A Quick Update

November 21, 2008 — Steve Waite

Readers may have noticed that Kris has been doing all of the blogging over the past several weeks. I’ve been hampered with a serious medical condition that has constrained my ability to work. I am hopeful that I will be able to resume normal business operations in the new year and my physicians tell me that is a high probability if I stay the current course.

In the meantime, Kris will be covering for me and I would like to thank him for keeping things rolling during this difficult time.

I would like to take this time to wish all of our readers a joyous and healthy holiday season.

Best,

Steve

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So this is the destruction part, right?

October 25, 2008 — Kris Tuttle

Since we started outlining our plans for The Creative Destruction Fund we have been scratching our heads over how the plethora of hedge funds all chasing the same trades was going to survive.  We’re all disciples of the law that a breakdown of diversity is a clear signal that markets are not working and a major inflection point is upon us.

Going back a few years when we were only mulling the concept of a fund like this we met with a CEO or two to talk about the concept.  Inevitably we were cut off early in our discussion because they would be in the process of investing a big chunk of their money in something like the Goldman Sachs Quantitiative Fund that would “give them 30-40% per year returns without any risk.”   The greedy excitement in their eye made us not even bother to push back on their thinking and discuss the relationship between risk and return.  As they say the rest is, or at least soon will be history.

The point here isn’t to say I told you so; it’s to highlight the implications of a healthy cleansing of thousands of funds that simply should never have existed.  It’s not just the quantitative or “black box” funds that need to be trimmed but the thousands of funds that are either too limited (long only) or too flexible (using options and derivatives to leverage up versus control and reduce risk.)

Market declines will help push assets under management back down to the still-respectable $1T or so.  At the same time our hopes would be that the nearly 8,000 funds would shrink to something closer to 4,000.

All that is going to be painful to be sure and a good example of how the destruction phase comes along to flush out the inefficient, disadvantaged players from the market and makes room for new ideas.  We have think that more investors will begin to realize that long-term thinking, backed by strong fundamental and financial analysis and risk management.  It all seems fairly straightforward but it’s been a surprise how much it’s been ignored in the last cycle.

At the same time the entry prices for technology companies going into the next growth phase are setting up to be another major opportunity.  Just as 2001-2003 was the time to broadly deploy capital we think we may see another chance developing here.  Our goal is to provide the one of the best vehicles for our clients and investors to reap these rewards.

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RVR is coming

October 15, 2008 — Kris Tuttle

We always have an eye towards the evolution of mainstream technology as we move into a RealVR world.  Yesterday Apple announced that basically all their new notebook computers would feature a GPU from NVIDIA.  This is a pretty big deal and is making it clear that higher end graphics, approaching photo realistic quality are here.  Other consumer-based technology like HDTV has further sensitized most to the idea that video can look much more realistic. 

The Apple move is a fairly big deal. Including a GPU by default makes a strong statement and clearly adds to the cost of the computer for Apple.  So this move marks an important strategic shift for one of the clear leaders in the mainstream technology space.

Several smaller notes were sounded recently like the introduction of a 3D photography offering from Fuji that is drawing a bit of attention.  We also note that even very low end systems like the Nintendo DS are being equipped with more interactive capabilities.  The new device has two cameras that open up all kinds of new gaming and application possibilities.

Watch this space carefully.  We believe that the advent of multiple cameras and displays on devices is one of the gateways to bridging into the RVR space for the common man.

Meanwhile we are getting ready to release our initial published note on RVR along with an ecosystem that includes companies like NVIDIA, Ciena, Linden Labs and many others.

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Backchannels Online

October 7, 2008 — Kris Tuttle

Another technology is just beginning to move out of the Alpha Geek world and into the mainstream.   For a long time now technologists have used "backchannel" communication tools to basically conduct multi-person chat sessions around specific events, topics or presentations.  The use has grown slowly but steadily over the years.

