Archive for January, 2009

Crybaby

It was exciting to watch such an historic inauguration yesterday.  I wish President Obama well.  [Note to the folks at WordPress: “Obama” is getting flagged by your spellcheck.  You probably want to fix that…]

He is clearly inheriting a mess, no matter whom you believe was responsible for it.   The Onion certainly has one view, as they noted on a recent video piece:  “Obama to keep Bush on as National Scapegoat.

crying_babyTerrorism threats, two wars to resolve–and plenty to avoid being entangled in, a banking system nearing either collapse or nationalization, a recession (perhaps a depression), energy and environmental issues, the list goes on and on.

The state of the country brings to mind my son, who as a baby suffered from colic.

As any of you who’ve experienced it know, this is a disaster.  For months, no matter what we did, he would just start crying for no apparent reason.  Every night, like clockwork.  (And before you ask, no, it wasn’t synced to the market close.)

Nothing we did, no medicine, no old folk remedy, no comfort we provided, seemed to help.  It simply had to run its course.  When his colicky period ended we were relieved, and now it’s a distant memory for us.

I suspect this is how–eventually–some of our current crises will play out.

I’m optimistic that Obama will be a very good President.  His early moves have indicated he is deliberative and even-handed.  And most of all, intelligent.  This is a hopeful time for many.    [Disclosure:  I voted for Obama.  My respect for his intelligence and leadership overcame my reluctance over his inexperience and the fear he would be too liberal.  I hope I am right.]

Some have suggested President Obama’s first major crisis will be a terrorist strike.  Others have opined that the economy will severely test our new leader.  I have another suspicion, that Obama’s initial challenge will be dealing with the inevitable disillusionment that accompanies his first few failures.  The existing groundswell of support, hope, enthusiasm, and (here it comes) irrational exuberance may not serve Obama well in the coming months.

When he stumbles, many of his supporters–some perhaps the most fervent–could quickly become critics instead.

In other words, it appears we are in an Obama bubble.  And when the bubble pops, there will likely be some oscillation in our new President’s approval rating.

obama-hype-cycle

This is not to say he will fail all together.  As I said, I’m hopeful.  But he is not perfect, he does not walk on water, nor did he arrive from the mountain with tablets in hand.  He is human.  More important, he is a politician, and is surrounded by other politicians.  Each with their own beliefs, agendas, and baggage.  No matter how well he has picked his advisers and cabinet, that will not change.

Still, he has already done one thing right.  By inheriting a country with so many issues–real and perceived–it appears there is very little downside risk for him.  And tremendous potential on the upside.

Or as a rather crafty mentor of mine said to me long ago:  “Never accept an offer to hold a happy baby.”

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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January 21, 2009 at 12:40 pm 4 comments

Close to the Edge

With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?

yes_1972_close_to_the_edgeFor technology stocks, I think it’s important to have an “edge”.

Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.

Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.

So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.

Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.

Healthcare

Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.

radiologistConsumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.

All of this is related to distributing power or value creation away from traditional central facilities and control.

Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.

Manufacturing

Here’s a favorite.

Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.

manufacturing3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software.  Before, even simple prototypes had to be fabricated over the course of weeks.  Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.

Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.

Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?

Municipal Networks

While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.

True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.

Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.

And it’s happening with energy generation too.

Others

Here’s a partial list of other innovations that are benefiting from “the edge”:

edge-apps

So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:

Decentralization–moving utility to the edge

The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.

Examples–3D printing, TiVo, municipal networks, distributed energy generation

Authoring–tapping users to create

Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.

Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube

Emergent Systems–enabling collective/cooperative effort

This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet. 🙂

Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing

Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”

Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.

The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.

Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.

I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.

Let me know if you think of other ways this idea might be manifesting in technology markets.

Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.

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January 10, 2009 at 9:12 am 2 comments

We Interrupt This Transition…

…to bring you an important announcement.

In today’s NY Times, former FCC commissioners William Kennard and Michael Powell both urged Congress to delay implementation of the digital TV transition.  There’s been neither enough money set aside to subsidize converter boxes, nor are there enough in stock to satisfy demand anyway.

Oh, and not enough people have taken advantage of the government offer.  Nor is the FCC call center prepared to handle the estimated 1.5 million calls from confused consumers once the switchover occurs.

“Moreover, many people will need help hooking up their converter boxes and setting up their antennas. (Picking up the digital signal may require reorienting or moving an antenna, or buying a more powerful digital antenna.)”

That last part has not generally been communicated to anyone.  At least those likely to be affected.

[Switching to my best Jon Stewart falsetto]:   “Nailed it….”

I agree with the commissioners.  The FCC and other powers-that-be need to do a better job of making this transition happen.  It’s not a simple one, and there are technical elements beyond the skills of many people to understand without help.  Otherwise, as the article states, “If the transition to digital TV goes badly, it will inconvenience millions.”

