Harry Dent and many, many other analysts over the years have written volumes about the nature of cycles in commodity prices.  To summarize those volumes in one paragraph, commodity bubbles are always self defeating.  Once a valuable commodity becomes prohibitively expensive, market mechanisms correct the imbalance in a couple of different, complimentary ways:

1. High prices lead to reduced usage (setting the air conditioning at 80 degrees instead of 75, for example)
2. High prices lead to efficiency drives (think insulation in homes and increased fuel efficiency in cars)
3. High prices lead to substitution effects (switching from gasoline to diesel in your choice of car or from steak to chicken at your dinner table, for example)
4. High prices lead to new sources of supply being searched for and found (consider Brazil’s enormous recent oil discoveries in the Atlantic)

These adjustments do not always happen overnight, of course.  Depending on the rate of technological change and other factors, some supply/demand imbalances can persist for years or decades, and sometimes the points above can conflict with each other.   One example is rubber. Read the rest of this entry »

We have an ongoing commentary on the budding e-book revolution, and specifically our love affair with the Amazon Kindle.  Any investment writer or analyst worth the ink that his words are written with ought to have an extensive library at his disposal.   The problem is that when you have 200-300 books and more white papers and article clipping than you know what to do with, you have too much of a good thing.  Searching for that one quote you need becomes difficult when you have stacks of books to look through, and you also have limited mobility.  Unless you like to travel in a moving van, your library can’t go with you.

Having an e-book reader solves these problems.   You can put your entire research library in a small briefcase, and you can use its search capabilities to find what you need in a hurry.   This is arguably the best technological innovation since the Internet itself.

Today, Apple jumped into the mix.  Looking to capitalize on the recent success of the iPhone and iPod, Steve Jobs just announced the iPad tablet PC, which can act as a book reader.   On this new concept the AP writes,

“Apple CEO Steve Jobs has unveiled the iPad, a tablet-style computer that resembles the iPhone, but larger…  The CEO says the iPad will also be better for reading books, playing games and watching video than either a laptop or a smart phone.”

Apple’s strategy in recent years has been a variation of “go big, or go home.”  We would expect that the company’s aggressive entry into the e-book market will accelerate the trends already underway, just as its introduction of the iPod made digital music mainstream for the average Joe or Jane.  With Apple, Sony, and Amazon.com leading the way, we believe that this revolution will have legs.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

 Nokia announced on Thursday that it would be offering free GPS-based mapping software on all of its high-end smart phones in order to compete with the iPhone and Google Android phones.  Though I myself am a tightwad who refuses to pay more than $20 for a cell phone (I find that all the smart phone features waste my time and give me carpal tunnel and a sore neck.  I don’t even like text messaging.  Hate it, in fact.  And it will be a cold day in hell before I pay $300 for a phone that breaks the first time I drop in a parking lot or jump into a jacuzzi before remembering to take it out of the pocket of my swim trunks…not that I know that from experience, of course.), as a student of economic history I appreciate the pace of innovation in the telecommunications industry.  The iPhone is, for all intents and purposes, a computer that fits in your pocket (but preferably not your swim trunks pocket for the reasons discussed above), and competition from Nokia, Research in Motion, and the new generation of Android-based phones will insure that the pace of innovation stays quick.

It’s too bad that entertainment media, in contrast, is actually going retrograde.  Read the rest of this entry »

We have an ongoing commentary on the future of telecom, specifically the role that voice-over-internet services such as Skype will play in this evolution (see “Your Phone Company is Doomed” and “Talk is Cheap.  Skype is Cheaper.”

On B5 of today’s Wall Street Journal, we saw a news snippet by Sarmad Ali that is worth repeating here:

“The volume of international phone calling that is being handled by Skype continues to surge, with much of the gains coming at the expense of traditional telephone companies, according to new data.  The Internet phone service is expected to account for 12% of international phone calling in 2009, up from 8% a year earlier.”

Stop and think about that for a minute.  Given the massive volume of international phone calls, 12% of all international calls is a huge number.   Skype didn’t even exist until a few years ago, and already more than 1 in 10 international calls now involves the service.

