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Archive for April 19th, 2009

Four Bad Bears Markets

Four Bears and Inflation

Four Bears and Inflation

Four Bears and Inflation
April 17, 2009
Earlier this week the Bureau of Labor Statistics (BLS) announced a Consumer Price Index number for March that showed an annualized negative number. It was tiny, a mere -0.38%. But it was the first negative annualized rate since August of 1955. Is it a hint of more to come?

Deflation has been a chronic problem in the Japanese economy since the Nikkei 225 topped out in 1989, and it was a debilitating problem during the Great Depression. There are a few economists who see deflation as a threat to the U.S. economy on the expectation of continuing unemployment and consumer deleveraging.

But the consensus seems to believe that monetary easing by the Federal Reserve is more likely to trigger the reverse problem — higher inflation. Some even foresee a return to the sustained inflation of the seventies and early eighties. This is yet another topic that demonstrates the heightened “Uncertainty Factor” in today’s economy and its imperfect reflection in the markets.

And speaking of the markets, most people think only in terms of nominal price values with little consideration of real (inflation-adjusted) performance. But over longer periods inflation and deflation are major factors. The thumbnails to the right offer a quick comparison of our Four Bad Bears chart in nominal, real, and alternate-real formats. In nominal prices, our current bear has begun to pull away from the treacherous slope that led to the Great Depression. That’s not the case in real prices, mostly because (ironically) the deflation of the earlier period makes the 1929-32 decline seem less grave. If the ShadowStats Alternate CPI adjustment has any credence, the real comparison is even more bizarre. The ShadowStats claim of understated inflation since 1982 makes the Tech and current declines significantly more severe.

Click on the small charts for a series of larger versions. Use the blue links at the top to navigate among them.

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Bear Turns to Bull?
April 17, 2009 updated daily
The S&P 500 closed the week by rallying to a new high 28.5% above the March 9th low. Are we in a new bull market, or is this just another bear rally? Click here to review the previous rallies during the current bear market, and here’s a table showing the 1929-1932 Dow rallies.

We continue to be fascinated with the saga of the Four Bad Bears. In nominal terms, the latest rally puts the S&P 500 just slightly higher than Dow Crash of 1929 over the equivalent time frame. In real (inflation adjusted) terms, the Dow fares better.

The accompanying charts are intended not as a forecast but rather as a way to study the current decline in relation to three familiar bears from history.

For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.

For a bit of international flavor, here’s a chart series that includes the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.

Since inflation is a favorite topic on this website, I now regularly update a pair of charts to facilitate a comparison of the nominal and real declines. See also my logarithmic scale view of the “Four Bad Bears” comparison.

For a visual analysis of bear market recoveries, be sure to see my Bear Bottoming charts introduced in the next section.

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 The Mega-Bear Quartet and L-Shaped Recoveries
April 17, 2009 updated weekly
Here’s an update of the Mega-Bear Quartet. It’s especially relevant these days because of the frequent mention of L-shaped recoveries and references to the Japanese market after the 1989 bubble.

To see the mega-bear comparison more clearly, here’s musical analogy that allows you to view the similarities incrementally. Use the blue links to add the parts.

This latest update now includes an inflation-adjusted chart, which gives us a fascinating visualization of the impact of inflation on long-term market prices. The higher the rate of inflation during a bear market, the greater the real decline. Compare the peak of the Dow rally in year seven against the nominal chart. The difference is the result of deflation during the great depression.

It’s rather stunning to see the real (inflation-adjusted) decline of the Nikkei, 19 years after its crash. The current lows rival the traumatic Dow bottom in 1932, less than 3 years after its peak.

