Trends I'm Watching

Fed kills a key inflation gauge

Trend: The Fed kills M3, another statistic that provides insight into inflation. (The core rate CPI was changed to exclude food and energy in 1996.) Skeptics have more ammo for questioning long-term economic policy making.

Jim Jubak at MSN Investing discusses the end of tracking M3, a boring and abstract topic but potentially important measure of money supply and inflation.

Source: MSN Money - Fed kills a key inflation gauge - Jubak's Journal

The U.S. Federal Reserve made big news at the end of March. And almost nobody noticed. Here's the headline you didn't see:

Fed kills M3, decides money supply doesn't count
Move raises risk of higher long-term inflation and new asset bubble

The Federal Reserve conspiracy theorists go on to argue that this is exactly the kind of monetary policy you'd expect from the world's greatest debtor nation. Use your credentials as a short-term inflation fighter to convince global savers it's safe to buy U.S. dollars and U.S. debt, while at the same time supporting the long-term inflation that will cut the future value of that debt and thus let the U.S. pay back its current debt in less-valuable future dollars.

Of course, I'd never want to go so far as to put something like that in print. It's just too outlandish to believe.

So instead, let me offer up a more concrete fear. Although the Federal Reserve may be correct when it argues that there isn't a tight connection between inflation and growth in the money supply over the short-run, the data does argue, convincingly in my opinion, for a connection in the long run.

This monetarist view of the link between growth in the money supply and growth in inflation was once part of mainstream thinking at the U.S. Federal Reserve. The great monetarist economist Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon." That view was echoed in policy at the U.S. Fed when then-chairman Paul Volcker starved the inflation of the late 1970s by tightening the money supply.

But the Fed -- under Greenspan, and so far under Bernanke -- has behaved as if money supply growth didn't matter and as if price inflation were all that mattered. Even as they have raised interest rates in an effort to slow the economy and reduce demand, they've continued to let money supply grow at close to double-digit rates. M3, the most inclusive measure of the money supply, grew at a seasonally adjusted annual rate of 8.7% in the three months from November 2005 to February 2006. That's faster than the annual rate -- 8% -- for the 12-month period beginning in February 2005.

So if you want to fully understand the Federal Reserve -- and where this most-powerful U.S. economic institution is taking the national and global economy -- don't just look at the headlines touting the Fed as inflation fighter. Higher interest rates are half the story. And the near-term half, at that.

Because, even as the Federal Reserve is raising the cost of money for consumers and home buyers, it's keeping the money supply spigots wide open.

In the long run, countries with faster-growing money supplies experience higher inflation.

And even worse, if the money supply grows fast enough, it provides the liquidity required for the runaway growth of asset bubbles, like the stock market in 2000. And, some would argue, like the U.S. real-estate or credit markets now.

In the long run, that's likely to be more important to you than the next quarter-point hike in interest rates.

Are CEOs and Shareholder interests aligned?

Trend: Extraordinary payouts to CEOs without equity appreciation are creating shareholder backlash.

Mark Cuban describes why some CEOs are not working for the shareholders.

Source: The Big Lie - CEOs and Shareholder interests are aligned - Blog Maverick

There seems to be “prevailing wisdom”, or we could call it a school of thought, that if the CEO of a public company owns stock, that their interests are aligned with shareholders.

The underlying logic  is that all shareholders want the price of the stock they own to go up. So if management owns stock, and they work to get the price up, then management and shareholders have achieved a meeting of the minds and everyone is happy. Right ? Wrong.

There is one primary disconnect that makes this completely untrue and at its heart,  the reason why executive pay has gotten so out of line and why individual shareholders are being taken advantage of every single day.

There are two types of CEOs, those who are the founders or co-founders of their companies, and those who were hired to do the job. The difference is important because those involved with the founding of their companies not only have a different personal connection with the company and its employees, but more importantly, since they founded the company, they most likely already own a lot of stock.  The motivation of a founding CEO will be money, but there will be other considerations. Sometimes.

Then there are those hired to be CEOs.  What are the goals of hired CEOs ?. Plain and simple, its to get paid. To make as big a chunk of money as they possibly can in the shortest amount of time. No one in their right mind is going to take on a job with the amount of pressure, stress and away from family time that comes with being the CEO of a public company without getting paid incredible sums of money.

There is an interesting kinship between hired CEOs and professional athletes. Both realize that there are limited opportunities to make the big financial score, and if they dont make it this time through, they may never get the opportunity again.

There isnt a CEO in America with the opportunity to take  the helm of a public corporation that didnt run the numbers in their head and play “what if”. What if the stock went to this price ? What if the stock went to that price?  Then based on the total number they needed to get to the networth they always dreamed of, and  using the CEO pay totals of men or women who had already  done the same  thing to get their current jobs as comps, they  negotiated their deal from there.  Any CEO in this position who tells you otherwise is lying.