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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January 9, 2009 at 10:16 pm 1 comment

Pump, Baby, Pump

Speaking of today’s NY Times, Paul Krugman’s op-ed just begs for a comment.

[Actually, I haven’t spoken of the NY Times, because the article where I mention it hasn’t been written yet.  But you’ve already read that article that I haven’t written, because postings on blogs are displayed in reverse chronological order, so that article appears before this one.  Wait, I’m getting dizzy.  I’d better sit down.]

Anyway, the piece concerns Krugman’s belief that Obama’s proposed stimulus package is a good start, but is woefully short of what’s needed by the economy.  I think what he’s really saying is we have to reinflate the bubble.

I read Paul Krugman even though many times I don’t agree with him.  He’s an eminent economist, his writing is lucid, and I usually learn something new every time I read his stuff.  I do wish he’d stick with economics and avoid the purely political rants.

And I get impatient if he has too many columns in a row where he just whines without offering a specific solution.  But none of those problems arose today.

Here’s where I fall off the wagon:

Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

Yet by his own admission, Krugman believes that the economy that we had a year or two ago was an unsustainable balloon.  To quote:

The fact is that the U.S. economy’s growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

So our national output rose to meet a demand that is unnatural.  Our ability to produce has outstripped our natural ability to consume.  Why, then, is he suggesting we try and ramp demand up to that pre-crisis level?

bicycle-pumpOur problem isn’t that the pump needs to be bigger.  It’s that the balloon we’re trying to reinflate is too large.  You don’t grow the economy to a level that’s an aberration without suffering contraction as things revert to the mean.  There’s no pain-free recession.

Now maybe I’m missing something.  If so, somebody explain.  Maybe that $15 trillion/year figure was less than our pre-crisis demand, and so Krugman’s large suggested figure is OK.  But it still seems to me that his remedy would simply set us up for some rather painful oscillations somewhere down the road.

And that assumes at least a modicum of fiscal stimulus is a good idea.  Others disagree.  For me, the jury’s out on Keynes.  But as I said recently in “Tiny Bubbles“, to try and pump that balloon all the way up again is a recipe for disaster.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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January 9, 2009 at 10:12 pm 4 comments

Viral Marketing

appstore_hero20081217Smartphone applications are one of the biggest trends going, one that will only get bigger in 2009.  Not exactly unexpected, especially for anyone who’s followed Salesforce.com’s  (NYSE: CRM)  AppExchange model.  But despite how Google’s Android (NASDAQ: GOOG) foreshadowed the market, it’s taken the brilliance of Steve Jobs to get the ball rolling.

On the one hand, the dynamics are similar to ring tones

  1. Cheap.   A few bucks each; some are free
  2. Easy.   Apple (NASDAQ: AAPL) sets the standard for ease-of-use, though with the usual drawbacks that come from its closed system.  Android’s market will be a little more “wild west”, but probably more innovative for it.
  3. Not originated by the service provider.   The best services never are, telcos are about as innovative as rocks.
  4. Customizable.   Make your phone personal, whether it’s playing apps or having different ring tones for each caller.
  5. Cachet.   Everyone wants the latest “cool” app, just like they wanted the most popular songs to sound out whenever their phone rings.

On the other hand, the mobile phone app phenomenon is also evolving  into an analogue for the gaming industry, with developers writing apps for one of only a few “platforms” (e.g. iPhone, Windows Mobile, Android, etc.).  I expect to see developers selling versions of their apps onto multiple platforms, especially for the more popular ones, just as happens with game consoles.

The last, and most ominous similarity, is with Windows.  Despite the existence of Android, there’s a chance the iPhone could become the uber platform, with most apps being written for it (at least first), creating a Microsoft-like dominance of phone applications.  All of which leads to the following prediction for the New Year:

The most widespread iPhone application in 2009 will be a virus.

Think about it.  All the elements are already there:

  • rocketing platform/device popularity with a growing market share
  • viral growth in application number and complexity, providing plenty of ready vectors for the introduction of malicious code
  • existence of a large, dedicated, developer base
  • a ready black market for both hardware and software–which means plenty of hackers.

virus_alertsDespite assurances to the contrary from its PR department, Apple software is not virus proof.  It’s largely benefited from a lack of attention given its small (though growing) share of the desktop/laptop market.  But the success of the iPhone changes those dynamics.  Already, iphone dev team has unlocked the iPhone 3G, and is even now delivering its yellowsn0w software to the masses.

True, Android will undoubtedly be more vulnerable, given its marketplace model and the lack of a central control.  But betting against hackers has always been a sucker play, and it will remain so even for the iPhone.  Just ask the Blu-ray folks.

The predators are circling.  And it’s only a matter of time.

Disclosure: The author holds no position in any of the stocks mentioned here.

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January 5, 2009 at 12:34 pm 4 comments


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Scott J. Berry, NY area

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