The first sighting of this form of communications in the business world showed up with the arrival of the Blackberry.  Employees would use PIN to PIN messaging to communicate during meetings and corporate sessions where they wanted to share information, make jokes or be in cahoots.  It didn’t take long for companies to catch on though.

A whole new level of activity is being ushered in today on the back of services like Twitter.  Twitter is basically a shared messaging platform that is very simple but can be adapted for many interesting applications. One growing one is backchannel communication.  Probably the best way to understand it is to experience it.  On Twitter one can follow and post to streams of comments based on events in real time. The Presidential debate tonight is a good example.  During the debate users can follow and participate in an active real-time commentary with everyone watching. 

There are also more focused topics popping up like one to follow the development of the upcoming Web 2.0 Expo in Berlin.  (Use our code webeu08gr63 to get a big discount.)  By following "w2e_europe08" on Twitter everyone attending and/or interested in the event is instantly connected. This has been possible for a long time using more technical methods but for the first time it’s as easy as two clicks.

Easy and fluid backchannels are another important development in the "hive" model of information processing and collective intelligence.  It tends to run circles around conventional methods and is growing fast.    We expect to dig deeper into this topic at the event in October so any of our European readers should certainly try to get there.  In the US we’ll be participating in a great event called Defrag in Denver on November 2-4.  (Again use our code "r2" for a big discount there.)

Posted in Computing, RealVR. No Comments »

The Next Bull Market

September 19, 2008 — Steve Waite

Well, things certainly have been moving briskly in financial markets since my last post. Wall Street has become one of those roller coaster rides that can scare the heck out of even the most daring rider. But fear not. Like all roller coaster rides, this one too shall come to an end. In fact, seasoned investors will tell you that bear markets end precisely at the time when fear is at a maximum.

My friends at Morgan Stanley made the following observation today, which tells me we may have reached that maximum point of fear:

People are so consumed with fear, that T-bills got to 0% and negative yields. The TED spread also got to 300bps in the 1987 stock market crash. A TED spread of 300bps suggests a turning point in the market.

And we have this classic sign as well:

S&P futures had their fourth consecutive session of record setting volume with Thursday’s total just shy of 7mm contracts shattering the previous daily record. Today’s volume for the overnight session is already 7x above average volume for the same period. To describe yesterday’s price action as extraordinary would be an understatement.

Bear markets typically end with a bang. This one is no exception. And while it will be months, perhaps even years, before the mess associated with all of the dislocations experienced on Wall Street over the past year will be cleaned up, I think it’s a great time to begin to look ahead to the next bull market.

What will the next bull look like? That’s anybody’s guess at this juncture. Kris and I both believe that technology will continue reshape the global economy in profound ways in the years ahead. We are, after all, in the up-phase of a powerful gale of creative destruction that is likely to peak in the 2017-2020 time frame (see my book Quantum Investing for more on the current long wave of creative destruction).

Disruptive technologies will continue to flourish in the marketplace. The build-out of broadband infrastructure is still in its infancy. Mobile computing, Real VR, Nanotech, Cleantech (Energy, Water, etc.), Biotechnology - these are all areas of keen interest to us. Kris and I have no doubt there will be a great deal of wealth creation in these areas in coming months and years. Our job, as analysts and portfolio managers, is to identify the companies that “get it” and have what it takes to serve customers and create shareholder value.

We are less than two weeks away from the the launch of our Creative Destruction model portfolio.  We can’t think of a better time to launch our portfolio. Needless to say, we look forward to sharing our ideas with readers and welcome your comments.

Many happy total returns.

Postcript:

If you are looking for a sign that oil has peaked in the near term, consider this little nugget just in from a friend who follows the energy and commodities markets from the Middle East:

Dubai is planning for a 2.4 km high tower.

Veteran investors will tell you that market tops have been characterized by the announcement of huge skyscrapers.  Dubai’s oil-driven stock market looks like it may be heading south in the months ahead, based on this news.

