Continued from Your Future Housing Options, Part 1
Homeowners and investors looking to hedge against the decline in housing prices may find respite in an old corner of the financial market that allows them to bet on changes in future prices. Futures and options, known in the financial world as derivatives, help investors offset the risk exposure of their portfolios. A futures contract is a legal agreement to buy or sell a product for a given price at a given time in the future (hence its name), typically commodities such as pork bellies or oil. An option gives the buyer the right, but not the obligation, to buy or sell a security at a given price at or within a given time. Speculators buy futures and options to try to profit from market volatility; hedgers use them to offset the risks of adverse market movements on their investments. Most futures contracts are for physical commodities such as cattle, pork bellies or coffee beans, while the housing contracts are pegged to a more complex index of housing prices. The contracts for housing are tied to the S & P/Case-Shiller Home Price Index, a survey of housing prices in 10 metro areas (Boston, Washington DC, San Francisco, Denver, Chicago, Miami, L.A., Las Vegas, New York, San Diego) developed by Shiller in conjunction with Professor Karl Case and Standard & Poor's.
In late May, the Chicago Mercantile Exchange introduced Housing Market Futures and Options, an investment vehicle similar to futures contracts that allows investors to hedge against changing commodity prices. The exchange hopes that investors will seek protection through these instruments at a time when many anticipate a prolonged real estate decline. Futures contracts traded on the Chicago Mercantile Exchange show that traders expect double-digit declines in 9 out of the 10 biggest housing markets in the U. S. with the only exception Chicago, where prices are still expected to fall by 5.6% over the next year. In the latest batch of data released by Standard & Poor's for its S&P/Case-Shiller home price indexes, the national index of home prices showed a drop of 4.5% (yr/yr) from the third quarter of 2006, and a sequential decline of 1.7%. This sequential 1.7% slide is the largest since the index was first created. Robert Shiller, chief economist at MacroMarkets, responds to this report, "There is no real positive news in today's data."
To further understand how this proven method of investment in a volatile economy can be applied to the current housing market, consider the following. Futures and options are contracts that trade on exchanges to allow investors to bet on prices going up or down. They are known as derivatives because their price movements are derived from the price movements of an underlying security, asset or index. Investors' predictions about these real estate markets are certainly not guaranteed to be accurate. They do provide, however, insights into what people with skin in the game think lies ahead. These types of "predictive markets," have proven to be surprisingly accurate in forecasting everything from the outcome of political elections to housing movements.
To apply this strategy, suppose you own an expensive house in San Francisco that you are afraid will suffer a severe decline in value, but you do not want to sell it and move. You could stay in the house and sell futures or buy put options on the San Francisco housing price index. If home prices in San Francisco fall, the value of your house will probably go down as well. However, this loss will be compensated by the money you will earn on your futures contracts. If you bet wrong, you will lose money on your contracts, but you will have essentially insured yourself against this loss and will have retained the value in your property or possibly realized an increase. Unfortunately, futures and options have a steep learning curve, too steep for the average homeowner who wants to place a one-time bet. The housing contracts are also quite costly at this time as they are still relatively new and thinly traded. While the average homeowner can participate in these publicly traded futures, the cost of hedging might prove prohibitive unless they hold prime and pricey real estate that they want to protect. Each Mercantile housing futures contract is valued at $50,000.00 with an initial buy-in (also called a good faith investment or margin) of $2,500 (five percent of the contract's value), not including brokerage fees. Contract values have not been announced for the CBOE housing futures yet, but its offerings will carry a 10 percent to 15 percent initial buy-in.
Smaller-scale investing in housing futures has been offered since May 2005 at HedgeStreet.com, a San Mateo, Calif.-based online exchange that offers futures contracts at up to $10 each. The new Housing Price Hedgelets are tradable as both Yes/No and Variable contracts with 3-month and 6-month durations and are benchmarked against the National Association of Realtors (NAR) reported Median Sales Price of Existing Single-Family Homes in Chicago, Los Angeles, Miami, New York, San Diego and San Francisco. Hedgelets are unique financial instruments that do not exist on any other market. John Nafeh, CEO of HedgeStreet states, "For most Americans, their home is their single largest investment and, as such, the desire to reduce risks surrounding that asset is important. Housing Price Hedgelets provide a unique way for them to hedge against depreciation in the value of a home, or conversely, speculate on the degree to which housing prices will appreciate."
The concept of insuring yourself against a big drop in the value of your home, the same way you can insure against losses from fire, hurricane, or a guest who gets drunk and falls down your steps, is a comforting thought. Someday, it might be as easy as adding a rider to your homeowner's policy. Shiller predicts that "Once we have a futures market, then people can develop home equity insurance and mortgage products that protect the equity in the home and they in turn can then use the futures market to hedge the risk they assume by creating these products." The housing futures market will hopefully, in turn, provide large insurers a way to hedge the risk of offering home equity insurance to consumers.
Concluded in Your Future Housing Options, Part 3
Tuesday, February 5, 2008
Wednesday, January 2, 2008
Your Future Housing Options, Part 1
Research from a multitude of economists, financial experts and housing professionals convey varying levels of negative projection for the U.S. housing market. All cite degrees of blame aimed at self serving lending institutions which made ill advised loans to unqualified buyers, packaged these loans which received a questionable “buy” rating and were then sold in the secondary market. The result, an unprecedented credit collapse in the U.S. economy, opaque institutional liabilities, a lot of finger pointing, and even more questions on how to potentially alleviate further housing depreciation. The resulting housing market plummet affects a large portion of Americans with relatively few solutions on hand. Application of the market strategy of hedging may perhaps be a creative solution for some home owners as a method of protecting what is for most Americans their greatest asset.
Housing valuations commonly utilize a metric based on the house price-to-rent ratio (P/R), which is akin to a price-to-earnings multiple for stocks. This metric is intended to reflect the relative cost of owning versus renting. Naturally, when housing prices are high relative to rents, potential home buyers will choose instead to rent, thus reducing the demand for houses and bring prices back in line with rent costs. Economists suggest that when price-to-rent ratios remain high for a prolonged period, prices are being sustained by unrealistic expectations of future price gains rather than the fundamental rental value, thus creating a bubble.
The application of this price-to-rent formula in key housing markets illustrates the dangerous climb in housing costs over the past seven years.
The price to rent ratio (P/R) compares the median single family home sale price to the median monthly rent for a 3 bedroom apartment in one of the top 10 housing markets. The financing terms assume a 20% down payment on a 30-year fixed rate loan and the historical median home sale price is determined by fitting the HPI index to NAR's median home sale price over the last few years. The median rent is again provided by Housing and Urban Development.
The basic formula suggests buying under the following conditions:
Rental rate + Appreciation - Interest cost > 0
Historically, the real after-tax, after-depreciation interest rate for houses is four percent. From 2000 to 2007 the nationwide P/R jumped from 15 to 24, an increase of 60%. Cities with the largest P/R increases are Tampa, 12 to 21; Washington, D.C., 11 to 26; and California’s east Bay, an area that includes Oakland, 28 to 51. Others argue that the historical P/R value should be 16.7 with the real after-tax, after-depreciation interest rate being 4 percent with additional maintenance costs (roofing, paint, HVAC repairs, broken water pipes, etc) taken into account. These are calculated at 1 percent per year and real estate taxes another 1 percent. To get a real return of 4% given these additional items, annual rent needs to be at least 6% of the house price instead of 4%, which then raises the P/R ratio from 15 to 16.7. For the sake of this blog, we will use the P/R ratio of 15. If the rental rate is 6% of the house price rather than 4%, it lowers annual appreciation rate from 4% to 2% which is not a realistic number. Lower price to rent ratios generally indicate that homes are more affordable.
Correspondingly, the U.S. housing phenomenon is powered indirectly by Asian funding. The Yen Carry Trade by Asian hedge funds exploits a 3.0% differential between U.S. and Japanese long-term interest rates. The yawning U.S. trade gap translates into a gargantuan trade surplus which Asian investors recycle into U.S. Treasury Bonds. Direct Asian central bank intervention, often transferred overnight, offers regular U.S. Dollar support by means of U.S. Treasury Bonds. Thus, Asian bond support is absolutely critical to the housing movement in supplying funds utilized in mortgage financing. Erosion in confidence in the U.S. economy and subsequent reduced investment in U.S. Treasury Bonds, along with the liquidity problem created by the foreclosure crisis, has led to a serious decline in consumer lending and subsequent adverse effects on the housing market.
Many analysts say the worst is yet to come. Banc of America Securities predicted in a report last month that the median U.S. home price would fall 15 percent over the next four years and not rebound until 2012. This is decline is partially fueled by foreclosed housing that causes comparable sales in a given area to under represent their true value. Bank of America, who recently bailed out mega lender CountryWide by injecting them with much needed funds, further estimate that with $361 billion in subprime loans made to borrowers with weak credit scheduled to reset at higher interest rates next year foreclosures will peak in the third quarter of 2008 and will not return to more normal levels until 2011.
The options for homeowners in the face of such negative reports are limited. Few people are willing to sell their homes now to avoid possible declines in the future. But Yale economists Robert Shiller raised one provocative possibility after the latest data was released, suggesting that homeowners may want to consider hedging their homes as a way to protect themselves against declines in their home values.
Continued in Your Future Housing Options, Part II
Monday, December 3, 2007
Goog-411, Part 4
The Final Piece of the Puzzle
Let’s consider the idea of Google becoming a wireless telephone provider. In recent news, the FCC rules for the upcoming sale and use of 62 megahertz of spectrum in the 700MHz band has the mobile community titillating with interest. It is a highly desirable slice of the airwaves because it can easily transport mobile-video services and applications to end-users located dozens of miles away in hard-to-reach places like basements and elevators. The 62 megahertz of spectrum is coming available due to the fact that television broadcasters are moving to a digital signal from an analog signal in early 2009, which requires much less spectrum. The sale of the spectrum will be done through an auction scheduled to happen in January 2008, so most parties will have to wait until then to find out how far Google will go towards acquiring the highly coveted 700 MHz band.
To appreciate the situation, one must first understand that purchasing the spectrum would be an incredible feat for Google, especially considering the opposition they would have to overcome from existing telephone giants, AT&T, Verizon, and Vodafone. Additionally, the auction is highly anticipated since the sale of 62 megahertz of spectrum is widely seen as the last opportunity for a new entrant to establish a presence in the wireless broadband market. On 22 megahertz of the lucrative 62 MHz airwaves being sold off by the Federal Communications Commission, two open-access conditions were attached that are aimed at introducing greater consumer choice and competition into the wireless industry.
Let’s consider the idea of Google becoming a wireless telephone provider. In recent news, the FCC rules for the upcoming sale and use of 62 megahertz of spectrum in the 700MHz band has the mobile community titillating with interest. It is a highly desirable slice of the airwaves because it can easily transport mobile-video services and applications to end-users located dozens of miles away in hard-to-reach places like basements and elevators. The 62 megahertz of spectrum is coming available due to the fact that television broadcasters are moving to a digital signal from an analog signal in early 2009, which requires much less spectrum. The sale of the spectrum will be done through an auction scheduled to happen in January 2008, so most parties will have to wait until then to find out how far Google will go towards acquiring the highly coveted 700 MHz band.
To appreciate the situation, one must first understand that purchasing the spectrum would be an incredible feat for Google, especially considering the opposition they would have to overcome from existing telephone giants, AT&T, Verizon, and Vodafone. Additionally, the auction is highly anticipated since the sale of 62 megahertz of spectrum is widely seen as the last opportunity for a new entrant to establish a presence in the wireless broadband market. On 22 megahertz of the lucrative 62 MHz airwaves being sold off by the Federal Communications Commission, two open-access conditions were attached that are aimed at introducing greater consumer choice and competition into the wireless industry.
Specifically, Google encouraged the FCC to require the adoption of four types of "open" platforms as part of the license conditions:
1. Open applications – no restrictions should be imposed on downloading and using any software applications, content, or services.
2. Open devices – consumers should be able to freely switch their handheld communications device between any wireless network available.
3. Open services – third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms.
4. Open networks – third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms.
In the end, the FCC approved the creation of networks that can work with any device (consumers will have the freedom to attach any device and any application to a 22-MHz section of the band), but refused to comply with the so-called "wholesale condition," (conditions No. 3 and 4 in the aforementioned list).
Consumers would greatly benefit from Google’s request to allow open devices and applications on a third of the spectrum. Traditionally phone companies have been stringent about what applications and devices could operate on their networks. With the 700 MHz band open to fresh companies, a whole new breed of mobile technology may emerge. While the FCC did not mandate the charge of wholesale prices of the 22 MHz of the spectrum, they did heed what some consider Google’s ultimatum, open devices and applications. It will be interesting to see the results of the auction. The entire band has been valued around $20 billion, which would be financial blow for any one company to bear, but Google could easily partner with any large carrier (Sprint, Alltel) or a fellow tech company (Apple, Intel) to offset the expense.
