Fire Hydrant of Freedom
Politics, Religion, Science, Culture and Humanities => Science, Culture, & Humanities => Topic started by: Crafty_Dog on November 06, 2006, 08:40:32 AM
-
This thread is for chatter on particular stocks. I'll start with a couple I've filed under the heading of "reckless"
Based upon a Spear report suggestion, I am in on MVIS at 1.90, so I am up 50% in very short order.
KVHI (think Sat Radio like XMSR, but instead its for TV-- which includes military battlefield application). I rode this one up and down on its ride to 30 and got out too late to profit much, but got back in , , , just in time for the recent drop on options issues. Ugh-- but I've bought some more in the 11s. We shall see.
On a less reckless basis, I'm following David Gordon's calls on GOOG, UARM and am looking to fatten my position in RACK.
Even at last again on IRF.
-
http://eutrapelia.blogspot.com/
New suggestions from David Gordon. Highly recommended.
-
Solid steady progress from the Spear Report's water play UU.
Looks like I timed well my entry into AQNT.
-
Well RACK is not looking good :-(
Looking at a longer term chart, I'm re-entering KVHI. Like XMSR and SIRI for sat-radio, KVHI does the same for mobile sat-TV. They also do a lot for the military (think of a tank with a TV screen showing what is going on from other POVs).
Feel free to contribute chatter here folks.
-
I rode out MVIS's pullback from the 3.25 area and now it pulls back from 3.90 area (3.80 is a double for me in 10 weeks).
================
FWIW, here's a teaser on MVIS from the Gilder Report:
The Week / A New Vision for Microvision
Gilder Technology Report’s Charlie Burger: By combining its proprietary silicon micromirror with modulated light sources, Microvision (MVIS) enables higher-intensity, finer-grained imagers and displays using a fraction of the size and power of rival systems. Though it possesses the single most potent display technology in the industry, Microvision has for years been foundering in uncharted waters, steered by a Magellan management pursuing too many difficult applications too early.
Now, new management fresh out of General Electric (GE) appears to be steadying the ship. After a decade filling key marketing, operations, and product development roles at GE, Alexander Tokman jumped to Microvision a year ago July as operations chief. Quickly gaining the CEO spot last January, he brought in marketing and sales chief, Ian Brown, and R&D head, Sid Madhaven, with a combined 26 years of experience at GE.
Finally, Microvision becomes as focused as its photons
The key goal of the new team is development of an integrated photonics module (IPM) or microprojector to be used as a common display engine in its new products. Small enough to integrate into a cellphone or iPod, the microprojector will include the silicon micromirror (about a square millimeter in size) and light sources, electronics to wiggle the mirror and modulate the light, a controller, and memory.
Three separate beams of red, blue, and green light from either LEDs (light emitting diodes) or semiconductor lasers shine on the mirror. Gimballing on two axes, it flickers to project 30 million pixels a second onto a surface such as a wall. Even though the mirror reflects one pixel at time in raster fashion, it does it so quickly that our brains “see” a static image or continuous movie. To produce different colors during the scan, the light sources are modulated to emit beams at varying combinations of intensities.
In addition to functioning as a projector, Microvision’s display technology can be turned into a scanner or near-field camera that works well over distances that are about the same as those for a barcode reader. In this case, the light sources that bounce off the moving mirror are used to illuminate an object. A detector receives the scattered light energy and converts it to electrical signals stored in the appropriate memory locations based on the corresponding pixel position, thereby reproducing the object. Because the time the beam remains on any given spot is a very short 20 nanoseconds, there’s virtually no motion blur.
Tokman is focusing on three specific product areas: (1) miniprojectors, including embedded projectors inside cellphones and standalone models that will work with portable devices; (2) head-up displays (HUDs), now making their way into luxury cars, that shine an image directly in front of the driver, just above the steering wheel, displaying information about the engine, weather, navigation, and traffic; (3) eyewear that creates immersive experiences for gamers and movie buffs, giving them a virtual screen equivalent to an 80- to 100-inch display.
Management is focusing on potent markets. By 2008, some 80–90 percent of all cellphones—some 800 million shipped that year—are expected to have mega-pixel cameras and/or be capable of receiving broadband video. Nokia (NOK) is already looking at technologies to integrate projectors into mobile devices, and several large consumer electronics companies are reportedly developing microprojectors based on very small display technologies. And head-up displays are becoming popular in cars for safety, for convenience, and as a differentiator for luxury models. Automakers installed several hundred thousand units last year and could increase that to 4 million units a year by 2010.
But when the consumers and manufacturers arrive, will Tokman be there to meet them? …
Learn more, by reading Charlie Burger’s complete Microvision analysis. Logon with your GTR subscriber ID at http://www.gildertech.com/ now.
-- RELATED NEWS --
Hands-on With Microvision's Itty Bitty Projector
http://www.engadget.com/2007/01/08/hands-on-with-microvisions-itty-bitty-projector/
CES 2007: Microvision to Debut Miniature Projector
http://gizmodo.com/gadgets/gadgets/ces-2007-microvision-to-debut-miniature-projector-226157.php
-
Big move by KVHI today-- apparently the market liked what it heard this morning:
=========
KVH Industries' CEO & CFO to Speak at 9th Annual Needham & Company Growth Conference
7:30 AM EST January 11, 2007
KVH Industries' (Nasdaq: KVHI) president and chief executive officer, Martin Kits van Heyningen, and chief financial officer, Patrick Spratt, will be speaking at the Ninth Annual Needham & Company Growth Conference in New York City on Friday, January 12, 2007. The presentation, which is scheduled for 9:30 a.m., will be simulcast on the Internet and can be accessed via KVH Industries' investor website, http://investors.kvh.com. An audio archive of the presentation will also be available for replay later in the day at the same website address.
About KVH Industries, Inc.
KVH Industries, Inc., is a premier manufacturer of systems to provide access to live mobile media ranging from satellite TV to telephone and high-speed Internet for vehicles and vessels as well as a leading source of navigation, pointing, and guidance solutions for maritime, defense, and commercial applications. The company's products are based on its proprietary mobile satellite antenna and fiber optic technologies. An ISO 9001-certified company, KVH is based in Middletown, Rhode Island.
SOURCE: KVH Industries
Chris Watson KVH Industries 401-845-8138 cwatson@kvh.com
-
Crafty
I notice David likes Isis pharmaceuticals on the basis of thei cholesterol drug.
Some good caveats from the Street on Isis:
http://www.thestreet.com/_yahoo/newsanalysis/investing/10322093.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
-
An interview with Jim Rogers. Better to own gold, oil, copper, natural gas, etc., or gold, oil, copper, natural gas *stocks*:
http://www.investment-u.com/ppc/splash_rogers.cfm?kw=XVVIU329
-
Price=Risk. :-D I am in ISIS at 10.18
As for Gold and Silver:
For silver I am a triple plus on PAAS.
For gold, I recently re-entered and am slightly ahead on AUY and slightly behind on GFI.
For oil/gas various positions. Of course the recent downturn has diminished current value, but these I hold with a long term mind set.
-
Apparently I come late to the water hypothesis, but still it has treated me well. I see WTS may be about to break out.
-
KVH Industries receives 5-year sole-source contract from U.S. Military
7:31 AM EST February 1, 2007
Co announces that it has received a sole-source contract from the U.S. Army Tank and Automotive Command for the purchase of KVH's T.A.C.N.A.V vehicle navigation systems for use on U.S. Army combat vehicles. The contract is potentially worth $11.5 mln over five yrs.
I'm under water at the moment on this one, but at the moment look to ride it out.
-
David Gordon makes some new calls:
http://eutrapelia.blogspot.com/
-
Crafty,
When did David first rec intuitive surgical?
I remember reading something about them sometime back.
A ten bagger! Ah those were the days.
-
Wow...
haven't browsed this forum, and i find this one. awesome.
With your daily reading Crafty, i'm not suprised you're well rounded. You seem very much the right character to do well - risk taker, researcher, consntantly reevaluating, cpu nut. To add - your following of the politics and war on terror, gives you an edge fundamentaly wise to military type financial vehicles, as well as inverse type commodities like metals and oil.
I have not actively played in a couple of years, part of it the commitment to my training and some personal...the game can be a huge time and energy vaccuum. I still love the game and can't wait to actively reengae with full throttle. It used to be my passion. No where else is the potential bigger or defeat faster. Again can't wait to play full steam, but i may have to prioritze and scale into it for time is the most precious commodity.
Odds and scaling are my favorite strategies.
I do want to develop a 'Shock- News' type plan with various default orders sitting at various brokers. I love that things fall 66% faster than they rise. That's on my horizon... and is not one that requires daily adjustment, prodding and pruning.
-
KVHI has been scaring me a bit of late and been scraping along a support line, so today was a nice day. Here's this from yesterday:
KVH Joins Lazydays in Providing Satellite TV to RV Owners
7:30 AM EST February 21, 2007
KVH Industries, Inc., (Nasdaq: KVHI) announced today that Lazydays RV SuperCenter(R), the nation's number one RV dealership, has joined KVH's nationwide independent RV dealer network. Lazydays will offer KVH's premier line of TracVision(R) mobile satellite television antennas, and the TracNet(TM) mobile Internet system. Offering satellite TV systems to customers directly through leading independent RV dealers like Lazydays is a key element in KVH's commitment to enhancing its national RV dealer network and providing its customers with the best sales, installation, and after sale support available in the RV marketplace.
"We are thrilled to be joining forces with Lazydays to bring live satellite TV and HDTV programming to RV customers," said Ian Palmer, KVH's executive vice president for satellite sales. "We believe that independent dealerships offer the greatest value to our customers in terms of sales, quality installation, support, and customer satisfaction. Lazydays RV SuperCenter has earned its place as the nation's largest single-point dealership due to its professionalism, commitment to customer satisfaction, and its outstanding facilities and staff. They will provide KVH customers with outstanding service in selecting the right equipment, installation, and after-sale support. We look forward to building on this valued relationship and, in doing so, benefit KVH, Lazydays, and most of all, our mutual customers."
Lazydays is now offering its customers KVH's award-winning TracVision satellite TV product family, including the in-motion TracVision R5, the stationary, automatic TracVision R4, and the premier TracVision R6 in-motion satellite TV system. These all-digital, HDTV-ready systems allow RV passengers throughout North America to enjoy more than 300 channels of digital programming and commercial-free music via the DIRECTV(R), DISH Network(TM), and ExpressVu services. Lazydays will also offer KVH's TracNet 100 Mobile Internet system, which provides mobile high-speed Internet access via the TV screens of the RV as well as through an integrated WiFi network that turns the RV into a rolling hot spot.
"Our priority is to offer our customers the best experience possible at all times, whether it's the quality of the accessories they choose, the installation and service, or the entertainment options available," said Bob Grady, director of parts and service for Lazydays. "KVH shares our commitment to superior quality and the TracVision satellite TV systems are a great match for our mission and our customers' expectations."
About Lazydays
Lazydays RV SuperCenter (lazydays.com), founded in 1976, is the largest single-site RV dealership in the world. Located on 126 acres outside Tampa, Florida, Lazydays has an 86,600 sq. ft. main building, 273 service bays, 300 RV campsites and more than 1,200 RVs on display. This national RV destination will host more than one million visitors and serve more than 300,000 meals this year alone.
About KVH Industries, Inc.
Middletown, RI-based KVH Industries, Inc., is a leading provider of in-motion satellite TV and communication systems, having designed, manufactured, and sold more than 100,000 mobile satellite antennas for applications on boats, RVs, trucks, buses, and automobiles. Winner of the prestigious General Motors Innovative Design Award, CES Innovation Award, 22 National Marine Electronics Association "Best Product" awards, and a finalist for the Automotive News PACE Award, KVH's mission is to connect mobile customers with the same digital television entertainment, communications, and Internet services that they enjoy in their home and offices.
-
I have followed XMSR and SIRI for several years now, but have not invested in either of them since XMSR was as 32, so I post this WSJ editorial more out of sentiment than anything.
What's the Frequency, NAB?
April 21, 2007
Ever since satellite-radio companies XM and Sirius announced plans to merge back in February, the National Association of Broadcasters, which represents commercial AM and FM radio stations, has been urging federal regulators to quash the deal on antitrust grounds.
The NAB's argument is a remarkably weak one, and the government would be remiss if it became a party to the group's transparent agenda, which is to stop satellite radio from luring away any more of its listeners than it already has. Which isn't much, otherwise the two satellite-radio companies wouldn't be merging.
In the name of preventing some phantom "monopoly" from forming, the NAB is effectively asking regulators at Justice and the Federal Communications Commission to help it keep the competition in check and thus deprive consumers of figuring out whether this is a viable alternative radio service.
Don't take our word for it, by the way. Last October, just months before XM and Sirius unveiled their plans to combine, NAB President David Rehr spoke openly about the make-up of the current marketplace for audio news and entertainment. "We still must address new competitors," he said in a speech to the National Press Club in Washington. "On the radio side, we have satellite radio, Internet radio, iPods, other MP3 players, cell phones, and many, many other things. How will we compete?" Not much we can add to that.
Apparently that argument was fine so long as XM and Sirius were lost in space, losing money. Today, Mr. Rehr is saying that regulators should consider satellite radio a unique and separate market when assessing the competitive impact of the merger. In testimony before Congress, Mr. Rehr said XM and Sirius are seeking to form a monopoly that "would undermine audio content competition, not enhance it." The NAB has also commissioned several analyses of the merger that employ sophisticated Herfindahl-Hirschman Index measures and the like to determine that XM/Sirius would dominate the market for satellite radio.
It's true that a XM/Sirius merger would leave us with one satellite-radio provider. But opposing the deal on those grounds is wide of the mark. Sometimes the best response to what a person is saying today is what that person has said in the past. And despite Mr. Rehr's efforts of late to take it all back, the reality is that he had it right the first time.
Monopolies are harmful when they are the sole seller of a product or service with no close substitutes. And as Mr. Rehr acknowledged, substitutes -- competitors -- abound in the marketplace. XM and Sirius, whose subscribers currently represent less than 4% of total radio listeners, aren't merely competing for each other's customers; blocking the merger on that assumption makes little sense. The real objective of XM and Sirius is to lure listeners from free radio, the Internet, MP3 players, music channels on cable television, cell phones and who-knows-what-other options coming down the pike.
XM and Sirius, which have a combined 14 million subscribers, continue to lose money. More than 220 million people tune into free radio each week. No one knows whether the public will ever really take to the pay model, but it's not the role of the government to help the NAB smother a fledgling competitor in the crib. This appears to be a merger of desperation more than anything, and blocking it could well result in no satellite-radio providers and thus fewer listening options for consumers. Consumers, not the government, should decide whether one satellite-radio provider is one too many.
This isn't the first time the NAB has tried to forestall competition from XM and Sirius. The group opposed granting them radio licenses and urged the FCC and Congress to ban satellite providers from offering local weather and traffic reports. This is more of the same.
Telecom policy should not be about picking winners and losers but about encouraging investment and innovation. For that to happen, what's most important is competition among technological platforms: cable, telephone, wireless and satellite (for now). Policy makers and regulators would do better to focus less on static models of market share within one platform and more on making sure rival platforms continue to exist. Consumers will happily take care of the rest.
-
Sent to me by a friend from my Gilder days-- Marc
For the record, I have what is for me a fairly solid size position.
====================================================
For you LNOP shareholders, I enclose the following interview with Eli Fruchter, CEO, in an Israeli newspaper, Globes. Right now, the company's annual revenue is $8 million. By 2008-2009, the company should capture at least 50% market share of the $250 million market. This is why I have recommended buying shares in this company. We are looking at 1200% revenue growth from 2006 to 2009.
*********************
Shiri Habib 2 May 07 18:56
Two years ago, Eli Fruchter, President and CEO of EZchip Technologies Ltd. said that it was not inconceivable that the company would record revenue of $75 million in 2008. He was still optimistic when he talked to "Globes" last week although this time round he refuses to give figures. "The market we're targeting will reach $250 million in 2008-2009. I expect that we will have a sizeable chunk of it," he predicts.
Yokneam-based EZchip, which is controlled by LanOptics Ltd. (Nasdaq: LNOP; TASE:LNOP), is a fabless company that develops high-speed network processors. EZchip's chip sits in the router, and Fruchter describes it as the "Pentium of routers."
Most of EZchip's customers presently use its first generation NP-1c processor. The company began shipping the newer NP-2 to customers at the end of 2006. At the same time, it is also developing the next generations of processor, the NP-3 and NP-4.
EZchip's potential customers are telecommunications equipment manufacturers and the three largest companies in this sector are Cisco Systems Inc. (Nasdaq: CSCO), which controls 50% of the market, Juniper Networks (Nasdaq: JNPR), and Alcatel-Lucent (NYSE: ALU). EZchip has more than 100 design wins, and two of the three companies just mentioned are its customers. Fruchter refuses to say who they are but describes them as the "crème-de-la-crème in the field."
One individual who has been forthcoming about this is tech stocks guru George Gilder, who has been following EZchip for several years. In his latest report, Gilder writes that EZchip's revenue is likely to increase thanks to the sales of NP-2 processors, followed by sales of the next generation of processors, NP-3, to Cisco and Juniper from the beginning of next year. He believes that revenue of $100 million or more for EZchip in 2009 is definitely possible. For the sake of comparison, the company ended 2006 with sales of $8.5 million.
"We began shipping NP-2 processors in the third quarter of 2006," says Fruchter. "Every router has many cards and every card has our chips. The previous generation of processors had one chip in each chassis, while the new generation can take up to 64 chips. The difference in price is such that the NP-2 costs about half of the NP-1, so even if you don't fill the chassis with our chips, the potential revenue from NP-2 is ten times that of NP-1."
Since the time from the announcement of a contract win to the launch of a completed product on the market can sometimes be two to three years, EZchip is now recognizing revenue from previous years. This fact should on the face of it give the company good visibility and the ability to publish forecasts, but it doesn't do this. "We have visibility for one quarter and that's not enough," says Fruchter. "The customers' products need to prove themselves on the market. In order to increase our visibility, we need more large customers that have reached the production stage." In any event, he adds the company should not be judged on a quarterly basis. "If anyone is expecting stable growth, it won't necessarily happen. There could be surges from one quarter to the next. At the annual level, 2007 should be a lot stronger than 2006."
Globes: And when will the profit come? You lost $12.3 million in 2006.
Fruchter: "We are spending just over $1 million a month, $12-13 million a year, and with an expenditure level like this and a profit margin of around 60%, a quarter in which we recorded $5.5 million in revenue would be a profitable one. I can't say exactly when this will happen, but it will."
As a start-up, EZchip was not required to publish its results, but it is controlled by LanOptics, which is a public company. LanOptics has a market cap of $211 million, reflecting a value for EZchip of $270 million, in which it has a 78% stake. EZchip is LanOptics' sole activity, and LanOptics recently decided to raise its stake in EZchip to outright ownership. Last December it increased its holding from 60% to 78% after it gave EZchip's minority shareholders its own shares in exchange for their holdings.
"The current structure does not give us any advantage," says Fruchter, who also serves as LanOptics chairman. "It started when EZchip needed a lot of money, and LanOptics didn't have enough. We raised a total of $60 million through venture capital funds, the last part of which was raised in 2005. The goal is to simplify the structure and return to full ownership by LanOptics. The problem here is not efficiency but simplicity - people like simple things."
Fruchter notes that today two funds remain investors in EZchip - Goldman Sachs and JK&B Capital. "They hold preference shares in EZchip, and if they convert them they will receive ordinary LanOptics shares," explains Fruchter. "I assume that once LanOptics's stock is at a certain price level, it'll be worthwhile for them to convert. I believe it is worthwhile for them now. There's a good chance that it will happen as early as next year." Once it does, Fruchter believes that LanOptics will change its name to EZchip and continue trading under its new name.
EZchip is already acting more and more like a public company. The company plans to hold a conference call following the publication of its financials for the first quarter, and a road show, and it also intends to work with an investor-relations company. "The main reason for this is that a lot of investors are interested in us, largely thanks to the "Gilder Reports," says Fruchter. The company currently does not have any coverage by investment houses.
Does EZchip's market cap give a fair reflection of the state of the company and the market?
"I'm not an analyst and I don't engage in calculations of profit multiples. It has transpired from conversations with investors that the fairly high value is derived from their view of EZchip as a growth company. This is typical of many companies at the early growth stages."
EZchip recently announced a collaboration with Marvell Technology Group (Nasdaq: MRVL), an announcement that sent LanOptics' stock up sharply, even though the collaboration was known before the official announcement was made. The two companies are collaborating on R&D, marketing, and sales of network processors to the Ethernet market. "The goal is to increase exposure to Tier 1 customers, a sector in which Marvell has a very strong grip," says Fruchter. "Marvell is active primarily in the enterprise solutions sector, and our chip is designed for service providers. The combination enables us to approach customers of both companies."
Do you mean customers that are apprehensive about working with a small company like EZchip?
"That's one good example."
The collaboration with Marvell was a form of response to Broadcom Corp. (Nasdaq: BRCM), which entered EZchip's market after it acquired the privately-held Sandburst Corporation at the beginning of 2006. "Broadcom is our main competitor," says Fruchter. "Broadcom and Marvell are acting in a similar fashion to each other. They both came from the enterprise field and are trying to reach service providers, Broadcom by way of an acquisition, and Marvell through a collaboration."
Did Broadcom approach you or make an acquisition offer to you too before it acquired Sandburst?
"I'd rather not comment on that."
But do you feel that EZchip could still be an acquisition target?
"Yes, of course it could. Looking ahead, the most reasonable scenario is that LanOptics will buy the remaining holdings and reach 100% ownership, and that EZchip will continue to grow as a public company. Another option is that EZchip will be acquired, before or following a full merger with LanOptics. A third option, albeit highly unlikely, is that EZchip itself will make an offering, but there is no need for this at present."
Aside from Broadcom, EZchip faces another kind of competition, since there are companies that prefer to develop their chips in-house. One competitor now quitting the market is Intel Corporation (Nasdaq: INTC). "Intel announced that it would no longer be making any developments in the field," says Fruchter. "They're in the process of exiting the market. They developed low-speed processors, while we have been developing high-speed processors. I imaging that had they stayed in the market, they would have developed high-speed ones too." Fruchter believes that Intel decided that a market worth hundreds of millions of dollars in which other companies were also active, was not suited to a company of its size.
Fruchter notes the many changes that are now taking place in the market. "The standards are changing. The whole idea of processors is to replace chips, which are not flexible. This allows for changes to be made and the product's life to be extended when the market changes," he says. "The move to processors is a move to another technology and it takes time."
According to Fruchter, the market was worth less than $20 million in 2006, but it has grown. "Service providers have seen some dry periods," he says. "They didn't invest in new infrastructures and routers, things are now changing. There has also been a move to Internet services, which necessitates the replacement of old infrastructures, something that helps to push the processors."
Are there any other directions that EZchip could develop in?
"We began with large and expensive chips, and working our way down from that is easy. We're looking at further options, such as for example, entering the developing wireless market."
Fruchter says EZchip could also acquire companies for the purpose of growth, although the company wishes first to complete the move with LanOptics.
How will EZchip look in a few years from now?
"I don't want to commit myself as to figures, but the company will sell at levels that are a lot higher than those today. We'll take our technology to additional markets as well."
-
In the last couple of weeks I have finally jettisoned KVHI-- a big loser for me than totally offset my gains in MVIS.
I retain the big position in MVIS and have entered into bigger positions in ISIS and LNOP.
ISIS is per David Gordon's recommendation. His http://eutrapelia.blogspot.com/ offers some of the finest market commentary and stock commentary/advice to be found anywhere. (I recently doubled by solid position in GOOG at 462 on his call)
LNOP is a hot choice of George Gilder, whose advice led me to seriously disasatrously consequences a few years ago, but Rick Neaton who continues following the Gilder universe has persuaded me about this one.
TAC!
-
Also, I am back to breakeven on CREE! :-)
PCL chugs forward nicely.
-
Another fine call by David Gordon on JCG, which jumped over 10% yesterday. Thanks to his table pounding I expanded my position just in time.
-
I have followed David Gordon's decision to exit from ISIS for now at about a 10% loss. DG feels that it looks to be going down a bit further and, assuming the story, fundamentals remain as they are, will re-enter at that time.
MVIS is now a triple for me :mrgreen:
-
http://chip.seekingalpha.com:80/article/39626
LanOptics Subsidiary EZchip In Bed with Cisco
-
CraftyD,
I own some level three by way of corvis by way of broadwing. A recent report from LVLT suggests the real tidal wave for broadband will come with the adoption of high definition TV which requires multiple times of bandwidth then anything being used now. Does Gilder or DMG express any theories as to when this will occur?
Will LNOP's processors also be needed in the middle of such networks?
What about the political risks of owning an Israeli company? I looked on their website and the only address is listed in Israel. This makes me warry of investing in an Israeli company.
I noticed the surgical robotics company is doing great. Now that there are some studies coming out that show reduced risks compared to other surgical techniques as well as healing benefits I would think it only a matter of time till this gets more universally adopted. If it can be shown that it is *cost effective* by way of reduced hospital stays, less complication rates, etc. - despite the higher costs of the equipment than this seems a no brainer. It would still take time for the pressures on surgeons to learn this new kind of procedure to override their resistance to change.
It sounds like Medicare does not have any special reimbursement rate for this procedure. The reimbursement rate for laproscopic procedures is lower than for open procedures. This despite the fact that laproscopic procedures are technically more difficult for the surgeon to perform. The reason is that the cost of care for the patient is reduced because of faster healing, faster they can return to work, etc
-
I'ved asked Rick Neaton to come comment on your post. I know that he is still following the Gilder universe and is particularly positive on LNOP.
As for David Gordon, try his excellent blog at http://eutrapelia.blogspot.com/
-
EZChip NPU's operate in line cards in the metro networks. These cards are installed in switches that route traffic from the core networks, the big pipes between cities, to the netwroks that ring the various metro areas. They are also installed to route traffic from the metro netwroks to the networks; e.g., enterprise networks, and other end users that exist at the other edge of the metro network. Their appeal is their programmability which is very useful to the carriers in the metro because their functions can be adjusted to meet changing circumstances.
LNOP, the parent of EZChip is a fabless company. Thus, war in Israel would not impact the company's ability to produce NPU's. They are produced at Taiwan Semi and IBM. The company backs up its intellectual property in several ways. It does have operations here in the US. They are mainly sales offices.
LVLT and Broadwing/Corvis focused more upon the core network. There is not as great a need for lots of programmable switching in the core because there are not as many destinations for traffic as exist in the metro networks. They can install ASIC's in the core more efficiently. However, in the metro, the ASIC may not be as efficient because the carriers would need to replace them frequently as needs changed. The NPU serves these needs better.
EZChip just announced a successful design of a 100gb NPU that should be ready for production in 2-3 years.
Revenues are expected to ramp seriously beginning in 2008. A good stock to own in conjunction with EZChip is NETL. They make a Layer 7 solution to overflow that occurs at that point. The performance of that stock also gives the investor an idea of what to expect from LNOP.
-
Outstanding Rick-- thank you!
Any comments on a buy price for NETL? Buy now? Put in an order at? etc
-
Hi Rick,
Great to hear from you. Thanks for the excellent post.!!
I guess cable will handle the HDTV bandwidth at the edge until other carriers catch up. Verizon is starting this on a small scale:
http://biz.yahoo.com/ap/070709/verizon_cutting_copper.html?.v=1
It seems fiber to the home is still eons away.