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Good gone bad and more reasons to invest in technology…

September 13, 2008 — Kris Tuttle

We were struck today by something that is painfully, obviously right in front of us which is the meltdown of big financial companies like Bear Stearns and Lehman Brothers.  When asked about it over lunch we described all the simple facts as we know them today like they are common knowledge in investing circles.  At the same time we noted that even companies like Merrill Lynch who don’t seem for the moment to be going out of business they have had to take write downs that essentially wiped out their cumulative profits from the last 100 years or so.

So what?  We’re not generally investors in the financial services stocks.  But it does make us realize that many of the businesses in technology that we do invest in are in fact extraordinarily good businesses.  Plenty of institutional portfolio managers (like Warren Buffett most famously) "don’t invest in technology" by reasoning that it is hard to understand and changes frequently. (Hmmm…. sounds a lot like CDO, CDS and all that jazz to us.)

In the past we’ve heard investors say that technology changes too quickly, that sales cycles are long, that there are ebbs and flows in the business.  Perhaps the worst element is the "hockey stick" that causes many technology firms to "miss" estimates from outside analysts and send shares into a tailspin.  We think these issues are distractions rather than fundamentals.  How many businesses out there are as good as Google’s?  Or Dell’s? Or Oracles? Or RIM’s?   There are some but far fewer than one might suspect.

So today will be a crazy and chaotic day in the markets.  At a broader level we have documented here our "out of the game" stance on the market starting several months ago.  Recently Steve has started warming to the market and we have been building our "shopping list" to be ready for times like these.   Our model portfolio will be up on October 1 for clients and we’re relishing the opportunity to invest in great businesses that we feel will be appreciated all the more when the dust settles in the financial services space.

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Old Media’s Slow Burn

September 12, 2008 — Steve Waite

I came across an article in WIRED that featured a talk with founder, Louis Rossetto, that caught my attention. In the article, Louis is talking about the things they got wrong over the past 15 years. One of the things they missed was the death of media. Here’s how Louis put it:

“We predicted the demise of what we called Old Media (aka mainsteam/lamestream/dinosaur media) over and over again, and yet it’s still alive, True, we said the Internet would erode Old Media’s monopoly on interpreting reality, and we were right about that: If you’re surfing Boing Boing, you’re not reading the paper edition of the New York Times. The result is imploding Old Media and exploding Google ad revenue.

But we underestimate how slowly Old Media would auger in — and how irresponsible it would become in its death throes. As John Perry Barlow put it on our first TV show, the purpose of media isn’t ultimately, to inform; it’s to sell our eyeballs to advertisers. And how better to do that — if your monopoly is being eroded by this newfangled Internet — than to scare the shit out of us? Then, we’re so paralyzed that we stick around through the commercials.

Face with fierce competition for those eyeballs, Old Media is hawking the apocalypse. The world is inundated by war, poverty, destruction, fascist Republicans! It’s about to be swept away by tidal waves unleashed by melting polar ice caps! More on how this is humanity’s own fault — after the break.”

The creative destruction process is non-linear. As such, it is inherently difficult to predict. A large, established industry, such as Old Media, is likely to die much more slowly than a less mature industry when its livelihood is threatened by disruptive technology. I’ve always been fond of something Charles Darwin noted about the evolution of species — it’s not the strongest or the smartest that survive, it’s those who are best able to adapt to a changing environment.

From the best I can tell, Old Media has become terribly irresponsible over the past several years. But this is to be expected. After all, death of one’s industry or company is rarely, if ever, perceived to be a pleasant experience for any businessperson.

Assuming the Internet is not regulated out of existence, I think it’s safe to say that most of Old Media will die and go away. That said, death is likely to continue to be a slow burn, making the idea of shorting these companies problematic. But there will be a few survivors who will go on to prosper handsomely in the years ahead. And you can bet your bottom dollar that those survivors will be the ones that saw the writing on the wall and adapted.