Which is why the concept of CEO and shareholders interest being in alignment because they both own stock is a big lie.  The CEO wants to hit the homerun of their career when they take the job, the shareholder just doesnt want to strike out with their life savings.

via Barry Ritholtz at The Big Picture

10 Modern Marketing Facts

Trends: The Internet and connectivity are changing life in modern societies (as predicted in the cluetrain manifesto in 1999).

James Cherkoff at Collaborate Marketing summarizes some major trends that are disrupting traditional marketing channels.

Link: Collaborate Marketing Services - About Us: 10 Modern Marketing Facts.

1. The consumer is in control.
"We need to embrace the urgent implications of consumer control."  Jim Stengel, Global Marketing Officer, Procter & Gamble

2. The consumer is skeptical and increasingly resistant to advertising.
“In the US 69 per cent of consumers are interested in products and services that allow them to block, skip or opt out of advertising and marketing messages.”  Yanklevich Partners

3. Media fragmentation is pervasive.
"The average British Internet user now spends 164 minutes online each day for personal use, compared to 148 minutes spent watching TV".  March 2006

4. Mass markets are being replaced by niche markets.
“McDonalds global head of marketing, Larry Light, has declared that mass marketing no longer works. Furthermore, Light goes onto declare, 'the end of brand positioning as we know it”.  Advertising Age, June 16th, 2004

9. Broadband is a mass medium.5. Corporate executives are under greater levels of scrutiny.
“As ever, the debate in the industry centres on the best way to achieve results.” The Harder Hard Sell, Economist, May 13th 2004

6. Companies that understand Internet Culture best will benefit most.
"What I worry about much more is our ability to make the necessary cultural changes to meet the new demands of the digital native." Rupert Murdoch, 13 April 2006

7. Consumers are mobilizing themselves in new, powerful ways.
"The digital native doesn’t send a letter to the editor anymore. She goes online, and starts a blog." Rupert Murdoch, April 13th 2005.

8. The broadcast model isn't working.
"What you've been selling for the last 50 years, no longer works."  John Stratton, CMO, Verizon Wireless, talking to Agency Chiefs, March 2006

"Overall, the EU market more than doubled in 2005 to 48.2 million DSL subscribers, where the UK sits third, behind Germany and France." 20th March 2006

10. User generated content (CGM) is influential and growing rapidly.
"Our audiences have moved on dramatically. Now they are consuming, creating, sharing and publishing their own content online." Tom Glocer, CEO, Reuters

NCAA Basketball Playoffs Available via Download

Trend: Major television productions are testing various strategies for extending the reach of popular content.

Pete Lerma at Agency Media Strategies describes CBS' strategy for distributing the Division I NCAA basketball games.

Source: March Madness, Again on Demand

The first time CBS offered the men's Division I NCAA basketball tournament online and on demand was in 2004. Back then, CBS charged a subscription fee to watch selected games online. Its approach this year is an interesting one with a few quirks. It's allowing fans to watch up to 56 games from the first three rounds of the tournament, and it's making those games available for free.

For rounds four through six, CBS will only deliver game highlights.

Not to worry, this doesn't mean you can't see the final rounds. A distribution deal with iTunes gives fans access to the semifinals and finals. iTunes and CBS have teamed up to deliver these games the day after they're played. Of course, this deal isn't free (I'm still waiting for iTunes to start offering ad-supported downloads). It's offering individual games for $1.99 and a season pass for $19.99. For that price, games are automatically downloaded for the user.

These games will be condensed versions, which is raising questions among fans as to whether those games will be commercial-free or nothing more than highlight reels. Reuters quotes Apple iTunes executive Eddy Cue as saying, "Once halftime and advertising breaks are removed, full-length games run about an hour." That's what it's talking about when it says "condensed version." So, it seems, fans should be satisfied with the content.

Intelligent ETF Indexing

Trend: Intelligent indexing of ETFs eliminates the poorly performing stocks from an index.

Timothy Middleton, the mutual fund expert at MSN Investing, describes PowerShares' funds use intelligent indexing to emphasize the best stocks in an index, which should mean higher returns. Excerpts below.

Source: MSN Money - A smarter breed of ETFs

PowerShares Capital Management launched 32 of the 51 exchange-traded funds that debuted last year. PowerShares specializes in intelligent indexing.

“A market index includes securities regardless of their investment merit," says Bruce Bond, PowerShares’ chief executive. "With PowerShares, we want to give you market-like exposure, yet at the same time … make sure the stocks you’re investing in have investment merit."

There's already some evidence that points to the approach’s success. Between its inception on May 1, 2003, and Feb. 15 of this year, PowerShares Dynamic shot up 76.1%, compared with the 39.7% advance of the S&P 500 Index, ($INX).

The PowerShares approach is to examine the same universe of stocks as a given index, and then replicate its most important characteristics, such as sector and industry weightings. After that, though, the idea is to include stocks that appear to be attractive investments, not merely representative of the group’s top players.

PowerShares’s 25-point checklist of attributes broadly divides into four categories -- valuations, risk, growth characteristics and timeliness (or relative strength). The investment matrix was developed in consultation with the American Stock Exchange, which oversees the indexes and rebalances them quarterly.

Frequent rebalancing -- adding to or subtracting from stock holdings to create the desired mix -- creates heavy turnover. The S&P 500 has annual turnover of 2%. Bond estimates Dynamic Market’s turnover is 150%. Ordinarily, that would create a tax burden for shareholders, but ETFs can escape capital-gains distributions. Indeed, last year none of PowerShares’ 37 funds made a cap-gains distribution.

ETFs are created and destroyed through the exchange of shares in the constituent index between a cooperating institution and PowerShares, not by the purchase or sale of shares, which is what triggers taxes on gains.

So it isn’t taxes that concern me about PowerShares -- it is risk.... Between mid-January and mid-May of 2004, when the Nasdaq corrected 10%, Dynamic OTC plunged 15%....Also, PowerShares are extremely expensive by indexing standards.

With such a limited track record, PowerShares has to rely more on theory than proof to woo investors. But intelligent indexes have proved very successful at Dimensional Fund Advisors. I’ve called those portfolios the best funds you can’t buy, because they are largely restricted to the wealthy through hand-picked financial advisers.

Wind Energy Reports Record Year of Growth, Job Creation

Trend: Installed wind power in the US grew by 35% in 2005, compared to 2004.

According to the American Wind Energy Association, states in the middle of the US have tremendous potential for producing wind power. The states with the most potential are: North Dakota, Texas, Kansas, South Dakota, and Montana.

Source: AWEA News Release - Wind Energy Eyes Record Years of Growth, Job Creation

States with most wind energy installed, by capacity (MW):

#1 California - 2,150 MW #2 Texas - 1,995 MW #3 Iowa - 836 MW #4 Minnesota - 744 MW #5 Oklahoma – 475 MW #6 New Mexico – 407 MW #7 Washington – 390 MW #8 Oregon – 338 MW #9 Wyoming – 288 MW #10 Kansas – 264 MW States with most wind energy resource (in billion kWh) #1 North Dakota – 1,210 #2 Texas – 1,190 #3 Kansas – 1,070 #4 South Dakota – 1,030 #5 Montana – 1,020 Largest wind farms operating in the U.S. (MW): # 1 Stateline, Oregon/Washington - 300 MW # 2 King Mountain, Texas - 278 MW # 3 Horse Hollow Wind Energy Center, Texas – 210 MW # # 4 New Mexico Wind Energy Center, New Mexico - 204 MW # # 5 Storm Lake, Iowa - 193 MW Leading owners of wind energy installations in the U.S. (MW): #1 FPL Energy – 3,192 MW #2 PPM Energy – 518 MW #3 MidAmerican Energy – 360.5 MW #4 Edison Mission Group – 316 MW #5 Shell Wind Energy - 315 MW

via Jamais Cascio in QuickChanges

Owens Corning Announces High-Performance Material for Wind Turbine Blades

Trend: Technological innovations aimed at the energy marketplace are starting to appear and could have a significant impact on US energy consumption.

Clean Edge News reports that Owens Corning is introducing a new single-end roving and knitted fabric which could enable lower costs and higher performance for wind turbines.

Link: Clean Edge - The Clean-Tech Market Authority - News

Owens Corning is introducing a new single-end roving and knitted fabric, WindStrand, which could enable lower costs and higher performance for wind turbines, says the company. The product could allow turbine manufacturers to increase blade lengths by as much as six percent and deliver up to 12 percent more power -- for up to 20 percent less cost than any competing carbon-glass hybrid solution currently on the market.

The product, which is targeted to be commercially available in late 2006, is the first application using the new Owens Corning high- performance reinforcement platform, HiPer-tex, which is the result of new advances in glass melting, fiberizing and sizing technology. The performance statistics for WindStrand are based on beta testing in the field by the company, and design blade optimization by an independent research establishment based in the Netherlands, Composite Technology Centre (CTC). CTC studied the effects of replacing traditional E-glass with WindStrand for several components in a 44-meter long rotor or blade, suitable for a 2.5 MW wind turbine.

Disclosure: I own shares of Owens Corning.

Investing in Water – A Deeper Look at the ETF PHO

Trend: Well-targeted Exchange Traded Funds, such as PHO, can provide great investment vehicles for astute investors.

Russell Bailyn's Financial Planning Blog provides some insight into the water ETF PHO. He recommends investing in PHO, based on a long term, big pricture view. Excerpts below.

