I am calling the bottom (in case anybody cares)

We are at the bottom – more or less. The S&P500 declined around 50% from his highs, which makes this market one of the biggest bear markets in history (the much referred Great Depression being the only one that was worse). Here is my reasoning:

Chart by Doug Short

Chart by Doug Short

1. Horrible Retail Numbers, Auto Execs pilloried and Dooming Job Numbers – Nobody cares anymore

This week we saw retail numbers that were quite impressive. Auto sales in November down 41%  year of year . All kinds of consumer good categories down between 25% and 35%. Numbers not seen for 40 years. Given that the US economy is driven 73% by consumption one can roughly extrapolate the contraction that we will see in Q4. Then, this week a bail-out of the Detroit-Trio became unlikely – all these miles driven for nothing, maybe they should have car-pooled? And we saw job numbers exceeding even the worst estimates. Each of those three ‘surprises’ would have created a major stock sell off normally. But this week nobody seemed to care – in fact the S&P500 left the week slightly higher. When even historic bad news do not bring the market down anymore, the market does not want to go down.

2. Warren Buffet is always right (sort of)

This week Warren Buffet called the bottom (again – first time in October) – and he has never been wrong in the past, at least in the long-term. He is not a market timer (he admits he does not know how much longer this bear market will last) but a market ‘pricer’. Meaning that investments in  stocks (the right ones – please no financials or gas guzzlers) at current levels should get long-term above average returns. When I am wrong with calling the bottom, than at least I have prominent company. Clusterstock has a nice write-up and links to all the Warren Buffet articles where he is calling the bottom.

3. Shoeshine boy buys triple leveraged short ETFs

Joseph P. Kennedy (1888-1969) knew that it was time to get out of the market in 1929 when his shoeshine boy began giving him stock tips. When people like me start to play with double and tripple leveraged short ETFs (hello SKF, FXP, SDS etc.) then the party must be over. Retail investors get to these parties always too late – by then the cool crowd has moved on already. That means from here on it will go sideways or up, but not further (significantly) down.

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Transitions

Since the beginning of the year, I have been going through a big transition in my professional live. For nearly 8 years I helped to built a successful company (ClickandBuy) against all odds. I transitioned out at the end of last year and since then have been repositioning and refocusing on something completely different. This context switch took much longer than I thought. Only now, after working 10 month on my new idea, I realized that I left my old role behind me and feel 100% immersed by this new company, this new idea and this completely different industry.

We started ClickandBuy in March 2000 before the bubble burst and launched right into the decline of Web 1.0 in the summer that same year. In this negative environment we were able to survive because we believed in our product and the value that our company would bring to the market place. But of course there were times of doubt. In fact it was easy to dismiss what we were trying to do, because of the market sentiment, the competition of incumbents (banks & telcos) and because of the complexity of the industry we were in (we probably were not fully aware of that last point). But we believed in us and made each other believe in the company, creating an interesting dynamic of identification between the founding team and the company. This identification was nurtured over nearly 8 years.

So after transitioning out of ClickandBuy, it took me longer than I thought to leave my role behind. Maybe because I did not take a break but jumped right into this new idea. Finally by now the new idea fits like a glove and going back is unthinkable to me right now.

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Yes, America can

I came to the United States in 2002 during George W. Bushs first term. It was difficult to see him win his second term, given his track record. Given the way he represented this country and his internal and international policy choices that left the world wondering in disbelief.

the-new-york-times-breaking-news-world-news-multimedia

It was even harder to explain to friends from abroad why I chose to live in this country. Back then it seemed that the United States had lost all those reasons that attracted people around the world to come to the US. It seemed like this country had lost its path.