Posted in Media. Tags: , . No Comments »

New Friedman book is a manifesto on energy innovation

September 10, 2008 — Kris Tuttle

I’m not sure the book is great but there is a short video clip of Thomas Friedman on Letterman to promote it that is worth watching.

He’s equating innovation around energy technology as our next "Sputnik" and it’s something we all agree on and get excited about.

Here’s a link to the video posted by Craig Newmark.

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Getting Bullish on U.S. Equities

September 4, 2008 — Steve Waite

Blogging has been light over the past several weeks as Kris and I have taken some time to enjoy the end of summer. We hope our readers have had an enjoyable summer. While Kris and I intend to be more prolific on the blogging front in coming weeks than we have been recently, I wanted to kick off things and mention that I’m becoming increasingly bullish on U.S. equities. Put simply, I expect the broader U.S. equity markets to bottom in the near future (i.e., sometime between now and the end of October).

Last spring, when I reviewed the outlook for stocks, I felt as if I were sitting at a card table in Vegas holding a two of clubs and three of spades. The two of clubs represented the huge energy and commodities shock reverberating throughout the global economy and the three of spades represented the large financial shock. Needless to say, I quickly folded that dreadful hand and went 100% into fixed income and cash.

While I don’t believe we are completely out of the woods just yet, I do believe the worst of both shocks have been discounted by the market. To use the card metaphor, we are likely to see better hands dealt soon. Of course, there may be another financial crisis in the weeks ahead - perhaps associated with an emerging market that got over-leveraged and is getting squeezed by a shrinking U.S. current account deficit.  This wouldn’t be surprising and it would certainly take stocks down. But I think it would signal the end of the financial shock. The energy and commodities markets too may continue to be volatile, but my sense is that the equity markets have largely discounted the worst. If oil and commodities prices continue to head south, that will a big breath of disinflationary air to investors.

The bottom line is this: I think now is the time to be putting together a list of attractive equities to buy and be looking to reallocate our portfolios away from cash and bonds into stocks in the weeks ahead on weakness (always best to buy on sale, I like to say!). Kris and I were looking at Ciena (CIEN) today, which has been decimated during the bear market. Kris has written adoringly of Apple (AAPL) and Reserach in Motion (RIMM) and we have both been keen on Dell (DELL) since Michael came back as CEO.  There will be good money to be made in the year ahead if we do our homework and pick our spots correctly.

Kris and I will be doing a great deal of fundamental research in coming weeks and putting together The Creative Destruction long/short model portfolio. If you are interested in learning more about our fundamental equity research, let us know via email. We’d love to hear from you.

Here’s to the next bull market in stocks!

Postscript:

After I posted this entry, I received a research note from my friend Clay Allen. Clay is a seasoned analyst that has developed proprietary technical tools to gauge the ups and downs of financial markets that he markets through his company “Market Dynamics.” He notes that we are still on track for a low in the S&P 500 by the end of September into the first part of October.  He further notes that the month of the September has a long-standing record of being the most seasonally weak month of the year. Clay also reminded his subscribers what Warren Buffett likes to tell his investors: “The time to be greedy is when everyone else is fearful.”

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Solar Energy as Consumer Product

September 4, 2008 — Kris Tuttle

We know that lower oil prices are likely to put a damper on market valuations for solar stocks.  However even if oil settles in at the $70-80/bbl range it’s not likely to change what are new perceptions from consumers about taking advantage of new energy sources.

It’s not just more efficient and lower cost solar cells that are being produced.  Look at sites like this one which enables a consumer to use Google Maps and some simple information to evaluate their potential use of solar energy.

After the financial crisis subsides we can expect to see lots of consumer loans using home equity or other methods to fund these investments.  More contractors are coming to market and installation procedures are getting more streamlined. 

The technology investment community has latched onto alternative energy for the long haul and we hope the oil barons enjoy the vestiges of their extreme market power.

Posted in Energy. 1 Comment »
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