Ali continues,

“Calls between Skype users, which is generally free, is growing even more quickly.  It is projected to rise 63% to 54 billion minuted in 2009.”

Skype has saved us a small fortune in recent years.  When my wife goes to Peru to visit her parents, she can call my mobile phone for free using our Skype subscription.  When I was living in Peru (see “Unconventional Medical Tourism“), I used Skype to stay in contact with the office in Florida.

Skype is a phenomenal service, and it and its competitors such as Magic Jack and Yahoo Voice will absolutely wreak havoc on the traditional fixed line telephone business in the years to come.  Creative destruction, meet the telecom industry.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“After Dubai, will Greece be next?” asks the Financial Times this morning.  They are speaking of sovereign default, of course.  The debt payment moratorium by Dubai World has investors asking these kinds of questions for the first time in nearly a year.

In late 2008, the question was “which bank is next?”  Today, the question is “which sovereign state?”  Might it be one of the usual suspects?  Perhaps Russia, Turkey, or one of the South American republics?  Or might it be someone new and exciting — like another Iceland!

Interestingly, one country is conspicuously off the list of candidates: the United States.  Yes, it appears that investors like to talk good game about dumping US dollars in favor of “safe” havens like gold (for our views on the barbarous relic, see here).  Yet somehow, when the world suddenly looks risky again, it is not gold that offers protection (gold fell sharply on the Dubai news, in fact).  It is the US dollar and US government debt that investors run to.

These are certainly interesting times.  We’ll refrain from attempting to call the exact top on the gold bubble.  We already tried that on the euro (see here), and thus far we’ve been wrong, or at least “early” on that call.

We continue to advise caution on both the euro and gold.  There is absolutely nothing wrong with attempting to earn a quick speculative buck on either, so long as you understand the risk being taken.  But both would appear to be very highly vulnerable, and their current bull markets are based on very questionable assumptions about the US dollar.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

In yesterday’s post, we introduced Larry Downes and his insightful new book The Laws of Disruption, discussing the relevance of Moore’s Law, which says that computational power roughly doubles ever 12-18 months while costs stay constant or even fall.  Today, we’re going to pick up where we left off with Metcalfe’s Law.

Mr. Downes writes,

Metcalfe’s Law, formulated by networking pioneer Robert Metcalfe, explains a phenomenon anyone with a telephone already understands.  The more people you can reach, the more reasons you find to reach them.  One telephone is useless.  A few phones have limited value. A billion phones create a vast network.  As the number of connected devices in any network increases, the number of possible connections between them grows exponentially.  Each new connection, therefore, adds far more value than the one that preceded it.  To paraphrase Metcalfe’s findings, the usefulness of a network is the square of the number of users connected to it.

The value of the internet and its related technologies (e-mail, instant messengers, Facebook, etc.) is that everyone is on it.  The web of potential collaborators is virtually infinite.  One of the key concepts of economics is that of diminishing marginal utility.  This is, each additional unit of something is less useful than the one that preceded it.  If you already have five pairs of jeans, that sixth pair just isn’t all that important to you.

But in the information economy, we actually see increasing marginal utility.  The more friends you can reach of Facebook, the more useful that application is to you. Read the rest of this entry »

The world of computing is undergoing a major shift.  Consider this fact:  The newly released Windows 7 is Microsoft’s first operating system to come with fewer features.

Yes, you read that right.  Windows is actually getting slimmer.  And the primary reason for this is the rise of internet-based “cloud computing.”  Let’s see what the Economist has to say on the matter (”Clash of the Clouds“):

Windows 7 is not just a sizeable step for Microsoft. It is also likely to mark the end of one era in information technology and the start of another. Much of computing will no longer be done on personal computers in homes and offices, but in the “cloud”: huge data centres housing vast storage systems and hundreds of thousands of servers, the powerful machines that dish up data over the internet. Web-based e-mail, social networking and online games are all examples of what are increasingly called cloud services, and are accessible through browsers, smart-phones or other “client” devices. Because so many services can be downloaded or are available online, Windows 7 is Microsoft’s first operating system to come with fewer features.