-
Cable is not true fiber to the home because the actual connection to the home is usually standard coax that you can buy at Radio Shack.
VZ (Verizon) FIOS is the major residential fiber to the home project out there at this time. AT&T U-verse relies upon fiber to nodes and lower capacity connections from nodes to the home. However, both systems rely heavily upon IPTV as the means to distribute digital and HD content. BTW, VZ is deploying the JNPR MX960. Remember that the MX 960 contains the EZChip NP-2.
MSFT is a big player in IPTV and is involved with AT&T. Most new overseas TV developments involve IPTV.
-
PHO is a basket of water stocks, which IMHO is an increasingly important sector with excellent long term fundamentals. PHO is one of my largest holdings (average basis of 17.50) Slow and steady!
-
LNOP
http://www.ezchip.com/Images/pdf/LNOP_Investors_070516.pdf
-
Here is a great article my good friend "Jasen Davis" Wrote. He wrote it for "Maxim" mag and he now writes for Skinny.
Its a great article..Since its long and the site wont let you attach anything or post of 20000 words I will post it in over to post.
What’s NASDAQ and NYSE?
“Nasdaq and NYSE are exchanges. Stocks typically either trade on the Nasdaq or the New York Stock Exchange. There are also lesser known exchanges like the American Stock Exchange and even electronic exchanges (ECNs) like Instinet, Island, and Archipelago. When a stock goes public, it will typically go public on either the Nasdaq or the NYSE. NYSE has stricter rules for allowing stocks to trade. Nasdaq is a little less stringent, but still has rules that prevent any small company from trading without meeting the requirements. NYSE is typically made up of traditional large companies like Ford, GM, American Express, etc. Nasdaq is mostly Technology, Biotech, and the like.”
“Nasdaq trades stock through a system of Market Makers. When you buy and sell stock, you are not actually buying or selling with another individual - you are buying or selling from the Market Maker. The Market Makers have rules that govern what they must do (for example, they must provide a liquid market --- this means you will always have a way of buying or selling a stock). You can write an entire article just on the Market Makers. The largest of these is Knight Trading. The market makers determine the price of a stock, and the "spread" (difference between the current bid and ask) is where the market makers make their profits.”
“NYSE trades through market specialists. There are specialists for all the major stocks, and the specialists understands the company they are responsible for and helps keep a fair price at all times. Again, an entire article could probably be written just on specialists.”
“S&P is not actually a market, it is a group of stocks (the most common is the S&P500) that make up an index. This index is tracked along with many others. The S&P500 index tracks the performance of a select 500 stocks. Nasdaq also has an index fund that tracks the largest 100 stocks that trade on the Nasdaq exchange. The most common index is the Dow Jones Industrial Index which is made up of just 30 stocks --- all big names that just about everyone has heard of.”
Thank you, Mr. Law.
Reading stocks is a fairly simple skill. A stock usually has it’s name, for instance, Microsoft Corporation, how much it’s stock is at the given moment, say, $71.20, and whether it’s up or down from yesterday (+.02, at the moment of this writing).
At www.cnn.com one can also click on the company itself to get a more detailed assessment of the stock. Continuing with the above example, Microsoft Corp. (MSFT) as of 7/17/01, opened at $70.66 a share, with a high of $71.48 and a low of $70.14.
Mr. Law gave me more insight in regards to this matter.
“Newspapers typically have the major stocks from the Nasdaq, NYSE, and AMEX listed every day in the business section. To really track stocks, the best way to do it is online. E*Trade has a free section where people can become members and get information about stocks without actually having an account. Two of my other favorites are http://quote.yahoo.com and http://cbs.marketwatch.com. These sites provide vast amounts of investing information all for free. Both allow you to set up "portfolios" of stocks to watch.”
More on portfolios, later.
I mentioned CNN’s website, and it is indeed the place to go to track stocks. It also has a section that gives you a list of brokers and how much they charge. I highly recommend that you go there.
What’s an IPO?
“An IPO is an Initial Public Offering. This is when a stock is first going to trade publicly. A few years ago, the IPO market was in a frenzy. Every day companies were going public, and the stock price would just skyrocket. Examples of huge first day gainers were VA Linux Systems (LNUX) and Freemarkets (FMKT). Both went up into triple digit prices on the first day of trading publicly. People who got shares at the IPO price made 300% or more on the first day. Both stocks are now trading well below their IPO prices.”
-
* Continue*
“The trick to an IPO was actually getting shares at the IPO price. An IPO has an underwriter (usually multiple underwriters) that actually brings the stock to market. These underwriters typically cater to their largest clients (usually institutions) who get the vast majority of shares at the IPO price. It wasn't until recently that individual investors started getting access to IPOs. I believe E*Trade and Wit Capital were two of the first brokerages offering IPO shares to their clients. Even with this access, the number of shares given to these companies was small. And they had to distribute the shares to requesting clients. For a while, the usual number of shares available to an individual investor was typically 100. And these were generally given on either a first come first serve basis or through a lottery system. As demand grew, the typical allotment fell to 50 shares.”
“Currently, the IPO market is very cold, and not many companies are going public. The few that have have had either modest gains or even fallen below their IPO price. For now, it seems the IPO game is over, but it is definitely a cyclical thing as many years ago, Biotechs had a hot IPO market much like the Internet IPO market of a couple years ago.”
So you got money. You want to invest.
You need a broker.
A broker is a glorified bookie. Just like at the horse races. A broker takes your moolah, advises you on how to invest it wisely, and does all the work for you, turning your modest pile of moolah into a Matterhorn pile of moolah (hopefully), for a modest fee, of course.
There are four laws about what to look for when choosing a broker.
One is that he is easy to talk to.
Two is that he does not pressure you.
Three is that he pays attention and acts on what you say.
Four is that he explains things until you understand.
Those are good rules to follow.
Remember, this is your money. He works for you. No “Boiler Room” tactics here, just make sure that those four things are happening and you will go far.
If you are worried about a broker (like, you aren’t sure if he has ties to the Russian Mob) you can go to the National Association of Securities Dealers (or visit their website at www.nasdr.com) and look the broker up. They should have good things to say. Too many complaints (or the guy is not listed there at all) then you should drop him like uranium.
I checked out the Buy and Hold broker’s corporation, and they offered a starting deal at a mere $6.99 per month for two trades, and every trade after would set you back $2.99, or a package deal of $14.99, with unlimited trades.
Now, next, you have to pick the stocks you wish to invest in.
There are many, many ways to do this.
The Motley Fool (www.fool.com) has a technique called the Foolish Four.
Stock Guru Michael O’Higgins, author of the book “Beating the Dow”, has a technique called “The Dogs of the Dow”, also known as “The Dow High Yield Strategy.”
The thing to look for in any stock is low price, high yield. Simply put, you pay little and it becomes more. Easy enough. There are many different names for stocks. Penny stocks. Blue chip stocks. Preferred stock.
Stocks are all a part of your portfolio. A portfolio is simply a term used to describe all investments and assets a company owns.
One method, for example, is to research companies who were traditionally well off, according to the Dow Jones Industrial Average (a famous index of the cream of the crop of American businesses), but have taken a bad turn.
You invest in these faltering corporations for a year, gambling on the fact that perhaps they just went through temporary bad times and will return bigger and brighter in the future. When they do, the 100 shares you bought for 50$ a pop (a five thousand dollar investment) will hopefully double (or even triple) to ten or even fifteen thousand.
Yeah, I know, you are thinking of all that cash and your eyeballs are starting to sweat. Let’s back up a bit.
No one…NO ONE can predict how a the market is going to be in the future. It’s just not possible. People have been trying to do it for decades. It’s like guessing which horse will get to the finish line first, or the winning numbers of the lotto. It’s voodoo. It’s called speculation, and sometimes it works and sometimes it does not.
Basically, it sounds good in the short term, you buy several shares of Microsoft at $50.00 a share. Let’s say you bought 20 shares for a total of $1,000. Later that day, the market is full swing, the price goes up to $75.00 a share and you sell, sell, sell all of your shares and reap a profit of $500.
Short term investing is fast and furious, and can be as successful as faith healing. Much like a game show, you can win big or lose big, and there are no guarantees.
The moral of the story is, don’t bet your rent money in Las Vegas.
Another method is so very simple you wonder why economic analysts and brokers get paid. “The Dogs of the Dow”, which I mentioned earlier, was invented by the famous broker’s group, The Motley Fool.
You simple buy stock from ten companies that have the highest yield and hold onto them for a year. At the end of the year, if your stocks are not on the top ten list, sell them and buy shares in the ones that are.
Simple, eh? Well, according to the Motley Fool, you can make $10,000 into $625,00 over the course of twenty five years.
But start small. Start by investing, say, $100.
I have already mentioned the broker part. You are going to need one. Well, you need to decide what type of broker you want to hire, a full-service broker or a discount broker.
There are differences…when you get big time you will certainly want a full-service broker, but let’s put it this way: a discount broker will cost you $20, while a full-service broker from someplace like Merril Lynch can be up to $150, with an additional $150 annually.
Bare in mind also that full service brokers are salesmen. They reap a profit based on what you buy, and how often you trade. As you can imagine, if you own fifty shares in a software company that’s cutting a deal to sell it’s new product to the U.S. Government, you probably want to hold onto those stocks until after the beta testing is done.
Don’t think for a second that the company you decide to put your green into is none of your business. It is.
For big investing, that is, when you have more cash to throw around, look into companies which are clearly doing well and building golf courses for their fat cat CEO’s= Microsoft, Disney, Starbucks, or look for companies that are universal= Gilette, Coca-Cola, Intel.
But for now you are doing what’s called small cap investing.
In plain argot, small cap investing is putting your money into companies that are moving up but don’t have their own company University like Microsoft.
These companies tend to have shares on sale for $7 (yes, seven dollars, the price of a gallon of gas will probably be one year from now) with sales of only $500 million (gee, I wish I only made $500 million.) Typically, the company in question has a net profit margin above 7%, with insider holdings of 15% or more.
Simply put, ask your broker, after you have found one and set up an appointment with him, to look for small, profitable, growing companies. Look for products that people want, like pencils, pens, soda, microchips, or look for companies that are researching something that is going to be big= like the cure for AIDS or hair loss.
Brett Law offers his own advice on how to start investing.
“The easiest way to start buying and selling stocks is through an online account. There are many online companies including E*Trade, Ameritrade, and Datek among others. They typically require some initial amount to open an account, and then you can start trading immediately. I think the most important thing to remember is that profiting from individual stocks is NOT EASY. It takes a lot time and energy as well as some luck.”
“ For most people just starting out, the best way to start is through mutual funds. Mutual funds own a variety of stocks, and when you buy into the mutual fund, you essentially own all the stocks within the fund. By doing this, you allow professionals to do the research, and you invest in the professional. Finding a mutual fund can be almost as difficult as finding a good stock. Mutual funds have a prospectus which describes the strategy of the fund including the type of companies they invest in, the size of the companies, etc. Individuals should try and match a mutual fund to the type of stocks they would be interested in owning.”
“Another fun way to begin investing is through an investment club. I've been the president of an investment club for the past few years now, and it is something that gives us a chance to meet every month or two to discuss our performance and present research to the rest of the group. Decisions on stock purchases are made through voting, and we all succeed or fail together while reducing each individuals risk. It also allows us to buy more shares and / or more stocks than we could if we were each investing on our own. Information on investment clubs can be found at the National Association of Investors Corporation (NAIC) at www.better-investing.org.”
I’d like to take this time to mention that, aside from being quite an effendee when it comes to investing, also makes a great deal more money than I do. He’s more than just a little worth listening to.
My advice?
Invest in porn.
You laugh, but porn is a big business that is going to go public with their stock in a major way. Men buy porn (no, really, they do.) and it’s not going to go away, despite what George Bush and the Pope think otherwise. It makes a pretty big profit, too…Steve Hirsch and David James, owners of Vivid Entertainment, are serious businessmen. They made a mere $1 million a few short years ago, but are expected to make $18 million in 2001.
Not bad, not bad.
Investing can’t be learned overnight, quite obviously. It’s not something that is automatic, either. It takes time to learn, like any other hobby, but the principles are constant and fundamental, just like changing the oil in a Buick or a Honda.
There is nothing loathsome about calling the company you wish to invest in and asking them. They will usually send you a starting investors package with a complete step by step of where to go with your money, in regards to their future.
If you were to drop $100 dollars into stocks in an up and coming business, buying eight shares at $10 each, giving $20 to your broker, and five years later that company gets bigger (as companies do, remember, businesses rarely tread water for long, in the raging seas of capitalism they either sink or swim) to where there shares are $50 each, you will have made a profit of $300, which you will then wisely reinvest, right?
In the movies, investing is exciting. Drooling stockbrokers, wearing immaculate Armani suits, running around screaming with their ties around their heads like bandanas, foaming, “Sell!!! For the love of God, SELL!!!”
That’s what’s known as hourly trading, and it’s for the dauschunds. Wise investing is done over years, patiently, investing and reinvesting what you’ve made, not wrestling other suits like some cocaine addict with a business major.
As I have said before, it’s your money, and investing is there, waiting. The next time the love of your life wants to spend $250 on those damned beanie babies, explain to her that if you drop $250 into an off shore genetics manufacturing firm that goes public, your investitures could mature within four years, and a possible percentage increase of 300%. That’s enough cash to buy a thousand of those damn glorified bean bags. Just don’t tell her you’re going to invest it in “Sexx, Inc.” a porn movie making company out of Orange County, California, and that you’re going to spend your share on a night out at the local pub, followed by an excursion to the strip club, with you and your buddies.
$5,000 can buy a lot of lap dances, you know…
-
After the scare of the other day, LNOP is recovering nicely and then some 8-) With a basis of 1.89
MVIS hit a 3x for me before backing off considerably, but now looks to be headed back up.
POT is doing nicely for me. Hat tip to Scott Grannis.
Took a position in MA per David Gordon-- who has a new post on his blog on it.
-
David Gordon's comments are always worth careful consideration:
http://eutrapelia.blogspot.com/
-
Another red day for most, but LNOP is up nicely.
-
David Gordon comments (see previous post for URL)
17 August 2007
Back to the drawing board
I receive many messages this morning that read, in part, "Praise be the FRB! Today's discount rate cut kick starts the markets' rally..." -- which could not be farther from the truth.
Today's action by the FRB does not, by itself, cause a reversal (up), but does exacerbate the short term up trend that kicked into gear yesterday.
Please recall that traders had their signals, purchased yesterday at varying points based on each trader's objectives, and would likely purchase more shares today based upon tick by tick data. Today's news reverses the previous trend: the sellers suddenly stand aside, as the buyers crush the doors attempting to get into this (new) market trend. Its duration, however, remains to be determined.
So, to reiterate, today's FRB action merely exacerbates what was to occur anyway.
-- David M Gordon / The Deipnosophist
-
LNOP up 7.3 %.
Re-entered ISIS.
-
Re LNOP:
http://www.thestreet.com:80/_yahoo/newsanalysis/technicalanalysis/10376112.html
-
LNOP kicking butt!!! :-D :-D :-D
Back in ISIS too.
-
Hey crafty,
You like your LNOP?
Another 52 week high and closing high today. I think that the company is close to placing the remainder of its secondary. It has already sold 900,000 shares of the secondary to one private investor with a last name of Cheney. The stock is up 50% during this placement.
Here are some more fundamental tidbits that I have discovered since my last post here. The newly announced NP-4 chip will be cost competitive with ASIC's. This is huge because it opens up the opportunity to move downspeed with cheaper,slower chips in other parts of the network. It will be usable with any company's switch fabric. It incorporates the physical layer on to the chip and includes many functions that now require additional chips in a linecard. Market share in the target market is about 50% higher than any assumption out there. The initial ramp will run through 2012. It has design wins at Lockheed Martin, Motorola and with the Israeli government.
The more I learn about this company, the better its prospects look. Gilder may have stumbled onto another big winner like QCOM at its zenith and EQIX.
-
Crafty and Rick,
LNOP's recent meteoric rise seems to be temporally related to Cramer and the Street's mention of it. I suppose the private placement with Cheney and the Street's mention is no coincidence either. Sounds to me like it was orchestrated.
I've been burned so badly in the past listening to Gilder and drinking his koolaid I have been hesitant to get into this one though it sounds like it has the technological edge. We've learned that having the technological edge isn't always enough.
When did he say Terayon (another Israeli company) would follow Qualcomm "over the rainbow" - around 1999 or 2000. Its price soared to well into the 200s. What is the price now, 1 or 2 bucks? Are the Israeli's running LNOP more attuned than the brothers who managed Terayon to oblivion? I am not being sarcastic. I don't know the answer to this. But clearly we have to have not only tech brains but business brains to have any chance of a homerun. (along with a big dose of luck)
That is the problem with these kinds of tech picks. They can go up 1000% (like QCOM) or more frequently drop 95% (like TERN, AVNX and countless others).
I learned if nothing else whatever one invests into these crap shoots - one better be willing to risk all of the investment which should be small and reasonable. Great technology aside these investments are only one step above venture capital investments in myHO.
Every time my greed fires me up to "get in" and make great profits I go through the above safety valve analysis that I've learned the hard way. This one will turn out to be a great investment - why - because I am holding off.
-
I know so very well what you mean!!! :-P
FWIW here's this from GG in today's newletter on LNOP:
============
George Gilder, Gilder Telecosm Forum (9/9/07): People everywhere want to know. What are the limits of EZchip (LNOP)?
The Linley Group defines EZ's limits as some portion of the $700M Carrier Ethernet market, particularly the demand for metro ethernet switches. Yet the NPU performs generic functions of routing, switching and managing traffic for Internet Protocol packets and Ethernet frames, which are by no means restricted to metro slots. These functions have to be performed everywhere the Internet reaches, from entertainment rooms to Googleplex datacenters, from telco central offices to enterprise local area networks, from surveillance devices to satellite links, from automobiles to airplanes, from storage area networks to medical centers. The current carrier switches are merely the first of the markets to emerge, but they do not begin to represent the limits for EZchips.
-
Took advantage of yesterday's drop due to a secondary offering to fatten my position in LNOP a bit.
-
Good thing I had a tight stop on the incremental purchase of LNOP!
-
Tis a rare event, but I re-entered the minor stopped out sub-position in LNOP in profitable fashion and today am quite happy. As I type LNOP is up 5.8%-- and ISIS is having yet another fine day.
-
LNOP just tripled the size of its total addressable market (TAM) with this announcement.
http://biz.yahoo.com/prnews/071011/ukth056.html?.v=3 (http://biz.yahoo.com/prnews/071011/ukth056.html?.v=3)
-
A HUGE run by LNOP the last several days. I want to thank you Rick for putting me on to this. Because of your credibility with me I went in pretty big on this and am feeling quite good.
-
It will settle down now and consolidate for several weeks. Q3 earnings will be announced around 15 November. Expect some more action around that time.
-
David Gordon is back in town and has several posts in recent days up on his blog. His call for ISRG is up quite nicely for me! Speaking of David, it was he who first brought my attention to the fundamentals of water as an investment hypothesis. Here is a recent article that speaks to this theme.
==========
By JON GERTNER
Published: October 21, 2007
Scientists sometimes refer to the effect a hotter world will have on this
country's fresh water as the other water problem, because global warming
more commonly evokes the specter of rising oceans submerging our great
coastal cities. By comparison, the steady decrease in mountain snowpack -
the loss of the deep accumulation of high-altitude winter snow that melts
each spring to provide the American West with most of its water - seems to
be a more modest worry. But not all researchers agree with this ranking of
dangers. Last May, for instance, Steven Chu, a Nobel laureate and the
director of the Lawrence Berkeley National Laboratory, one of the United
States government's pre-eminent research facilities, remarked that
diminished supplies of fresh water might prove a far more serious problem
than slowly rising seas. When I met with Chu last summer in Berkeley, the
snowpack in the Sierra Nevada, which provides most of the water for Northern
California, was at its lowest level in 20 years. Chu noted that even the
most optimistic climate models for the second half of this century suggest
that 30 to 70 percent of the snowpack will disappear. "There's a two-thirds
chance there will be a disaster," Chu said, "and that's in the best
scenario."
In the Southwest this past summer, the outlook was equally sobering. A
catastrophic reduction in the flow of the Colorado River - which mostly
consists of snowmelt from the Rocky Mountains - has always served as a kind
of thought experiment for water engineers, a risk situation from the outer
edge of their practical imaginations. Some 30 million people depend on that
water. A greatly reduced river would wreak chaos in seven states: Colorado,
Utah, Wyoming, New Mexico, Arizona, Nevada and California. An almost
unfathomable legal morass might well result, with farmers suing the federal
government; cities suing cities; states suing states; Indian nations suing
state officials; and foreign nations (by treaty, Mexico has a small claim on
the river) bringing international law to bear on the United States
government. In addition, a lesser Colorado River would almost certainly lead
to a considerable amount of economic havoc, as the future water supplies for
the West's industries, agriculture and growing municipalities are
threatened. As one prominent Western water official described the possible
future to me, if some of the Southwest's largest reservoirs empty out, the
region would experience an apocalypse, "an Armageddon."
One day last June, an environmental engineer named Bradley Udall appeared
before a Senate subcommittee that was seeking to understand how severe the
country's fresh-water problems might become in an era of global warming. As
far as Washington hearings go, the testimony was an obscure affair, which
was perhaps fitting: Udall is the head of an obscure organization, the
Western Water Assessment. The bureau is located in the Boulder, Colo.,
offices of the National Oceanic and Atmospheric Administration, the
government agency that collects obscure data about the sky and seas. Still,
Udall has a name that commands some attention, at least within the Beltway.
His father was Morris Udall, the congressman and onetime presidential
candidate, and his uncle was Stewart Udall, the secretary of the interior
under Presidents John F. Kennedy and Lyndon Johnson. Bradley Udall's
great-great-grandfather, John D. Lee, moreover, was the founder of Lee's
Ferry, a flyspeck spot in northern Arizona that means nothing to most
Americans but holds near-mythic status to those who work with water for a
living. Near Lee's Ferry is where the annual flow of the Colorado River is
measured in order to divvy up its water among the seven states that depend
on it. To many politicians, economists and climatologists, there are few
things more important than what has happened at Lee's Ferry in the past,
just as there are few things more important than what will happen at Lee's
Ferry in the future.
The importance of the water there was essentially what Udall came to talk
about. A report by the National Academies on the Colorado River basin had
recently concluded that the combination of limited Colorado River water
supplies, increasing demands, warmer temperatures and the prospect of
recurrent droughts "point to a future in which the potential for conflict"
among those who use the river will be ever-present. Over the past few
decades, the driest states in the United States have become some of our
fastest-growing; meanwhile, an ongoing drought has brought the flow of the
Colorado to its lowest levels since measurements at Lee's Ferry began 85
years ago. At the Senate hearing, Udall stated that the Colorado River basin
is already two degrees warmer than it was in 1976 and that it is foolhardy
to imagine that the next 50 years will resemble the last 50. Lake Mead, the
enormous reservoir in Arizona and Nevada that supplies nearly all the water
for Las Vegas, is half-empty, and statistical models indicate that it will
never be full again. "As we move forward," Udall told his audience, "all
water-management actions based on 'normal' as defined by the 20th century
will increasingly turn out to be bad bets."
========
Page 2 of 10)
A few weeks after his testimony, I flew to Boulder to meet with Udall, and
we spent a day driving switchback roads high in the Rockies in his old
Subaru. It had been a wet season on the east slope of the Rockies, but the
farther west we went, the drier it became. Udall wanted to show me some of
the local reservoirs and water systems that were built over the past
century, so I could get a sense of their complexity as well as their
vulnerability. As he put it, he wants to connect the disparate members of
the water economy in a way that has never really been done before, so that
utility executives, scientists, environmentalists, business leaders, farmers
and politicians can begin discussing how to cope with the inevitable
shortages of fresh water. In the American West, whose huge economy and
political power derive from the ability of 20th-century engineers to conquer
rivers like the Colorado and establish a reliable water supply, the prospect
that there will be less water in the future, rather than the same amount, is
unnerving. "We have a very short period of time here to get people educated
on what this means," Udall told me as we drove through the mountains. "Then
once that occurs, perhaps we can start talking about how do we deal with
it."
Skip to next paragraph
Udall suggested that I meet a water manager named Peter Binney, who works
for Aurora, Colo., a city - the 60th-largest in the United States - that
sprawls over an enormous swath of flat, postagricultural land south of the
Denver airport. It may be difficult for residents of the East Coast to
understand the political celebrity of some Western water managers, but in a
place like Aurora, where water, not available land, limits economic growth,
Binney has enormous responsibilities. In effect, the city's viability
depends on his wherewithal to conjure new sources of water or increase the
output of old ones. As Binney told me when we first spoke, "We have to find
a new way of meeting the needs of all this population that's turning up and
still satisfy all of our recreational and environmental demands." Aurora has
a population of 310,000 now, Binney said, but that figure is projected to
surpass 500,000 by 2035.
I asked if he had enough water for that many people. "Oh, no," he replied.
He seemed surprised that someone could even presume that he might. In fact,
he explained, his job is to figure out how to find more water in a region
where every drop is already spoken for and at a moment when there is little
possibility that any more will ever be discovered.
Binney and I got together outside Dillon, a village in the Colorado Rockies
75 miles from Aurora and just a few miles west of the Continental Divide. We
met in a small parking lot beside Dillon Reservoir, which sits at the bottom
of a bowl of snow-capped mountains. Binney, a thickset 54-year-old with dark
red hair and a fair complexion, had driven up in a large S.U.V. He still
carries a strong accent from his native New Zealand, and in conversation he
comes across as less a utility manager than a polymath with the combined
savvy of an engineer, an economist and a politician. As we moved to a picnic
table, Binney told me that we were looking at Denver's water, not Aurora's,
and that it would eventually travel 70 miles through tunnels under the
mountains to Denver's taps. He admitted that he would love to have this
water, which is pure snowmelt. To people in his job, snowmelt is the best
source of water because it requires little chemical treatment to bring it up
to federal drinking standards. But this water wasn't available. Denver got
here before him. And in Colorado, like most Western states, the rights to
water follow a bloodline back to whoever got to it first.
One way to view the history of the American West is as a series of important
moments in exploration or migration; another is to consider it, as Binney
does, in terms of its water. In the 20th century, for example, all of our
great dams and reservoirs were built - "heroic man-over-nature"
achievements, in Binney's words, that control floods, store water for
droughts, generate vast amounts of hydroelectric power and enable
agriculture to flourish in a region where the low annual rainfall otherwise
makes it difficult. And in constructing projects like the Glen Canyon Dam -
which backs up water to create Lake Powell, the vast reservoir in Arizona
and Utah that feeds Lake Mead - the builders went beyond the needs of the
moment. "They gave us about 40 to 50 years of excess capacity," Binney says.
"Now we've gotten to the end of that era." At this point, every available
gallon of the Colorado River has been appropriated by farmers, industries
and municipalities. And yet, he pointed out, the region's population is
expected to keep booming. California's Department of Finance recently
predicted that there will be 60 million Californians by midcentury, up from
36 million today. "In Colorado, we're sitting at a little under five million
people now, on our way to eight million people," Binney said. Western
settlers, who apportioned the region's water long ago, never could have
foreseen the thirst of its cities. Nor, he said, could they have anticipated
our environmental mandates to keep water "in stream" for the benefit of fish
and wildlife, as well as for rafters and kayakers
==========
Page 3 of 10)
The West's predicament, though, isn't just a matter of limited capacity,
bigger populations and environmental regulations. It's also a distributional
one. Seventy-five years ago, cities like Denver made claims on - and from
the state of Colorado received rights to - water in the mountains; those
cities in turn built reservoirs for their water. As a result, older cities
have access to more surface water (that is, water that comes from rivers and
streams) than newer cities like Aurora, which have been forced to purchase
existing water rights from farmers and mining companies. Towns that rely on
groundwater (water pumped from deep underground) face an even bigger
disadvantage. Water tables all over the United States have been dropping,
sometimes drastically, from overuse. In the Denver area, some cities that
use only groundwater will almost certainly exhaust their accessible supplies
by 2050.
The biggest issue is that agriculture consumes most of the water, as much as
90 percent of it, in a state like Colorado. "The West has gone from a
fur-trapping, to a mining, to an agricultural, to a manufacturing, to an
urban-centric economy," Binney explained. As the region evolved, however,
its water ownership for the most part did not. "There's no magical locked
box of water that we can turn to," Binney says of cities like Aurora, "so it's
going to have to come from an existing use." Because the supply of water in
the West can't really change, water managers spend their time looking for
ways to adjust its allocation in their favor.
Binney knew all this back in 2002, when he took the job in Aurora after a
long career at an engineering firm. Over the course of a century, the city
had established a reasonable water supply. About a quarter of its water is
piped in from the Colorado River basin about 70 miles away; another quarter
is taken from reservoirs in the Arkansas River basin far to the south. The
rest comes from the South Platte, a lazy, meandering river that runs north
through Aurora on its way toward Nebraska. Binney says he believes that a
city like his needs at least five years of water in storage in case of
drought; his first year there turned out to be one of the worst years for
water managers in recorded history, and the town's reservoirs dropped to 26
percent of capacity, meaning Aurora had at most nine months of reserves and
could not endure another dry spring. During the summer and fall, Binney
focused on both supply and demand. He negotiated with neighboring towns to
buy water and accelerated a program to pay local farmers to fallow their
fields so the city could lease their water rights. Meanwhile, the town asked
residents to limit their showers and had water cops enforce new rules
against lawn sprinklers. ("It's interesting how many people were watering
lawns in the middle of the night," Binney said.)
Water use in the United States varies widely by region, influenced by
climate, neighborhood density and landscaping, among other things. In the
West, Los Angelenos use about 125 gallons per person per day in their homes,
compared with 114 for Tucson residents. Binney's customers generally use
about 160 gallons per person per day. "In the depths of the drought," he
said, "we got down to about 123 gallons."
Part of the cruelty of a Western drought is that a water manager never knows
if it will last 1 year or 10. In 2002, Binney was at the earliest stages of
what has since become a nearly continuous dry spell. Though he couldn't see
that at the time, he realized Aurora faced a permanent state of emergency if
it didn't boost its water supplies. But how? One option was to try to buy
water rights in the mountains (most likely from farmers who were looking to
quit agriculture), then build a new reservoir and a long supply line to
Aurora. Obvious hurdles included environmental and political resistance, as
well as an engineering difficulty: water is heavy, far heavier than oil, and
incompressible; a system to move it long distances (especially if it
involves tunneling through mountains or pumping water over them) can cost
billions. Binney figured that without the help of the federal government,
which has largely gotten out of the Western dam-and-reservoir-building
business, Aurora would be unwise to pursue such a project. Even if the money
could be raised, building a system would take decades. Aurora needed a
solution within five years.
-
Page 4 of 10)
Another practice, sometimes used in Europe, is to drill wells alongside a
river and pull river water up though them, using the gravel of the riverbank
as a natural filter - sort of like digging a hole in the sand near the ocean's
edge as it fills from below. Half of Aurora's water rights were on the South
Platte already; the city also pours its treated wastewater back into the
river, as do other cities in the Denver metro area. This gives the South
Platte a steady, dependable flow. Binney and the township reasoned that they
could conceivably, and legally, go some 20 or 30 miles downstream on the
South Platte, buy agricultural land near the river, install wells there and
retrieve their wastewater. Thus they could create a system whereby Aurora
would use South Platte water; send it to a treatment plant that would
discharge it back into the river; go downstream to recapture water from the
same river; then pump it back to the city for purification and further use.
The process would repeat, ad infinitum. Aurora would use its share of South
Platte water "to extinction," in the argot of water managers. A drop of the
South Platte used by an Aurora resident would find its way back to the city's
taps as a half-drop in 45 to 60 days, a quarter-drop 45 to 60 days after
that and so on. For every drop the town used from the South Platte, over
time it would almost - as all the fractional drops added up - get another.
Many towns have a supply that includes previously treated water. The water
from the Mississippi River, for instance, is reused many times by
municipalities as it flows southward. But as far as Binney knew, no
municipality in the United States had built the kind of closed loop that
Aurora envisioned. Water from wells in the South Platte would taste
different, because of its mineral and organic content, so Binney's engineers
would have to make it mimic mountain snowmelt. More delicate challenges
involved selling local taxpayers on authorizing a project, marketed to them
as "Prairie Waters," that would capitalize on their own wastewater. The
system, which meant building a 34-mile-long pipeline from the downstream
South Platte riverbanks to a treatment facility in Aurora, would cost
three-quarters of a billion dollars, making it one of the most expensive
municipal infrastructure projects in the country.
When Binney and I chatted at the reservoir outside Dillon, he had already
finished discussions with Moody's and Fitch, the bond-rating agencies whose
evaluations would help the town finance the project. Groundbreaking, which
would be the next occasion we would see each other, was still a month away.
"What we're doing now is trading high levels of treatment and purification
for building tunnels and chasing whatever remaining snowmelt there is in the
hills, which I think isn't a wise investment for the city," he told me. "I
would expect that what we're going to do is the blueprint for a lot of
cities in California, Arizona, Nevada - even the Carolinas and the Gulf
states. They're all going to be doing this in the future."
Water managers in the West tend to think in terms of "acre-feet." One
acre-foot, equal to about 326,000 gallons, is enough to serve two typical
Colorado families for one year. When measurements of the Colorado River
began near Lee's Ferry in the early 1920s, the region happened to be in the
midst of an extremely wet series of years, and the river was famously
misjudged to have an average flow of 17 million acre-feet per year - when in
fact its average flow would often prove to be significantly less. Part of
the legacy of that misjudgment is that the seven states that divided the
water in the 1920s entered into a legal partnership that created unrealistic
expectations about the river's capacity. But there is another, lesser-known
legacy too. As the 20th century progressed, many water managers came to
believe that the 1950s, which included the most severe drought years since
measurement of the river began, were the marker for a worst-case situation.
===========
Page 5 of 10)
But recent studies of tree rings, in which academics drill core samples from
the oldest Ponderosa pines or Douglas firs they can find in order to
determine moisture levels hundreds of years ago, indicate that the dry times
of the 1950s were mild and brief compared with other historical droughts.
The latest research effort, published in the journal Geophysical Research
Letters in late May, identified the existence of an epochal Southwestern
megadrought that, if it recurred, would prove calamitous.
When Binney and I met at Dillon Reservoir, he brought graphs of Colorado
River flows that go back nearly a thousand years. "There was this one in the
1150s," he said, tracing a jagged line downward with his finger. "They think
that's when the Anasazi Indians were forced out. We see drought cycles here
that can go up to 60 years of below-average precipitation." What that would
mean today, he said, is that states would have to make a sudden choice
between agriculture and people, which would lead to bruising political
debates and an unavoidable blow to the former. Binney says that as much as
he believes that some farmers' water is ultimately destined for the cities
anyway, a big jolt like this would be tragic. "You hope you never get to
that point," he told me, "where you force those kinds of discussions,
because they will change for hundreds of years the way that people live in
the Western U.S. If you have to switch off agriculture, it's not like you
can get back into it readily. It took decades for the agricultural industry
to establish itself. It may never come back."
An even darker possibility is that a Western drought caused by climatic
variation and a drought caused by global warming could arrive at the same
time. Or perhaps they already have. This coming spring, the United Nations'
Intergovernmental Panel on Climate Change will issue a report identifying
areas of the world most at risk of droughts and floods as the earth warms.
Fresh-water shortages are already a global concern, especially in China,
India and Africa. But the I.P.C.C., which along with Al Gore received the
2007 Nobel Peace Prize earlier this month for its work on global-warming
issues, will note that many problem zones are located within the United
States, including California (where the Sierra Nevada snowpack is
threatened) and the Colorado River basin. These assessments follow on the
heels of a number of recent studies that analyze mountain snowpack and
future Colorado River flows. Almost without exception, recent climate models
envision reductions that range from the modest to the catastrophic by the
second half of this century. One study in particular, by Martin Hoerling and
Jon Eischeid, suggests the region is already "past peak water," a milestone
that means the river's water supply will now forever trend downward.
Climatologists seem to agree that global warming means the earth will, on
average, get wetter. According to Richard Seager, a scientist at Columbia
University's Lamont Doherty Earth Observatory who published a study on the
Southwest last spring, more rain and snow will fall in those regions closer
to the poles and more precipitation is likely to fall during sporadic,
intense storms rather than from smaller, more frequent storms. But many
subtropical regions closer to the equator will dry out. The models analyzed
by Seager, which focus on regional climate rather than Colorado River flows,
show that the Southwest will ultimately be subject to significant
atmospheric and weather alterations. More alarming, perhaps, is that the
models do not only concern the coming decades; they also address the
present. "You know, it's like, O.K., there's trouble in the future, but how
near in the future does it set in?" he told me. "In this case, it appears
that it's happening right now." When I asked if the drought in his models
would be permanent, he pondered the question for a moment, then replied:
"You can't call it a drought anymore, because it's going over to a drier
climate. No one says the Sahara is in drought."
Climate models tend to be more accurate at predicting temperature than
precipitation. Still, it's hard to avoid the conclusion that "something is
happening," as Peter Binney gently puts it. Everyone I spoke with in the
West has noticed - less snow, earlier spring melts, warmer nights. Los
Angeles this year went 150 days without a measurable rainfall. One afternoon
in Boulder, I spent some time with Roger Pulwarty, a highly regarded
climatologist at the National Oceanic and Atmospheric Administration.
Pulwarty, who has spent the past few years assessing adaptive solutions to a
long drought, has a light sense of humor and an air of optimism about him,
but he acknowledged that the big picture is worrisome. Even if the
precipitation in the West does not decrease, higher temperatures by
themselves create huge complications. Snowmelt runoff decreases. The immense
reservoirs lose far more water to evaporation. Meanwhile, demand increases
because crops are thirstier. Yet importing water from other river basins
becomes more difficult, because those basins may face shortages, too.
=========
Page 6 of 10)
"You don't need to know all the numbers of the future exactly," Pulwarty
told me over lunch in a local Vietnamese restaurant. "You just need to know
that we're drying. And so the argument over whether it's 15 percent drier or
20 percent drier? It's irrelevant. Because in the long run, that decrease,
accumulated over time, is going to dry out the system." Pulwarty asked if I
knew the projections for what it would take to refill Lake Powell, which is
at about 50 percent of capacity. Twenty years of average flow on the
Colorado River, he told me. "Good luck," he said. "Even in normal conditions
we don't get 20 years of average flow. People are calling for more storage
on the system, but if you can't fill the reservoirs you have, I don't know
how more storage, or more dams, is going to help you. One has to ask if the
normal strategies that we have are actually viable anymore."
Pulwarty is convinced that the economic impacts could be profound. The worst
outcome, he suggested, would be mass migrations out of the region, along
with bitter interstate court battles over the dwindling water supplies. But
well before that, if too much water is siphoned from agriculture, farm towns
and ranch towns will wither. Meanwhile, Colorado's largest industry,
tourism, might collapse if river flows became a trickle during summertime.
Already, warmer temperatures have brought on an outbreak of pine beetles
that are destroying pine forests; Pulwarty wonders how many tourists will
want to visit a state full of dead trees. "A crisis is an interesting
thing," he said. In his view, a crisis is a point in a story, a moment in a
narrative, that presents an opportunity for characters to think their way
through a problem. A catastrophe, on the other hand, is something different:
it is one of several possible outcomes that follow from a crisis. "We're at
the point of crisis on the Colorado," Pulwarty concluded. "And it's at this
point that we decide, O.K., which way are we going to go?"
It is all but imposible to look into the future of the Western states
without calling on Pat Mulroy, the head of the Southern Nevada Water
Authority. Mulroy has no real counterpart on the East Coast; her nearest
analog might be Robert Moses, the notorious New York City planner who built
massive infrastructure projects and who almost always found a way around
institutional obstructions and financing constraints. She is arguably the
most influential and outspoken water manager in the country - a "woman
without fear," as Pulwarty describes her. Pulwarty and Peter Binney respect
her willingness to challenge historical water-sharing agreements that, in
Mulroy's view, no longer suit the modern West (meaning they don't suit Las
Vegas). According to Binney, however, Nevada's scant resources give Mulroy
little choice. She has to keep her city from drying out. That makes hers the
most difficult job in the water business, he told me.
Las Vegas is almost certainly more vulnerable to water shortages than any
metro area in the country. Partly that's a result of the city's explosive
growth. But the state of Nevada has the historical misfortune of receiving a
smaller share of Colorado River water (300,000 acre-feet annually) than the
other six states with which it signed a water-sharing compact in the 1920s.
That modest share, stored in Lake Mead along with water destined for
Southern California, Arizona and northern Mexico, now means everything to
Las Vegas. I traveled to Lake Mead on a 99-degree day last June. The narrow,
110-mile-long lake, which at full capacity holds 28 million acre-feet of
water (making it the largest reservoir in the United States), was at 49
percent of capacity. When riding into the valley and glimpsing it from
afar - an astonishing slash of blue in the desert - my guide for the day,
Bronson Mack of the Southern Nevada Water Authority, remarked that he had
never seen it so low. The white bathtub ring on the sides of the canyon that
marks the level of full capacity was visible about 100 feet above the water.
"I have a photograph of my mother on her honeymoon, standing in front of the
lake," Mack, a Las Vegas native, said. That was in 1970. "It was almost that
low, but not quite."
Over the past year, it has become conceivable that the lake could eventually
drop below the level of the water authority's intake pipes, the straws that
suck the water out for the Las Vegas Valley. The authority recently hired an
engineering firm to drill through several miles of rock and create a deeper
intake pipe near the bottom of the lake. To say the project is being
fast-tracked is an understatement. The day after visiting Lake Mead, I met
with Mulroy in her Las Vegas office. "We have everything in line to get it
running by 2012," she said of the new intake. But she added that she is
looking to cut as much time off construction as possible. Building the new
intake is a race against the clock, or rather a race against a lake that
keeps going down, down, down.
-
Page 7 of 10)
Mulroy is not gambling the entire future of Las Vegas on this project. One
catchphrase of the water trade is that water flows uphill toward money,
which is another way of saying that a city with ample funds can, at least
theoretically, augment its supplies indefinitely. In a tight water market
like that of the West, this isn't an absolute truth, but in many instances
money can move rivers. The trade-off is that new water tends to be of lower
quality (requiring more expensive purification) or far away (requiring more
expensive transport). Thanks to Las Vegas's growth - the metro area is now
at 1.8 million people - cost is currently no object. The city's cash
reserves have made it possible for Mulroy to pay Arizona $330 million for
water she can use in emergencies and to plan a controversial
multibillion-dollar pipeline to east-central Nevada, where the water
authority has identified groundwater it wants to extract and transport.
Wealth allows for the additional possibility of a sophisticated trading
scheme whereby Las Vegas might pay for a desalination plant on the Pacific
Coast that would transform seawater into potable water for use in California
and Mexico. In exchange, Nevada could get a portion of their Colorado River
water in Lake Mead.
So money does make a kind of sustainability possible for Las Vegas. On the
other hand, buying water is quite unlike buying anything else. At the
moment, water doesn't really function like a private good; its value, which
Peter Binney calls "infinite," is often only vaguely related to its price,
which can vary from 50 cents an acre-foot (what Mulroy pays to take water
from Lake Mead) to $12,000 an acre-foot (the most Binney has paid farmers in
Colorado for their rights). Moreover, water is so necessary to human life,
and hence so heavily subsidized and regulated, that it can't really be
bought and sold freely across state lines. (Enron tried to start a water
market called Azurix in the late 1990s, only to see it fail spectacularly.)
The more successful water markets have instead been local, like one in the
late 1980s in California, where farmers agreed to reduce their water use and
sell the savings to a state water bank. Mulroy and Binney each told me they
think a true free-market water exchange would create too many winners and
losers. "What you would have is affluent communities being able to buy the
lifeblood right out from under those that are less well heeled," Mulroy
said. More practical, in her mind, would be a regional market that gives
states, cities and farmers greater freedom to strike mutually beneficial
agreements, but with protections so that municipalities aren't pitted
against one another.
More-efficient water markets might ease shortages, but they can't replace a
big city's principal source. What if, I asked Mulroy, Lake Mead drained
nearly to the bottom? Even if drought conditions ease over the next year or
two, several people I spoke with think the odds are greater that Lake
Powell, the 27-million-acre-foot reservoir that supplies Lake Mead, will
drop to unusable levels before it ever fills again. Mulroy didn't
immediately dismiss the possibility; she is certain that the reduced
circumstances of the two big Western reservoirs are tied to global warming
and that Las Vegas is this country's first victim of climate change. An
empty Lake Mead, she began, would mean there is nothing in Lake Powell.
"It's well outside probabilities," she said - but it could happen. "In that
case, it's not just a Las Vegas problem. You have three entire states wiped
out: Arizona, California and Nevada. Because you can't replace those volumes
with desalted ocean water." What seems more likely, she said, is that the
legal framework governing the Colorado River would preclude such a dire turn
of events. Recently, the states that use the Colorado reached a tentative
agreement that guarantees Lake Mead will remain partly full under current
conditions, even if upstream users have to cut back their withdrawals as a
result. The deal supplements a more fundamental understanding that dates to
the 1920s. If the river is failing to carry a certain, guaranteed volume of
water to Lee's Ferry, which is just below Lake Powell, the river's
lower-basin states (Nevada, Arizona and California) can legally force the
upper-basin states (Colorado, Wyoming, New Mexico and Utah) to reduce or
stop their water withdrawals. This contingency, known as a "compact call,"
sets the lower-basin states against the upper, but it has never occurred; it
is deeply feared by many water managers, because it would ravage the fragile
relationship among states and almost certainly lead to a scrum of lawsuits.
Yet, last year water managers in Colorado began meeting for the first time
to discuss the possibility. In our conversations, Mulroy denied that there
would be a compact call, but she pointed out that Las Vegas's groundwater
and desalination plans were going ahead anyway for precautionary reasons.
=========
Page 8 of 10)
I asked if limiting the growth of the Las Vegas metro area wouldn't help.
Mulroy bristled. "This country is going to have 100 million additional
people in it in the next 25 to 30 years," she replied. "Tell me where they're
supposed to go. Seriously. Every community says, 'Not here,' 'No growth
here,' 'There's too many people here already.' For a large urban area that
is the core economic hub of any particular area, to even attempt to throw up
walls? I'm not sure it can be done." Besides, she added, the problem isn't
growth alone: "We have an exploding human population, and we have a
shrinking clean-water supply. Those are on colliding paths. This is not just
a Las Vegas issue. This is a microcosm of a much larger issue." Americans,
she went on to say, are the most voracious users of natural resources in the
world. Maybe we need to talk about that as well. "The people who move to the
West today need to realize they're moving into a desert," Mulroy said. "If
they want to live in a desert, they have to adapt to a desert lifestyle."
That means a shift from the mindset of the 1930s, when the federal
government encouraged people to settle in the West, plant water-intensive
crops and make it look like the East Coast. It means landscapes of parched
dirt. It means mesquite bushes and palo verde trees for vegetation. It means
recycled water. It means gravel lawns. It is the West's new deal, she seemed
to be saying, and I got the feeling that for Mulroy it means that every
blade of grass in her state would soon be gone.
The first impulse when confronted with the West's water problems may be to
wonder how, as scarcity becomes more acute, the region will engineer its way
back to health. What can be built, what can technology accomplish, to ease
any shortages? Yet this is almost certainly the wrong way to think about the
situation. To be sure, construction projects like a pipeline from
east-central Nevada could help Las Vegas. But the larger difficulty facing
Pat Mulroy and Peter Binney, as they describe it, is re-engineering the
culture and conventions of the West before it becomes too late. Whether or
not there is enough water in the region for, say, the next 30 or 50 years
isn't necessarily a question with a yes-or-no answer. The water managers I
spoke with believe the total volume of available water could be great enough
to sustain the cities, many farms and perhaps the natural flow of the area's
rivers. But it's not unreasonable to assume that if things continue as they
have - with so much water going to agriculture; with conservation only
beginning to take hold among residents, industry and farmers; with supplies
diminishing slowly but steadily as the Earth warms; with the population
growing faster than anywhere else in the United States; and with some of our
most economically vital states constricted by antique water agreements - the
region will become a topography of crisis and perhaps catastrophe. This is
an old prophecy, dating back more than a century to one of the original
American explorers of the West, John Wesley Powell, who doubted the
territory could support large populations and intense development. (Powell
presciently argued that river basins, not arbitrary mapmakers, should
determine the boundaries of the Western states, in order to avoid inevitable
conflicts over water.) An earlier explorer, J. C. Ives, visited the present
location of Hoover Dam, between Arizona and Nevada, in 1857. The desiccated
landscape was "valueless," Ives reported. "There is nothing there to do but
leave."
Roger Pulwarty, for his part, rejects the notion of environmental
determinism. Nature, in other words, isn't inexorably pushing the region
into a grim, suffering century. Things can be done. Redoubling efforts to
prevent further climate change, Pulwarty says, is one place to start;
another is getting the states that share the Colorado River to reach
cooperative arrangements, as they have begun to discuss, for coping with
long-term droughts. Other parts of the solution are less obvious. To Peter
Gleick, head of the Pacific Institute, a nonprofit based in Oakland, Calif.,
that focuses on global water issues, whether we can adapt to a drier future
depends on whether we can rethink the functions, and value, of fresh water.
Can we can do the same things using less of it? How we use our water, Gleick
believes, is considerably more complex than it appears. First of all, there
are consumptive and nonconsumptive uses of water. Consumptive use, roughly
speaking, refers to water taken from a reservoir that cannot be recovered.
"It's embedded in a product like a liter of Coca-Cola, or it's contaminated
so badly we can't reuse it," Gleick says. In agriculture, the vast majority
of water use is also consumptive, because it evaporates or transpires from
crops into the atmosphere. Evaporated water may fall as rain 1,000 miles
away - that's how Earth's water cycle works - but it is gone locally. A
similar consumptive process characterizes the water we put on our lawns or
gardens: it mostly disappears. Meanwhile, most of the water used by
metropolitan areas is nonconsumptive. It goes down the drain and empties
into nearby rivers, like Colorado's South Platte, as treated wastewater.
==========
Page 9 of 10)
Gleick calls the Colorado River "the most complicated water system in the
world," and he isn't convinced it will be easy, or practical, to change the
laws that govern its usage. "But I think it's less hard to change how we use
water," he says. He accepts that climate change is confronting the West with
serious problems. (He was also one of the country's first scientists, in the
mid-1980s, to point out that reductions in mountain snowpack could present
huge challenges.) He makes a persuasive case, however, that there are
immense opportunities - even in cities like Las Vegas, which has made
strides in conservation - to reduce both consumptive and nonconsumptive
demand for water. These include installing more low-flow home appliances and
adopting more efficient irrigation methods. And they include economic tools
too: for example, many municipalities have reduced consumption by making
water more expensive (the more you use, the higher your per-gallon rate).
The United States uses less water than it did 25 years ago, Gleick points
out: "We haven't even paid too much attention to it, and we've accomplished
this." To go further, he says he believes we could alter not only demand but
also supply. "Treated wastewater isn't a liability, it's an asset," he says.
We don't need potable water to flush our toilets or water our lawns. "One
might say that's a ridiculous use of potable water. In fact, I might say
that. But that's the way we've set it up. And that's going to change, that's
got to change, in this century."
Among Colorado's water managers, Peter Binney's Prairie Waters project is
considered both innovative and important not on account of its technology
but because it seems to mark a new era of finding water sources in the
drying West. It also proves that the next generation's water will not come
cheap, or come easy. In late July, I went to Aurora to meet up again with
Binney. It was the groundbreaking day for Prairie Waters, which had been on
the local television news: Binney and several other officials grinned for
the cameras and signed a section of six-foot steel pipe, the same kind that
would transport water from the South Platte wells to the Aurora treatment
facility. That evening, Binney and I had dinner together at a steakhouse in
an Aurora shopping mall. When he remarked that we may have exceeded what he
calls the "carrying capacity" of the West, I asked him whether our desert
civilizations could last. Binney seemed dubious. "Not the way we've got it
set up," he said. "We've decoupled land use from water use. Water is the
limiting resource in the West. I think we need to match them back together
again." There was a decent amount of water out there, he went on to explain,
but it was a false presumption that it could sustain all the farms, all the
cities, all the rivers. Something will have to give. It was also wrong to
assume, he said, that cities could continue to grow without experiencing
something akin to a religious awakening about the scarcity of water. Soon,
he predicted, we would talk about our "water footprint" just as we now talk
about our carbon footprint.
Indeed, any conversations about the one will in short order expand to
include the other, Binney went on to say. Many water managers have known
this for a while. The two problems - water and energy - are so intimately
linked as to make it exceedingly difficult to tackle one without the other.
It isn't just the matter of growing corn for ethanol, which is already
straining water supplies. The less water in our rivers, for instance, the
less hydropower our dams produce. The further the water tables sink, the
more power it takes to pump water up. The more we depend on coal and nuclear
power plants, which require huge amounts of water for cooling, the larger
the burden we place on supplies.
Meanwhile, it is a perverse side effect of global warming that we may have
to emit large volumes of carbon dioxide to obtain the clean water that is
becoming scarcer because of the carbon dioxide we've already put into the
atmosphere. A dry region that turns to desalination, for example, would need
vast amounts of energy (and money) to purify its water. While wind-powered
desalination could perhaps meet this challenge - such a plant was recently
built outside Perth, Australia - it isn't clear that coastal residents in,
say, California would welcome such projects. Unclear, too, is how dumping
the brine that is a by-product of the process back into the ocean would
affect ecosystems.
=========
Page 10 of 10)
Similar energy challenges face other plans. In past years, various schemes
have arisen to move water from Canada or the Great Lakes to arid parts of
the United States. Beyond the environmental implications and construction
costs (probably hundreds of billions of dollars), such continental-scale
plumbing would require stupendous amounts of electricity. And yet, fears
that such plans will resurface in a drier, more populous world are partly
behind current efforts by the Great Lakes states to certify a pact that
protects their fresh water from outside exploitation.
Just pumping water from the Prairie Waters site to Aurora will cost a small
fortune. Binney told me this the day after the groundbreaking, as we drove
north from Aurora to the site. Along the 45-minute journey, Binney narrated
where his pipeline would go - along the edge of the highway here, over in
that field there and so on. Eventually we turned off the highway and onto a
small country road, and Binney slowed down so I could take in the
surroundings. "Here's where you see it all coming together and all of it
coming into conflict," he told me. To him, it was a perfect tableau of the
West in the 21st century. There was a housing development on one side of the
road and fields of irrigated crops on the other. Farther ahead was a gravel
pit, a remnant of the old Colorado mineral-extraction economy.
He drove on, and soon we turned onto a dirt road that bisected some open
fields. We rumbled along for a quarter mile or so, spewing dust and passing
over the South Platte in the process. Binney parked by a wire fence near a
sign marking it as Aurora property. We got out of the truck, hopped over a
locked gate and walked into a farm field.
For miles along the highway, we passed barren acreage that formerly grew
winter wheat but was now slated for new houses. The land we stood on once
grew corn, but tangles of weeds covered it now. As we walked, Binney
explained that the collection wells on the South Platte would soon be dug a
few hundred yards away; that water would be pumped into collection basins on
this field, where sand and gravel would purify it further. Then it would be
pumped back to the chemical treatment plants in Aurora before being piped to
residents. "We're standing 34 miles from there," Binney said.
It was a location as ordinary as I could have imagined, an empty place, far
from anything, and yet Binney saw it as something else. Earlier, when we
crossed over the gravel banks of the South Platte, I found the river
disappointing: broad and shallow, dun-colored and slow-moving, its
unimpressive flow somehow incorporating water Aurora had already used
upstream. James Michener, in writing about this region years ago, was
dead-on in calling it "a sad, bewildered nothing of a river." Still, the
South Platte was dependable. It was also Aurora's lifeline, buying the city
20 or 30 years of time. "What I really like about it," Binney said, smiling
as we walked from the field back to his truck, "is that it's wet."
-
MSN Money Homepage
MSN Money Investing
advertisement
TODAY'S MOST POPULAR
1. Google Phone Plan Draws Interest
2. Merrill's Job: Cleaning Up and Moving On
3. Can Google-Powered Phones Connect With Carriers?
4. Bernanke Rewrites Fed Playbook
5. O'Neal Gets No Severance, but $161.5 Million in Pension, Stock
MORE
PEOPLE WHO READ THIS...
Also read these stories:
What's This?
LanOptics 3Q Losses: 5c/Share Vs 18c >LNOP
DOW JONES NEWSWIRES
October 30, 2007 9:08 a.m.
DOW JONES NEWSWIRES
LanOptics Ltd. (LNOP) on Tuesday reported a third-quarter net loss of $768,000, or 5 cents a share, narrowing from $2.1 million, or 18 cents a share, in last year's third quarter.
The Israeli maker of network processors had revenue for the period ended Sept. 30 of $5.24 million, up from $2.07 million a year earlier, according to a filing with the U.S. Securities and Exchange Commission.
The company's shares closed Monday on the Nasdaq Capital Market at $22.84.
-Ingrid Pedrick Lehrfeld, Dow Jones Newswires; 202-862-1361
-
Silver company PAAS is now a four bagger for me :-D
David Gordon thinks the market is headed for a rougher patch :-o
-
Bought more LNOP yesterday around 20.25, and slept through this morning's scary ride. Rick says there is rumor a hedge fund dropped a large block, which is a thinly traded stock like LNOP which is already volatile every day can really move things around. He says to buy more.
-
Bernake in the middle of opposing tidal waves:
http://www.humanevents.com/article.php?id=23465
-
I disagree with much that PB writes here.
Concerning the crash of '29 and the Great Depression that followed: Yes the Fed made things worse AFTER the market crashed, but this does not explain that there was a world-wide depression until WW2. PB is wrong-- the Great Depression was exactly because of the fragmentation of the world-wide economy brought on by beggar they neighbor devaluations, and tariffs and duties such as the Smoot Hawley Tariff Act and its analogues in our trading partners. FDR killed a nascent recovery of the stock market by increasing taxes in his first term. Jude Wanniski's analysis in his brilliant "The Way the World Works" is in my opinion, the correct analysis of this history.
PB is right that Bernake is on the horns of a dilema. What he misses is this is because monetary policy is only half the problem and solution. Tax policy is also half the problem and solution. Yes the Fed has been too loose and needs to stop it, but the real issue is tax rates. While we have not been looking, the various Euros have simplified and lowered their taxes and investment capital flows, which dwarfy trade flows, now flow to Europe. Despite this, the Dems, who look likely to win, are talking massive tax increases (Rangel's plan, various plans of the Dem candidates, the general nature of Dems). These tax increases (including accepting the end of the Bush tax cuts) if enacted, will tip the US into a severe recession and stagflation. THIS is the problem in my opinion.
-
As George Will wrote, the stock market has predicted nine of the last three recessions. I agree with Crafty on his great depression summary. I don't completely understand the low dollar period we are now experiencing. Nor do I understand Pat Buchanan's dislike of free trade: "given their free-trade fanaticism and free-spending ways, that fate would not be undeserved." What qualifies a private freedom to do business to be lumped in with reckless public spending as a cause of economic disaster? Buchanan has never adequately explained that, in my view.
-
On a PPP basis, the dollar is now dramatically undervalued. The explanation lies I think in the fact that much of Europe has cut and simplified taxes and investment capital, which if I understand correctly dwarfs trade, flows to Europe instead of us.
Anyway, here's an interesting URL:
http://www.currencytrading.net/2007/50-places-to-discover-financial-news-before-it-goes-mainstream/
Seems like a good list of places to go for intel ahead of the herd.
-
POT is nearing a triple for me 8-)
PAAS is virtually a quadruple 8-)
Got out of CELG in time to keep nice profit intact
CWCO got hit hard for misleading accounting :cry:
LNOP is scaring me :-o-- but here's this:
http://biz.yahoo.com/prnews/080103/ukth006.html?.v=6
LanOptics to Complete Acquisition of Substantially All of EZchip's Equity
Thursday January 3, 8:00 am ET
LanOptics Trading Moves to NASDAQ Global Market Applied to Change Trading Symbol to "EZCH"
YOKNEAM, Israel, January 3 /PRNewswire-FirstCall/ -- LanOptics Ltd. (NASDAQ: LNOP - News), a provider of Ethernet network processors, announced today that the last two principal shareholder groups of its subsidiary, EZchip Technologies Ltd., have elected to exchange all of their shares of EZchip for shares of LanOptics. This exchange represents the last major step in LanOptics' long-term plan to acquire 100% ownership of EZchip.
ADVERTISEMENT
LanOptics will acquire preferred shares of EZchip from the two principal shareholders, representing the equivalent of 20,047,365 EZchip ordinary shares, in exchange for the issuance of 5,011,841 LanOptics shares. The resulting dilution in each LanOptics shareholder's percentage of ownership will be substantially offset by the increase in LanOptics' holdings in EZchip. LanOptics' business consists exclusively of the business of EZchip, a company that is engaged in the development and sales of Ethernet network processors.
Following the exchange, LanOptics will own approximately 99% of the outstanding share capital of EZchip, or 89% on a fully diluted basis. The residue represents unissued EZchip shares subject to outstanding EZchip options held by current and former employees of EZchip. Pursuant to the exchange agreement, LanOptics is required to register the shares issued in the exchange with the U.S. Securities and Exchange Commission.
LanOptics further announced that starting tomorrow January 4, 2008, the company's ordinary shares will be traded on the NASDAQ Global MarketSM. The company has also applied to change its trading symbol from "LNOP" to "EZCH" effective January 17, 2008.
"It is an exciting day in the history of our company and the beginning of a new era," commented Eli Fruchter, the Chairman of LanOptics and CEO of EZchip. "It has been our long-term goal to acquire full ownership of EZchip and we are excited to finally reach this milestone. We expect the rationalizing of our corporate structure and the unifying of the shareholdings in the two companies under our EZchip brand name to further support the company's continued growth and allow various efficiencies in the operation of the businesses."
"We are also delighted to announce our upgrade to the NASDAQ Global MarketSM - a testament to the company's recent results and increased trading in the company's shares. We expect the move to the more prestigious NASDAQ Global MarketSM, combined with our new trading symbol - "EZCH", once approved, will provide greater visibility and liquidity to our shares and promote our EZchip brand name recognition," Mr. Fruchter added.
This press release shall not constitute an offer to sell or solicitation of an offer to buy, any securities of LanOptics.
About LanOptics
LanOptics' business consists exclusively of the business of EZchip, a company that is engaged in the development and marketing of Ethernet network processors for networking equipment. EZchip provides its customers with solutions that scale from 1-Gigabit to 100-Gigabits per second with a common architecture and software across all products. EZchip's network processors provide the flexibility and integration that enable triple-play data, voice and video services in systems that make up the new Carrier Ethernet networks. Flexibility and integration make EZchip's solutions ideal for building systems for a wide range of applications in telecom networks, enterprise backbones and data centers. For more information on LanOptics and EZchip, visit the web site at http://www.ezchip.com.
-
Like the rest of you in the market, I've had much adventure-- and not much time to report here.
Following David Gordon I have taken a position in VMW at 82 and doubled it the other day at 74.
Nice day from CREE and PCL.
Rick N has kept me apprised of LNOP, which is now EZCH. I added strongly to my position at 11.80 Here is the latest on its technology being used:
=========
Press Release Source: Juniper Networks, Inc.
Independent Test Validates Simplicity of Juniper Networks MPLS Plug-and-Play Solution
Tuesday January 22, 9:00 am ET
Isocore's Comprehensive Testing Confirms Effectiveness of Juniper's Automated, Cost-effective Solution for Deploying Large Carrier Ethernet Networks
SUNNYVALE, Calif.--(BUSINESS WIRE)--Juniper Networks, Inc. (NASDAQ:JNPR - News), the leader in high-performance networking, today announced the completion of an independent, comprehensive test that validates the effectiveness of its MPLS Plug-and-Play solution designed to simplify network operations of Carrier Ethernet networks. Isocore, a leading technology validation and certification laboratory, evaluated Juniper Networks MPLS Plug-and-Play solution and verified a significant simplification in the provisioning of large-scale Ethernet networks and services, including the ease of managing and troubleshooting of Metro Ethernet networks.
ADVERTISEMENT
“The ability to dynamically provision and deploy Carrier Ethernet networks and services expeditiously and cost-effectively — in a true ‘plug-and-play’ fashion — is very important to service providers,” said Dr. Bijan Jabbari, president of Isocore. “In our evaluation of Juniper’s MPLS Plug-and-Play solution, it demonstrated its capabilities in fulfilling the promises of automated provisioning and configuration, which helps save time and eliminate configuration errors.”
Juniper Networks MPLS Plug-and-Play is a unique solution based on JUNOS software, which is designed to streamline and simplify network operations by automating time-consuming provisioning, configuration and troubleshooting tasks. MPLS Plug-and-Play from Juniper Networks can reduce service providers’ operating expenses and improves the overall efficiency of Carrier Ethernet networks, while retaining the full feature set of MPLS. MPLS Plug-and-Play leverages error resilient configuration, scripting, auto-discovery and other innovative technologies to simplify the installation and maintenance of Carrier Ethernet networks. In addition, MPLS Plug-and-Play enables customers to accelerate the deployment of new revenue-generating services based on Carrier Ethernet technology.
During the independent Isocore analysis, testing was conducted on a large test bed — representative of a true carrier class network — comprised of Juniper Networks MX-series Ethernet Service Routers (ESRs) and M-series multiservice edge routers. A few of the key findings of the independent test include:
MPLS Plug-and-Play successfully established the support of error-resilient configurations on both edge and core routers used in the test;
Successful demonstration of commit and operation scripts to automate configurations and diagnose failures in the network;
Faultless discovery and operation of Ethernet Unnumbered Interfaces within IGP, BGP and MPLS networks.
The M- and MX-series also demonstrated successful auto-provisioning of Layer 2 Point-to-Point BGP-based VPNs and VPLS services with four sites, and met Isocore’s stringent specifications for a plug-and-play environment. Customers can download Isocore’s complete report on Juniper’s website: www.juniper.net/ce.
“Ethernet’s ubiquitous success has been in large part due to its simplicity and ease-of-deployment,” said Manoj Leelanivas, senior vice president of the Edge and Aggregation Business Unit, Infrastructure Products Group, Juniper Networks. “As service providers adopt Ethernet-based networks, Juniper’s MPLS Plug-and-Play solution extends this simplicity to carrier networks — without requiring customers to give up any of their MPLS features or have their networks be a test-bed for unproven technologies.”
Webinar: Removing the Complexity in IP/MPLS Networks Using MPLS Plug-and-Play
In conjunction with Isocore, Telecommunications Magazine and Synergy Research Group, Juniper Networks will host an informative, no-cost webinar on the subject of MPLS Plug-and-Play. Entitled “Removing the Complexity in IP/MPLS Networks Using MPLS Plug-and-Play,” the webinar will take place on January 23 at 11:30 ET, and will be moderated by Sean Buckley, editor-in-chief of Telecommunications. The session will include expert perspectives from:
Kireeti Kompella, PhD, Juniper Fellow, former co-chair of the IETF CCAMP Working Group and author of several Internet Drafts and RFCs in the areas of CCAMP, IS-IS, L2VPN, MPLS, OSPF and TE;
Ray Mota, PhD, Chief Research Officer, Synergy Research Group;
Bijan Jabbari, PhD, president of Isocore.
For more information, and to register, please visit: www.telecommagazine.com/PlugandPlayJuniper.
About Isocore
Isocore provides technology validation, certification and product evaluation services in emerging and next generation Internet and wireless technologies. Isocore is leading validation and interoperability of novel technologies including Carrier Ethernet, IPv6, IP Optical Integration, wireless backhauling and Layer 2/3 Virtual Private Networks (VPNs) and currently focuses on IPTV service deployment architecture validation and design. Major router and switch vendors, service providers, and test equipment suppliers participate in Isocore activities. Isocore has major offices in the USA (the Washington DC area), Europe (Paris, France) and Asia (Tokyo, Japan).
About Juniper Networks
Juniper Networks, Inc. is the leader in high-performance networking. Juniper offers a high-performance network infrastructure that creates a responsive and trusted environment for accelerating the deployment of services and applications over a single network. This fuels high-performance businesses. Additional information can be found at www.juniper.net.
Juniper Networks and the Juniper Networks logo are registered trademarks of Juniper Networks, Inc. in the United States and other countries. JUNOS is a trademark of Juniper Networks, Inc. All other trademarks, service marks, registered trademarks, or registered service marks are the property of their respective owners.
Contact:
Juniper Networks, Inc.
Susan Ursch, 978-589-0124 (Media)
sursch@juniper.net
Kathleen Bela, 408-936-7804 (Investor Relations)
kbela@juniper.net
-
Juniper reports earnings tonight. Hopefully they will disclose how their MX series CESR switches are progressing. The Juniper MX960 is the primary product in which the EZChip NP-2 is used.
The drop in price from 18 to current levels was caused mostly by a series of margin calls that hit some of the larger shareholders. Etrade especially raised maintenance margins on the stock from 30% to 50, 60 or 70% in accounts that were heavily weighted to EZCH. Some of the larger shareholders were hedge funds that began selling the stock to reduce exposure on all equities because they purchased a lot of their shares with borrowed funds. Also, last Friday, Etrade's system caused a lot of selling after the ticker symbol change when it was not updated promptly. The system called for 100% maintenance margin on EZCH; i.e., no margin allowed. This prompted a number of holders to dump their shares on Friday morning thinking that they had margin calls.
EZCH reports earnings on February 11th.
-
Hi Rick,
Hope you are well.
Does Juniper's entrance into ethernet help EZCH?
I don't see any mention of the MX family.
http://www.reuters.com/article/marketsNews/idUKN2958373720080129?rpc=44
-
Good question there.
Re: David Gordon's call on VMW. Tis a rare event for him to have a pick bomb as badly as VMW has. OUCH (and I just read that GOOG, a big success story of his, is down 10% after hours today). I'm following his advice on his blog on when and how to get out.
-
Crafty,
Does DMG have any thoughts on Bidu? Or the MSFT/YHOo proposal.
-
Here is his blog:
http://eutrapelia.blogspot.com/
-
From the Gilder weekly letter:
The Week / EZ Reaction
LanOptics Announces 130% Revenue Growth in 2007: Yokneam, Israel, February 11, 2008 -- LanOptics Ltd. (NASDAQ: EZCH), a provider of network processors, today announced its results for the fourth quarter and full year ended December 31, 2007.
READ ON: http://www.ezchip.com/pr_080211ln.htm
EZchip Corporate Presentation: http://www.ezchip.com/Images/pdf/LNOP-investorsQ407-080214.pdf
Gilder Telecosm Forum Member #1 (2/11/08): The only way to listen to the company's comments and be discouraged is if you are using the daily stock price as your primary source of research…
Any frustration is a function of our own expectations which have been formed off of an incomplete understanding of the development cycle. But we now have the window for the break-out narrowed down to a few months…
Gilder Telecosm Forum Member #2 (2/11/08): I too was struck by [CEO] Eli Fructer not ruling out a 1H08 Cisco move to production with NP-3c… Eli has always been conservative and understated.
George Gilder (2/11/08): The key to EZ is its role in the critical path of the next three generations of networking technology. It defines the system level products on the fiberspeed level. That means it is slow to get off the ground, but once aloft will fly high for a long time.
For me there was one major upside surprise. I would not have guessed that 20 percent of EZ's design wins were with the two first tier customers. That means a minimum of 10 design wins with both Juniper and Cisco. That strikes me as huge. EZ penetrated Cisco only a year or so ago….
-
From the Gilder weekly freebie letter:
The Week / EZchip on the Critical Path of Fiberspeed Connectivity (video)
EZchip CEO Eli Fruchter speaking on the “Critical Path of Fiberspeed Connectivity” at Gilder/Forbes Telecosm 2007 in October: I wanted to start by telling you what we do, because not all of you own LanOptics shares…We build chips. We are a fabless company. We build network processors that go into network equipment; mainly switched and routers. The big companies that build switches and routers are using our chips…
Now, I want to say a few things about our NP-2 chip in light of yesterday’s session on multicore processing….
View the Complete Video:
http://www.discovery.org/v/44
-
Apparently Gilder is no longer so gung ho on EZCH. I'm guessing why the stock has declined some 40% in the last few weeks :cry: :cry: :cry:
-
He's promoting it for years.
-
From the freebie Friday letter:
The Week /EZCH, NETL, SIGM, CAVM, and RMI
~~~~~~
Gilder Telecosm Forum Member (3/1/08): George, What has changed to make
you view NetLogic (NETL) as having better long-term prospects?
George Gilder, Gilder Telecosm Forum (3/1/08): Comparing NetLogic (NETL)
with Sigma (SIGM) and Cavium (CAVM), and I have come to the conclusion
that NetLogic will be needed for IPv6 and that IPv6 will prevail over the
next decade. EZchip (EZCH) and NetLogic can work together where multiple
fast lookups are required.
EZchip has an architecture that can accommodate 7 layers, but 7 layer
processing will not happen for several years and when it does, TCAMs
(ternary content addressable memories) and so called knowledge processors
will be complementary for the first phases....
Cavium is a proven company pioneering in the largest but also most
competitive markets. It is in the upper layer processor field that is also
contested by the new Cisco (CSCO) control plane devices, LSI Corp. (LSI),
Applied Micro Circuits (AMCC), other control plane processors, RMI and all
the multicore multiprocessor innovators out there, from Intel (INTC) and
AMD (AMD) to Tilera and dozens of others.
To read more of George Gilder's posts and those of the Gilder Telecosm
Forum members, visit http://www.gildertech.com/ and become a Forum member
today.
========
@#$%@$^$%^&&^ :x :x :x You'd think I'd have learned by now.
-
Well, I am a major bagholder of LVLT from broadwing from corvis and can empathize with you. I do share your pain.
I am staying away from Gilder.
His model just doesn't work. Too many unforseen factors. Too many competitors. No one can know all that's going on behind closed doors, as well as the free market place, etc. Maybe EZCH will still do ok, but at my age its nuts to put any more into these companies which are really no more than patent or pending patent ideas.
He's toast for me.
He really does play into our emotional greed with his salesmanship.
-
For a long time I was a true believer in the Efficient Market Hypothes, but that was a long time ago. This piece does a fine scholarly job of discussing the issues involved:
http://web.mit.edu/alo/www/Papers/JPM2004.pdf
A critique of Black Swan theory
A critique of efficient markets hypothesis with improvements offered
http://web.mit.edu/alo/www/Papers/JPM2004.pdf
A critique of Black Swan theory
http://www.efalken.com/papers/Taleb2.html
-
I entered HPLF at .34 (yes, that is 34 cents :roll: ) with a suitably small position and added at .44 and am happy to report at the moment that it is at .68.
They are reporting success in their development of an artificial liver.
-
Cisco and EZchip earnings out soon. I don't own the stock but wish those who do good luck - Marc and Rick.
http://finance.yahoo.com/q?s=ezch
I've been doing a bit more value investing and looking at alternative energy.
-
I really like the website by motley fool. http://www.fool.com/ It has some very accessible stuff for first time investors
I also recommend www.iwillteachyoutoberich.com. It tends more for recent college grads but has good advice for everyone.
In other news Google now has real time stock quotes which will be nice.
-
I poorly timed my exit from EZCH and have not re-entered.
I have been dancing with a minor position in HPLF (artificial liver startup), so far rather profitably. Exited water play BSHF just in time to take a minor profit before it nosedived; ISIS fully entered and in the black;
TAC!
-
Hi All,
I have read Nassim Taleb's "The Black Swan," and although he can be quite pompous in doing so, he points out a valid criticism of human thinking.... that we tend not to account for unforeseeable events even though we know they are there, and that they do happen. That is his simple premise in the book.
As far as investing guidance, Peter Lynch, who ran the Magellan Fund during its peak years, has several excellent books such as "Beating the Street." They describe his approach and statistically analyze how keeping your money in the market vastly increases your financial gains over time, despite rises and falls.
Also.... John Maudlin's "Outside the Box" is one of the best financial news letters out there. He regularly has guest writers with expertise in different areas, such as Stratfor's George Friedman on geopolitical issues, as well as leading brokers from all over the world. The newsletter is free: http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/default.aspx
Good Luck!
Russ
-
A very high IQ friend recommends Taleb's book highly.
-
***I poorly timed my exit from EZCH and have not re-entered***
I am sorry to hear that. I did the same thing with LVLT. Bought corvis before it crashed (thousands of shares). Held on while it became broadwing. Then it became LVLT. Held on for 4 or 5 years. Then watched it go to 1.86 finally gave up and sold it at 2.79. Of course it is 4 and a quarter now.
Unless one is a savvy trader like David Gordon one should stay away from Gilder IMO. Gilder is poison for average investor like me. In addition, his political views are a bit out there and elitist, arrogant, and pompous (just like BO) though the other side of the political spectrum.
-
Savy trader DG stays away from GG like the plague!
My biggest current winner is POT. I bought at 50 and it is now well over 200 :-D :-D :-D
-
I didn't know David G no longer watches GG. I wish I had followed DG's advice on ISRG, GOOG, and MA. BTW, Potash's chart is spectacular! Crafty, where did you hear of this a few years ago? By the time I was alerted to the fertilizer companies it was *after* the rush.
Here is one company that I am in love with and has good long term growth potential and is not followed by any analyst - yet.
From the Brendan Coffey Cabot Green Investor newletter which is excellent IMO and I would recommend.
Website www.cabot.net
Sims Group (SMS)
Bought at $31. Recent price: $32.25
Sims is a value play that we believe offers growth stock-like
potential for the year. Its March purchase of Chicago's Metal
Management makes it one of the most important metal recyclers in the
world, but also means it changed its listing country and its ticker,
so northern hemisphere analysts aren't following it yet and funds are
only just starting to build positions. Early signs are brand name
funds are gobbling up shares. Another bullish sign, a Deutsche Bank
analyst predicts ferrous and non-ferrous metal prices will remain
firm worldwide, while signs are higher shipping costs for firms like
Sims are bring successfully passed on to buyers. BUY.
-
I think if you look at POT's chart you will see that the price of 50 is not so long ago. I got hipped to it in something Scott Grannis shared with me. The logic presented to me seemed very strong and so I entered into a position.
I have been following and ignoring :lol: DMG's advice for years now. GOOG is very solid for me and recently he kept me from panicking out of my position :-D ISRG I ignored him on :cry: And MA I followed on :-) I followed on VMW too :cry:
Thanks for the tip on SMS, I will look into it.
-
From Cabot value investor newsletter,
***Watts Water Technologies (WTS: 26.40) Min Sell Price = 46.08
WTS is the leading manufacturer of products used in the plumbing and
water quality industries. Major restructuring program will cause
earnings to decline in 2008, but a sharp rebound is expected in 2009.
Hold WTS.***
-
Cabot green investor seems to have soured on Sims since it is down for no obvious reason suddenly.
-
Yeah, I liked what on saw on it and took a position and got stung. :cry: What to do now? :?
I held WTS a while back and will take another look.
-
Crafty,
It is possible SMS has gone down with the metals and even though it is not a mining company and is scrap it may just be going down with other metal companies and since it went to 40 from 31 or 32 people are taking profits? I still don't see any news and the most recent news was actually positive as they upped their forecasts. I believe the "sell" rec. was based on technical factors with the stock selling off on *no* news in addition with the downtrend in stocks in general. All the green stocks in the newletter are "hold" right now. Another recent "sell" was ADM because of the negative sentiment with corn based ethanol.
I bought and just sold SMS (yesterday) at about break even.
I still hold WTS because the long term story still makes sense to me but I am down from 36 to ~ 26 :-(
-
This could also have been posted under the "water" thread:
The Motley Fool's take on energy conversion which as a process to desalinate salt water 10 times cheaper then competitors.
The Cabot green newletter has been recommending it and that is why I bought some. As long as there is no improved competition this sounds like a long term winner.
****A Different Path to Green Profits
By Toby Shute
August 27, 2008 Comment (0) Recommend (0)
In response to the soaring energy costs of recent years, investors have flocked to all sorts of supply-driven solutions to our little energy problem. From First Solar (Nasdaq: FSLR) to American Superconductor (Nasdaq: AMSC) to VeraSun Energy (NYSE: VSE), there are countless ways to play the emergence of energy alternatives -- some more sound than others.
Compared to supply-side issues, energy efficiency is the low-hanging fruit along the path to a greener future. A McKinsey study last year found that some very simple steps could slash energy demand growth among U.S. households by a full third by 2020. I've been thinking about this theme for some time now, and I've kept my eyes open for investable ideas.
Aside from smart power meter providers like Echelon (Nasdaq: ELON), I hadn't come up with a whole lot -- until the IPO of Energy Recovery (Nasdaq: ERII).
Not a drop to drink
The Energy Recovery (or ERI) story actually begins with another resource that's just as precious as petroleum. According to the UN, more than 1 billion people lack access to water, and global consumption is expected to double every 20 years. Water issues have the potential to lead to all manner of conflicts and catastrophes in the decades ahead if solutions aren't found, pronto.
Since about 97.5% of the world's water is seawater, that's a natural place to start. Seawater desalination has been around for decades now, but it's traditionally been quite energy-intensive. Folks like the Saudis could always afford that trade-off, but the broader market for desalination plants was pretty limited until the cost started dropping significantly.
Two key factors have driven down the cost of increasingly popular seawater reverse osmosis (SWRO) technology: more efficient membranes from the likes of General Electric (NYSE: GE) and Dow Chemical (NYSE: DOW), and the introduction of energy recovery devices.
I won't go into the details of how they work (here's a video for the curious), but Energy Recovery's energy-saving pressure exchangers are apparently the hottest thing going when it comes to such devices. The company keeps landing large contracts in places like China and the United Arab Emirates, and sales are growing at a furious clip. ERI's hardly starved for capital, but it must have seemed like a natural time to sell some shares to the public.
But is it time to buy?
Of course, a company that grew its top line by more than 75% last year won't come cheap. On a trailing basis through the recently reported June quarter, ERI is valued at around 46 times earnings. This is one spicy seawater stock.