Yesterday has shown that these United States the world used to admire were not lost during those last 8 years. In fact what happened yesterday could not have happened it most countries on this planet. This is the strongest message that the United States sent out yesterday. Instead of using my own words, I just quote:

If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer.”

and

And to all those watching tonight from beyond our shores, from parliaments and palaces to those who are huddled around radios in the forgotten corners of our world — our stories are singular, but our destiny is shared, and a new dawn of American leadership is at hand. To those who would tear this world down: We will defeat you. To those who seek peace and security: We support you. And to all those who have wondered if America’s beacon still burns as bright: Tonight, we proved once more that the true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity and unyielding hope.”

Or, better see for yourself here.

As a legal resident alien, I was not allowed to vote – in fact only few of the guests at our house yesterday night were allowed to vote in this country. Nevertheless this election was important and personal to all of us.

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My 2 cents on the ‘Bailout’ or ‘Splurge’

Where to start? Yesterday we had the biggest point drop in the Dow Jones since 1987, triggered by a failed attempt by the US government to launch a rescue package to save the credit markets. But the package failed in the House of Representatives. How do you write a short post to sum up my point of view when many things are connected with each other? Let’s try.

First of all, I believe that until now the freezing of the credit markets has not been understood or felt by the population and law makers. It still seems to be very theoretical. The economy is not strong but right now it does not feel like we are in a bad recession. But things are changing:

Last week I got a letter from our bank regarding our home equity line. When we bought our house, this home equity line was ‘forced’ upon us even though we did not want or need it. The bank hoped to upsell, but we did not feel the urge to buy a new TV or car or else (I got a nice check books to pay for stuff with my home equity loan). Anyway, I guess many people use these lines of credits and live of them. Surprise: Now it is gone. The bank informed us that they deemed the value of our house to be too low to support the line and canceled it. If we received such a letter, I bet they were closing down all home equity lines in our area, state or even nation wide. These days banks are not so eager to give credit – cash is king.

This means the credit crunch has arrived – now it starts to get real for the individual consumer after 18 months. I read as well that last week American Express reduced the credit allowance of all its cards on average by 50%. The coming holiday season will be no fun for the retail sector.

But it makes sense: Savings rate have been negative in the US for many years. Why would you build a safety cushion for bad times, if you have $100.000 in credit lines you can always tap into? No more. As credit stops being available to consumers, they will have to cut down on spending even harder – not only have the stop to buy on credit, but they will try replace this safety cushion that is now gone by saving money.

This will kick off this recession people have been talking about. Consumers stop buying, companies stop selling, companies go broke, employees loose jobs and hence stop spending etc.

But not only that, the credit freeze impacts (and has been impacting for a while) businesses. Profitable companies that have financed investments with loans that might come up for renewals can suddenly not find anybody to renew the loan. This leads to bankruptcies, leading to people loosing jobs, reducing their spending etc.

Now: This ‘Bailout’ – who is it bailing out? Not the investment banker on Wall Street. They have been doing fine in the last years (and I am not going into the question who is responsible for all these complex credit products that blew up and lead to the credit freeze – not interesting right now where we are. This will have to wait for later). The ‘Bailout’ is paid by the consumer and eventually for the consumer. Because the average consumer is the person that will suffer from this if we go into full blown meltdown.

So Congress does not serve well its constituency by blocking a package that is aimed to get the credit markets that our economy / society is built on moving again. 5 weeks before elections, many representatives did not want to be seen as ‘bailing out’ the fat cats on Wall Street. So the problem is that the people that do not understand what caused the credit freeze (which I did not comment on in this post) do not understand what this bailout is for.

Having said that, the bail out plan was not perfect. But I agree with Paul Kedrosky: we do not have the time to come up with, discuss and mull about the best probable plan. We need ‘a’ plan. And leadership that can push this plan through.

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Karadzic captured – world looks different

Great news broke this week: Radovan Karadzic finally is captured. It was an embarrassment that this man during the Bosnian war could commit atrocities and fool the world and then after the war did not have to face trial for his actions. The timing of his capture is coincidentally close to the new government beginning work in Belgrade. I am convinced that the reason he was not brought to justice until now is a political one and not one of failed police investigation.

Looking at Karadzic’s picture it is quite amazing to see his transformation. But there has been as well another transformation in the last 13 years since U.S. Army’s 1st Armored Division rolled across the Sava River into Bosnia. Back then in Europe the United States were seen as the only global player that is willing and able to interfere and risk their soldiers lives for a humanitarian cause and a value system that was widely acknowledged and accepted. Furthermore Europe perceived itself as unable to prevent a humanitarian catastrophe at its own borders and was welcoming and admiring the United States for its initiative. In the end significant European military contributions joined the United States, but it was the US leadership that made it happen.

13 years later, after Iraq and after Guantanamo, that perception has changed significantly. By now the value system of human rights and freedom is perceived as a mask that is hiding other ambitions for intervention: Power, influence and most of all economical gains of a small elite that currently is in the right offices to control this nation. Much has been destroyed in those years – primarily to the detriment of the US. Being perceived as a just world leader ultimately is tremendously valuable for an nation to attract talent, capital and real influence. I think this can be rebuild by the next president. I think that from the two candidates, only Barack Obama is able to do this job.

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The Myth of Cheap Web Startups – the Noise Problem

Today Hank Williams wrote a post on his blog that I can relate to. Starting Internet companies has become more expensive over the last years according to Hank. He argues that even with open source frameworks and on demand cloud computing becoming cheaper and more linear in their cost impact, the main cost driver for building and operating still is human resources.

I agree: having a team of bright developers is still the prerequisite to building a competitive web application/service. This has not changed over the last years. Even offshoring in my experience does not reduce the cost significantly. For me offshoring is a necessity to get access to required technical resources attached with a lot of risk and overhead to identify and manage the right people you want to work with.

One development in the Internet economy is responsible for making the launch of a new Internet service more expensive: There is a lot of competition for the users attention. Countless companies coming up with services that are thrown at users who have to try to comprehend what each service is about and whether it generates value or not. To be on top of this Startup Noise is a challenge. You either have to buy yourself in front of your audience – too expensive for startups and arguably not an efficient use of capital – or you have to find other ways to virally get your product spread.

But why do we see much more Internet startups these days than just a couple of years ago? In my opinion to get a working product out of the door is much easier and cheaper than it used to be 8 years ago. And there are a lot of people that have the skills and have been part of an Internet culture for some years where it seems to be natural to at some point in your life try to launch your own product/application.

So while I do not completely agree with Hank that starting a new service is as expensive as it used to be (otherwise we would not see so many new startups) I do agree that getting your startup in front of your audience is more challenging which makes it ultimately more challenging to start a successful Internet company.

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Biofuel revolution

Today I had lunch with the CEO of a biofuel company that I invested in. While my professional life so far took place primarily in the Internet Industry, I have been following the biofuel space for a while with great excitement. This is not  only an industry with tremendous potential to generate great returns but given the right technologies being used, it could help controlling global warming and the political turmoils that we see already unraveling as a world hooked on oil is realizing that its demand cannot be fulfilled.

Jatropha plantNow there are many different biofuel crops. A lot of biofuel is made out of food crops (Corn, wheat) which critics say are driving up food prices around the world. Therefore those biofuels are argued to be unethical as they lead to competition between the transportation/energy needs of the developed world versus the primary need of feeding the hungry in the developing world. Other companies generate biofuel out of non-food crops (e.g. sugar cane) that are however planted on soil that would be able to support food crops as well – so not much is gained.

However there are so called 2nd generation fuel crops that grow on ground that would not be suitable for food crops. This means that they do not compete with food crops and will allow farmers to use land that was of little use so far. Castor and Jatropha are the two fuel crops that are being used by this company mentioned above. According to what I heard, it is amazing how much demand there is right now for biofuel made from those two plants. But there are only few companies that are able to deliver this fuel. Luckily  my investment is positioned quite well in that game – it will be exciting to see how well they will be able to leverage that position in the next 12 month.

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