New Technology Boom!
We managed to see the Dow Jones break above that 15,000 level yesterday and the NDX is pretty close to breaking through 3,000. Much of the talk in the financial media is again focused on these new levels and again the question is; “Can we go higher?” Sure why not. The Fed’s monetary policy is “artificially” keeping bond prices high and yields low, making bonds a “terrible” investment, as Warren Buffett stated on Monday. So how much of this rally is based on a recovering economy and strong earnings vs. the equity market being the only choice for investors looking for return? Think about this, you can buy Johnson and Johnson (JNJ) stock that yields over 3% dividend and the company is rated AA+, which is a higher credit rating and better return than the US government treasury bonds. Yeah, it’s absurd, if not sad, that a company has a higher credit rating and paying a higher yield than the US government. So one must ask if we remove the Fed from the equation (their $85 billion per month money printing and “artificially” low rates), what would the bond market price and yield be? Obviously the yield would be higher than it is today, how much higher is certainly debatable. However, there is no doubt that investors would likely purchase government bonds over equities if they DID pay a higher yield and that would certainly reduce the order flow into equities. So we circle back to that question, how much is the Fed’s monetary policy pushing up the equity markets? I don’t know, but I do believe it is having a significant affect. So could a technology boom help get this economy going?
Next Technology Boom?
The big savior during the Great Recession had been Apple. The company continued to push out new products, the media embraced the company, and as all others struggled it was Apple defining the technology boom. Their latest and biggest contribution was the birth of the tablet, with the iPad, now many competitors are in the market and everyone is making one. So now the question is, what is the next big technology boom that could see capital injections and investors rush into?
There are several interesting areas and I am not sure which will become the next NEW thing that garners both investment capital, big IPOs, and media buzz. However, here are a few to think about:
I previous covered this in a Market Preview, but it is worth reminding. We are seeing a boom of software and Apps that are becoming reliant on Cloud Computing. These software products are known in the industry as “Software-as-a-Service” or SaaS. An example of SaaS is media driven content companies like Spotify and Hulu. These companies need Cloud-based computing horsepower to store and push out their on-demand content (Software-as-a-Service). Software like Google Docs is also a SaaS solution. I expect we will see more SaaS services in the coming year. So this is a two-level play, first we have the companies like Hulu and others that rely on subscribers, and second we have the companies that provide the technology that Hulu type companies need, like Cisco (CSCO).
Courtesy of wikipedia
3-D printing has certainly been garnering a lot of bad press in the news recently, with the recent “gun parts” designs. However, as the saying goes; “Bad publicity is still publicity!” While nefarious activities can be had with a variety of technologies, it is no doubt that 3-D printing is starting to come into its own and hitting the mainstream markets. The prices have come down from $50,000 to under $5,000 for some of these printers and I think they will continue to fall. The industry saw an accelerated rise in sales that topped a $2 billion in 2012, which is up several fold in the last couple of years. Some analysts are expecting this market to increase over 200% in the next 2 years. This sector also has different plays, from the makers of the low cost entry models to the producers of the media needed for these printers to work. There is also a bigger play in manufacturing; several firms are looking at special composites on larger scale manufacturing – even car parts. We are a ways away from massive 3-D production lines, but that is a very real future.
Oil and Gas technology boom:
Whether we like it or not, Fracking is here to stay. There is a huge boom in fracking technology to lower the cost and increase production (as well as address safety and environmental concerns). The industry as seen a huge increase in investments to tap new found resources. One company called GasFrac is already testing new waterless fracking in Texas.
Natural Gas Car
Courtesy of wikipedia
Fracking is not the only technology boom; we are seeing a larger adoption of alternative energy for cars. In Brazil, Ford (F), GM, and Honda are already offering models that run on compressed-natural-gas (CNG) and liquefied-natural-gas (LNG). When I was in Thailand, all the cabs run on CNG. They had been converted and they had a tank in the trunk, which made for storing our luggage a little difficult. According a report the world has seen a rise from 50,000 CNG/LNG cars to 3,000,000 in the last 5 years. However, the auto-companies are not the only possible play in this sector; there is the commodity itself (natural gas), the producers, and also companies that are making conversion kits for existing automobiles. We could very well see a new industry pop-up in this sector.
Courtesy of wikipedia
Cloud Computing has helped give rise to a boom in on-demand media companies. I currently subscribe to Spotify. In fact I have not downloaded an MP3 or bought a CD since joining this service. I can take my music anywhere, find new music, port it to my home stereo or play it on my computer and iPhone. Spotify is just one of many. Hulu, Netflix, Amazon (AMZN), even YouTube are moving into this sector and fast. There are many players and it will be hard to see who will be dominating in this space. Currently Netflix (NFLX) is the king of the hill, but that doesn’t mean they can stay there. Some of these companies are not public, but soon could be or be gobbled up by existing public companies.