Does the evidence support the theory that their established interest in mobile technology can only peak with the introduction of a new mobile device, or are they simply setting up a network of mobile applications in order to offer mobile advertising in the future? We may not have a definitive answer, but after January 2008 and the FCC auction, we may know more about Google’s desire to become a mobile provider.Conclusion
Could Google be poised to expand into the telecommunications and cable arena? The possibility definitely exists, and the company’s deep pockets mean they would be an instant competitor. Many believe, like TeleGeography’s Mr. Schooner, that Google will not venture into these markets because the profit margins are far too small. It is more likely that Google will use the dark-fiber they have bought cheaply and invest in their own backbone to the internet. They will effectively create their own infrastructure, and force their service providers into a lonesome corner. In contrast, Stephen Arnold has identified seventeen telephony-related patents and patent applications by Google and another dozen with a tangential link. “That means 11 to 12 percent of Google’s innovation effort since 1999 is in telephony,” he said. “Somebody at Google cares about this telephony stuff.”
Will Google offer a G-Phone? Google has been on the upward pendulum swing with their wireless and network aspirations. Google has been purchasing dark fiber in the US for many years. They will connect all their dark fiber to their new 700 MHz wireless spectrum throughout the US (if they win the auction). As subscribers utilize ‘Goog-Tel’, Google will push advertising based on their wireless activities or location further increasing revenue and margins. This national network will provide Google with unlimited bandwidth allowing them to compete with the telephone and cable monopolies for both internet and wireless customers as well as lowering their bandwidth expenses in the U.S..
Friday, November 2, 2007
Goog-411, Part 3
Surprisingly, it may be too narrow of a view to see Google’s recent movements as a push towards becoming a telephone company. Google managed to reinvent online search and advertising, so the same may be true of their aspirations with wireless and network technology. It would not be beyond the scope of their inventiveness to approach the wireless business from a fresh angle.
Google may be exploring the mobile arena for the possibility of expanding their advertising offerings into the cellular world. Some like, Scott Cleland the president of Precursor, are struggling to find the logic behind the G-Phone rumor. "Getting into the phone handset business or the wireless network business would radically change Google's business model," he said. However the mobile advertising market has grown tremendously from $60 million in 2006 to $275 million in 2007, with an expectation of reaching $2.2 billion by 2010. This type of growth does in fact warrant Google to explore and aggressively participate in the mobile phone and networking business. If Google simply wants to have a stronghold on those advertising dollars, then they need to develop a multi-prong approach in their dealings with the current mobile providers.
To cement their interest in wireless technology, Andy Rubin, the former co-owner of the popular technology creator Danger [and its popular Sidekick device], currently works at Google. Danger was a major player in the Web 1.0 era. Danger’s most accomplished project featured a flip out screen that transformed the way users interacted with the Internet, at a time when the technology was at its infantile stages. Many believe Rubin’s employment at Google signifies their work on a secretive G-phone. Presumably, Google has charged Andy Rubin with the task of creating the G-phone.
Google has already begun offering its own mobile applications through a partnership with Sprint. A Sprint customer can use Gmail, Google Calendar, and GoogleTalk through their mobile devices. Google and Sprint have also been in talks to offer their WiMax mobile internet customers the ability to search the web and interact with Web 2.0 social-networking tools. Google, an already active member in the mobile software arena, may use their acquired companies to create a phone comparable to Apple’s iPhone or even something well beyond the scope of that device.
Mobile providers have proven over the years to be just as stringent and guarded about their services, technology, and partnerships. It would be hard to imagine a mobile provider giving up much of the mobile advertising dollars to Google. They would only need to look deeper into the profits of the Adwords program at Google to see the vast potential of doing something outside a partnership. This may be the impetuous for Google to offer its own wireless solution. Before we go further, we should look at the key acquisitions of Google that could make them a strong player in the wireless, mobile market.
Key Acquisitions
We already spoke of Andy Rubin, Danger’s co-founder. He began work at Google labs after Android—his startup company—was procured by Google. Android revealed very little during their 22 months of existence, only that they were a mobile application startup presumably developing software for a location-aware mobile OS designed by Rubin. Given greater ease of Internet access with mobile products, this would allow Google to greatly expand the real-world utility of its search offerings.
While the purchase of Android could be a precursor to developing wireless technology, the acquisitions of ReqWireless and SKIA indicate Google’s strong desire to have their own handheld device. ReqWireless creates mobile applications and SKIA produced a vector-based presentation engine that essentially renders 2D graphics on mobile devices. The 2D rendering graphics technology that SKIA produces could be the building blocks of the graphical user interface of a future G-Phone. Purportedly SKIA’s core can fully utilize Java2D and PostScript, with an approximate 300K footprint.
Google purchased Grand Central Communications on July 2nd 2007. Grand Central communications offers a unique and control friendly solution for mobile phone users. The company developed a service that merges phone numbers from various accounts, including voice mailboxes, into one single account. The service complements existing phone lines, like for those who have home, work, and cell. Basically the service allows users to utilize one central voicemail box to collect messages. The user can access voicemails online or from any phone, and they have more control over these messages. Users can forward voicemails to anyone, block callers, save caller’s information, and more. One phone line can take calls from any of the lines a user has connected to the service, which would be an attractive feature for many business professionals. The most unique feature allows users to listen in real-time to messages being recorded.
On August 31th 2007, Google announced its investment in a company called Ubiquisys. Ubiquisys is a femtocell developer, meaning it is working on technology that would allow wireless signals (for example, from a WiFi node and a cellphone) to link up for added signal strength and interconnectedness. While a mobile provider would use the tech to strengthen cell signals in user's homes, Google could use it to promote unlicensed mobile access, service which could help mobile phones drop their ties to providers.
We know Google has purchased and invested in many unique mobile software companies. To add to that list, Google bought Dodgeball, a mobile social-networking service. The purchase of this company adds to Google’s repertoire of exciting and functional mobile services. Google made sure to purchase a company that would eventually open the door to social-networking on mobile devices. Another mobile networking company Google has invested in is Fon, a startup that allows consumers to share their wireless access points with a wider network in exchange for money or network-wide access. If such a network grew large, participating consumers could essentially access the internet anywhere, regardless of the provider. Google’s most recent purchase in the burgeoning social mobile space is Zingku. Whose services let consumers share cell phone photos with others through texting, get online blog posts sent to their cell phones as text messages, and poll friends via text message. As social-networking grows in popularity, the move towards mobile social-networking seems the next logical step for a company trying to develop sticky applications in which to sell ads on.
G-Phone
The possibility of Google having their own phone escalates when analyzing their various acquisitions. The mythical device dubbed the G-phone is being spear headed by Andy Rubin. Under Rubin works a team of about 100 people reportedly focused on the device. It’s believed that Rubin is working directly on the OS of the device. Collectively, the “mashed up” mobile application companies (Android, SKIA, and ReqWireless) could be poised to work on the yet undefined project, which could be the G-phone. Early rumors suggest the G-phone will run on a C++ core with a linux OS bootstrap, and be similar in design to a Blackberry. As should be expected, the phone will reportedly run the G-talk software and be optimized to run Java based applications similar to the Sidekick that Danger produced.
Concluded in Goog-411, Part IV
Google may be exploring the mobile arena for the possibility of expanding their advertising offerings into the cellular world. Some like, Scott Cleland the president of Precursor, are struggling to find the logic behind the G-Phone rumor. "Getting into the phone handset business or the wireless network business would radically change Google's business model," he said. However the mobile advertising market has grown tremendously from $60 million in 2006 to $275 million in 2007, with an expectation of reaching $2.2 billion by 2010. This type of growth does in fact warrant Google to explore and aggressively participate in the mobile phone and networking business. If Google simply wants to have a stronghold on those advertising dollars, then they need to develop a multi-prong approach in their dealings with the current mobile providers.
To cement their interest in wireless technology, Andy Rubin, the former co-owner of the popular technology creator Danger [and its popular Sidekick device], currently works at Google. Danger was a major player in the Web 1.0 era. Danger’s most accomplished project featured a flip out screen that transformed the way users interacted with the Internet, at a time when the technology was at its infantile stages. Many believe Rubin’s employment at Google signifies their work on a secretive G-phone. Presumably, Google has charged Andy Rubin with the task of creating the G-phone.
Google has already begun offering its own mobile applications through a partnership with Sprint. A Sprint customer can use Gmail, Google Calendar, and GoogleTalk through their mobile devices. Google and Sprint have also been in talks to offer their WiMax mobile internet customers the ability to search the web and interact with Web 2.0 social-networking tools. Google, an already active member in the mobile software arena, may use their acquired companies to create a phone comparable to Apple’s iPhone or even something well beyond the scope of that device.
Mobile providers have proven over the years to be just as stringent and guarded about their services, technology, and partnerships. It would be hard to imagine a mobile provider giving up much of the mobile advertising dollars to Google. They would only need to look deeper into the profits of the Adwords program at Google to see the vast potential of doing something outside a partnership. This may be the impetuous for Google to offer its own wireless solution. Before we go further, we should look at the key acquisitions of Google that could make them a strong player in the wireless, mobile market.
Key Acquisitions
We already spoke of Andy Rubin, Danger’s co-founder. He began work at Google labs after Android—his startup company—was procured by Google. Android revealed very little during their 22 months of existence, only that they were a mobile application startup presumably developing software for a location-aware mobile OS designed by Rubin. Given greater ease of Internet access with mobile products, this would allow Google to greatly expand the real-world utility of its search offerings.
While the purchase of Android could be a precursor to developing wireless technology, the acquisitions of ReqWireless and SKIA indicate Google’s strong desire to have their own handheld device. ReqWireless creates mobile applications and SKIA produced a vector-based presentation engine that essentially renders 2D graphics on mobile devices. The 2D rendering graphics technology that SKIA produces could be the building blocks of the graphical user interface of a future G-Phone. Purportedly SKIA’s core can fully utilize Java2D and PostScript, with an approximate 300K footprint.
Google purchased Grand Central Communications on July 2nd 2007. Grand Central communications offers a unique and control friendly solution for mobile phone users. The company developed a service that merges phone numbers from various accounts, including voice mailboxes, into one single account. The service complements existing phone lines, like for those who have home, work, and cell. Basically the service allows users to utilize one central voicemail box to collect messages. The user can access voicemails online or from any phone, and they have more control over these messages. Users can forward voicemails to anyone, block callers, save caller’s information, and more. One phone line can take calls from any of the lines a user has connected to the service, which would be an attractive feature for many business professionals. The most unique feature allows users to listen in real-time to messages being recorded.
On August 31th 2007, Google announced its investment in a company called Ubiquisys. Ubiquisys is a femtocell developer, meaning it is working on technology that would allow wireless signals (for example, from a WiFi node and a cellphone) to link up for added signal strength and interconnectedness. While a mobile provider would use the tech to strengthen cell signals in user's homes, Google could use it to promote unlicensed mobile access, service which could help mobile phones drop their ties to providers.
We know Google has purchased and invested in many unique mobile software companies. To add to that list, Google bought Dodgeball, a mobile social-networking service. The purchase of this company adds to Google’s repertoire of exciting and functional mobile services. Google made sure to purchase a company that would eventually open the door to social-networking on mobile devices. Another mobile networking company Google has invested in is Fon, a startup that allows consumers to share their wireless access points with a wider network in exchange for money or network-wide access. If such a network grew large, participating consumers could essentially access the internet anywhere, regardless of the provider. Google’s most recent purchase in the burgeoning social mobile space is Zingku. Whose services let consumers share cell phone photos with others through texting, get online blog posts sent to their cell phones as text messages, and poll friends via text message. As social-networking grows in popularity, the move towards mobile social-networking seems the next logical step for a company trying to develop sticky applications in which to sell ads on.
G-Phone
The possibility of Google having their own phone escalates when analyzing their various acquisitions. The mythical device dubbed the G-phone is being spear headed by Andy Rubin. Under Rubin works a team of about 100 people reportedly focused on the device. It’s believed that Rubin is working directly on the OS of the device. Collectively, the “mashed up” mobile application companies (Android, SKIA, and ReqWireless) could be poised to work on the yet undefined project, which could be the G-phone. Early rumors suggest the G-phone will run on a C++ core with a linux OS bootstrap, and be similar in design to a Blackberry. As should be expected, the phone will reportedly run the G-talk software and be optimized to run Java based applications similar to the Sidekick that Danger produced.
Concluded in Goog-411, Part IV
Thursday, October 11, 2007
Goog-411, Part 2
Continued from Goog-411, Part I
According to a recent blog post I came across during my research I believe that they are on the cusp of an even bigger strategic move, let me explain. The Internet as we know it is a utility pipe similar to electricity or water, with internet service providers (ISPs) building their profits primarily on how many users they can have practically share the same Internet connection. Based on the idea that most users aren't on the net at the same time and even when they are online they are mainly between keystrokes and doing little or nothing when viewed on a per-millisecond basis, ISPs typically leverage the Internet bandwidth they have purchased by a factor of at least 20X and sometimes as much as 100X, which means that the DSL line or cable modem that you think is delivering multi-megabits per second is really only guaranteeing you as much bandwidth as you could get with most dial-up accounts.
This bandwidth leveraging hasn't been a problem to date, but it is about to become a huge problem as we all embrace Internet video. When we are all grabbing one to two hours of high-quality video per day off the net, there is no way the current network infrastructure will support that level of use. At that point we can accept that the Internet can't do what we are asking it to do OR we can find a way to make the Internet do what we are asking it to do. Enter Google and its many, many regional data centers to fill this gap.
Looking at this problem from another angle, right now somewhat more than half of all Internet bandwidth is being used for BitTorrent traffic, which is mainly video. Yet if you surveyed your neighbors you'd find that few of them are BitTorrent users. Less than 5 percent of all Internet users are presently consuming more than 50 percent of all bandwidth. It's BitTorrent -- not Yahoo or Google -- that has been the target of the anti-net neutrality from telephone and cable companies. But the fact is that rather than being an anomaly, the BitTorrent users are simply early adopters and we'll all soon follow in their footsteps. And when that happens, there won't be enough bandwidth to support what we want to do from any centralized perspective. A single data center, no matter how large, won't be enough. Google is just the first large player to recognize this fact as their building program proves.
It is becoming very obvious what will happen over the next two to three years. More and more of us will be downloading movies and television shows over the net and with that our usage patterns will change. Instead of using 1-3 gigabytes per month, as most broadband Internet users have in recent years, we'll go to 1-3 gigabytes per DAY -- a 30X increase that will place a huge backbone burden on ISPs. Those ISPs will be faced with the option of increasing their backbone connections by 30X, which would kill all profits, OR they could accept a peering arrangement with the local Google data center. In which their internet traffic will be encrypted and sent through Google's servers to the Internet. The data that is received will then be encrypted and sent back through Google’s servers to your computer.
Seeing Google as their only alternative to bankruptcy, the ISPs will all sign on, and in doing so will transfer most of their subscriber value to Google, which will act as a huge proxy server for the Internet. We won't know if we're accessing the Internet or Google and for all practical purposes it won't matter. Are we tomorrow sending all of our internet traffic first to Google before it is passed from there to the destination server of your preferred site? This would really put Google in the driver seat. With one move, Google reduces all operators to bitpipe providers (from the end-user to the Google network) essentially marginalizing the ISP’s.
Take note that YouTube, owned by Google, accounts for close to 10% of today’s Internet traffic this means Google would literally save millions each month by activating their own branch on the internet tree. If Google moved all its traffic onto its own network, phone and cable firms would suddenly find the electronic equivalent of a vacuum on their own networks. They would also find a gaping hole where big network usage revenue used to be and the roles could be reversed -- the phone and cable firms could become customers of Google and be forced into buying access to the Google network.
Wireless Strategy
However, if purchasing dark-fiber for the past three years was the sign of Google pulling anchor and heading towards becoming a telephone company, then the acquisition of ReqWireless in July 2005 was the tide that took them out to sea. Even more recently, Google has purchased GrandCentral Communications—a Web Startup that allows users to consolidate their different home, work and mobile phone numbers into one through an Internet application. More tangible evidence comes from Europe where the South Korean electronics maker LG introduced a new phone on the market preloaded with Google applications. Many have dubbed this phone the “Google phone.” The other giant factor to Google leaning towards becoming a wireless provider comes from their interest in the 700 MHz wireless spectrum auction set to happen in January of 2008.
Continued in Goog-411, Part III
According to a recent blog post I came across during my research I believe that they are on the cusp of an even bigger strategic move, let me explain. The Internet as we know it is a utility pipe similar to electricity or water, with internet service providers (ISPs) building their profits primarily on how many users they can have practically share the same Internet connection. Based on the idea that most users aren't on the net at the same time and even when they are online they are mainly between keystrokes and doing little or nothing when viewed on a per-millisecond basis, ISPs typically leverage the Internet bandwidth they have purchased by a factor of at least 20X and sometimes as much as 100X, which means that the DSL line or cable modem that you think is delivering multi-megabits per second is really only guaranteeing you as much bandwidth as you could get with most dial-up accounts.
This bandwidth leveraging hasn't been a problem to date, but it is about to become a huge problem as we all embrace Internet video. When we are all grabbing one to two hours of high-quality video per day off the net, there is no way the current network infrastructure will support that level of use. At that point we can accept that the Internet can't do what we are asking it to do OR we can find a way to make the Internet do what we are asking it to do. Enter Google and its many, many regional data centers to fill this gap.
Looking at this problem from another angle, right now somewhat more than half of all Internet bandwidth is being used for BitTorrent traffic, which is mainly video. Yet if you surveyed your neighbors you'd find that few of them are BitTorrent users. Less than 5 percent of all Internet users are presently consuming more than 50 percent of all bandwidth. It's BitTorrent -- not Yahoo or Google -- that has been the target of the anti-net neutrality from telephone and cable companies. But the fact is that rather than being an anomaly, the BitTorrent users are simply early adopters and we'll all soon follow in their footsteps. And when that happens, there won't be enough bandwidth to support what we want to do from any centralized perspective. A single data center, no matter how large, won't be enough. Google is just the first large player to recognize this fact as their building program proves.
It is becoming very obvious what will happen over the next two to three years. More and more of us will be downloading movies and television shows over the net and with that our usage patterns will change. Instead of using 1-3 gigabytes per month, as most broadband Internet users have in recent years, we'll go to 1-3 gigabytes per DAY -- a 30X increase that will place a huge backbone burden on ISPs. Those ISPs will be faced with the option of increasing their backbone connections by 30X, which would kill all profits, OR they could accept a peering arrangement with the local Google data center. In which their internet traffic will be encrypted and sent through Google's servers to the Internet. The data that is received will then be encrypted and sent back through Google’s servers to your computer.
Seeing Google as their only alternative to bankruptcy, the ISPs will all sign on, and in doing so will transfer most of their subscriber value to Google, which will act as a huge proxy server for the Internet. We won't know if we're accessing the Internet or Google and for all practical purposes it won't matter. Are we tomorrow sending all of our internet traffic first to Google before it is passed from there to the destination server of your preferred site? This would really put Google in the driver seat. With one move, Google reduces all operators to bitpipe providers (from the end-user to the Google network) essentially marginalizing the ISP’s.
Take note that YouTube, owned by Google, accounts for close to 10% of today’s Internet traffic this means Google would literally save millions each month by activating their own branch on the internet tree. If Google moved all its traffic onto its own network, phone and cable firms would suddenly find the electronic equivalent of a vacuum on their own networks. They would also find a gaping hole where big network usage revenue used to be and the roles could be reversed -- the phone and cable firms could become customers of Google and be forced into buying access to the Google network.
Wireless Strategy
However, if purchasing dark-fiber for the past three years was the sign of Google pulling anchor and heading towards becoming a telephone company, then the acquisition of ReqWireless in July 2005 was the tide that took them out to sea. Even more recently, Google has purchased GrandCentral Communications—a Web Startup that allows users to consolidate their different home, work and mobile phone numbers into one through an Internet application. More tangible evidence comes from Europe where the South Korean electronics maker LG introduced a new phone on the market preloaded with Google applications. Many have dubbed this phone the “Google phone.” The other giant factor to Google leaning towards becoming a wireless provider comes from their interest in the 700 MHz wireless spectrum auction set to happen in January of 2008.
Continued in Goog-411, Part III
Saturday, September 29, 2007
Goog-411, Part 1
Have you ever dialed 1.800.GOOG.411? Better yet, have you ever heard of it? If the answer to either question is no, you may want to add a new number to your list of contacts. You may be wondering why it is so important to have this particular number. Well, it happens to be Google’s directory assistance line. If you still aren’t seeing the benefit of etching this number into your cell phone, perhaps you’d like to know more about this service and what it offers those who use it. This is Google’s directory assistance and free call connection alternative to the traditional 411 service provided by the incumbent telephone companies. The introduction of this service, along with many other key acquisitions, have many wondering what exactly Google has in store for the future. Is the sky darkening for many wireless and Internet providers as Google could be poised to unveil a wireless phone or even launch their own network for the internet? When investigating Google’s acquisitions during these past few years, interesting signs appear; the purchase of companies that create mobile applications, aggressive lobbying of the FCC for wireless spectrum, as well as buying dark fiber by the mile. What does it all mean? Will Google soon be the purveyor of a G-phone, or will they simply slash their own Internet costs by building their own network?
So far Google has not allowed the public to see past the hazy windows of the Google labs. Based on Google’s own acquisitions—their purchasing of dark fiber, and their other takeovers—it is only a matter of time before the whole world sees exactly what they have in store. “It’s not an if, it’s a when,” says California-based technology analyst Rob Enderle. “Different parts of this are coming in at different speeds, but once they’re done what they plan to do is offer comprehensive services through their own backbone and effectively lock a lot of the traditional players out of the market. A lot of them don’t even see it coming.” When we consider Google’s recent actions, coupled with their past acquisitions, the future seems to hold more for this Internet giant.
“These guys are increasingly swirling and swiveling around the telecom space,” says Lawrence Surtees, vice-president and principal analyst of Canadian communications research for global technology consultancy IDC. “If you put all of this together, is Google a search company or a telecom network service provider or all of the above?” Google famously built its own data center by stringing together thousands of inexpensive Dell PCs with Gigabit Ethernet and developing all the software internally, as opposed to purchasing high-end proprietary solutions sold by vendors such as H-P, Sun, or IBM. Google is now doing the same thing in telecom. It's using cheap standard technologies such as dense wave division multiplexing (DWDM) and Ethernet to drive costs down and develop its own private network using dark fiber coupled with the aforementioned DWDM and Ethernet. Rather than buying an expensive "solution" from an internet service provider i.e. telecom or cable company.
Google is likely working on a project to create its own global internet protocol (IP) network, a private alternative to the internet which could be controlled by the search giant. Their efforts appear to be picking up speed with each passing moment. Google has been buying up miles of unused fiber-optic cable called dark fiber, this usable network of cables was overbuilt by telephone and cable companies during the tech boom in the late nineties. Google has spent a small fortune purchasing these lines for pennies on the dollar at auctions and bankruptcy proceedings as well getting long term leases for these lines from third party vendors in order to construct its own private (IPv6) backbone between its data centers (estimates are 60 to 80 locations globally). Google is also buying shipping containers and building additional data centers within them, possibly with the aim of using them as significant nodes within the worldwide cable network. "Google hired a pair of very bright industrial designers to figure out how to cram the greatest number of CPUs, the most storage, memory and power support into a 20- or 40-foot box" Robert Cringely wrote. "The idea is to plant one of these puppies anywhere Google owns access to fiber, basically turning the entire Internet into a giant processing and storage grid." Late last year, Google purchased a 270,000sq ft telecom interconnection facility in
Google has been experimenting in WiFi in the city of Mountain View, California where they have mounted networking equipment to public utility poles in the city. Google is also partnering with Earthlink to try to get WiFi into the city of San Francisco. In the partnership between Google and EarthLink to provide WiFi access in San Francisco, EarthLink would provide wireless service for 16 years and Google would be the sole Internet provider or ISP. Google would profit by having their search engine, maps, and other online applications available to users through the EarthLink pages. Even though this test-bed scenario has since faltered due to price and politics with the city of San Francisco, Google is still looking to offer free wireless access to other cities across North America and possibly Europe. Suppose this secure WiFi solution becomes popular, the Google servers will see a huge surge in the amount of data traffic they currently process. It could be the reason for their interest in the miles of dark fiber, or it could be a reason to build their own, private network backbone?
Continues in Goog-411, Part II
Tuesday, August 28, 2007
Is Niche apparel a Niche stock ?
Clothing is a very ugly industry despite its glitz and glamour. For small businesses to survive and thrive – they need to create products that are emotionalized, authentic and, above all, differentiated. These businesses must be able to distinguish themselves from their direct competitors, establish themselves in consumers’ minds and therefore create a niche. Over the past few years we have seen an explosion of new brands in the niche apparel market. I’m going to examine two companies going in two very different directions in this hyper fickle realm of retail. Both companies have products that qualify as niche markets. HEELYS specializes in wheeled footwear that is currently all the rage among children, tweens and even teenagers. Under Armour has specialty sportswear that is engineered to keep athletes cooler during physical activity. These companies represent niche apparel as well as niche stocks. Stocks that are considered to have a short life once the fad (demand for the underlying product or service) begins to decline are known as niche stocks. Niche stocks have been making waves in the stock market for some time but it is difficult to determine which companies will qualify for more permanent status on the market and in your portfolio.
Heelys, Inc. (HLYS) is a designer, marketer and distributor of action sports-inspired products targeted to the youth market. The Company’s primary product, HEELYS-wheeled footwear, is a line of dual-purpose sneakers that incorporate a removable wheel in the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel of the sneaker. During the year ended December 31, 2006, approximately 98% of HEELYS’ net sales were derived from the sale of its HEELYS-wheeled footwear. The Company, however, also offers a selection of HEELYS branded accessories, including protective gear such as helmets and wrist, elbow and knee guards, heel plugs, wheel bags and replacement wheels, and a limited variety of apparel items.
