Wall Street institutions, I'm guessing that they may rush in once again to defend and/or pick up (more) shares at the 50d 'bargain' price if the stock would get there, unless the market keeps going down from herewith no 'year-end rally'.

From a contrarian point of view, the fact that most people, especially those in the media, are hoping/calling for a rally may not bode well for the right, and historically the Nov-Dec period tends to perform pretty well relatively to other times of theyear, so I guess one could make the case for a sell-fulfilled prophecy.

The noticeably increased volatility during the last 2 weeks near the October lows of the indices possibly warns that they are near an inflection point, and may soon resolve this situation, whether up or down is for them to decide. The Oct lows currently still hold with higher lows in the indices since, but it is negative that the Nasdaq is the only major index still above its 200d SMA, and the 30-year bond yield has been trending up steadily since Sept, and has broken to new highs this week.

On the other hand, the fact that the VIX spiked to a 5-month high on the day the indices made the Oct lows, and has since come down, and the fact that the Naz is still above its 200d is somewhat encouraging since it tends to lead strong rallies -- if that chance would come.

Unless long term bond rate would keep rising up from here, and/or the indices break the Oct lows, then revisit the April lows, I just cannot visualize AAPL pulling back 15-point without some bad news for the company. I have no doubt that a ~26% pullback can occur at some point, but betting on it to occur later at a much higher price. I've heard about the recent lawsuit concerning the iPod nano's screen, but thought that news was already absorbed. Of course I can easily be wrong, and this is just my wishy-washy attempt at defending my 'beloved' AAPL, although I've read somewhere: "Don't fall in love with, or marry your stocks!"

That may be true if one is a short-term trader, but not necessarily so for long-term investors. After all, how could one hold a stock for a very long time without 'loving' it, especially with a high performance one, such as AAPL or GOOG? I argue that the consequences of 'marrying your stock' are of no significant relevance in this case; it's one's conviction, and one must prepare and accept that one can be wrong, and deal with the outcome accordingly.

If AAPL breaks its 50d on high volume I may sell a portion of my current holding. Fortunately, I don't have to make another attempt to defend GOOG, since this rocket has clearly lifted off above the earth's atmosphere and seems to be heading for the moon (rational exuberance? :-) I've become relatively immune to 'short-term overbought' or 'waiting for pullbacks' arguments when it comes to rockets such as GOOG, CME, or SNDK. The initial support at 320 that Mr.Dorsey Wright mentioned hopefully won't be revisited for a long time.

My oldest holdings include AAPL, GOOG, CME, SWN, VLO,and a few housing stocks that were no longer in my portfolio but did bring substantial gains. I had bought them long before I knew about TA, solely based on my perception of their 'values' from the information (purely fundamental) I got at the time of purchase, and I'm glad I 'married' them -- the other losers were more than compensated for by these big winners. Fortunately, now with my newly gained (albeit still very basic) knowledge of TA, and help from world-class traders/investors such as you, The Deipnosophist, and Dan Zanger (he inspired me to study TA), I've also been starting to learn when to'separate' or 'divorce' them if and when necessary. :)

Thanks,
Tom

Google: The $400 gorilla

This CNN/Money Magazine article is very good, and worth reading. In fact, I recommend you do read it, and then read this blog post written (by me, of course) 9 months ago and very early in this blog's life. And when Google/GOOG was less than half its current share price.

You will quickly discover why I chuckled upon reading the CNN/Money article: all the arguments the author makes -- including its increasing cheapness amid a rising share price, its lessening valuation on all measures of fundamental performance, its move toward a possible $1 trillion market cap, etc -- are each an item I 'predicted' (a term I detest using) 9 months ago would come to pass -- and have come to be. And so here we are.

And where is here...? With a higher share price and even larger market cap yet to come. Google/GOOG is now in full-on acceleration mode, and ever higher highs will come more quickly... and more easily.

Questions? Comments?

Microsoft ogles Google's goodies

Interesting Financial Times article that limns Microsoft/MSFT's bid to catch up with Google/GOOG...

Hands on

Hansen Natural/HANS, previously recommended, appears set to break out of this well-articulated intermediate term base on today's opening...

... based on this research comment (via Briefing.com):
"Citigroup initiates Hansen Natural/HANS with a buy and $72 tgt. Firm believes the co is the most attractive pure-play in the fast-growing energy drink market. While the stock is up 177% YTD (and up over 10x over the past two years), firm believes that upside remains given their 18% long-term EPS growth estimates and favorable financial metrics."

Not to become too technical, but a key breakout is Monday's high trade ($51.10) and the critical breakout above the high of 2 September 2005 ($51.65); the latter transmutes this pattern (and setup) from possible top to probable bottom. The only breakout then remaining is at the old high of $54 -- and that would not be a true breakout. (A breakout requires a minimum of two data points.) But it works.

In fact, the shares are trading at $53.50 in pre-opening activity! I already am long, as per my earlier recommendation. Are you...?