I know I will get beaten up by several of my friends on this, especially after all the failures and criticisms that have been lobbed at President Obama for his several failed public/private investments in companies like Solendra. However, there have been some recent advancement in the solar industry which are bringing forth two important elements that could create a boom. First we are seeing pricing fall pretty significantly in the last couple of years, down over 20% in the last year alone. Second, the efficiency is drastically improving. There are three new solar technologies that I am aware of to improve efficiency by 10 to 50%. I would not be surprise to see a boom in Solar in the coming year. Why did it not boom before? Well, I don’t think anyone can FORCE something to happen and no matter how much the government wishes to invest and rely on HOPE, it is not until a technology break-through and competition drives both demand and lower prices, which will bring forth a boom. Of course just like Vice President Al Gore who “invented the internet”, President Obama could be known as the “solar president”.
Courtesy of wikipedia
These are just a few examples of areas that I expect we could see a technology boom come from in the next couple of years. I would not be looking at Apple to carry the water for the industry anymore; instead I would look at these sectors above and any huge developments. It would pay to take some time to research the sectors, the companies and developments. None of these will be short-term plays, but it’s always good to be the first in on the ground floor.
I would love to hear what you think.
Support & Resistance
While we did break above 15,000 yesterday – we need to remain cautious. The market moved higher on no news, but only the reality that there is no-where else to invest. I think the market can certainly continue higher in the short-term foreseeable future, however that doesn’t change the fact that I think our nation (despite any fundamental strength in companies) is creating a monetary bubble. Stocks are bought on leverage and the leverage in the nation is still big. Roubini, Buffett, and others see the bubble already and while they and others remain long the equity market, they are acutely aware of what is propping up the market and are certainly concerned.
Only a short ways away, could Apple, Netflix, Google, or Microsoft help push this index higher and through the 3,000 level? Sure, I think in the next year or so we could be on the cusp of another technology boom, I am just not sure where the traction will be and where investors will jump too. A big part will be marketing and media, which drives interest and spurs excitement. There are several areas that I think could bring some future excitement and investments.
This is starting to look like a new support every day we stay above it. However, that doesn’t mean it can’t be tested and I sure it will. The question on a pull back, do we buy? The VIX continues to tick lower as the market continues to march higher. I am a Bullish on the market, not because of fundamentals, earnings, or the economy, I am Bullish because the Fed will continue and most likely ramp up their money printing operations. You can’t fight the Fed. However, Bullish – I am significantly cautious and do hedge all my long positions, because when the rug gets pulled out – sometime in the futures – it will turn very quickly.
We busted up through the 960 level and that just shows that broad based order flow is heading into equities because as Buffett put it, “bonds are a terrible investment”. For now the Bears are not willing to fight the Fed and the margin/leverage is still available.
It does sound odd to be Bullish equities, while Bearish the economy. I am also fundamentally Bullish several sectors and stocks. Right now the market is rallying based on order flow having nowhere else to go. Stocks that should not rally based on fundamentals are rallying right alongside stronger companies. That is the first sign of euphoric investing.
This cycle continues as long as the following remain in place; first the Fed continues their monetary policy and keeping bond rates at zero, second that margin and leverage is still available to investors, funds, and banks. Remove the leverage or stop the Fed and the equity market quickly loses air.
Remember the days heading into 2008; the housing market was rallying not based on any fundamental changes, but rather the ever increasing access and expansion of credit.
It is this credit expansion, fueled by the Fed, which is the core driver. However, many ask why the economy is not improving now with all the Fed money? Well, that credit expansion is ONLY available to the banks, top 10% of earners, and those WITH assets. In the booming housing years (prior to 2008), credit was available to anyone and everyone with a pulse. So now banks are gun-shy and being VERY picky of whom they offer credit to.
This is why I believe we are “seemingly” seeing a shrinking of the Middle Class. I personally believe that prior to the Housing Bubble, we didn’t measure the Middle Class correctly. Rather than measuring “Class” on debt-free assets (“wealth”), we measured the Middle Class on credit-spending and debt-loaded assets. To me we didn’t have an expansion of the Middle Class, we had a massive expansion of the debt-spending Class, which made it seem like we had a booming Middle Class.
Now, banks are reluctant to take the risk to loan to those that had accumulated massive debt, which was a big portion of the Middle Class. It is this simple reality that is reflecting a shrinking Middle Class, more so than anything else.
IF and only IF, that banks again open the doors of credit to everyone (regardless of credit rating, income, or debt), will we see a spending explosion again and it will SEEM like a booming economy again. However, what we really are doing is creating the next big bubble.
Right now it is our government that has taken the role of deficit spending and accumulating debt, and that is what is causing concerns from Buffett, Ross, Rogers, Roubini, and others. Same game, different player.