Over the past few decades, equity markets in the U.S. have had an extended bull run. These charts remind us that bear markets can last a long time. And it’s not necessary to go back to the Great

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As Google’s Growth Falters, Microsoft Could Regain Momentum
By 24/7 Wall St. Wednesday, Apr. 01, 2009People sit under a Google logoitted.
JOHN MACDOUGALL/AFP/Getty
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Facebook Yahoo! BuzzTwitter Linkedin Permalink Reprints Related Most of the recent news about Google (GOOG) has been bad. Online advertising posted a slow fourth quarter. That unexpectedly included both display ads and search marketing which has made Google one of the fastest growing large companies in America. Several Wall St. analysts have commented that Google’s search revenue’s rate of increase flattened out in January and February. Since the consensus among experts who cover the company is that revenue will rise 11% in the first quarter, a flat quarter would be devastating.

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One of the things that Wall St. hates about Google is that it does one thing better than any other company in the world, but that is all it does. Google Chrome browser, Google Earth, Google Maps, and YouTube have really made much money. Some of the features have not produced any revenue at all. If its search operation falters, Google’s run as the hottest tech company in the world could be over. (See pictures of Google Earth.)

At this point, Google is a $22 billion company. If the search business drops to a growth rate of 10% a year, it will take three years for Google’s sales to get to $30 billion. From the time Microsoft (MSFT) hit $22 billion in sales in 2000, it took the company less than three years to get to the $30 billion plateau. Then from 2002 to 2008, Microsoft’s sales doubled. The software business not only grew. Until recently, it grew quickly. (See pictures of Bill Gates.)

The assumption about Google’s prospects is that the search company is the next Microsoft. Twenty years ago, Microsoft had the hot hand. Sales of Windows and the company’s business and server software were stunning. The margins on some of Microsoft’s software franchises were over 70%. Then the hyper-growth stopped as the company’s market penetration of PCs and servers reached a saturation point. Microsoft’s stock never saw the level it hit in 2000 again. Without lucrative stock options, employees who wanted to make it rich moved to start-ups. The people who had been at the company thirty years were already rich. Many of them retired.

About seven years after Microsoft’s stock hit an all-time high, Google traded at $747, its peak. It now changes hands at $348, and if the company’s sales can only grow at 10% or 15%, the stock is not going back above $700, ever. The myth about companies like Microsoft and Google is that what they do is so important to business and consumers and so pervasive that the growth curve never flattens out. It does flatten at every company. No exceptions.

The press coverage of Google this week included a few pathetic announcements. Disney (DIS) will put some of its premium content on Google’s YouTube. That should be good for $10 million in revenue a year. Google is starting a $100 million venture capital arm which will make it the 1,000th largest venture operation in the world. In other words, it will not be managing enough venture money to matter. Then word came out that Hewlett-Packard (HPQ) might use Google’s operating system in some of its netbooks instead of Microsoft Windows. The important word in that report is “might.” The news that Google is adding thousands of employees a quarter and that the founders have bought a 747 or an aircraft carrier probably hit a high point two years ago.

Saying that Google is doing poorly is not the same as saying that Microsoft is doing well. What matters to Microsoft is that Google becomes less of a threat each day as it fails in its diversification attempts. Google’s cash flow does not continue to give it an almost limitless capital arsenal. Google has to consider cutting people in areas which will never be profitable. The entire ethos at Google is in the process of changing. Microsoft may be in third place in the search business, but it is in first place in software, which is still the larger industry.

Investors still ask Microsoft why it is in the video game business. There is not any reasonable answer. It is an awful business with poor margins. It has nothing to do with selling Windows. There may have been some idea that being in the hardware business would help the software business, but, if so, that idea didn’t work out a long time ago.

With the perceived playing field that Microsoft and Google operate on a bit more level now, they can race after the one market that could be substantial for either one or both of them, which is providing software and search on mobile devices. The smartphone, which is really a PC for the pocket, is part of the one-billion-units-per-year-in-sales handset industry. Providing the operating software and other key components for wireless devices is almost certainly the next big thing for tech companies from Google to Yahoo (YHOO) to Microsoft to Adobe (ADBE). Trying to milk more money out of the PC gets harder and harder. For the largest companies in the industry, it has become a zero sum game. (See pictures of the 50 best websites of 2008.)

For Google and Microsoft, the best days are over, unless one can dominate the handset world the way it did the universe of computers.

— Douglas A. McIntyre
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