HEELYS current share price of $9.25 is in stark contrast to its public debut late last year when its shares received an enthusiastic welcome at $21. Heelys Inc.'s shares dropped to a then all-time low of $11.84 on August 8th, 2007 as a reduction in orders cast a cloud over sales for the remainder of the 2007 fiscal year. The shoe-maker forecast a dismal second half of the year due to over-inventoried U.S. accounts. It cited aggressive expectations and retail softness in footwear and apparel as explanation for the downward trend. The company's shares were trading down about 57.72 percent at $9.25 in morning trade on the NASDAQ, August 28, 2007. Robert W. Baird analyst, Mitch Kummetz, downgraded the stock to "neutral" from "outperform," adding that even if the company's sell-throughs were to improve before orders for spring 2008 came in, revenues for the first half of 2008 will likely be hurt due to cautious ordering. Bear Stearns analyst, Jennifer Childe, reports that retailers are hesitant to place additional orders in the face of already bloated inventories. Childe lowered her rating on the stock to "peer perform" from "outperform," but said management's guidance appears to reflect a "worse case scenario," with room for potential gains if back-to-school sales momentum continued. Bear Stearns was one of the underwriters for the company's initial public offering. At least three other brokers also downgraded their ratings.
Under Armour (UA), founded in 1996 by former University of Maryland football player Kevin Plank, is the originator of performance apparel - gear engineered to keep athletes cool, dry and light throughout the course of a game, practice or workout. The technology behind Under Armour's diverse product assortment for men, women and youth is complex, but the benefits are simple: for optimal performance wear HeatGear® when it's hot, ColdGear® when it's cold, and AllSeasonGear® between the extremes. Under Armour's mission is to "provide the world with technically advanced products engineered with their [our] superior fabric construction, exclusive moisture management, and proven innovation. Every Under Armour product is doing something for you; it's making you better...”
The sports apparel company is popular among more than just gym rats and teenage athletes. Short sellers, who try to make money by betting that the price of a company stock will fall, have made Under Armour one of the hottest stocks for short sales on Wall Street in recent months. In a Bloomberg News July 2007 ranking of companies with more than 10 percent of shares available for short trading, Under Armour ranked 25th among companies with the largest amount of short sales on the New York Stock Exchange. According to several analysts, it is not surprising that Under Armour’s stock is hot among short sellers. Since the company became publicly traded in November 2005, its stock price has prompted frequent Wall Street criticism. The company’s price to earnings ratio – the common Wall Street gauge in determining how expensive a stock is relative to its market value and earnings during the past year – is 78.16, according to Bloomberg statistics. In comparison, Nike, which dwarfs Under Armour, has a P/E ratio of 19.57. Under Armour has revenue of $467.32 million, while Nike $16.3 billion.
Many analysts have also wondered if the company can maintain a large enough growth in sales to justify its stock price. So far, the gamble that short sellers are taking has been stonewalled - by a large block of institutional investors who believe Under Armour stock will move even higher. Rather than falling, Under Armour stock has increased approximately 24.78 percent in 2007, and has achieved record highs during the past several months as investors push up demand for shares. Institutional investors, who are satisfied with the business fundamentals of the company are aware of its popularity among athletes and non-athletes alike, have been buying the stock and pushing up its price. The stock reached a record high of $67.10 after the company released second-quarter earnings July 31, 2007, and raised its financial outlook for the year. These diverging views have created a Wall Street money battle on which direction the stock will turn. Under Armour continues to receive praise and criticism as its stock price has fluctuated wildly during its two-years being publicly traded.
It is not surprising that these companies are being scrutinized. With the fall season almost upon them, sales from these two niche apparel makers will help determine who will survive to become a household staple and a stock market portfolio stalwart. Based on the analysis from Haye Capital Group, it is believed that unless HEELYS starts to diversify its product offerings they will go out of style like the zipper and metal studded leather jackets of the mid eighties. Under Armour has a more utilitarian purpose so for the time being it is the clear choice for both a lasting brand and stock portfolio pick. With its current product lines having a longer and better product life that is not just trendy but practical as well, Under Armour has a clear advantage. The key for both of these companies is to get the “niche” out of the perception of both their apparel and their stock if they are to be truly mainstream and lasting brands.
Tuesday, July 17, 2007
The "Magic Eye" in Business
Chaos—that unwieldy absence of order that haunts inventors, the creative-minded, and the entrepreneur in all of us—may be the very foundation of success. I am speaking of chaos, as in the spaghetti on the wall, where all the noodles converge to create a path, a miraculous mess, but substance nonetheless. In that mess, ideas intersect to make new business models or innovative solutions, at times birthing mistakes and at other times, lending new form to long standing businesses. Inside chaos the essence of innovation lives and breathes.
Every so often the creative chaos of the mind coalesces, preparing the way for sustained profitability around a new business model. In the nineties, Internet portals like Yahoo! and AltaVista positioned themselves to compete in the search market, but also offered directories, ads, news articles, and more. A young startup company, named Google, took what both Yahoo! and AltaVista had created, then turned it on its head. Google offered instead of more content—a minimalistic page, and instead of advertisements —whitespace. Only after Google had successfully tailored their search engine technology over years, did it branch into offering news, calendars, webmaster tools, and more. By first offering less (and doing that right), Google became the most lucrative Internet business in history.
Google’s business model has proven to be successful, as their search engine currently accounts for 63% of all internet searches, according to HitWise. Like Google, the utility of both PayPal and eBay was initially questioned, but ultimately embraced. How many thought similarly about PayPal or eBay? Like many successful entrepreneurs, we need to peer into the crossroads of ideas, seeing where they intersect, then take control of where they lead our businesses.
Think of chaos as a “Magic Eye” poster, or an autostereogram which is a 3D image buried in a 2D pattern, painted by consumers, businesses, technology, and emerging trends. The jumbled pixels in the poster obfuscate even the most ardent observers. But, if you relax just enough, allow your eyes to un-focus, a picture begins to take shape. The resulting picture may outline a new and innovative business idea.
Many businesses believe consumers want price cuts as a solution, like cheaper software, when, in reality, an innovative solution may infuse more profits into their bottom line. Imagine if eBay had only offered an e-commerce site with lower prices, rather than being innovative and creating an auction site for users to sell wares. What if Google had cluttered their pages, displayed obtrusive ads, and ultimately mimicked every other site at the time? They may not have stamped their brand into the minds of millions. It takes innovation to capture the imagination of consumers.
In the same way eBay cleared many garages of junk, and Google saved us hours of surfing the web to find a resource, the next big idea may solve a relatively small problem. The solution to a common problem can become a massive success overnight. The young coders from PayPal, who started YouTube, can attest to the frenzy created when a business offers an immediate solution. In a time when video was first becoming commonplace on the web, YouTube offered free hosting for user generated content. A HitWise study from May of 2006 showed that YouTube traffic was up 160% in a three month time period (March 2006 to May 2006), moving the site to the top 50 sites on the Internet. This happened only a year from their inception. This type of leaps-and-bounds success can be attributed to the risks they took. In order to host a site that had user uploaded and viewable content, they also had to have servers to handle the load and bandwidth to broadcast these large files to an audience numbered in the millions. YouTube’s bandwidth expense per month elevated from $900,000 to $1.5 million, by most estimates. Of course, we know about the buyout by Google, but many do not know the amount of money invested to keep YouTube online long enough to be purchased.
With innovation, there will always be risk involved. A business idea may take the breath away from complete strangers at the coffee shop but, when dealing with the global marketplace timing means just as much as potential. For instance, Pets.com failed in 2000 before ever fetching a profit. An internet business failure can be caused by a combination of market climate and consumer apathy or something as simple as poor site construction.
An idea can only be as good as its execution. A cumbersome website, faulty product/service, or other missteps can hinder a good idea. The crux of a successful introduction into the marketplace relies on timing, sound marketing of the product or service, and a solution that opens customer’s minds to a new way of doing something old or creating something new. Chaos in business can be briefly muted, absorbed, and altered by a solution that comes from the ether. As an entrepreneur, chaos may be the cluttered avenue of information for a particular service industry or the immediate need for a new product. By allowing imagination to lead where intellect cannot travel, an entrepreneur must believe in the possibilities generated by that imagination, nurture those possibilities, and make those possibilities a reality.
Monday, April 16, 2007
The IP in VOIP: A Vonage Story
On
Vonage Holdings Corp. would create a "separate, wholly owned, bankruptcy-remote subsidiary"—essentially a company within a company. Called Vone IP (for Vonage intellectual property), the entity would issue $250 million worth of bonds backed by the intellectual property of the Vonage brand. Vonage Holdings could pay a royalty fee of 5.5% to Vone IP to license the Vonage brand. This would be the same 5.5% of revenue the court has ordered Vonage Holdings to set aside to pay Verizon while it awaits its appeal. Vonage Holdings will have to wait two years for its
The principle of valuing intellectual property (IP) is to determine the future income associated with its ownership. Intellectual property is generated mainly through research, development, and advertising (IP generating expenses or IGE), making it hard to assess the effectiveness of IGE as the value of IP is generally independent of its cost. Determination of future income requires estimating the income due to the intellectual property in each of all future years over its life; i.e., the amount sold and the net income per unit after routine sales costs are deducted. If the intellectual property is used internally, then the savings due to owning it can be similarly estimated. The risk that intellectual property becomes obsolete is high, and reduces the current value. Without risk, future income is discounted by using a risk-free interest rate. Risks include unexpected competition, unauthorized copying, patent breaches or invalidation, and loss of trade secrets. With such risks, discount rates increase, based on the expected Beta coefficient. With high discount rates, sales that occur far in the future have little effect, simplifying the determination of the net current value of the included intellectual property.
Based on analyst from Haye Capital Group, the best possible bond structure would be a $250 million bond with a 3yr issue and a 5.5% yield. Note that Vone IP could end up paying a possible premium of two basis points on the current 5.5% court ruling giving their bond a yield as high as 7.5%. The bond could have a rating of Ba, with the calculated yield and rating due to the risk affiliated with owning this company’s debt while awaiting the outcome of their court appeal.
An alternative for Vone IP is to sell the new bond issue to an outside insurance company for the $250 million which Vone IP could use to finance the court ruling of 5.5% of annual revenue, litigation costs, the possible acquisition of another player in Voip field, or use it as an emergency line of credit. They could also sell the bonds to an outside insurance company for a financial loss or business interruption policy for Vonage Holdings Corp. in anticipation of their court appeal. Concurrently Vone IP could work out licensing agreements with other Voip carriers to use its trademark to sell their voip service, creating another revenue stream from licensing fees to help offset potential Verizon fees and court costs.
Whenever stripping away valuable - albeit, intangible - assets from a company will only serve to make issuing old-fashioned debt more expensive for the company in the future. But, if the gain from the IP securities is greater than the fall in the old debt, then it is worth the risk. Vonage, which on April 24th 2007, won a stay of an earlier decision barring the company from recruiting new customers, must now focus solidly on the future of the company while it awaits its patent infringement appeal. They are going to need to aggressively identify and execute alternative solutions to maintain their viability. Maybe the IP in VOIP should stand for intellectual property as Vonage fights to keep dial tone.
Monday, March 5, 2007
Elliot Wave Theory
This current market volatility is a great time to learn about the Elliot wave theory and how to look for it during this current bear stretch we are currently witnessing courtesy of the Shanghai index collapse on February 27, 2007.
The Elliott Wave Theory is named after Ralph Nelson Elliott. In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns contrary to the chaotic perception at the time both past and present. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns that recur in the markets. These patterns trade in repetitive cycles, which he pointed out were the emotions of investors and traders caused by macroeconomic events or the predominant psychology of the masses at the time.
Elliott explained that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns or as he called them, "waves". Very simply, in the direction of the trend both upwards (bull) and downwards (bear), expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "A, B, C." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. The recognition of smaller patterns fitting into bigger patterns, coupled with the Fibonacci relationships (another blog) between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid risk/reward ratios.
The 5 – 3 Wave Patterns
Mr. Elliott showed that a trending market moves in what he calls a 5-3 wave pattern. The first 5-wave pattern is called impulse waves and the last 3-wave pattern is called corrective waves.
Here is a short description of what happens during each wave. I am going to use stocks for this blog since stocks is what Mr. Elliott used but it really doesn’t matter what it is. It can easily be currencies, bonds, gold, oil, or futures. The important thing is the Elliott Wave Theory can also be applied to the foreign exchange market.
Wave 1
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.
Wave 2
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.
Wave 3
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.
Wave 4
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.
Wave 5
This is the point that most people get on the stock, and is most driven by hysteria and a “me too” following. This is when the stock becomes the most overpriced. On the end of Wave 4, more buying sets in and the prices start to rally again. The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The Wave 5 advance is caused by a small group of traders. Although the prices make a new high above the top of Wave 3, the rate of power, or strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance. Finally, when this lackluster buying interest dies out, the market tops out and enters a new phase, the ABC corrective pattern, typically caused by contrarians shorting the stock starting the corrective pattern.
A-B-C
The A-B-C wave correction pattern follows the 5 wave impulse pattern
There is only one pattern in a simple A-B-C correction. This pattern looks like a Zig-Zag . A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.
Wave B is usually 50% of Wave A and should not exceed 75% of Wave A
Wave C is either 1 x Wave A or 1.62 x Wave A or 2.62 x Wave A, in this wave the multipliers for Wave A are based off Fibonacci ratios
Elliott based part his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified. There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. In fact, Elliott believed that all of man's activities, not just the stock market, were influenced by these identifiable series of waves. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.
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