At the industry level, I can't really think of anything that would disrupt the increasing adoption of SWRO around the globe. Individual plants will be delayed or canceled, undoubtedly, but that's just a bump in the road. Desalination is an overarching trend that seems powerfully persistent.
I do have concerns at the company level, however. The key question, for me, is the durability of ERI's business model.
First and foremost, because ERI lives and dies by its pressure exchangers, the company needs an insurmountable competitive moat in this realm. I don't think it has one. I know the company has spent more than a decade developing this device. But what's to stop a company like GE from waking up one day and deciding to develop its own such doohickey, in a fraction of that amount of time?
Granted, that's what patents are for, and ERI has a handful. But the company's description of the patents -- " specific proprietary design features of our PX technology" -- makes it sound as though they're not particularly broad-based. In addition, these patents begin to expire in 2011. The company has filed for a new set, but I don't have more information than that.
Somewhat related to ERI's extreme product concentration is the company's lack of recurring revenue. One of the firm's stated strategies is to increase aftermarket sales, but it simultaneously acknowledges that the durability of its PX devices, which have only one moving part, may preclude a bustling aftermarket business. Rather than a razor-razorblade model operative here, aftermarket sales appear to be more incidental.
The Foolish bottom line
Having spent the better part of my weekend studying seawater desalination, I'm very bullish on the big picture here. As SWRO becomes big(ger) business, however, ERI will face intense competition, and I don't see enough of a barrier to entry to justify its premium valuation today.****
-
Thank you for this.
Another desalinazation play, CWCO seems to have come off its lows, but the drama of its plunge leaves me unwilling to go back in. For me PHO remains my main water play. Heavily diversified in various water stocks, it seems a good way to play the concept relatively safely. AWR is back to even for me.
-
Recommended in the highest terms as a place to go REGULARLY:
http://scottgrannis.blogspot.com/
-
Crafty,
Thanks nice site.
It is laid out a little like DGs site. I guess I should have listened to Scott two days ago and bought a liitle more.
:cry:
-
Me too.
I did add to PHO at 19 and CSCO too.
-
I recommend Scott Grannis in the very highest terms.
http://scottgrannis.blogspot.com/
-
From Scott Grannis' site:
"The total loss from '29 to the eventual bottom in '32 was 90%".
Yes and the market didn't return to its 1929 level till 1954.
Lets see, in 2033 I would be ____ years old. :wink:
-
Someone whose opinions I respect highly writes me:
I do think TIPS are the ideal asset for anyone who is risk-averse.
They are fully guaranteed by the US government. They pay a real
interest rate of about 3% on top of whatever the rate of consumer
price inflation is. Any time you can lock in a guaranteed real return
of 3% you would be wise to take it. On a risk-adjusted basis, TIPS are
today probably the most attractive asset class in the world.
Let's say you buy $10K worth of 10-yr TIPS. They currently have a 3%
real yield. The face value of the bonds will rise by a rate that is
equal to the rise in the consumer price index. If the CPI averages 3%
a year for 10 years, you will have bonds with a face value of $13,440
at maturity. Plus, each year you will receive a coupon payment equal
to 3% of the inflation-adjusted face value of the bonds.
So, if inflation is 3% a year, the return on your investment will be
(1.03) * (1.03) - 1, or 6.1% per year. If inflation is 4% per year,
your annual return will be (1.04) * (1.03) - 1, or 7.1% per year.
One caveat: if you hold TIPS in a taxable account the inflation
accretion of the face value is treated as OID, so that can result in
negative cash flow.
If an individual buys TIPS on the secondary market, the bid/ask spread
can be huge, typically 2.5%. Better to buy them at auction, but you
have to plan ahead to do that. Or buy them via a mutual fund. The best
one I know is the iShares Lehman Inflation Protected fund (symbol:
TIP).
-
Ignore the Stock Market Until February
The current volatility is less about fundamentals than forced selling.By ANDY KESSLERArticle
more in Opinion »Email Printer Friendly Share:
Yahoo Buzz facebook MySpace LinkedIn Digg del.icio.us NewsVine StumbleUpon Mixx Text Size
Down in the morning, up in the afternoon. Or is it the other way around? The topsy-turvy stock market is tough to read.
In the last year, the Dow Jones Industrial Average has briefly been over 13,000 and below 8,000. The past month has felt like the Cyclone roller coaster on Brooklyn's Coney Island -- lots of ups and downs, the whole rickety thing feeling like it's going to crash at any minute.
David KleinGreat investors are taught to listen to the market. Each tick of the tape has something to say about expectations for growth, inflation, policy changes and looming recessions. The stock market is like a giant mass of pulsing plasma doing price discovery and a game of hot potato, getting stocks into the correct hands with the right risk profile. It's way too big for any one person to manipulate, let alone touch directly. Instead, millions of us provide input with our buying and selling decisions.
When it's at its most efficient, with buyers and sellers neatly matched up at the right price, it's a pretty good predictor. The Crash of 1929 announced a recession, and the wake-up call unheeded might have caused many of the bad policies leading to the Great Depression. The Crash of 1987? Not so much.
You see, the market is a great manipulator. In September, the Dow dropped 700 points intraday after the House of Representatives voted down the Treasury's TARP bank-rescue bill. Spooked, the House passed the bill the next week. Or how about this? The Dow was up 300 points on Election Day applauding an Obama victory and then down 1,600 points since.
The market can also be a bold-faced liar. On Jan. 22, the Fed announced an emergency 75-basis-point rate cut in response to huge drops in European markets. A few days later, it came out that a rogue trader at Société Générale lost them $7 billion and the bank was unwinding his positions. Oops.
So which is it now: an efficient mechanism or a manipulating liar? Should you listen to it warning of doom or anticipating renewal? I'd say stick wax in your ears and don't listen to the market until February.
Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place:
- Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.
- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions.
Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem.
- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.
- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.
Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.
Today in Opinion Journal
REVIEW & OUTLOOK
The Obama Health Plan EmergesA Capital MessageThe Politics of Entitlement
TODAY'S COLUMNISTS
Wonder Land: Mad Max and the Meltdown
– Daniel HenningerNow Obama Has to Govern
– Karl Rove
COMMENTARY
Ignore the Stock Market Until February
– Andy KesslerLet's Have a Real Middle-Class Tax Cut
– Newt Gingrich and Peter FerraraObama Should Look Into Putin's Record, Not His Eyes
– Garry KasparovAn Auto Bailout Would Be Terrible for Free Trade
– Matthew J. SlaughterBy the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.
- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.
So won't January be alright once these dislocations weighing on the market are lifted? The January effect is supposed to be positive.
Well, often money managers are fired at the end of disastrous years. A new manager comes in, looks at the existing positions and dumps them all and remakes the portfolio with new stocks that he likes, thus generating more selling. My favorite Wall Street adage suggests that the stock market trades to inflict the maximum amount of pain. Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down . . . it might go up.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).
-
By CHARLES R. SCHWAB
The last time the stock market suffered from extreme volatility and risk of market manipulation as severe as we are experiencing today, our grandparents' generation stepped up to the plate and instituted the uptick rule. That was 1938. For nearly 70 years average investors benefited immensely from that one simple stabilizing act.
Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.
For the sake of our children and grandchildren, and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.
The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months -- more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer.
In the wake of the Great Depression, the uptick rule was established to eliminate manipulation and boost investor confidence. The rule said that short sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short selling process making it more expensive and limiting the ability of short sellers to manipulate stocks lower by piling on, driving the share price quickly down and quickly profiting from the downdraft they created. In July 2007, however, the SEC repealed the uptick rule after a brief study. Manipulative short sellers couldn't believe their luck.
The SEC's study took place during a period of low volatility and overall rising stock prices in 2005 through part of 2007 and didn't anticipate the kind of market we are experiencing today. We live in an environment now where 200 point drops or more in the Dow Jones Industrial Average are increasingly common, where a stock losing 20%, 30% or even more of its value in a single day barely warrants a second glance at the ticker. Ironically, it was just this sort of volatility that inspired the regulators of the 1930s to implement the uptick rule in the first place. Without this vital control mechanism, short sellers have been having a field day, betting heavily on lower prices and triggering panicked investors to sell even more.
Don't get me wrong. Legitimate short selling where a trader has borrowed shares for future delivery and believes those shares will lose value over time plays an important and stabilizing role in our markets. It provides a check on overexuberant prices on the upside, and provides natural buyers on the downside. The uptick rule, however, prevents short selling from turning into manipulative activity. Reinstating it will help smooth out the markets and reduce the speed of price drops. It will limit the ability of a small number of professional investors to trigger fast dramatic price drops that create panic among investors.
In today's Opinion Journal
REVIEW & OUTLOOK
The Obama Health-Care ExpressFight Racism, U.N.-StyleLet Ford Save Ford
TODAY'S COLUMNISTS
Main Street: Now for an Honest Debate on Gitmo
– William McGurnGlobal View: Obama's Team of Conformists
– Bret Stephens
COMMENTARY
Getting Out of the Credit Mess
– Harvey GolubRestore the Uptick Rule, Restore Confidence
– Charles R. SchwabHolding CEOs Accountable
– Jonathan MaceyThe SEC has an opportunity to make a real difference in helping to control future market stability and restore confidence in the fairness of our capital markets. But the SEC has been strangely silent as the crisis has worsened. It did step in earlier this fall to implement short stock borrowing restrictions and a temporary ban on short selling, first on 19 stocks in the financial services sector, and later in a broader swath of 900 stocks across several sectors. But these steps were a temporary half-measure and didn't fix the problem for the long term.
Clearly, the SEC will need to work on some of the mechanics of reinstating the uptick rule. Regulators should act quickly to establish a framework and solicit public comment, then reinstate the rule and remain flexible and willing to fine tune it if necessary.
Ordinary investors' expectations for investing are reasonable. They want a fair playing field. They want to be successful. They want to provide for their families, support their children's education, have a comfortable retirement, and maybe even leave a little bit for future generations. But they can't succeed when the markets are gripped by fear and manipulated by those who want to profit from that fear, at the expense of everyone else.
It may be too late for the restoration of the uptick rule to have much impact on where we are today. But there is no reason to wait and we need the protection in place for the future. It is time to restore it. It's what our grandparents did for us in 1938, and it worked for nearly 70 years. With that kind of track record, we should tip our hats to the regulators of yesteryear and acknowledge that they had it right all along.
Mr. Schwab is the founder and chairman of the financial services firm that bears his name.
-
Why asset bubbles are a part of the human condition that regulation can’t cure
by Virginia Postrel
Pop Psychology
IMAGE CREDIT: CHRISTOPHER STEVENSON/GETTY IMAGES
IN THESE UNCERTAIN economic times, we’d all like a guaranteed investment. Here’s one: it pays a 24-cent dividend every four weeks for 60 weeks, 15 dividends in all. Then it disappears. Unlike a bond, this security has no redemption value. It simply provides guaranteed dividends. It involves no tricky derivatives or unknown risks. And it carries absolutely no danger of default. What would you pay for it?
Before financially sophisticated readers drag out their calculators, look up interest rates, and compute the present value of those future payments, I have a confession to make. You can’t buy this security, and it doesn’t really pay dividends every four weeks. It pays every four minutes, in a computer lab, to volunteers in economic experiments.
For more than two decades, economists have been running versions of the same experiment. They take a bunch of volunteers, usually undergraduates but sometimes businesspeople or graduate students; divide them into experimental groups of roughly a dozen; give each person money and shares to trade with; and pay dividends of 24 cents at the end of each of 15 rounds, each lasting a few minutes. (Sometimes the 24 cents is a flat amount; more often there’s an equal chance of getting 0, 8, 28, or 60 cents, which averages out to 24 cents.) All participants are given the same information, but they can’t talk to one another and they interact only through their trading screens. Then the researchers watch what happens, repeating the same experiment with different small groups to get a larger picture.
The great thing about a laboratory experiment is that you can control the environment. Wall Street securities carry uncertainties—more, lately, than many people expected—but this experimental security is a sure thing. “The fundamental value is unambiguously defined,” says the economist Charles Noussair, a professor at Tilburg University, in the Netherlands, who has run many of these experiments. “It’s the expected value of the future dividend stream at any given time”: 15 times 24 cents, or $3.60 at the end of the first round; 14 times 24 cents, or $3.36 at the end of the second; $3.12 at the end of the third; and so on down to zero. Participants don’t even have to do the math. They can see the total expected dividends on their computer screens.
Here, finally, is a security with security—no doubt about its true value, no hidden risks, no crazy ups and downs, no bubbles and panics. The trading price should stick close to the expected value.
At least that’s what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that’s not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn’t seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Besides, Noussair emphasizes, “you don’t just get random noise. You get bubbles and crashes.” Ninety percent of the time.
So much for security.
These lab results should give pause not only to people who believe in efficient markets, but also to those who think we can banish bubbles simply by curbing corruption and imposing more regulation. Asset markets, it seems, suffer from irrepressible effervescence. Bubbles happen, even in the most controlled conditions.
Experimental bubbles are particularly surprising because in laboratory markets that mimic the production of goods and services, prices rise and fall as economic theory predicts, reaching a neat equilibrium where supply meets demand. But like real-world purchasers of haircuts or refrigerators, buyers in those markets need to know only how much they themselves value the good. If the price is less than the value to you, you buy. If not, you don’t, and vice versa for sellers.
Financial assets, whether in the lab or the real world, are trickier to judge: Can I flip this security to a buyer who will pay more than I think it’s worth? In an experimental market, where the value of the security is clearly specified, “worth” shouldn’t vary with taste, cash needs, or risk calculations. Based on future dividends, you know for sure that the security’s current value is, say, $3.12. But—here’s the wrinkle—you don’t know that I’m as savvy as you are. Maybe I’m confused. Even if I’m not, you don’t know whether I know that you know it’s worth $3.12. Besides, as long as a clueless greater fool who might pay $3.50 is out there, we smart people may decide to pay $3.25 in the hope of making a profit. It doesn’t matter that we know the security is worth $3.12. For the price to track the fundamental value, says Noussair, “everybody has to know that everybody knows that everybody is rational.” That’s rarely the case. Rather, “if you put people in asset markets, the first thing they do is not try to figure out the fundamental value. They try to buy low and sell high.” That speculation creates a bubble.
In fact, the people who make the most money in these experiments aren’t the ones who stick to fundamentals. They’re the speculators who buy a lot at the beginning and sell midway through, taking advantage of “momentum traders” who jump in when the market is going up, don’t sell until it’s going down, and wind up with the least money at the end. (“I have a lot of relatives and friends who are momentum traders,” comments Noussair.) Bubbles start to pop when the momentum traders run out of money and can no longer push prices up.
But people do learn. By the third time the same group goes through a 15-round market, the bubble usually disappears. Everybody knows what the security is worth and realizes that everybody else knows the same thing. Or at least that’s what economists assumed was happening. But work that Noussair and his co-authors published in the December 2007 American Economic Review suggests that traders don’t reason that way.
In this version of the experiment, participants took part in the 15-round market four times in a row. Before each session, the researchers asked the traders what they thought would happen to prices. The first time, participants didn’t expect a bubble, but in later markets they did. With each successive session, however, they predicted that the bubble would peak later and reach a higher price than it actually did. Expecting the future to look like the past, they traded accordingly, selling earlier and at lower prices than in the previous session, hoping to realize a profit before the bubble burst. Those trades, of course, changed the market pattern. Prices were lower, and they peaked closer to the beginning of the session. By the fourth round, the price stuck close to the security’s fundamental value—not because traders were going for the rational price but because they were trying to avoid getting caught in a bubble.
“Prices converge toward fundamentals ahead of beliefs,” the economists conclude. Traders literally learn from experience, basing their expectations and behavior not on logical inference but on what has happened in the past. After enough rounds, markets work their way toward a stable price.
If experience eliminates bubbles in the lab, you might expect that more-experienced traders in the real world (or what experimental economists prefer to call “field markets”) would produce fewer financial crises. When asset markets run into trouble, maybe it’s because there are too many newbies: all those dot-com day traders, 20-something house flippers, and newly minted M.B.A.s. As Alan Greenspan told Congress in October, “It was the failure to properly price such risky assets that precipitated the crisis.” People didn’t know what they were doing. What markets need are more old hands.
Alas, once again the situation is not so simple. Even experienced traders can make big mistakes when conditions change. In research published in the June 2008 American Economic Review, Vernon Smith and his collaborators first ran the standard experiment, putting groups through the 15-round market twice. Then the researchers changed three conditions: they mixed up the groups, so participants weren’t trading with familiar faces; they increased the range of possible dividends, replacing four possible outcomes (0, 8, 28, or 60) averaging 24, with five (0, 1, 8, 28, 98) averaging 27; finally, they doubled the amount of cash and halved the number of shares in the market. The participants then completed a third round. These changes were based on previous research showing that more cash and bigger dividend spreads exacerbate bubbles.
Sure enough, under the new conditions, the experienced traders generated a bubble just as big as if they’d never been in the lab. It didn’t last quite as long, however, or involve as much volume. “Participants seem to be tacitly aware that there will be a crash,” the economists write, “and consequently exit from the market (sell) earlier, causing the crash to start earlier.” Even so, the price peaks far above the fundamental value. “Bubbles,” the economists conclude, “are the funny and unpredictable phenomena that happen on the way to the ‘rational’ predicted equilibrium if the environment is held constant long enough.”
For those of us who invest our money outside the lab, this research carries two implications.
First, beware of markets with too much cash chasing too few good deals. When the Federal Reserve cuts interest rates, it effectively frees up more cash to buy financial instruments. When lenders lower down-payment requirements, they do the same for the housing market. All that cash encourages investment mistakes.
Second, big changes can turn even experienced traders into ignorant novices. Those changes could be the rise of new industries like the dot-coms of the 1990s or new derivative securities created by slicing up and repackaging mortgages. I asked the Caltech economist Charles Plott, one of the pioneers of experimental economics, whether the recent financial crisis might have come from this kind of inexperience. “I think that’s a good thesis,” he said. With so many new instruments, “it could be that the inexperienced heads are not people but the organizations themselves. The organizations haven’t learned how to deal with the risk or identify the risk or understand the risk.”
Here the bubble experiments meet up with another large body of experimental research, first developed by Plott and his collaborators. This work explores how speculative markets can pool information from lots of people (“the wisdom of crowds”) and arrive at accurate predictions—for example, who’s going to win the presidency or the World Series. These markets work, Plott explains, because people with good information rush in early, leading prices to reflect what they know and setting a trajectory that others follow. “It’s a kind of cascade, a good cascade, just what should happen,” he says. But sometimes the process “can go bananas” and create a bubble, usually when good information is scarce and people follow leaders who don’t in fact know much.
That may be what happened on Wall Street, Plott suggests. “Now we have new instruments. We have ‘leaders,’ who one would ordinarily think know something, getting in there very aggressively and everybody cuing on them—as they have done in the past, and as markets should. But in this case, there might be a bubble.” And when you have a bubble, you will get a crash.
The URL for this page is http://www.theatlantic.com/doc/200812/financial-bubbles
-
NASDAQ Creates Index To Track Bailed-Out Companies
Joe Weisenthal | Jan 8, 09 4:19 PM
This is fun. The folks over at the NASDAQ have created a new index, OMX Government Relief (^QGRI), to track firms that have been bailed out by the government. The index will track, with equal weight, companies of at least $1 billion market cap, that have come to Washington cap in hand. It's mostly TARP companies, but not necessarily all. The index, which was set at 1,000 on Monday, is already down to 941.42.
Now in true style, someone needs to come up with a triple-leveraged short ETF to track this.
We also like this suggestion from Schaeffer research that the NASDAQ should've given the index a clever ticker, like FAIL.
Subscribe to ClusterStock: RSS, email newsletter (no spam)
http://clusterstock.alleyinsider.com/2009/1/nasdaq-creates-index-to-track-bailed-out-companies
-
That is both funny and scary. :-o
-
http://www.reason.com/news/show/130843.html
The Next Catastrophe
Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.
Jon Entine | February 2009 Print Edition
Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom.
Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.
From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.
If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.
During melting markets, all pension funds come under siege. If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.
The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.
The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.
Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits.
Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted. Yet the investment performances of their corporate pension funds, while dismal, are holding up better than the returns of many public and union defined benefit plans. Those funds are facing their own reckoning, but in this case a lot of the pain is self-created and exacerbated by politics.
Social Investing Shenanigans
There is about $3.5 trillion sloshing through the U.S. retirement system, scattered across more than 2,600 public pension funds and federal retirement accounts. Another $1 trillion or so covers union workers at corporate jobs in which the union has key management control of the fund. These public and union-based defined benefit plans cover 27 million people and represent more than 30 percent of the $15 trillion dollars held in U.S. retirement accounts.
Traditionally, public investments and union-based corporate pension funds were managed according to strict fiduciary principles designed to protect workers and taxpayers. For the most part they invested in safe government securities, such as bonds or U.S. Treasury bills. Professional managers oversaw the funds with little political interference.
But during the last 30 years, state pension funds began playing the market, putting their money into riskier and riskier securities—first stocks, corporate bonds, and foreign investments, then real estate, private equity firms, and hedge funds. Concurrently, baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. Investments designed for the long-term welfare of retirees began to evolve into a political hammer. Some good occasionally came from the effort, as when companies were pushed to become more accountable in their practices. But advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects. Sometimes the money went to the very companies and financial instruments that, in the wake of the market meltdown, are now widely derided.
Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as “socially responsible investing,” or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don’t make it through certain “sin screens.” These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications on agriculture, many of which did well over the past decade. Stocks of public companies deemed to have poor records on labor, environmental issues, women’s rights, and gay rights are also frequently screened out, as are corporations that do business with regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions.
Socially responsible investing now claims a market of more than $2 trillion, according to the Social Investment Forum, the trade group for social investors. There are dozens of mutual funds and investment advisory companies that incorporate ideological screens. Most of them are liberal, although there are now a few conservative funds and some based on religious principles, such as Islamic law. Activist treasurers and pension fund managers in numerous states and municipalities, most notably in California, New York, and Connecticut, have incorporated social screens into their investment strategies.
Many of these funds prospered in the 1990s, when the basic material stocks that they frowned upon swooned, while the favored sectors—mostly technology and financial stocks, which were considered “clean investments”—did great. But the technology and communications bust of 2000–02 knocked out one of SRI’s pillars, and now the crash in financial stocks has destroyed the other. Despite much hype to the contrary, socially responsible stocks, as measured by major broad-based SRI stock funds, have significantly underperformed the market this decade, and some of the most aggressive pension funds that use “responsible” screens—such as the California Public Employees’ Retirement System—have taken some of the largest hits.
“Investing in socially responsible stocks just because they are socially responsible is not—underline not—a valid investment thesis,” says Steven Pines, a senior investment consultant for Northern Trust. Many of the largest socially responsible mutual funds, including a leading benchmark, the Domini Social Index, have been laggards for years. The Sierra Club’s high-profile social fund, which had regularly trailed the benchmark S&P 500 index by about 6 percent a year, liquidated in December, a victim of its poor performance record. As recently as last November, 76 out of the 91 socially responsible stock funds were underperforming the Dow, according to the investment research company Morningstar.
“This crisis highlights the limitations of social research methods,” says Dirk Matten, who holds the Hewlett-Packard chair in corporate social responsibility at York University’s Schulich School of Business. Although some socially responsible research models are more sophisticated than others, particularly ones that eschew simplistic screens, social investors have downplayed the actual business of a business, including whether it can create jobs and spread wealth, while overweighting what Matten believes are more symbolic concerns, such as announced programs to combat climate change.
Sometimes corporate social responsibility can mask or come at the expense of responsibility to shareholders. Fannie Mae, for instance, was named the No. 1 corporate citizen in America from 2000–04, based on datacompiled by the top U.S. social research firm, KLD Research and Analytics in Boston. Well, it does have a great diversity program.
As recently as mid-2008, three of the top eight holdings by the leading social investing organizations in the country were financial stocks: AIG, Bank of America, and Citigroup. AIG was praised for its retirement benefits and sexual diversity policies; Bank of America strove to reduce greenhouse gas emissions and promote diversity; and Citigroup donated money to schools and tied some of its loans to environmental guidelines. The stock prices of all three companies tanked in 2008.
From South Africa to the Shop Room Floor
The catalyzing event that changed pension funds from boring retirement pools to political operators was the international boycott of apartheid South Africa in the 1980s and the campaign to limit investments in companies that did business with Johannesburg. The success of the campaign energized baby boomers, now entering their prime earning years, who were committed to “making a difference” with their dollars. Taking a cue from these social investors, pension funds began dabbling in what came to be known as economically targeted investments—injecting money into communities or projects that addressed social ills, with healthy returns becoming a secondary concern.
The earliest pension fund social investing initiatives were often cobbled together during crises, with little appreciation for unintended consequences. In the 1980s, for example, the Alaska public employee and teacher retirement funds loaned $165 million—35 percent of their total assets—for the purpose of making mortgages in Alaska. When oil prices fell in 1987, so did home prices in the nation’s most oil-dependent state. Forty percent of the pension loans became delinquent or resulted in foreclosures.
While unions and social investors often work together, their investment strategies are not always in sync. In 1989, under union pressure, the State of Connecticut Trust Funds invested $25 million in Colt’s Manufacturing Co. after the beleaguered gun maker—hardly a favorite of the SRI crowd—lobbied the state legislature to save jobs. Colt’s filed for bankruptcy just three years later, endangering the trust funds’ 47 percent stake.
In the late 1980s, the Kansas Public Employees Retirement System, then considered a model of activist social investing, placed $65 million in the Home Savings Association, after its lobbyists told top officials that this would help struggling segments of the state economy. That investment evaporated when federal regulators seized the thrift. All told, the Kansans wrote off upward of $200 million in economically targeted investments.
Olivia Mitchell, executive director of the Pension Research Council at the Wharton School, has reviewed the performance of 200 state and local pension plans from 1968 to 1986 . She found that “public pension plans earn[ed] rates of return substantially below those of other pooled funds and often below leading market indexes.” In a study of 50 state pension plans during the period 1985–89, the Yale legal scholar and economist Roberta Romano concluded that “public pension funds are subject to political pressures to tailor their investments to local needs, such as increasing state employment, and to engage in other socially desirable investing.” She noted that investment dollars were directed not just toward “social investing” but also toward companies with lobbying clout.
Because of poor returns, these early experiments in economically targeted investments lost their allure. Most states and municipalities steered clear of social investing for a time. That hesitancy eroded during the 1990s, partly as a result of a new strategy employed by organized labor.
With their membership falling, union leaders found it harder to influence companies or politics from the factory floor. The new approach was to ally with social investors and adopt one of their key tactics: lobbying through shareholder resolutions intended to pressure corporations. “The strengthening of shareholder democracy promises to further empower investors to address governance issues such as out-of-control executive pay as well as environmental and social issues such as climate change,” Jay Falk—president of SRI World Group, which advises pension funds on social investing—said in 2007, as the tactic was gaining traction.
Union-led pension funds are also trying to rattle political cages, but they’re running closer to empty every day. Even before the sell-off, in the summer of 2008, while nearly 90 percent of nonunion funds met minimum safe funding thresholds—meaning they had adequate cash on hand to pay their benefits—40 percent of union funds were at risk. “These are high risk numbers even in a steady economy,” writes Diana Furchtgott-Roth, a pension fund specialist with the conservative Hudson Institute, in a recent study. Furchtgott-Roth notes that union fund management practices are opaque, costs are higher than at nonunion funds, and the plans have promised more than they can ever hope to deliver. “When workers entrust their retirement assets to an outside party, it is important that this party’s only interest be achieving the best returns possible,” she argues. “Unions clearly do not do this.”
-
California Screamin’
The biggest comeback of socially responsible investing also took place in the 1990s, when elected officials in New York, Connecticut, Minnesota, and—most notably—California began to dabble in asset allocation decisions based on a growing list of social concerns. CalPERS is the 800-pound gorilla among public pension funds. At its peak value in October 2007, CalPERS and its sister fund, CalSTRS (the state teachers’ pension system), held over $400 billion in assets. Their portfolios have more global influence than the entire economies of most sovereign nations. And during just three months last fall, more than 20 percent of the funds’ combined value evaporated—a horrendous performance for public investments designed to minimize risk and protect retirees. “We have ups and we have downs,” said Pat Macht, CalPERS assistant executive officer, as the fall 2008 massacre unfolded.
CalPERS and CalSTRS began flexing their financial muscles by demanding corporate governance reform, publicly excoriating companies they deemed to be poorly managed. It was an aggressive, almost unprecedented demonstration of the growing corporate transparency and accountability movement. The state’s pension fund meddling went into high gear in 1998 with the election of Phil Angelides as California treasurer. If there is a face to pension fund activism, it’s Angelides’. As political issues go, treasury and pension fund investments are not the sort of hot-button topics that ambitious California politicians usually ride to glory. But Angelides had a vision: to use retirement dollars as a way to change the world, and the state treasurer position became his tool.
Under Angelides’ direction, CalPERS emerged as a leading voice on behalf of shareholder rights, at least as he defined them. To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan. This social activism has acted as a model for public pension funds in other states. Laws directing funds to scrap investments in companies that invest in disfavored countries have passed or are being considered in 20 states, including Texas, Maine, Tennessee, New Jersey, Florida, and Idaho.
In 1999 Angelides’ funds committed $7 billion to a program called Smart Investments to support “environmentally responsible” growth patterns and invest in struggling communities. As in Alaska and Kansas in the 1980s, however, there were no accountability provisions to measure the impact of the venture, let alone to determine its financial consequences.
Supported by labor unions and minority groups, Angelides argued that the state had too many billions stashed away in so-called emerging markets—Third World nations where democracy is weak and wages are low—and not enough invested at home creating jobs and housing. So in March 2000, he rolled out an ambitious social investing program, dubbed the Double Bottom Line, which included dumping $800 million in tobacco stocks and persuading fund managers to shed investments in countries that Angelides thought had questionable environmental or governance practices. He claimed the initiatives would not sacrifice investment returns, saying at the time: “I feel strongly that we wouldn’t be living up to our fiduciary responsibility if we didn’t look at these broader social issues. I think shareholders need to start stepping up and asserting their rights as owners of corporations. And this includes states and their pension funds.”
How has this social engineering worked out? Angelides left his job as state treasurer in 2006 for an unsuccessful run for governor, but his legacy of politicizing pension fund investing remains. In 2003 CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds. That was a costly decision, as their stock markets roared in the ensuing years. Another decision to shun investment in China, India, and Russia cost the fund some $400 million in forsaken gains, according to the fund’s own 2007 internal report.
Under sharp criticism and amid devastating declines, CalPERS last August finally repealed the screening policy, claiming victory in its reform efforts. “Year by year, scores [of countries and corporations that invest in them] are improving, and many countries have responded to our standards for investing,” CalPERS President Rob Feckner said in a press release.
CalPERS’ tobacco boycott was equally disastrous. With the float of most large cigarette companies so large, disgorging even a sizable fraction of one company’s shares has little impact on the stock price; it’s akin to taking a thimble full of water out of the deep end of a pool, only to have it dumped back in the shallow end when the buyer makes his purchase. Since California sold its tobacco shares, the AMEX Tobacco Index has outperformed the S&P 500 by more than 250 percent and the NASDAQ by more than 500 percent. That one decision alone cost California pensioners more than $1 billion, according to a 2008 report by CalSTRS.
Some of the most steadily performing sectors, through both good and bad times, have been the very “vice” stocks that are no-nos for most social investors. When times get tough, the sinners get sinning. “Demand for drinking, smoking, and gambling remains pretty steady and actually increases during volatile times,” says Tom Glavin, chief investment officer at Credit Suisse First Boston. Alcohol, tobacco, and gambling stocks rallied solidly during two of the last three major recessions, in 1990 and 1982. “Many of these industry groups tend to be beneficiaries of the flaws of human character,” Glavin says.
So what stocks did the California funds buy instead? High on the list were financial stocks, which have been given a green bill of health by social investors. CalSTRS recently acknowledged it had lost hundreds of millions of dollars on Lehman Brothers, AIG, and other fallen icons that were recent favorites of social investors.
But those losses may pale when the tab comes due for misplaced bets on the boom-to-bust California real estate market. According to a report released last April, CalPERS had 25 percent of its $20 billion real estate assets in the California market, which has declined faster than the real estate markets in most of the rest of the country.
In the summer of 2007, CalPERS was more than 100 percent funded. It’s now under 70 percent funded and falling, and that doesn’t fully factor in its plummeting real estate investments. Funding levels stand near a dismal 50 percent for Connecticut, where State Treasurer Denise Napier has been a vocal proponent of social investing. Both states are far below mandated minimum funding standards, and they pale in comparison to even the beleaguered ratios of corporate defined contribution plans, which have mostly avoided using social screens.
Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap. “This is adding insult to injury,” says Jon Coupal of the Howard Jarvis Taxpayers Association. “At the same time we’re seeing our own 401(k)s get hit, we’re on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk.”
When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.
Unsteady Future
Public and union pension funds will be increasingly important factors in financial markets for the foreseeable future. As part of their fiduciary mandate to maximize investment returns, their trustees certainly have a right and duty to lobby for changes in corporate behavior that could result in better returns for their pension holders. But judging by the words and actions of some pension activists, “shareholder value” has become synonymous with “cause-related investing,” justifying a range of actions that may put at risk, directly or indirectly, pensioners’ retirement holdings.
If the goals of pension managers and retirees are not the same—as is often the case—then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.
A few politicians have begun speaking out against risking pension funds on political causes, for fear of limiting returns in a difficult investment climate. New York state and New York City public funds prohibit investing in new tobacco stocks, a policy that has drawn the ire of Mayor Michael Bloomberg, even though he is a zealous opponent of smoking. “I don’t think we should be using the city’s investment policies…to advance social goals, no matter how admirable those goals are and no matter how much I believe in it,” he has said.
Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.
Jon Entine is a columnist for Ethical Corporation, an adjunct fellow at the American Enterprise Institute, and a consultant on sustainability. His website is jonentine.com.
-
A couple of major posts from David Gordon!
http://eutrapelia.blogspot.com/
-
The brilliant blog of Scott Grannis:
http://scottgrannis.blogspot.com/
-
Now is a Once-in-a-Lifetime Opportunity for Income Investors
Dan Ferris
Friday, May 29, 2009
Not one investor in a hundred realizes this, but now is a once-in-a-lifetime opportunity for income investors.
Most people will never recognize this opportunity because they don't know what a truly great income investment is. Most income seekers like to buy things like commercial real estate stocks (REITs) to collect rents.
REITs have a big problem: They're required by law to pay out 90% of their distributable earnings. So if they want to grow, they have no choice but to take on debt or dilute your interest by selling more shares. That's why so many REIT dividends have been cut over the past two years. Banks are in horrible shape and getting worse all the time, so it's only going to get worse for businesses like REITs that depend on a lot of debt financing.
Take another traditional income investment: risky commodity stocks with high current yields. Investors love royalty trusts because most of them are in the energy business. These stocks paid double-digit dividends when oil was over $100 a barrel. It was great earning those big yields... until the sector fell more than 70%.
I'm not interested in those traditional income investments because right now we can buy mature, World Dominator businesses that have large competitive advantages at huge discounts. These are – and always will be – the Holy Grail of income investing.
A "World Dominator" is a company with an absolutely dominant position in its industry... like Procter & Gamble, ExxonMobil, or Wal-Mart. World Dominators can raise prices to keep ahead of inflation, get financing (or not need it) when other companies are finance-starved (like right now), and are large and well-managed enough that you can count on fewer (if any) bad surprises happening to them.
You should be looking for companies like these if you're interested in collecting large amounts of investment income for decades. Here's why...
Most World Dominators are past their capital-intensive, high-growth cycle... so they can funnel surplus cash to shareholders in the form of dividends and share buybacks. Instead of funding growth, cash goes to you.
World Dominators are also usually the lowest-cost provider of their product or service. They tend to crush the competition and have exceptional brand names. That means they often generate enormous amounts of cash. And that cash can support dividends through good times and bad.
Here's where most investors don't "get it." World Dominators aren't yielding in the eye-popping double digits. They yield 3%-5%. But that yield grows like an oak in your portfolio. ExxonMobil, for example, has raised its dividend every year for 26 years. Procter & Gamble has increased its dividend every year for 53 years.
Now is a great time to buy these stocks. Without times of great financial turmoil, it's hard to make a lot of money in stocks. We need bad times to buy stocks cheaply enough to make us rich over the long term. As I'm sure you're aware, we're in "bad times" right now. The Dow Industrials turned in the third worst year in its history... and the worst ever since the Great Depression. This has set off a fire sale in these companies. Most World Dominators go for less than 10 times annual cash flow.
If you have, say, seven or more years until you're going to need an alternative income source, you should load up on World Dominators now and reinvest the growing dividends until you need to live off them. By the time you actually need the income, the yield over your cost will be much higher, and you won't make the mistake of chasing high current yields on REITs or energy trusts.
Think about it: Which is more certain, Procter & Gamble's 53 consecutive years of dividend growth or the price of oil? It's an easy choice.
Good investing,
Dan Ferris
P.S. I've devoted months of research to finding the best deals in World Dominating stocks today. I will shout it from the rooftops that these are THE ONLY stocks you need to immediately build an income machine in the coming years. To read more about how to secure all the income you need for the rest of your life, click here.
http://townhall.com/Columnists/DanFerris/2009/05/29/now_is_a_once-in-a-lifetime_opportunity_for_income_investors
-
does anyone know how one can pull up the trades made in a particular stock for a day.
For example the list of shares that trade in sequence of trading during the day.
say 3:00 2000 shares traded
3:05 200 traded
and so forth.
-
http://readingthemarkets.blogspot.com/2010/01/what-could-goldman-sachs-do-for-you.html
-
http://globaleconomicanalysis.blogspot.com/2010/01/state-of-wisconsin-goes-insane-with.html
This sounds really unpromising , , ,
-
This raises a point I have been wondering after we have had first row seats watching Goldman and the Fed, and the Treasury.
Why is it that Goldman seems to do so well?
Could it be that they have the inside skinny on all the government wheeling and dealing that the rest of us are not privy to?
Are they really all that brilliant or is it they keep getting their guys appointed to the top gov financial positions and always get the inside scoop before anyone else?
This certainly has the appearance of being the real answer.
This is a great topic for a real investigative reporter.
I can hear it from 100 miles away - "oh it may be a bit unethical but nothing illegal was ever done". Or something to the effect "while it has the appearance of conflicts of interest and GS may have had some gains from this, in reality it was good for the country and 'main street' overall".
And all the other excuses and rationalizations we hear thrown out there....
-
See my post today on the "Fascism, Liberal Fascism" thread.
-
NY Times reports speculators have begun to zero in on another small member of Europe's troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.
Just as investors turn their attention to the next vulnerable country, Greece moved a step closer on Thursday to activating a $61 billion rescue package, as Prime Minister George A. Papandreou asked the European Union and the International Monetary Fund to meet in Athens next week. The aid package agreed on last weekend — aimed at calming fears of a Greek default — has not yet had its desired effect. The yield on Greek 10-year bonds briefly topped 7.3% Thursday, not far from the 7.5% it was at before the rescue package was announced.
Interest rates on 10-year government bonds for Portugal have also been rising, hitting a high of 4.5% on Thursday.
-
Origin of Wall Street’s Plunge Continues to Elude Officials
By GRAHAM BOWLEY
Published: May 7, 2010
NYT
A day after a harrowing plunge in the stock market, federal regulators were still unable on Friday to answer the one question on every investor’s mind: What caused that near panic on Wall Street?
Through the day and into the evening, officials from the Securities and Exchange Commission and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges.
But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market.
The initial focus of the investigations appeared to center on the way a growing number of high-speed trading networks interact with one another and with venerable exchanges like the New York Stock Exchange. Most investors are unaware that these competing systems have fractured the traditional marketplace and have displaced exchanges like the Big Board as the dominant force in stock trading.
The silence from Washington cast a pall over Wall Street, where shaken traders returned to their desks Friday morning hoping for quick answers. The markets remained on edge, as the uncertainty over what caused Thursday’s wild swings added to the worries over the running debt crisis in Greece.
In a joint statement issued after the close of trading, the S.E.C. and the Commodity Futures Trading Commission said they were continuing their review. And the two agencies indicated they were looking particularly closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem.
“We are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility,” the statement said.
A government official who was involved in the investigation said regulators had moved away from a theory that it was a trading mistake — a so-called fat finger episode — and were examining the links between the futures and cash markets for stocks.
In particular, this official said, it appeared that as stock trading was slowed on the New York Exchange when big price moves started, orders moved automatically to other, electronic exchanges that did not have pricing restrictions.
The pressure in the less-liquid markets was amplified by the computer-driven trades, which led still other traders to pull back. Only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.
On Friday evening, another government official directly involved in the investigation said that regulators had not yet been able to completely rule out any of the widely discussed possible causes of the market’s gyrations.
This official, who also spoke on the condition of anonymity, said that regulators had collected statistical and trading data from stock and futures exchanges, and had begun cross-analyzing that with trading reports from brokerage firms and large market participants. Regulators have also gathered anecdotal accounts of what happened from hedge funds and other trading firms.
The two major regulatory agencies — the Securities and Exchange Commission and the Commodity Futures Trading Commission — have generated multiple memos detailing what they have found and offering possible causes for the market events. Among the issues discussed in the memos, the official said, were the disparate rules that different stock exchanges have for dealing with large price movements on the same securities and how prices on futures markets and stock exchanges appeared to lead or follow each other’s movements down and back up.
The lack of a firm answer, more than 24 hours after the market’s plunge Thursday, left some on Wall Street frustrated.
“The problem is you don’t come in and find out what the clear answer is,” said Art Hogan, the New York-based chief market analyst at Jefferies & Company. “We don’t have the clear explanation for how it happened.”
Others, however, said it would take time to pinpoint what happened given the increasingly complex nature of modern stock trading.
Over the last five years, the stock market has split into a plethora of new competing hubs and trading outlets, a legacy of deregulation earlier this decade and fast-paced technological change. On Friday, the rivalry between the two main exchanges erupted into view as each publicly pointed the finger at the other for being a main cause of the collapse on Thursday, which sent shockwaves around the globe.
“This is the sort of situation that has been a worry for a long time, but the markets have changed in a way that has made things more difficult,” said Robert L. D. Colby, former deputy director of trading and markets at the S.E.C. “They’ve become more fragmented, so it’s harder for any one exchange to see the full picture and take action.”
On Friday, President Obama sought to provide reassurance that regulators were working to find the root of the problem.
“The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again,” the president said.
The absence of a unified system to halt trading in individual stocks led to bitter accusations between exchanges on Friday. Robert Greifeld, chief executive of Nasdaq OMX, appeared on CNBC to criticize the New York Stock Exchange for halting trading for up to 90 seconds in half a dozen stocks on Thursday.
“Stopping for 90 seconds in time of crisis is exactly equivalent to not picking up the phone,” Mr. Greifeld said.
A few minutes later, Duncan L. Niederauer, chief executive of NYSE Euronext, responded in an interview on CNBC, blaming Nasdaq’s computers for continuing trading while the market was in free fall.
“These computers go out and just find the next bid they can find,” he said.
Mr. Niederauer acknowledged the need to introduce circuit-breakers along the lines of those already in place on the Big Board, and his views were echoed by some chief executives of the new exchanges.
-
remember 1987 when they had the computers start running away with the trades and the panic that caused? This is probably a similar glitch in the system. As long as we the imperfect keep on developing imperfect machines and turning them lose we will have these moments. the market bounced back pretty quickly didn't it? So we had a busy day at the office rather than any crisis.
-
Has anyone looked at actually studying stock investing? The Investors Business Daily (IBD) paper supports a method by the founder O'Neill called CAN SLIM that is a momentum system. But "reading" the chart and turning it into a quantified result seems like voodoo to me.
I'm a BogleHead, but maybe only because I can't do the Quant math.
-
Is the bond market undergoing a secular change? The last 20-40 years have been characterized by a steady direction of interest rates that increased the value of bonds over time. Now they say its changing. That would mean that all of the retirement calculators, as well as the training & personal experience (= habits & biases) of professional investment advisors, are no longer correct.
I'm really wondering if everything I know about how to adjust my ratio of stocks : bonds over time is still statistically useful.
Bonds are used to adjust your "risk" element down to a variance that you can sleep with. You re-balance your mutual fund allocation yearly or quarterly or when it goes outside of a "band."
I wonder also if buying option puts or LEAPs might be a cost effective way to hedge downside variance, at least during periods when its difficult to sleep. If you have a portfolio that has a calculated return of say 9% with a variance of 25%, could you pay something reasonable like 1% of your portfolio value to limit any losses to say 15%. So your resulting numbers would be 8% with 15% downside variance. I've never seen anything talking about that sort of risk management for long term, retirement portfolios.
PIMCO says (of course, its their business) that investors will need to use actively managed bond funds instead of passive. OTOH the Vanguard/Bogle camp of statistical analysis proves that extra gains from active management over long periods is no better than luck.
-
Some excellent questions there CL.
Opinions are like noses, everyone has one. FWIW IMHO the long run bond bull market is over. IMHO interest peaks are going to rise faster and further than anticipated. If this is so, then bonds are no longer a safe investment. Gold may well not be a safe investment at this point either. Working from memory, the gold bubble of the Carter years burst when Volcker drover up interest rates. The idea you raise about puts, LEAPS, etc. is an interesting one, but as you note, the empirical track record does not support the notion.
-
If you can't use bonds to reduce volatility risk... I don't know what to do.
I just spent the whole day reading this guy's 500 pg book (I got the hardcopy, but at the moment you can download a PDF for free)
Jim Otar:
http://www.retirementoptimizer.com/
It didn't make my eyes glaze over.
He points out that retirement portfolios fail when they are overdrawn during the first 4 years due to the random (bad luck) of retiring at the start of a sideways or bear market. He focuses on planning to prevent the worst 10th percentile outcomes using historical market backtesting. He says that the Monte Carlo, Gaussian calculators are not correct models for the distribution phase because it is not true that asset allocation is responsible for 90% of performance in a _distribution_ portfolio. He says the _sequence of yearly returns_ and inflation rate are the major drivers of failure.
So maybe keeping a lot more in the cash "bucket,' to cover more years of bad markets, might be necessary in the future. Which means that your safe withdrawal rate from the equity/bond portfolio will be much lower.
-
Canis:
I just took a quick look at that page. Thanks for the tip, it looks interesting.
In general, I note that common assumptions of 8% average returns are looking pretty fg fantastical.
-
I just realized that the Crash of 2008 is 100% the fault of Roosevelt.
If the vast amount of money owed by Social Security was instead invested (real money, not phantom money replacing the real money stolen by the Govt to use for accounting trickery to hide inflation over the decades) by private insurance companies -- the financial greed of the 2000's would not have occurred. Insurance companies would have placed all that money in truly rational, safe investments. The percentage of the economy in whacky derivatives etc would have been small.
-
WRT hedging downside variance -- This guy Milevsky theorizes a sort of annuity which does exactly that. Other intersting papers on the site too:
A Different Perspective on Retirement Income Sustainability:
Introducing the Ruin Contingent Life Annuity (RCLA)
http://www.ifid.ca/pdf_workingpapers/WP2007SEPT15_RCLA.pdf
He's of the same school as Otar apparently; talking about the main risk being a bad sequence of returns in the first years of retirement.
This product would be a "reverse" index, based on a particular year matching your year of retirement. If the index goes to zero, it means your portfolio probably has become unsustainable as well. So the product would then begin paying out a defined amount to you for the rest of your life. Very clever idea; it separates the growth and the risk components of Immediate Annuities. You keep ownership of the growth part and export the risk to the policy. Its cheaper if you are older (because you live for fewer years, if it needs to pay out).
worth quoting:
IN SUM
The creation of a stand-alone ruin contingent life annuity (RCLA) would be a triumph of
insurance and financial engineering. On the one hand it is a type of long-term equity put
option, but it also provides true longevity insurance. Indeed, it is currently embedded
within an assortment of GLiBs on variable annuities, but we believe they should be
given a separate life of their own and sold on a stand alone basis.
Another use of such a concept product is that it provides us with a mark-to-market (or at
least mark-to-model) value for one’s retirement income plan. If a 7% spending rate is
truly unsustainable, then the cost of 7% RCLA would tell us by how much – exactly.
If mom and dad are spending too much, the relevant x% RCLA value would provide the
beneficiaries with a rough (average) estimate of what it will cost them – in value terms –
to cover their anticipated spending if and when they run out. The children
might want to set this sum of money aside now, in a risk free saving account, to cover
the cost of a life annuity if-and-when mom and dad ever run out of money.
At the very least, the creation of such products would enable retirees and their financial
advisor to put a market price – as opposed to just simulation values -- on the risks they
are running by spending too much, not investing appropriately or simply living too long.
In this case, market prices would function as economic signals or even warning signs.
-
Canis:
I really like what you are bringing to this thread!
-
06.01.2010
Interview in late May 2010 with journalist Elizabeth Corcoran
Venture capitalist Vinod Khosla is investing in energy projects from nuclear power to cheap battery chargers. His biggest bet: that all the energy pundits are dead wrong.
Leading clean-tech investor, Vinod Khosla, stepped up his game this week when he announced that former U.K. Prime Minister, Tony Blair, signed on to advise venture fund, Khosla Ventures. Blair will provide strategic advice about navigating the international politics surrounding energy production as well as make introductions between energy entrepreneurs and world leaders. Beyond the usual solar, wind and efficiency investments, Khosla's firm has been investing in a diverse and eclectic mix of ventures from precision agriculture, internal combustion engines, water, satellites to nuclear technologies.
Khosla, who began investing in clean technology deals in 2004 using his own funds, broadened his reach last year when his venture firm raised $1.3 billion from private investors. On the eve of announcing his alliance with former PM Blair, Khosla invited journalist Elizabeth Corcoran to speak with him about his investment philosophy, his belief in technology and his search for the elusive but powerful "black swans."
Q: You started Khosla Ventures as a private operation with your own money. Now it's a $1.3-billion fund with private investors. What's driving you?
Khosla: Six years ago, I didn't know how much innovation and renovation could be done to the energy infrastructure. Larger change is possible than I had ever imagined. We're working on everything from a nuclear reactor to a $4-cell phone charger for rural Africa built in an Altoid mint box that charges when you throw it into a cooking stove. That diversity boggles my mind. What's very, very clear is that when creative minds start working on problems, there are many more solutions than experts and pundits ever predict.
Q: You say the experts are wrong -- and wrong a lot. Can't we learn anything from the past?
Khosla: I personally only like to look forward.
Q: But surely there's something we learn from the past?
Khosla: What makes me a better mentor—a genuine "venture assistant"--to an entrepreneur, is that I have probably made more mistakes in building technology companies than most people on this planet. But I try not repeat past mistakes.
The problem with forecasts are the embedded assumptions. We make assumptions based on extrapolations of what exists today. Inventing the future is about upending those assumptions.
In 1995, there were billions of dollars investing in the existing telecommunications infrastructure. I was told by almost every major telecom company that the combination of that investment and other forces -- from the unions to the fact that the latest technology had to work with the most outdated switch in rural Iowa -- meant there was no way the Internet would change telecom. Less than 10 years later, the companies that hadn't adjusted to change were severly depressed. Even stalwarts like Lucent and Nortel were facing bankruptcy. AT&T itself was sold for a song to a wireless company. Invention drives that kind of change.
I have an almost religious belief that we're about to see that kind of invention and change in the field of energy.
Q: We had great predictions for alternative energy back in the 1970s. Those fizzled. Why will now be different?
Khosla: The underlying technology wasn't mature enough. The ecosystem wasn't there to support significant entrepreneurial activity. Nobody would fund a nuclear reactor as a startup. And most importantly, the intellectual horsepower wasn't there.
For the last 30 years, there were no fresh candidates for PhDs interested in energy. Today it's the hottest topic at schools like CalTech, MIT and Stanford. Five years after those students graduate, we'll see an explosion of innovation. So getting the attention of the smartest minds is key—and we've never had that in energy.
On black swans—and loons
Q: You say you're looking for intellectual "black swans," those rare ideas that can turn the world upside down. But how do you tell the difference between a black swan and a crazy loon?
Khosla: You don't. Arthur C. Clarke who said: "Any sufficiently advanced technology is indistinguishable from magic." You can't tell what's crazy and so we encourage crazy. I often suspend disbelief and listen to a story that sounds crazy and impossible. The answer lies in taking more shots on goal -- not trying to predict which shots will go in.
Black swans are extremely rare. We have something like 75 potentially revolutionary technologies in our portfolio. If there were 100 such investment portfolios around the world - 10,000 ideas - then five or six would succeed in changing the world's energy picture.
On Tony Blair and world politics:
Q: Energy policy, especially worldwide, is deeply political. How are you grappling with that?
Khosla: Creating new technology is a necessary but not sufficient condition for creating global change. Understanding local and global politics is now important for us, techie nerds. This is where our relationship with (former U.K. Prime Minister) Tony Blair can really help us. Tony understands far better than I ever will the political and geopolitical forces, as well as organization behavior and social behavior and change.
Q: Your former venture firm, Kleiner Perkins Caufield & Byers, has relationships with former U.S. vice president Al Gore and former U.S. secretary of state, Colin Powell. Is this association with Tony Blair just trophy hunting?
Khosla: Absolutely not. If I'm going to build a new technology, I look for the world's experts in that technology. If we're going to interact with policy makers in Europe or Asia, I need a world expert in politics. I'm particularly looking forward to his advice about China, Europe and Africa because of my personal ignorance on the topic. This is about gaining a perspective we don't usually get in Silicon Valley. And that's become critically important in this industry.
Tony and I have a shared passion for the topic of climate change. That's our bond. He was one of the first world leaders to embrace climate change as a priority. He also has a serious interest in Africa, in China, in the Mid East -- all areas critical to the energy infrastructure. I think he's excited about using the lever of innovative technology in the global fight against climate change and in understanding how innovation and policy interact. I've seen his eyes light up when I put him in front of a young PhD student with an idea about how to make a battery that's ten times better than lithium ion batteries. This isn't about making money but about catalyzing change. I expect Tony's contributions to be significant.
On subsidies and the 'Chindia test':
Q: You say you're not a fan of government subsidies. But aren't some of your biofuel companies helped by government support and subsidies?
Khosla: I don't have a problem with taking advantage of subsidies if the government offers them. I'm a capitalist.
But we will not ever invest in a company just because it operates in a subsidized marketplace. Subsidies, quotas, incentives all help new technologies get started. They can be very good policy tools. But if the technology can't achieve unsubsidized market competitiveness within five to seven years of starting production, we won't invest. We believe we're working on global companies. Technology has to work in countries where there are no subsidies or supportive policies.
Q: Do you consider yourself an environmentalist first and an investor second?
Khosla: No. I call myself a "pragmentalist." You can't ask people to buy the more expensive product just because it's "green." Sure, you'll get 5% of wealthy San Franciscans or Germans to buy but you won't have that great sucking sound of massive technology adoption if the economics doesn't work.
Economic gravity always wins. I call it the "Chindia test"— what's the price that will convince people in the developing world to adopt these technologies? Nothing that takes more than 12 months to pay for itself works in India. Electric cars wont be broadly adopted in India anytime soon.
This is something that environmentalists just don't get. They've done a very good job of raising awareness of the problems. But most of the solutions they've proposed are poor, naive, and uneconomic. And they may, in pushing for such solutions, may have hurt more than helped.
The downside of environmental activism
Q: What's an example?
Khosla: Look at electric cars. We'll ship 1 billion cars on this planet in the next 15 years. But the chances that people will pay an extra $5,000 to $25,000 more per car are very slim so a majority will be gasoline or diesel engine cars. And if we do have electric cars, chances are they're be essentially fueled by coal (which is still supplying most of the power for the electric grid).
The focus on electric cars has reduced technologist's interest in reinventing the common gasoline or diesel internal combustion engine even if a new internal combustion engine could reduce carbon emissions far more than a hybrid can. By the way, we are aggressively investing in radical battery technology too.
So instead of supporting "electric cars," we should have policy calling for a certain level of emissions per mile. That would be a technologically neutral policy. Or in electricity—instead of calling for "renewables," policy could set a goal of so much carbon emissions per kilowatt-hour of electricity generated. That policy would open the door for innovations in nuclear power, in "clean coal" power and other areas.
Q: But I thought you said early subsidies could help a new idea get started.
Khosla: And I want to emphasize that the policy maker's job is very complex.
It's even hard to know when you're saying "geologic sequestration" that a more general form of it would be "permanent sequestration," which should have been the policy. No other form of sequestration was on the table at the time. Our transportation policy should be around "low carbon" transportation. That would let every type of technology—from electric cars to novel internal combustion engines—compete against each other. And competition is always good.
Game changing technologies:
Q: Some of these are technologies you're supporting. For instance, you have just invested in a nuclear startup, right?
Khosla: Yes. We just invested in a nuclear reactor technology. It is an unusual bet for us but we got convinced it could be a good rate of return.
Q: What are other investments that you've made that could be game changers?
Khosla: There's a company in Houston called KiOR that can make crude oil from a wide variety of biomass including wood. We are not talking ethanol, but crude oil, which can be dropped into any refinery in the world, just like oil out of the ground. Our cellulosic biofuel investments are all doing well too.
Q: How?
Khosla: The Kior plant uses a standard technique called the fluid catalytic cracking (FCC) process. The innovation—the magic—lies in the catalyst technology. The resulting crude oil can be processed in existing facilities, moved through existing pipelines and mixed into regular crude in any proportion. Unlike an oil refinery, which takes about seven years to build, we are just starting construction on a plant that we hope will be online by mid next year. By the time we build our third or fourth plant, we expect that the cost of this fuel - unsubsidized - will be competitive in a market where crude costs $65 a barrel.
It has no carbon footprint because we're taking wood chip waste as an input. You will get carbon emissions when you burn the fuel. But if the feedstock was naturally grown and harvested locally, then the carbon emissions are balanced by the carbon absorbed when the plants grew.
That's just one. After coal and oil, cement and steel companies are the largest emitters of carbon. We are investing in a cement plant here on the coast of California built by a startup called Calera, that captures massive volumes of carbon dioxide and other emissions from electricity plants and turns it into cement like building materials and aggregate. This company has the potential to lower the lifecycle carbon emissions of a coal plant to below zero, making it "cleaner" than solar, by capturing the emissions from the plant in addition to offsetting the emissions created in existing cement manufacturing. Today it isn't applicable to every coal plant but our technology matrix at Calera is expanding rapidly making more and more plants viable candidates.
A company in Troy, Mich., called EcoMotors, is reinventing the combustion engine. They have an engine that they've run for hundreds of hours that improves efficiency by 30-50%. And then there's New Pax, with an HVAC design that uses 75% less than current technology, and Soraa in Santa Barbara, Calif., that has been working on semiconductors to come up with a light bulb that uses 80% less power than conventional incandescent bulbs, which pays for itself in less than a 12 months. Soraa expects to start selling its light bulbs in 2011. There's no reason not to save power with those kinds of economics.
We're talking about innovations that are one or two years -- not 20 years -- out. I can't even imagine what kinds of answers we'll invent in the next 20. That's the power of entrepreneurship.
-
Unintended consequences:
Q: Policy choices can have unintended consequences—but so, too, can technologies. You are clearly a technology champion.
Khosla: A technology bigot. A religious, technology bigot.
Q: Are you comfortable with the unintended consequences of your investments?
Khosla: I'm fine with that.
Q: But what if those consequences fall on other people's shoulders?
Khosla: Look: I sincerely believe there are risks with technology. But I also believe that doing business as usual and not taking any risks may be the biggest risk we take. I don't believe we have the option of being conservative, of continuing to do what we've done. The only choice we have is which risks we choose to take. And generally, technology risks are more controllable risks: they're patchable.
Q: Do you want to make money doing this?
Khosla: Absolutely.
Q: Aren't you rich enough already?
Khosla: No, it's not that. I have come to the view that unless somebody makes money at doing something, the idea won't be deployed broadly or quickly. Competition keeps ideas fresh and draws improvements. Almost every well-intentioned effort fails in the face of human characteristics. So I do believe capitalism is the only way to solve the world's problems.
I am definitely an optimist-- a technology optimist. Hopefulness is a key part of my message. We don't just need to grapple with inconvenient truths—we need to keep our minds open to radical solutions, the more convenient truths.
05.24.2010
Khosla Ventures Announces Tony Blair Associates as Senior Advisors
Former British Prime Minister to help innovative cleantech startups achieve a global impact
MENLO PARK, Calif., May 24, 2010 — Khosla Ventures, a venture assistance firm that focuses on cleantech and information technology startups, today announced a strategic partnership with Tony Blair Associates. Former British Prime Minister Tony Blair and his team will leverage his advocacy for environmental issues and his global relationships to help Khosla's broad portfolio of clean technology companies maximize their effectiveness in achieving their environmental goals. Founded by Vinod Khosla in 2004, Khosla Ventures is developing one of the largest, most diverse, and eclectic cleantech portfolios. Khosla Ventures views partnerships with large corporations, environmental and governmental organizations essential to maximizing its environmental impact. As part of the relationship, Mr. Blair accompanied Vinod Khosla yesterday to tour the Calera green cement demonstration plant in Moss Landing, Calif.
Tony Blair Associates will offer strategic advice to Khosla Ventures' green portfolio companies, drawing on his considerable geopolitical, political, organizational and environmental expertise. With Mr. Blair's support, Khosla Ventures will continue to foster innovations that can cost-effectively reduce carbon emissions — in areas that include solar, batteries, biofuels, lighting, mechanical and energy efficiency, and building materials. Mr. Khosla dubs their area of focus "maintech" rather than "cleantech," as he believes the infrastructure of society will be substantially impacted by technologists and entrepreneurs supported by his and other similar portfolios.
"Solving the climate crisis is more than just a political agenda item — it's an urgent priority that requires innovation, creativity, and ambition," said Tony Blair. "I share a clear vision with Vinod, one of the earliest leaders in cleantech investment, that entrepreneurs in Silicon Valley and beyond will have a tremendous impact on our environmental future. Vinod's portfolio companies are galvanizing scientific and technological know-how into businesses that can make a huge difference in reducing carbon and other emissions, and I look forward to dedicating a portion of my time to help them move us toward a more sustainable tomorrow. The Khosla Ventures organization is particularly effective in assisting entrepreneurs to develop and deploy their technologies all over the world."
Mr. Blair has long led on climate change issues, both in the U.K. and worldwide. He was the first major head of government to bring climate change to the top of the international political agenda at the 2005 Gleneagles G8 summit. He is a proponent of pursuing practical solutions to tackle climate change through technology and energy efficiency. Tony Blair now leads the Breaking the Climate Deadlock initiative, a strategic partnership with The Climate Group, working with world leaders to build consensus on a new comprehensive international climate policy framework.
"I have always admired Mr. Blair's early and consistent commitment to addressing climate change," said Mr. Khosla. "His goals align so well with our own mission to support disruptive startups in the cleantech space and to find technology solutions that can achieve unsubsidized market competitiveness for green technologies. We believe in attempting to achieve the 'Chindia price point,' the price at which even developing countries will voluntarily adopt these carbon efficient technologies. It's a price that is either cheaper than fossil alternatives or can achieve less than one year payback for efficiency investments, and is the key to scalable global adoption of environmentally beneficial technologies. With Tony's advice and influence, we will create opportunities for entrepreneurs and innovators to devise practical solutions that can solve today's most pressing crisis at a global scale while creating new jobs, new businesses and new sources of sustainable growth. Many more Google, Apple and Facebook-like new companies will be created in the environmental space based on breakthrough black swan technologies."
Mr. Blair's appointment was announced today as a part of the Khosla Ventures Limited Partner Summit near San Francisco, Ca. While on location, Mr. Blair will participate on a panel with Vinod Khosla and executives from selected cleantech startups in Khosla Ventures' green portfolio. Featured companies include Calera, which creates carbon-negative building products; Cogenra, developer of highly efficient solar solutions; EcoMotors, developer of high-efficiency internal combustion engines; KiOR, a leading biofuels company that converts biomass to high-quality bio-crude oil; New PAX, Inc., an inventor of high efficiency HVAC technology; and Soraa, innovator of highly efficient and affordable LEDs. Later that evening Mr. Blair and Bill Gates will speak to the Khosla Ventures entrepreneurs and limited partners.
About Khosla Ventures
Khosla Ventures helps entrepreneurs deliver lasting change through technological innovation. The firm, founded in 2004 by Vinod Khosla, co-founder of Sun Microsystems, offers venture assistance, strategic advice and capital to entrepreneurs with the audacity to take on what others may call insoluble dilemmas. Khosla Ventures' team members have known the stress of working through a crisis and the thrill of growing an idea into a multi-billion dollar company. The firm leverages that experience to help entrepreneurs turn technological risk into new opportunities. Today Khosla Ventures has one of the largest and broadest clean technology portfolios (including solar, energy storage, nuclear power, wind and high-efficiency engines), as well as holdings in traditional technology sectors such as mobility, Internet and silicon. Copyright © 2010 Khosla Ventures.
All Rights Reserved.
-
Is Khosla Ventures something ordinary people can buy stock in? What is the utility of 6 month old articles?
-
a) It read like venture capital to me.
b) Six months presents no issues for me when the subject matter is not transient.
Here's an interesting piece from today's NYTimes.
=====================
A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.
Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.
Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States.
The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by.
“This,” says Steven Bonanno, the chief technology officer of the exchange, looking on proudly, “is where everyone does their magic.”
In many of the world’s markets, nearly all stock trading is now conducted by computers talking to other computers at high speeds. As the machines have taken over, trading has been migrating from raucous, populated trading floors like those of the New York Stock Exchange to dozens of separate, rival electronic exchanges. They rely on data centers like this one, many in the suburbs of northern New Jersey.
While this “Tron” landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company. For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.
The advantages of this new technological order are clear. Trading costs have plummeted, and anyone can buy stocks from anywhere in seconds with the simple click of a mouse or a tap on a smartphone’s screen.
But some experts wonder whether the technology is getting dangerously out of control. Even apart from the huge amounts of energy the megacomputers consume, and the dangers of putting so much of the economy’s plumbing in one place, they wonder whether the new world is a fairer one — and whether traders with access to the fastest machines win at the expense of ordinary investors.
It also seems to be a much more hair-trigger market. The so-called flash crash in the market last May — when stock prices plunged hundreds of points before recovering — showed how unpredictable the new systems could be. Fear of this volatile, blindingly fast market may be why ordinary investors have been withdrawing money from domestic stock mutual funds —$90 billion worth since May, according to figures from the Investment Company Institute.
No one knows whether this is a better world, and that includes the regulators, who are struggling to keep up with the pace of innovation in the great technological arms race that the stock market has become.
WILLIAM O’BRIEN, a former lawyer for Goldman Sachs, crosses the Hudson River each day from New York to reach his Jersey City destination — a shiny blue building opposite a Courtyard by Marriott.
Mr. O’Brien, 40, works there as chief executive of Direct Edge, the young electronic stock exchange that is part of New Jersey’s burgeoning financial ecosystem. Seven miles away, in Secaucus, is the New York Four warehouse that houses Direct Edge’s servers. Another cluster of data centers, serving various companies, is five miles north, in Weehawken, at the western mouth of the Lincoln Tunnel. And yet another is planted 20 miles south on the New Jersey Turnpike, at Exit 12, in Carteret, N.J.
As Mr. O’Brien says, “New Jersey is the new heart of Wall Street.”
Direct Edge’s office demonstrates that it doesn’t take many people to become a major outfit in today’s electronic market. The firm, whose motto is “Everybody needs some edge,” has only 90 employees, most of them on this building’s sixth floor. There are lines of cubicles for programmers and a small operations room where two men watch a wall of screens, checking that market-order traffic moves smoothly and, of course, quickly. Direct Edge receives up to 10,000 orders a second.
Mr. O’Brien’s personal story reflects the recent history of stock-exchange upheaval. A fit, blue-eyed Wall Street veteran, who wears the monogram “W O’B” on his purple shirt cuff, Mr. O’Brien is the son of a seat holder and trader on the floor of the New York Stock Exchange in the 1970s, when the Big Board was by far the biggest game around.
But in the 1980s, Nasdaq, a new electronic competitor, challenged that dominance. And a bigger upheaval came in the late 1990s and early 2000s, after the Securities and Exchange Commission enacted a series of regulations to foster competition and drive down commission costs for ordinary investors.
These changes forced the New York Stock Exchange and Nasdaq to post orders electronically and execute them immediately, at the best price available in the United States — suddenly giving an advantage to start-up operations that were faster and cheaper. Mr. O’Brien went to work for one of them, called Brut. The N.Y.S.E. and Nasdaq fought back, buying up smaller rivals: Nasdaq, for example, acquired Brut. And to give itself greater firepower, the N.Y.S.E., which had been member-owned, became a public, for-profit company.
Brokerage firms and traders came to fear that a Nasdaq-N.Y.S.E. duopoly was asserting itself, one that would charge them heavily for the right to trade, so they created their own exchanges. One was Direct Edge, which formally became an exchange six months ago. Another, the BATS Exchange, is located in another unlikely capital of stock market trading: Kansas City, Mo.
Direct Edge now trails the N.Y.S.E. and Nasdaq in size; it vies with BATS for third place. Direct Edge is backed by a powerful roster of financial players: Goldman Sachs, Knight Capital, Citadel Securities and the International Securities Exchange, its largest shareholder. JPMorgan also holds a stake. Direct Edge still occupies the same building as its original founder, Knight Capital, in Jersey City.
=================
Page 2 of 4)
The exchange now accounts for about 10 percent of stock market trading in the United States, according to the exchange and the TABB Group, a specialist on the markets. Of the 8.5 billion shares traded daily in the United States, about 833 million are bought and sold on Mr. O’Brien’s platforms.
As it has grown, Direct Edge and other new venues have sucked volumes away from the Big Board and Nasdaq. The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.
THE Big Board is embracing the new warp-speed world. Although it maintains a Wall Street trading floor, even that is mostly electronic. The exchange also has its own, separate electronic arm, Arca, and opened a new data center last year for its computers in Mahwah, N.J.
From his office in New Jersey, Mr. O’Brien looks back across the water to Manhattan and his former office on the 50th floor of the Nasdaq building at One Liberty Plaza, and he reflects wistfully on the huge changes that have taken place.
“To walk out of there to go across the river to Jersey City,” he says. “That was a big leap of faith.”
His colleague, Bryan Harkins, the exchange’s chief operating officer, sounds confident about the impact of the past decade’s changes. The new world is fairer, he says, because it is more competitive. “We helped break the grip of the New York Stock Exchange,” he says.
In this high-tech stock market, Direct Edge and the other exchanges are sprinting for advantage. All the exchanges have pushed down their latencies — the fancy word for the less-than-a-blink-of-an-eye that it takes them to complete a trade. Almost each week, it seems, one exchange or another claims a new record: Nasdaq, for example, says its time for an average order “round trip” is 98 microseconds — a mind-numbing speed equal to 98 millionths of a second.
The exchanges have gone warp speed because traders have demanded it. Even mainstream banks and old-fashioned mutual funds have embraced the change.
“Broker-dealers, hedge funds, traditional asset managers have been forced to play keep-up to stay in the game,” Adam Honoré, research director of the Aite Group, wrote in a recent report.
Even the savings of many long-term mutual fund investors are swept up in this maelstrom, when fund managers make changes in their holdings. But the exchanges are catering mostly to a different market breed — to high-frequency traders who have turned speed into a new art form. They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a category that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.
One new strategy is to use powerful computers to speed-read news reports — even Twitter messages — automatically, then to let their machines interpret and trade on them.
By using such techniques, traders may make only the tiniest fraction of a cent on each trade. But multiplied many times a second over an entire day, those fractions add up to real money. According to Kevin McPartland of the TABB Group, high-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, some exchanges now even pay high-frequency traders to bring orders to their machines.
High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”
As everyone goes warp speed, a number of high-tech construction projects are under way.
=============
Page 3 of 4)
One such project is a 428,000-square-foot data center in the western suburbs of Chicago opened by the CME Group, which owns the Chicago Mercantile Exchange. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location — at a cost of about $25,000 a month per rack of computers.
The exchange is making its investment because derivatives as well as stocks are being swept up in the high-frequency revolution. The Commodity Futures Trading Commission estimates that high-frequency traders now account for about one-third of all volume on domestic futures exchanges.
In August, Spread Networks of Ridgeland, Miss., completed an 825-mile fiber optic network connecting the South Loop of Chicago to Cartaret, N.J., cutting a swath across central Pennsylvania and reducing the round-trip trading time between Chicago and New York by three milliseconds, to 13.33 milliseconds.
Then there are the international projects. Fractions of a second are regularly being shaved off of the busy Frankfurt-to-London route. And in October, a company called Hibernia Atlantic announced plans for a new fiber-optic link beneath the Atlantic from Halifax, Nova Scotia, to Somerset, England that will be able to send shares from London to New York and back in 60 milliseconds.
Bjarni Thorvardarson, chief executive of Hibernia Atlantic, says the link, due to open in 2012, is primarily intended to meet the needs of high-frequency algorithmic traders and will cost “hundreds of millions of dollars.”
“People are going over the lake and through the church, whatever it takes,” he says. “It is very important for these algorithmic traders to have the most advanced technology.”
The pace of investment, of course, reflects the billions of dollars that are at stake.
The data center in Weehawken is a modern building that looks more like a shopping mall than a center for equity trading. But one recent afternoon, the hammering and drilling of the latest phase of expansion seemed to conjure up the wealth being dug out of the stock market.
As the basement was being transformed into a fourth floor for yet more computers, one banker who was touring the complex explained the matter bluntly: “Speed,” he said, “is money. “
THE “flash crash,” the harrowing plunge in share prices that shook the stock market during the afternoon of May 6 last year, crystallized the fears of some in the industry that technology was getting ahead of the regulators. In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.
The fund company, Waddell & Reed Financial of Overland Park, Kan., conducted its sale through a computer algorithm provided by Barclays Capital, one of the many off-the shelf programs available to investors these days. The algorithm automatically dripped the billions of dollars of sell orders into the futures market over 20 minutes, continuing even as prices started to drop when other traders jumped in.
The sale may have been a case of inept timing — the markets were already roiled by the debt crisis in Europe. But there was no purposeful attempt to disrupt the market, the regulators found.
But there was a role played by some high-frequency machines, the investigation found. As they detected the big sale and the choppy conditions, some of them shut down automatically. As the number of buyers plunged, so, too, did the Dow Jones Industrial Average, losing more than 700 points in minutes before the computers returned and prices recovered just as quickly. More than 20,000 trades were ruled invalid.
The episode seemed to demonstrate the vulnerabilities of the new market, and just what could happen when no humans are in charge to correct the machines.
Since the flash crash, the S.E.C. and the exchanges have introduced marketwide circuit breakers on individual stocks to halt trading if a price falls 10 percent within a five-minute period.
But some analysts fear that some aspects of the flash crash may portend dangers greater than mere mechanical failure. They say some wild swings in prices may suggest that a small group of high-frequency traders could manipulate the market. Since May, there have been regular mini-flash crashes in individual stocks for which, some say, there are still no satisfactory explanations. Some experts say these drops in individual stocks could herald a future cataclysm.
===================
Page 4 of 4)
In a speech last month, Bart Chilton, a member of the futures trading commission, raised concerns about the effect of high-frequency trading on the markets. “With the advent of ‘Star Trek’-like, gee-whiz H.F.T. technology, we are witnessing one of the most game-changing and tumultuous shifts we have ever seen in financial markets,” Mr. Chilton said. “We also have to think about the myriad ramifications of technology.”
One debate has focused on whether some traders are firing off fake orders thousands of times a second to slow down exchanges and mislead others. Michael Durbin, who helped build high-frequency trading systems for companies like Citadel and is the author of the book “All About High-Frequency Trading,” says that most of the industry is legitimate and benefits investors. But, he says, the rules need to be strengthened to curb some disturbing practices.
“Markets are there for capital formation and long-term investment, not for gaming,” he says.
As it tries to work out the implications of the technology, the S.E.C. is a year into a continuing review of the new market structure. Mary L. Schapiro, the S.E.C. chairwoman, has already proposed creating a consolidated audit trail, so that buying and selling records from different exchanges can be examined together in one place.
In speeches, Ms. Schapiro has also raised the idea of limiting the speed at which machines can trade, or requiring high-frequency traders to stay in markets as buyers or sellers even in volatile conditions. just as human market makers often did on the floor of the New York Stock Exchange. .
“The emergence of multiple trading venues that offer investors the benefits of greater competition also has made our market structure more complex,” she said in Senate testimony last month, adding, “We should not attempt to turn the clock back to the days of trading crowds on exchange floors.”
MOST of the exchanges have already eliminated a controversial electronic trading technique known as flash orders, which allow traders’ computers to peek at other investors’ orders a tiny fraction of a second before they are sent to the wider marketplace. Direct Edge, however, still offers a version of this service.
The futures trading commission is considering how to regulate data centers, and the practice of co-location. The regulators are also examining the implications of so-called dark pools, another product of the technological revolution, in which large blocks of shares are traded electronically and without the scrutiny exercised on public markets. Their very name raises questions about the transparency of markets. About 30 percent of domestic equities are traded on these and other “unlit” venues, the S.E.C. says.
For Mr. O’Brien, the benefits of technology are clear. “One thing has surprised me: people have looked at this as a bad thing,” he says. “There is almost no other industry where people say we need less technology. Fifteen years ago, trades took much longer to execute and were much more expensive by any measure” because market power was more concentrated in a few large firms. “Now someone can execute a trade from their mobile from anywhere on the planet. That seems to me like a market that is fairer.”
For others who work at the company or elsewhere in the financial ecosystem of New Jersey, it has been a boon.
“A lot of my friends work here or in this area,” says Andrei Girenkov, 28, one of Direct Edge’s chief programmers, over lunch recently in Dorrian’s restaurant in Direct Edge’s building. “It changed my life.”
But some analysts question whether everyone benefits from this technological upending.
“It is a technological arms race in financial markets and the regulators are a bit caught unaware of how quickly the technology has evolved,” says Andrew Lo, director of the Laboratory for Financial Engineering at M.I.T. “Sometimes, too much technology without the ability to manage it effectively can yield some unintended consequences. We need to ask the hard questions about how much of this do we really need. It is the Wild, Wild West in trading.”
Mr. Lo suggests a need for a civilizing influence. “Finally,” he says, “it gets to the point where we have a massive traffic jam and we need to install traffic lights.”
-
For every flash crash caused by high-speed or automated trading, you can expect to find new automated trading programs that work the opposite way, to take advantage of arbitrary declines in prices. That is the role of speculators, after all: buy when everyone else is selling, and vice versa. I think the concerns over automated trading are overblown. The market will adapt, as smart people look to things like flash crashes as great opportunities to make money.
===========
Marc: This is true, but little folks like me cannot tell when a dramatic decline is arbitrary and momentary or is a real excrement storm.
-
Yes it is venture capital.
I wish I had listened to Khosla when he predicted 90% of tech stocks would fail before the tech crash of 2000.
I thought it interesting that he feels the climate change pundits are totally off base by predicting that solar, wind electric cars will dominate.
He thinks it will more likely be a major advance in some already established energy not a whole new source that will be the big winner.
-
For every flash crash caused by high-speed or automated trading, you can expect to find new automated trading programs that work the opposite way, to take advantage of arbitrary declines in prices. That is the role of speculators, after all: buy when everyone else is selling, and vice versa. I think the concerns over automated trading are overblown. The market will adapt, as smart people look to things like flash crashes as great opportunities to make money.
===========
Marc: This is true, but little folks like me cannot tell when a dramatic decline is arbitrary and momentary or is a real excrement storm.
**I'm reminded of the military use of robots. I had always assumed that we would always have a human to make the decision to employ deadly force, however I found that the thinking in military circles is that if one side of a conflict had effective AI in it's weapon systems, a opponent that relied on decision making by humans would be unable to compete because of a gap in response time (OODA loop). The unintended consequence of being dependent on automated systems is the classic "humans destroyed by their own creation".
Skynet Trade-1000?
-
Bothered by outing the locations of these places. Yea there is backup, but its not instant.
Remember the Star Trek episode with the two planets at war controlled by computers? The people in the destroyed sectors just walked to the disintegrator machines. Their culture was never destroyed until Kirk broke the machine & instigated real nuclear retaliation.
-
Gotta love the silly putty-like flexibility of the prime directive. :roll:
-
Doh! Didn't know about this forum or thread...loads of catching up... seems like everyone on the thread are very knowledgeable... i'm still learning
Didn't read thread completely yet... MCP (Molycorp) + 15% today ... yesterday up like 5%... rare earth metals used e.g. in batteries powering the IPad (or IPod)... most rare earth metals are found in China.... MCP is the only non-Chinese co in China ... do the homework on this... decide for yourself if there is still upside
http://finance.yahoo.com/news/Molycorp-climbs-as-analyst-apf-2111880290.html?x=0
http://data.cnbc.com/quotes/mcp
dahlman rose analyst has his target prx of $85
A few mos ago I was looking at this... could've gotten in at $30... but no... more important to save and buy a new convertible tablet/laptop... stupid me... anyway, it swung and was a little scary
-
ugh on me...would've doubled my money in ~3 mos time. up 7% today - closed $61.80 -- c'est la vie
http://data.cnbc.com/quotes/mcp
-
Hell, I doubled MCP when I sold at 30. (good profits in REE too) I'd have a four bagger now if I had held.
-
Hell, I doubled MCP when I sold at 30. (good profits in REE too) I'd have a four bagger now if I had held.
Awesome!
-
In spite of some recent predictions on this site that the market might fall to 6000, :evil: to the contrary, the Stock Market today is over 12,300.
Interesting to note, most consider the stock market a leading economic indicator. Good news for our economy's future.
However, as this article points out, although most of the news is good, let's not get too optimistic, (not a problem on this forum). :-)
http://money.cnn.com/2011/02/17/markets/thebuzz/index.htm
-
Yes, it only got down to 6500 or so.....
Pay no attention to all the cities, states and possibly the USG defaulting. Happy days are here again!
-
hmmm
In the past two years, despite continuing dire economic predictions on this site, the market has almost doubled.
Sounds like a pretty rosy leading indicator to me...
Double your money in two years. I guess happy times ARE here again for SOME people. Not everyone.........
-
http://www.europac.net/commentaries/financial_disconnect
Financial Disconnect
February 14, 2011 - 10:28am — europac admin
By:
John Browne
Monday, February 14, 2011
Despite last week’s confusing employment data, the increasing threat of another decline in home values, political uncertainty in Egypt and the broader Middle East, and sharp pullbacks in some emerging markets such as Brazil, US stock markets continued to rise. It sometimes seems that Wall Street exists in a bubble that is well-insulated from the rough and tumble of the outside world. But, in what may be a harbinger that America’s era of prosperity is winding down, the hallowed New York Stock Exchange, long the epicenter of American economic might, is expected to be bought by Germany’s Deutsche Boerse. When the king is so unceremoniously uncrowned, it can't be long before investors notice how shabbily dressed he really is.
Earlier this month, the Bureau of Labor Statistics revealed that the unemployment rate had fallen from 9.4 percent to 9.0 percent. Many in the financial media seized on the report and bundled it together with recently released data on improved consumer sentiment as great news for the economy. However, the report only showed 36,000 new jobs created, far less that the 146,000 that economists estimate need to be created to bring down unemployment significantly. Regardless, US stock markets continued to rise.
One must remember that the unemployment figure excludes those who have given up looking for jobs altogether. The percentage of Americans who have jobs continues to shrink. By factoring back in those who have left the work force over the last few years, many economists have concluded that the real unemployment rate is closer to 20 percent.
The housing market also shows fresh signs of enduring stress. Based on a report released last week, using data as of November 2010, nearly one third of US houses are now worth less than the amount owed on their underlying mortgages. Not surprisingly, given this harrowing statistic, defaults continue to rise. The price of the average house is now at a ten-year low and still falling.
In view of this evidence of increased unemployment and continued erosion in the housing sector, it is hard to see any likely recovery in consumer demand in the short term. Without such a rise, it is hard to justify any short-term run up in consumer sentiment and stock prices. But both have done just that. From my perspective, this represents a major financial disconnect.
Serving under former Fed Chairman Greenspan, Ben Bernanke helped to engineer the largest asset boom in history. The natural result was the credit crunch of 2008, from which we now are still trying to recover. However, Bernanke has been unwilling to accept continued recession. Clearly, he is determined to stimulate the economy, not by encouraging consumer demand, but by inflation.
The stimulus packages and quantitative easing programs have created a massive injection of liquidity. Furthermore, the Fed’s manipulation of interest rates has pushed investors into riskier assets, such as equities and commodities, and out of relatively secure investments, such as bank deposits and bonds. This abundance of cheap money is creating an artificial asset boom, and it is the main reason why equity prices have risen.
Meanwhile, the political problems in Egypt have caused smaller investors to temporarily fear political risks in emerging markets, despite their having better fundamentals than the US. I expect this dynamic to quickly reverse as the protests settle in Cairo.
In short, the continued rise in US equities appears to be stimulated not by sustainable US consumer demand, but by cheap government-supplied liquidity, and a temporary diversion away from emerging markets. This qualifies more as a splash than a wave. The tide is still drawing capital to the developing world.
The big question investors should ask themselves is: for how long can the rise in US stock prices continue when consumers are still faced with stagnant employment and falling house prices?
The printing of fiat money is likely to be able to sustain a false economic recovery for some time. But, eventually, the cost will be a rapid erosion of the value of the US dollar – not just in real terms, but also against almost every other foreign currency. Despite possible short-term corrections, gold and silver holdings are likely best to shield investors from the perils that lie ahead.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.
-
More money chasing fewer companies. The reversing of expansionary monetary policies is a certainty, we just don't know when. The revitalization of entrepreneurial capitalism is uncertain and unlikely (?)
Do people remember when markets always contracted on inflation news. Not because of inflation but because of the expectation/fear of the Feds reaction to it. For the time being, that check and balance is gone. The longer they wait to respond, the more severe the correction will need to be.
-
FWIW, the brief version of my take on this:
As JDN notes, the market is generally considered to be a leading indicator. (Contrarily it is sometimes said the market can be wrong longer than you can stay solvent, but I digress , , ,). If that is so here, let us see what was on the horizon when the market crashed, and what has been on the horizon as is has "returned" to roughly where it was.
The market dived when BO decisively passed McCain in the polls. Coincidence? Look at all the deranged possibilities that were on the horizon: Obamacare, Cap & Trade (!!!), high and higher taxes, mad spending, regulations, mortgage boondoggles, bailouts, takeover of the auto industry, crony facism, defeaet in Iraq and the mid-east and much, much more--this group here needs no complete list to get my point. Multiply the movement in market prices by computer trading by hedge funds and other mo-mo players.
What was on the horizon when the market began to climb?
The possibility, then the probability that BO and the Demogogues would get crushed in the polls. Cap & Trade? Dead in the water. Expiration of the Bush rates and other tax increases? Dead. More stimulus boondoggles-- less clear, but certainly far less than would be the case had the Dems retained control of the house. Chance of defunding Obamacare. BO himself? Now forced to pretend to be a centrist. etc etc. With these things, money that had been sitting on the sidelines (and there was a lot of it due to BO generated uncertainty) began coming back into play.
As GM notes in his way, a very good case can be made that the current moves of the market are essentially the market being "wrong" due to gamers playing with easy money sloshing around the system, hedge fund momentum computer trading (a big majority of trades now if I am not mistaken) and those being fooled by what is essentially a quintessential bear trap.
QE2 is spending $600B for a claimed 3M jobs saved-- i.e. $200,000 per job!!! The Fed govt is borrowing some 35-40% of every dollar it spends. The deficit is some 9-10% of GDP (some claim 8, but whatever) The % of the budget that must go to cover interest payments, even at these articially low level interest levels, is some 12%. What happens if/when interest rates double? Triple? Quadruple? (and note a large % of our borrowings are short term) This can happen! Look at what happened in the late 70s under Carter-- and having lived through then and now, IMHO we are in FAR, FAR worse shape now. BO's budget numbers are even more criminal than the usual baseline budgeting numbers. The demographic chickens of SS, Medicaid, and Medicare are coming home to roost. Many state governments are essentially bankrupt. All of us here are familiar with the unemployment data.
The hazy fibology of the progressives aside, the reality is that FDR's programs created a market pattern similar to the one we see now-- minus the late 30s seeing things turn down again badly. Like the 30s, the possibility of a world wide conflict looms.
To call the market's wild government induced ride a doubling from the bottom, as JDN does, while mathematically correct, IMHO misses most of the picture.
-
OTOH, here's Wesbury:
http://www.ftportfolios.com/Commentary/EconomicResearch/2011/2/18/no-bubbles,-sugar,-or-dead-cat-bounces
-
Worried that their son was too optimistic, the parents of a little boy took him to a psychiatrist. Trying to dampen the boy’s spirits, the psychiatrist showed him into a room piled high with nothing but horse manure. Yet instead of displaying distaste, the little boy clambered to the top of the pile, dropped to all fours, and began digging.
“What do you think you’re doing?” the psychiatrist asked.
“With all this manure,” the little boy replied, beaming, “there must be a pony in here somewhere.”
-
"the market is generally considered to be a leading indicator"
- Amazingly the market has predicted 13 of the last 4 recessions.
200k per (imaginary) job saved? - I can't find the total numbers, but I believe Bernanke was referring to the entire QE (trillion and a half, more ?) and 3 million jobs saved of course is pure fabrication. What economic theory believes that devaluing our currency makes us wealthier?
"To call the market's wild government induced ride a doubling from the bottom, as JDN does, while mathematically correct, IMHO misses most of the picture."
- Right, you can't buy only at the exact trough or sell only at the exact peak. One would not meaningfully measure ocean level at the top or bottom of a tidal wave. 'Smoothing' the data is an imperfect science, otherwise pick points in time where policy or events changed to judge how the markets responded (as Crafty did).
-----
Wesbury is empirically optimistic. These are modest predictions of growth. Then they compare their predictions with actual results. Sometimes they are wrong. He will still tell you I believe that we are missing out on half the growth available with our excessively anti-growth policies. I posted Kudlow recently saying that average growth when Reagan's policies took effect was 7.7% for 6 quarters, then he won 49 states. Wesbury is not saying anything like that. He is telling his investors that his analysis says to stay invested. Predicting the future has (obvious) risks. That's why I judge these economists by how well they can explain the past. I hadn't seen Wesbury in a video before. He speaks well. Instead of Fed chair, I think I would like him to be VP. I wonder if he could hold his own debating Joe Biden on economic policy.
There is an honesty there for a supply-sider to predict growth under the opponent's regime. I think he just tells you wherever his analysis takes him, although there may be a bias in his business of wanting investors to stay in.
-
http://www.businessinsider.com/charts-debt-unemployment--2011-2#
There has to be a pony in here somewhere.....
-
Several of these charts do something that irks me greatly. They massively increase the visual impression given by how they label the axis.
For example, a movement of 400 from 400 to 800 in 1980-1985 a movement of 100%, is given the same visual as a movement today from 3,200,000 to 3,600,000, a movement of 12.5%.
The situation is godawful, no doubt about it, but visually misleading charts do not help our understanding.
-
Good point.
-
I took a good size position in PAAS at around 8.50. It is now nearly 4x that, so this article was of great interest to me.
========================
POTH
As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.
Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.
Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.
.The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible.
The gist goes something like this: When JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks in November in federal court in the Southern District of New York.
“The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”
In the United States, trading in precious metals and other commodities is regulated and closely monitored by a federal agency, the Commodity Futures Trading Commission. In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the commission’s enforcement division started an investigation. In November 2009, an informant, described in the law suit only as a former employee of Goldman Sachs and a 40-year industry veteran, approached the commission with tales of how the silver traders at JPMorgan were bragging about all the money they were making “as a result of the manipulation,” which entailed “flooding the market” with “short positions” every time the price of silver started to creep upward. The idea was that by unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low.
Soon enough, the informant was identified as Andrew Maguire, an independent precious metals trader in London. On Jan. 26, 2010, Maguire sent Bart Chilton, a member of the futures trading commission, an e-mail urging him to look into the silver trading that day. “It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market can instigate a sell off at will,” Maguire wrote.
On Feb. 3, 2010, Maguire gave the futures trading commission word about an impending “manipulation event” that he said would occur two days later, when the Labor Department’s non-farm payroll numbers would be released. He then spelled out two trading scenarios about which he had been told. “Both scenarios will spell an attempt by the two main short holders” — JPMorganChase and HSBC — “to illegally drive the market down and reap very large profits,” Maguire wrote in an e-mail to a trading-commission investigator.
On Feb. 5, Maguire took a victory lap, writing in another e-mail to the trading commission that “silver manipulation was a great success and played out EXACTLY to plan as predicted.” He added, “I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position … I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.”
In March 2010, Maguire released his e-mails publicly, in part because he felt the trading commission’s enforcement arm was not taking swift enough action. He was also unhappy over not being invited to a commission hearing on position limits scheduled for March 25. Then came the cloak and dagger element: the day after the hearing, Maguire was involved in a bizarre car accident in London. As he was at a gas station, a car came out of a side street and barreled into his car and two others; London police, using helicopters and chase cars, eventually nabbed the hit-and-run driver. Reports that the perpetrator was given a slap on the wrist inflamed the online crowds that had become captivated by Maguire’s odd story.
In any case, the class-action lawsuit contends that between March 2010 and November 2010, JPMorgan Chase and HSBC reduced their short positions in the silver market by 30 percent, causing the metal’s price to rise dramatically, but leaving them still with a large short position. Now, with the value of silver rising nearly every day, the two banks are caught in a “massive short squeeze,” according to one market participant, that appears to be costing them the billions they made originally plus billions more. Whether these huge losses will show up on the books of JPMorgan Chase and HSBC remains to be seen. (Parsing through the publicly filed footnotes of derivative trades is no easy task.)
Nonetheless, the conspiracy-minded have claimed that the Fed must have somehow agreed to make JPMorgan and HSBC whole for any losses the banks suffered if and when the price of silver rose above the artificially maintained low levels — as in right now, for instance. (About all this, a JPMorganChase spokesman declined to comment.)
Some two-and-a-half years later, the Commodity Futures Trading Commission’s investigation is still unresolved, and at least one commissioner — Bart Chilton — thinks that after interviewing more than 32 people and reviewing more than 40,000 documents, there has been enough investigating and not enough prosecuting. “More than two years ago, the agency began an investigation into silver markets,” Chilton said at a commission hearing last October. “I have been urging the agency to say something on the matter for months … I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”
What’s more, Chilton said in an interview last week, that “one participant” in the silver market still controlled 35 percent of the silver market as recently as a few months ago, “enough to move prices,” he said, and well above the 10 percent “position limits” the commission has proposed to comply with Dodd-Frank financial reform law. Since that law’s passage last summer, the commodities exchanges have issued waivers permitting the ownership of silver positions above the limits the C.F.T.C. has proposed, and which were supposed to be in place by January of this year. Yet the waivers remain in place, and the big traders have not been penalized, much to Chilton’s frustration And the mystery deepens: last Thursday, the price of silver fell $1.50 per ounce in less than an hour before recovering. “This was robbery at its most obvious and most vindictive,” wrote Richard Guthrie, a London-based trader, in an e-mail to Chilton. “How many investors lost money and positions to the financial benefit of an elite few?”
It’s getting harder and harder to continue to brush off Andrew Maguire’s claims as the rantings of a rogue trader with a nutty online following. The Commodities Futures Trading Commission should immediately release the files from its investigation into the supposed manipulation of the silver market so the public can determine whether JPMorganChase and HSBC did anything illegal, with or without the help of the Fed. In addition, the commission should start enforcing the 10 percent threshold on silver positions it has proposed to comply with Dodd-Frank law. Basically, the other commissioners must join with Bart Chilton to do the job they are required to do: Protecting the sanctity of the markets and preventing the sorts of manipulation we’ve seen all too often.
.
-
economist:
Print edition Internet businesses
Another digital gold rush
Internet companies are booming again. Does that mean it is time to buy or to sell?
May 12th 2011 | BEIJING AND SAN FRANCISCO | from the print edition
PIER 38 is a vast, hangar-like structure, perched on San Francisco’s waterfront. Once a place where Chinese immigrants landed with picks and shovels, ready to build railways during California’s Gold Rush, the pier is now home to a host of entrepreneurs with smartphones and computers engaged in a race for internet riches. From their open-plan offices, the young people running start-ups with fashionably odd names such as NoiseToys, Adility and Trazzler can gaze at the fancy yachts moored nearby when they aren’t furiously tapping out lines of code.
“The speed of innovation is unlike anything we’ve seen before,” says Ryan Spoon, who runs Dogpatch Labs, an arm of a venture-capital firm that rents space to young companies at Pier 38. Like many other entrepreneurs, the tenants would love to follow firms such as Facebook and Zynga, a maker of hugely popular online games including Farmville, that have been thrust into the internet limelight in the space of a few short years.
Some of the most prominent start-ups are preparing for stockmarket listings or are being bought by big firms with deep pockets. On May 9th LinkedIn, a social network for professionals that took in revenue of $243m last year, set the terms of its imminent initial public offering (IPO) on the New York Stock Exchange (NYSE), which value it at up to $3.3 billion. The next day Microsoft said it was buying Skype, an internet calling and video service, for $8.5 billion (see article).
Start-ups
New York Stock Exchange
Other firms such as Groupon, which provides online coupons to its subscribers, are likely to go public soon. The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.
Technology, finance and China
Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.
Start with technology. Moore’s law, which holds that the number of transistors that can be put on a single computer chip doubles roughly every 18 months, has continued to work its magic, leading to the proliferation of ever more capable and affordable consumer devices. Some of today’s tablet computers and smartphones are more powerful than personal computers were a decade ago. IDC, a research firm, estimates that around 450m smartphones will be shipped worldwide this year, up from 303m in 2010.
Moore’s law also underpins the growth of “cloud” services, such as Apple’s iTunes music store, which can be reached from almost any device, almost anywhere. Such services are hosted in data centres, the factories of the cloud, which are crammed with hundreds of thousands of servers, whose price has plunged as their processing power has soared. Everything is connected ever faster, with ever fewer wires.
These technological trends have given rise to new “platforms”—computing bases on which other companies can build services. Examples include operating systems for smartphones and social networks such as Facebook and LinkedIn. Some of them are used by hundreds of millions of people. And the platforms are generating oceans of data from smartphones, sensors and other devices.
These platforms are vast spaces of digital opportunity. Perhaps the most striking example of the innovation they have sparked is the outpouring of downloadable software applications, or “apps”, for smartphones and computers. Apple’s App Store, a mere three years old, offers more than 300,000 of them. Users of Facebook are installing them at a rate of 20m a day. Services such as Skype have also benefited from the spread of smart devices and lightning-fast connectivity.
Some excited people have likened this technological upheaval to the Cambrian explosion 500m years ago, when evolution on Earth speeded up in part because the cell had been perfected and standardised. They may be exaggerating. Even so, creating a web firm has become much easier. By tapping into cheap cloud-computing capacity and by using platforms to reach millions of potential customers, a company can be up and running for thousands of dollars rather than the millions needed in the 1990s.
Guardian angels
Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.
Some “super angels”, such as Aydin Senkut, a former Google employee who runs Felicis Ventures, and Mike Maples, a software entrepreneur who oversees a firm called Floodgate, are occasionally making bets comparable to those of conventional venture funds, which gather and invest money from a wide range of institutional investors. Individual investments of up to $1m are not uncommon. Sometimes angels are clubbing together to provide young firms with even larger sums.
Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-internet firms and makers of software apps.
The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.
Venture firms are not the only ones with internet companies in their sights. Some would argue that it was DST, a Russian holding company now renamed Mail.ru, and a related investment fund, DST Global, that set off the boom. In 2009, when most investors in America were sitting on their hands, both poured hundreds of millions of dollars into fast-growing prospects there such as Facebook and Groupon. Those investments seem likely to pay off handsomely.
American hedge funds, private-equity firms and even some mutual funds have followed, falling over one another in pursuit of the shares of popular internet companies. Investment banks including Goldman Sachs and JPMorgan Chase have also set up funds to help rich clients buy stakes.
Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations (see chart 1).
American consumer-internet companies have not been the only beneficiaries of this flood of cash. The boom’s third driving force is the rapid globalisation of the industry. Europe, which has at long last developed an entrepreneurial ecosystem worthy of the name, is home to several impressive firms. These include Spotify, an Anglo-Swedish music-streaming service with more than 10m registered users, and Vente Privée, a French clothing discounter with annual revenue of some $1 billion.
Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping. Between 2010 and 2015, predicts BCG, China’s e-commerce market will more than quadruple, from $71 billion to $305 billion—which could make it the world’s largest.
Such forecasts have stimulated plenty of venture capital, both foreign and domestic. Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.
Investors have also been desperate for shares in Chinese companies listed on American stock exchanges (see table). Since the start of the year the share prices of the biggest of these firms have risen by more than a third, according to iChina Stock, a website. Baidu, China’s largest search engine, has seen its share price climb from about $60 to $150 in the past 12 months, taking its market capitalisation to nearly $50 billion. Tencent, which makes most of its money from online games, is worth about the same. Both are among the world’s top five internet firms by stockmarket value. The ten biggest Chinese companies have a combined worth of $150 billion, not much less than Google’s.
They tend to sparkle on their debuts. When Youku, China’s largest online-video company, listed its shares on December 8th its stock jumped by 161%, the biggest gain by a newcomer to the NYSE for five years. The share price of Dangdang, an online retailer floated on the same day, almost doubled. And on May 4th Renren, a social network, saw its share price rise by 29% on the first day of trading, though it has fallen back almost to where it started.
The experience of Chinese firms in America has encouraged other emerging-market internet companies to consider IPOs there. On the day LinkedIn revealed the terms of its offering, Yandex, a Russian search engine, said it would soon raise $1.1 billion by listing its shares on the tech-heavy NASDAQ stockmarket.
Those who think that talk of a new tech bubble is misleading point out that firms such as LinkedIn and Renren have proven business models and healthy revenues. Many internet firms that went public in the late 1990s could not say the same. Moreover, the price-earnings multiples at which other public companies in the technology sector are trading are nowhere near as frothy as they were before the last bubble burst in 2000. That should limit excesses in valuing private firms.
Bubble in the making?
This has led some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns.
Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies. They are chasing scarce skills when the broader technology industry is on a roll. The NASDAQ index may be far below the heights of March 2000, but it has bounced back from the global downturn; and the Federal Reserve Bank of San Francisco’s Tech Pulse Index, which measures the vibrancy of America’s tech industry, is near its peak of 11 years ago (see chart 2).
There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.
The danger in all this is that investors lose sight of the risks to the value of internet companies. These are greatest in China. Competition there is intense and users are fickle. Moreover, Chinese firms must wrestle with thorny regulatory and political issues. The government has yet to shut down a listed web company and firms are usually masters of self-censorship. But any move against them could have broad repercussions for all Chinese internet stocks.
European and American internet start-ups do not face a similar threat. But they are still vulnerable to inflated expectations. “Every bubble is a game of musical chairs,” says Steve Blank, a former serial entrepreneur who teaches at Stanford. The trick is to sell or float companies just before the music stops and the bubble bursts. If some of the hopefuls of Pier 38 can do just that, they may one day be able to afford a yacht or two of their own.
from the print edition | Briefings2
About The Economist online About The Economist Media directory Staff books Career opportunities Contact us Subscribe - Site feedback Copyright © The Economist Newspaper Limited 2011. All rights reserved. Advertising info Legal disclaimer Accessibility
-
A relative foolish enough to think me wise, has asked me about the following advertisment. I've never traded options, and I gather from the following that margin is part of the strategy (yes?). So please help me out in my ignorance. What are the pitfalls in what is being suggested here?
Fellow Trader,
The above voucher, of course, isn’t issued by anybody on Wall Street.
No stock exchange guarantees you money-doubling trades. But we, on the other hand, do.
We are Nick Atkeson and Andrew Houghton, professional money managers and the guys behind Big Money Options, where money-doublers can be a regular part of your trading routine.
For example…
We recently closed one trade in NuVasive June calls for fast 194% profits….
…another in EMC Corp for 246% gains; and yet another trade in Beazer Homes for 700% gains!
In fact, in 2012 so far, we’ve booked 23 fat winners, including 12 that doubled our money or more!
Unusual? Not at all! Since we started publishing Big Money Options in June 2008, we have opened and closed 413 trades in all:
• 124 of those trades doubled our money or better.
• And we have banked even more humongous winners for gains of 550%… 700%… 1,310%… 500%… 645%… 581%… 800%… 500%… 847%… 550%… 563%… 1,400%… 3,700%… 536%… 850%… 2,300%… 1,100%… 1,200%… and even 5,300%!
Just a small $1,000 investment in each of those 19 big winners would have mushroomed into more than $200,000!
Imagine the thrill! Imagine the bragging rights!
And best of all, imagine the satisfaction in knowing you’re well on your way to securing your family’s future with a few simple trades that take you less than 20 minutes a week.
What’s more, the vast majority of your trades will be WINNERS! At Big Money Options, our subscribers have enjoyed a near 70% success rate. Better still, since we strive to cut our losers AND let our winners run, we have averaged an astounding 99% profit on every trade closed — even with the losers averaged in.
With about ten trades a month, on average, AND an average gain of 99% on each one of them, you get plenty of opportunities to grow your wealth fast.
Join us now and get 6 money-doublers in the next sixty days —and get big limited time savings.
Do you have what it takes to make so much money so fast?
Not everyone is cut out to trade with us.
Some people still want to believe in buy-and-hold. Others are stuck in a comfort zone of more tired old investing strategies from yesteryear.
They don’t belong at Big Money Options.
PLEASE DON’T GROAN if you’ve never traded options before… or if you’ve never had much luck… or if you simply assume trading options is hard.
It’s NOT! We give you full buy and sell instructions. And we’re not breathless day-traders, so there’s no need to quit your day job. If you can trade stocks, you can trade options the Big Money Options way.
You see, we take proven tactics from our professional trading life and simplify them to make it easy for the average Joe, or Josephine, to make their fortunes trading options.
If you’re already a “semi-pro,” you’ll love all the money doublers. And if you’re less-experienced you’ll appreciate our detailed instructions on both the buy and sell side, too.
If you can punch a keyboard and point a mouse, you can make big profits with us starting right now.
Double your money 6 times in the next 60 days
At Big Money Options, we bring you real-time, on-the-ground intelligence by tracking the secret moves of Wall Street’s most-privileged insiders.
We have spent years perfecting the Big Money system, starting with a commonsense premise and layering in dozens of screens developed, and perfected, over time.
And studies at America’s leading “think tank” recently confirmed what we’ve known for years: You can predict the short-term future of a stock’s price by watching money flow in the options market.
But not just any money.
Their research — backed by our own real-life experience — show that smaller trades mean nothing. They are just “noise.” But if you track the smart money — the big institutional investors who move tons of cash around — you can predict what happens next with uncanny accuracy.
And that’s what we do at Big Money Options.
We start with our proprietary tracking software, called Big Money Radar Alert. After all, with 2,000 stocks that trade options contracts — and millions of contracts traded each day — scanning the market in real-time and targeting trades that stand out as “unusual” is impossible without a big investment in technology.
But that’s just the very
base level of all that we do
You see, most options analysis starts, and ends, with tracking trading volume. And many amateurs figure that big volume always means big money. But they’re WRONG!
If it were that easy, everyone would make big money trading options. And the SEC would be 100% effective at shutting down all the insider information trades. But they’re not.
Sure, we start with volume. But then we delve into issues of delta, expiration dates, persistence, intensity, absolute and relative volatility, trade history and many more key characteristic. But even that isn’t enough to make us feel confident in recommending a trade to you.
We don’t just look at the numbers. We talk to the people making and executing the trades. We converse with the market makers.
That’s right. We schmoose with the actual traders on the floors of the option exchanges to get their professional opinion about the truth behind the trades. Numbers alone often lie. And reporting errors are frequent.
That’s why we go the extra mile to get on-the-ground intelligence before telling you to pull the trigger on any trade.
So if you’re ready to follow the “smart money” to big profits of your own, we urge you to join us at Big Money Options now.
Big limited-time savings!
For a limited time, you can try the full service for just 99 bucks. That $99 gets you two months to decide if Big Money Options is a good fit for you. Here’s what you get:
• 2-3 Big Money Trades each week, on average.
• Our Weekly Trading Outlook, issued Monday to give you the trading landscape and our target for the week ahead.
• Profit Updates and Alerts — we don’t just say, “Buy,” and then leave you to your own devices. We track each trade closely and give you clear instructions when it’s time to sell.
• Risk-Cutting Strategies that help you avoid the big mistakes that kill other options traders.
• Full 24/7 use of our Big Money Options website.
• Plus more money-doublers in the next year than most investors enjoy in a lifetime.
Accept your limited-time savings by going here now.
Sincerely,
Nick Atkeson Andrew Houghton
Big Money Options Big Money Options
-
Anything that does not try to quantify the risk-adjusted return is bullshit. Define the benchmark you are trying to meet or beat.
"Trading" is a sucker's word for "speculation." Always remember that the professional "traders" do it with other people's money. In the case above, YOUR $99.
If your object in INVESTING is to accumulate enough money to retire at a reasonably young age, then pay attention at Bogleheads.org.