Any of you readers who get this blog post delivered to a Hotmail, Gmail, or Yahoo! e-mail address already know a thing or two about the Cloud.  Though a Microsoft Outlook-based e-mail server may be what you use at work, you no doubt appreciate the convenience of a personal e-mail account that can be accessed from any web browser anywhere in the world.

For now, most applications remain on desk tops (we tried Google Docs, Google’s online office solution, and it was horrid).  But this will likely change.  Google’s office solution will no doubt get better in the years to come, and Microsoft is moving to get its flagship Office suite available in the cloud on a subscription basis.

Furthermore, there are economies of scale that can be exploited.  As the Economist writes, “Why should every company or university set up and maintain its own mail server when Google or Microsoft can do it more efficiently?  Companies are already happy to rely on utilities to provide electrical power, after all.  Cloud computing will do the same for computing power.”

The beneficial result should be cheaper computing and higher productivity.  And a nasty recession with deflationary forces putting pressure on profits give companies every incentive to accelerate this process.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We’ve commented before about Netflix and its business model.  We’re not a big fan of Netflix’s core business model, and we think it has only a few more years left it in at most.  In the age of fast downloads, it simply does not make sense to mail DVDs back and forth.  (Netflix also has an on-demand movie download service, which has promise.)

At any rate, while Netflix’s original business model is well on its way to obsolescence for digital media like movies, it may yet have potential for “old economy” industries.  The New York Times had an article about two young Harvard MBA graduates who started a “Netflix type” web business that rents designer dresses: “Haute Couture, Available Through the Netflix Model.”

This is an interesting idea.  It has long been possible to rent high-end women’s dresses for events (and men’s tuxedos too, of course).  But there has never been an online mail-order site for it.  The Times writes,

Rent the Runway is a recession-era twist on the Internet rent-by-mail model, which has been used for things like textbooks and video games in addition to movies. Unlike those utilitarian items, however, the dresses offer a touch of Cinderella — on a budget….

Rent the Runway is betting that its shop-by-Web convenience and the appeal of its top-quality fashions will persuade women across the country to rent a dress for a special occasion without trying it on beforehand.

It will be interesting to see if this business prospers.  It’s difficult to buy (or rent) clothes without trying them on.  This is hard enough for a standard pair of jeans, let alone tailored clothing.  Fashion is also a notoriously fickle industry.

At any rate, we’re not so much interested in this particular business as in the larger trend it could represent.  Recessions are a time of vicious creative destruction in which old business models are destroyed and new ones created.  It would be ironic if Netflix’s core business failed yet inspired copycats that revolutionized other industries.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

This is a quick follow-up to a prior post, “Another One Bites the Dust: Readers Digest In Bankruptcy.”  It now appears that Fortune Magazine has come under severe financial distress.

Consider this recent headline: “Fortune Magazine To Sharply Cut Publishing Frequency.”

First Portfolio, the business magazine launched just two years ago by publishing giant Conde Nast, folded. Then, the largest business magazine in America, BusinessWeek, was sold by its parent company, McGraw-Hill (MHP), to Bloomberg for as little as $3 million plus its subscription liabilities. Now, Fortune, started by Time, Inc. founder Henry Luce, will cut its publishing frequency from 25 times a year to 18 times. According to several media reports, Time, Inc. will also cut several hundred jobs. Time, Inc. is part of media giant Time Warner (TWX).

Fortune will probably never recover.  The magazine is victim to a changing economy in which its primary moneymaker — print advertising — is simply not as lucrative as it used to be.  Plus, the internet has provided a barrage of new competition, much of it available for free or at a very low cost.  And, perhaps more importantly, you can’t e-mail, re-post, or Twitter a hard-copy article like you can an online article.  If Fortune plays its cards right, it could perhaps retain its prestige as a premier financial website.  But it it doesn’t make some substantial changes, it will be on the fast road to irrelevance.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy