Where are the tech innovators?

An interesting thing has happened over the last few years… tech innovators have gotten older. Gates and Ballmer (Microsoft), Ellison (Oracle), and Jobs (Apple) are all over 50. Remember when all of these men and companies were just upstarts?

Well, times are a changing. We have now reached the end or the beginning of the end of some of these careers. Gates has left Microsoft after a 2 year swan song; Ellison is so busy with his sailing that I would be surprised if he hits the office twice a week; and finally, Jobs has been hampered by pancreatic cancer in the past, and his appearance at the Apple Conference started the health rumors anew.

All of these men are important in the history of technology innovation, and with their careers slowing down, where do these companies go from here? Ballmer has not been a big success at Microsoft (MSFT), and the team under him is also not exactly fresh blood. Ellison has no clear heir apparent, and who knows... maybe he will be there another two decades. Jobs is probably the most important to his company, and while Apple clearly has brilliant minds, not one of them is Jobs.

Not to fear though, a new crop of leaders is emerging. Sergey Brin and Larry Page from Google, Mark Zuckerberg from Facebook, and probably 10 other soon to be billionaires that we have never even heard of... yet.

In the end, the big guys will be there, but the nimbleness and fire will be gone. A new wave of innovation is coming be it in energy, communication, transportation, or ??? We do not know where it will begin, but we will all be looking for it...

This little walk down memory lane has been brought to you by the retirement of Bill Gates.

Going Green vs. Going Organic

Going green has become all the rage, and while it is obviously the right thing to do from an environmental point of view, it can easily be expensive. Is it worth the cost?

Remember when everyone started wanting every food to be organic? It was a great idea, and the number of people that were willing to pay extra for organic food seemed to grow every day. Unfortunately, food and oil prices have recently risen dramatically, and suddenly everyone is shying away from organic food and its cost. Whole Foods, The Fresh Market, etc. have all seen a large decrease in foot traffic and sales over the last few months. Will the same thing happen to going green?

The answer is almost definitely no. The reason is pretty simple. Little one time changes here and there can help save money and energy. From compact florescent bulbs (CFLs) to programmable thermostats to dripline irrigation systems each will cost more initially, but in the end, they would each save the homeowner money and be environmentally friendly. This is much different from eating organic foods because that is an increased every single week… not just once. These are just little examples, but they can make a big difference when a neighborhood, community, or city makes the change. By the way, did you know that some insurance companies will give you a “utility credit” for a home that is more energy efficient? It can save you as much as 10%... Usually it is new homes that will qualify.

There are some things that definitely do cost more by going green, but as with most new technology, the initial costs are high, but they start to come down (CFLs have become much, much cheaper and better). Hybrid cars are still too pricey, and if you check the calculators on how long you need to keep the car to save money, you will notice it is not yet very economical... but it will be in the future.

The question is what does the future hold? Will cars continue to be hybrids or will batteries become better allowing for longer trips? Will solar energy or wind energy become more readily available? What will the energy source(s) of the future be? All of these answers have different business possibilities and investment opportunities, yet in the end, which will be the winner? Only time will tell...

Want to learn more about going green? Visit The Green Guide – the site includes information for your green home, green products (from towels to beer), and a green buying guide.

US Energy Secretary Blames Oil Production on Rise in Prices

On Saturday, the US Energy Secretary, Samuel Bodman, said the lack of sufficient oil production had lead to higher oil prices and not speculation or manipulation in the financial markets. These are quite surprising comments, and the fact that they were said before a conference of oil producing countries and oil consuming countries is also interesting timing.

Saudi Arabia, the host country, has stated repeatedly that they will increase production as necessary to keep up with demand, but Bodman said they have not. Bodman points to the ever increasing demand from developing countries (China, India, etc.) as the reason for needing the increased production globally. Saudi Arabia has already agreed to build infrastructure to allow for 12.5 million barrels a day in production, but they have not signaled wanting to increase oil production beyond that.

Saudi Arabia’s thoughts are that if the continued record oil prices start to hinder growth in the US and global economies, the demand for oil could drop which could start a dramatic downswing in oil prices. The issue is how to control production and the cost of oil while balancing the global economy and growth. This is not an easy task.

Do not think that Bodman only blames the oil producing countries though. Bodman clearly stated that the oil consuming nations must also do their part by becoming much more efficient with their oil consumption. From energy efficiency to alternative fuels, oil consuming nations must chip in to help.

This is a conference that the world will be watching.

Want to know more? Read the Yahoo article

NYSE Short Interest at a Record High

Yesterday the NYSE released its mid-month short interest report for June. Since the end of May, short interest on the NYSE has grown by 7%. This is the third time in 2008 short interest has increased by more than 5%.

Historically short interest in the market has been considered a contrarian indicator, but during the past few years the emergence of hedge funds and long/short funds has somewhat skewed the numbers. In the end, short positions are usually held by "short term" or "day" traders, and they are much more inclined to move quickly to cover a short position and lock in any profit or loss than a long term investor. Thus, even as the numbers on the short side grow, the end result should be a market that at any point could turn and have the shorts covered. Any momentum to the upside could bring a dramatic move to cover these shorts. This one issue should be seen as something that should provide a bit of cushion.

The NYSE Press Release - link:

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NYSE Group Inc. Issues Short Interest Report

New York, June 19, 2008--The NYSE Group, Inc. today reported short interest as of the close of business on the settlement date of June 13, 2008.

Based on information received from members and member organizations, short interest increased to 17,654,028,383 from 16,431,281,684 shares on May 30, 2008. This is an increase of 1,222,746,699 shares and is an all time record.

The short interest on June 13 was equal to 4.6 percent of the total shares outstanding.

The short interest in warrants as of June 13 amounted to 1,012,976 warrants, compared to 1,153,676 warrants the previous period.

As of the settlement date, there were 3,715 stocks and 10 warrants available for trading. Of these, 3,172 issues had either a short position of at least 5,000 shares or a change of 2,000 shares since the last monthly report.

A short sale is any sale of a security that the seller does not own or any sale that is completed by the delivery of a borrowed security.

News - June 2008

The themes driving the economic discussions and the markets continue to be the same factors in play that have dominated the past several months. The only episode rivaling the run in commodity prices seems to be the endless presidential primary season and ensuing general election campaign. The exhaustive news coverage of these events can even cause the most fascinated observer to become weary. Thankfully (and assuming there will be no McCain v. Obama Supreme Court coup de grâce), the presidential race will come to an end this fall, while the duration of the bull-run in commodities is a bit less predictable.

The increasing cost of crude oil and gasoline has remained foremost in the commodity discussion as prices at the pump have eclipsed the $4 per gallon level in many U.S. cities. Crude oil prices have continued to soar from $96.29/barrel on December 31, 2007 to $127.78/barrel on May 30, 2008, which is actually down a few dollars from the peak during the month of May. Congress has looked into whether there are any manipulative practices influencing the price of oil on the financial markets, and it appears that they do see speculation, but nothing that appears to be widespread illegal manipulation of prices.

Consumer confidence recently registered at the lowest levels since the previous President Bush was in the White House. The weak housing prices, rising energy costs, and a shaky job market are all adding to consumer jitters. Statistical evidence of a weaker economy and a cautious consumer oftentimes has been a harbinger of prosperous moves higher by the equity markets. In fact, since mid March through the end of May, we have already seen the NASDAQ rally over 15% and the S&P 500 rebound by roughly 10%.

The unemployment data for May showed an unexpected spike as the jobless rate increased from 5.0% to 5.5% in one month. There are many economists who have offered an explanation for the unusual monthly spike. One reason is that it is estimated that the job market needs to produce 100,000 jobs each month to match the additions to the labor force. The past five months of job data have shown negative job growth without much of a rise in the unemployment rate, so the lag in the rise of unemployment could have shown up in the data this month. Others have challenged the data and the seasonal adjustments, attributing the rise to the end of the school year, which added thousands of teenagers and college graduates into the labor force.

The always anticipated sell-off in May did not materialize this year. The NASDAQ was a notable outperformer for the month of May, gaining 4.6% along with small cap stocks, as the Russell 2000 also rose by 4.6% during the month of May. The S&P 500 was up 1.3%, while the Dow Jones Industrial Average lost 1.2% for the month. All of these measures are negative for the year while rebounding since March. The Dow Industrials and S&P 500 are off 3.8% for all of 2008, the NASDAQ, despite its recent strong performance, is down 4.6% for the year, and the Russell 2000 is only off 1.8% for the year.

In the U.S., we are, on aggregate, larger consumers of commodities as opposed to producers of these valuable resources. Several economies have thrived, in part, due to the rising prices paid for those resources. The U.S., Japan and Europe seem to be lagging behind Canada, Latin American, Russia and some Asian countries, which are large producers of energy and natural resources compared to their relative consumption.

International markets have been mixed for the year. As we have said, the developed economies, which are larger consumers of natural resources, have struggled compared to the other markets. The developed international market as measured by a popular ETF has declined 3% for the year while the most widely followed emerging markets ETF has been slightly negative for the year by 0.5%. China’s and India’s stock markets have struggled this year while some of the other foreign markets have done better. For the year, the Latin American ETF has produced a gain of 20.2%, while the Canadian ETF has added 8%, and finally an ETF focusing on Russia has gained 10.4% through May 31^st.

Financials continued their struggles, falling 6.95% during the month of May and extending the year-to-date losses to 13.77%. Many analysts had believed that the Bear Stearns bailout would mark the bottom for the financials as fear reached a peak. Unfortunately for many investors, numerous financial stocks have eclipsed the lows of March after rebounding temporarily in April. The Federal Reserve actions have had a positive impact on the functioning of credit markets; however, these improvements have had surprisingly little positive impact on financial stocks.

Despite continued volatility in the markets, the major averages and indices have not breached the lows reached during January and tested in March. Some market technicians (those who use charts and trends as proxy for investor psychology) have opined that it’s likely the market has seen the worst. We are loathe to suggest with any certainty that we have, indeed, seen the worst, but the market does seem to be signaling that the economy may stabilize and begin to strengthen towards the end of the year.

The rest of 2008 is sure to be filled with political uncertainty and posturing, and uncertainty is not something the financial markets typically embrace. However, there is some historical evidence that the uncertainty, fear, or even exuberance related to political leadership changes are frequently exaggerated. We’re confident that the U.S. economy and financial markets will have success in the future regardless of what change the 2008 election brings.

You Can't Fight the Fed!

From the Desk of Joe Rollins

As I am sure all of you are painfully aware, the first quarter of 2008 was a tumultuous one from an investing perspective. A great deal of the news regarding the state of the financial markets and the banking institutions seemed to be sensationalized, and so I was not completely surprised when it eventually took its toll on the stock market, impacting our returns for the first quarter of 2008. The purpose of this memo is to provide you with our thoughts on the financial events we are experiencing at the current time.

First and foremost, what is happening in the stock market right now is neither unusual nor unanticipated. From 2003 until 2007, we enjoyed extraordinary returns on our total portfolio under management of 108.1% before advisor fees. Remember that this percentage does not represent our best performing portfolios only; it is the average percentage of our total portfolios under management. For the same time period, the S&P 500 index return increased 81.6%.

Rollins Financial’s total portfolio under management has had five consecutive years of double-digit returns. It is not atypical for the stock market to decline after such a long period of positive returns. For the first quarter, our total portfolios have averaged a loss of 8.1% as compared to the S&P’s loss of 9.4%. The Dow Jones Industrial Average was down 7% for the quarter and the NASDAQ Composite was down 13.9% for the quarter.

The United States economy suffered severe economic blows during the first quarter of 2008, but the governmental agencies are certainly doing their part to nurse it back to health. Our Federal Reserve has taken remarkable and unprecedented swift actions to alleviate the liquidity issues due to the perceived credit problems. I believe we will see positive reactions due to those actions by the Federal Reserve.

Historians interested in the stock market quickly discover that it is unwise to invest against the Federal Reserve. The Fed is simply too big and too strong, and its impact on the economy cannot be ignored. The Fed’s cutting of interest rates over the last six months from 5.25% to 2.25%, and its injection of over $1 trillion into the economy, will have a hugely positive economic effect on our economy. While none of us know whether the country will ultimately fall into a recession, as an investor it is important that you understand that the Federal Reserve has already moved to stabilize and improve the economy. An investor would be ill-advised if he or she attempted to invest against the Federal Reserve.

With the government’s reduction of key interest rates, cash is currently an underwhelming performer. Over the last four or five years, the returns for cash have been a true competitor to stock market investing. In fact, in many cases, CD’s outperformed the S&P 500 index last year. No longer will that be the case. Interest rates are falling like rocks and investors will soon see money market rates in the 2% classification. As more investors realize cash is not earning enough to even keep up with inflation and can only provide negative returns, that money will migrate back into stock market investing.

The first quarter of 2008 was somewhat bifurcated in that virtually all of the losses were incurred during the first two and a half weeks of January. At the start of the New Year, there was a massive rotation of portfolios which essentially brought down all mutual funds. At Rollins Financial, we were also heavily trading on our portfolios during this timeframe. We reallocated the entire portfolio to remove some of the highly volatile mutual funds and instead invested in less erratic funds. Additionally, we moved out of many of the growth positions held in the portfolio and into more conservative investments that might gain during a net interest rate reduction. Our moves proved to be successful by the end of the quarter; our total portfolio actually wound up making some money from late January through the end of March.

The first quarter was also peculiar in that nearly all actively managed mutual funds incurred losses. In most cases, those mutual funds had losses greater than the S&P 500’s loss for the quarter – but losses were not isolated among stock mutual funds. High yield bond mutual funds in almost all types of high yield investments lost money this quarter. The only mutual funds that made profits during the quarter were mutual funds dominated by government-backed securities. However, even those gains were completely muted from an investment standpoint.

Fidelity Investments offers 41 diverse select mutual funds that allow you to choose the sector you believe will do well for the quarter. Interestingly, during the first quarter of 2008, only two of those 41 select funds actually had positive returns: gold provided a limited return of 4.9% and natural gas had a positive return for the quarter of 1.2%. The other 39 select funds all had losses, many of which had losses in the double-digits. Clearly, this illustrates that the first quarter, from an investment viewpoint, suffered broad-based losses and none of which were in any particular sector or asset class.

Even though the U.S. economy has slowed, the worldwide economy continues to boom. The economies of Asia, South America’s and many other economies in the world were bolstered by the world’s need for natural resources, and they continue to explode upward. While some economies will be influenced by the decline in growth in the U.S., it is highly unlikely that this decline will significantly affect their explosive growth. For that reason, we anticipate that we will continue investing in international funds for years to come.

I recognize that the first quarter has been difficult and frightening for investors. However, I do not believe that what we are experiencing is the first step in a long downward spiral. It is clear that the Federal Reserve is on the job and intends to solve the problems concerning the economy in short order. In my opinion, it is likely we will see the positive effects of the Fed’s moves sometime in the third quarter of this year, which will likely coincide with the Presidential election.

It is interesting to me that when stocks are cheap (as they are now), investors often ignore the buying opportunity. However, when stocks are expensive, investors seem to rush to participate. Right now we have some of the most amazing stock buying opportunities in history. I encourage you to look at your portfolio and add to it during the upcoming quarter so that you don’t miss the boat. This is also the perfect time to make your IRA contributions.

As always, if you would like to discuss this matter further or meet with any of us individually regarding your portfolio, please feel free to give us a call. Best regards.