Link: Investing in Water? A Deeper Look into PHO.

The PowerShares Water Resources Portfolio (PHO) is up 17% so far in 2006, blasting past both broader market indexes and related sector indexes such as utilities, natural resources, and clean energy. In fact, the S&P 1500 Water Utilities Index rose 46% in 2005. Why the sudden interest in water? Let us explore news and statistics on the sector first and then discuss why PHO is the best way to play it.

PHO invests in environment-friendly companies such as the California Water Service Group (CWT) that both purify water and provide facilities and technology for water testing and inspection. They also look for companies that treat water for use in industrial processes. These companies do not operate exclusively in the West. China and the Middle East have a huge demand for pure water, both for industrial purposes and basic consumption. The ability to transport water greatly affects countries such as Israel, Jordan, and Lebanon where arid conditions make agriculture quite difficult. Finally, PHO recognizes the growing bottled water industry.

The PowerShares Portfolio is based on the Palisades Water Index, a quarterly rebalanced portfolio of 25 stocks created in 2003 by Elias Azrak of Hydrogen Ventures, LLC. The PowerShares Portfolio may vary it’s weighting on different stocks in the sector and maintains a 20% flexibility in straying from the sector when appropriate. Please note that while PHO is passive as compared to a mutual fund, the ETF tends to re-weight and switch holdings regularly with its rigorous rebalancing schedule. The intellidex system used by PowerShares tends to favor smaller capitalized stocks with aggressive growth rates rather than large-cap stocks.

Economists estimate $500 billion being spent in the next 25 years on research and infrastructure related to clean water initiatives. Another $100 billion is estimated for researching health concerns regarding pollutants which affect water and other natural resources.

via Seeking Alpha

Disclosure: I own shares in PHO.

Is the current account deficit important?

Trend: The US current account deficit, weighed down by the growing trade deficit, shifted from a surplus to a deficit in the fourth quarter of 2005.

Jim Jubak at MSN Investing says the accelerating US trade deficit sounds really bad – and it's really worse than it sounds.

Source: MSN Money - The trade deficit's deep bite - Jubak's Journal

On Mar.14, the U.S. Bureau of Economic Analysis announced that the broadest measure of the U.S. trade deficit grew to $225 billion in the fourth quarter of 2005. That marked an increase of 21% from the $185 billion deficit in the third quarter of 2005. And the quarter's results drove the deficit for all of 2005 to $805 billion, a new record.

Let's take a look at the most ominous trend in the 2005 numbers.

Unlike the trade deficit, which just measures the difference between what we export in goods and services and what we import, the current account deficit also includes international flows of investment income. That's worked to the benefit of the United States over the decades since World War II because we've built up quite a big portfolio of overseas investments from real estate to ownership stakes in foreign companies to holdings of foreign bonds that pay income to the U.S. owners of those foreign investments. For all of 2005, that income flowing into the U.S. came to a whopping $466 billion, up 24% from 2004.

But for years, overseas investors have been buying our assets faster than U.S. investors buy foreign assets. In 2005, for example, U.S.-owned assets overseas increased by $492 billion, while foreign-owned assets in the U.S. increased by $1,293 billion. (Or $1.29 trillion, if you prefer.)

And as you'd expect, the faster growth in foreign ownership of U.S. assets has gradually increased the amount of income that overseas investors receive from the United States. In the fourth quarter, the income flow actually turned against the U.S. We sent $2.4 billion more in income overseas than we received. That was a shift from the $4.9 billion income surplus in favor of the United States in the third quarter of 2005, and only the second time EVER (or at least since there have been decent records) that income from investments has been in deficit for the United States. In 2004, the surplus from income was more than $30 billion. From 1980 to 1985, the annual average was above $30 billion, and from 1980 to 2004, the smallest annual surplus was $4.3 billion in 1998.

So the shift from surplus to deficit in the fourth quarter is a big deal. It quite probably marks the end of a long period when flows of income into the United States from U.S.-owned assets helped offset deficits in years when U.S. imports exceeded U.S. exports.

A shift from an income surplus of $30 billion to the income deficit of the $10 billion or so some economists project for 2006 isn't much help if you're trying to balance an annual current account deficit north of $800 billion. But it becomes positively devastating if you add this trend to other trends now working to push the current account deficit higher in the years ahead.

And there's certainly a good chance that the price of that oil -- and hence the size of the U.S. trade and current account deficits -- will climb in the years ahead.

There's an unfortunately long list of similar trends that are working to continue to push the U.S. current account deficit higher.

Facial recognition technology expanding to new markets

Trend: Entrepreneurs are applying technology to make us safer in public places, at the sacrifice of some privacy and freedom.

Technology can help identify criminals and human predators, but it can be misused and inaccurate.

Link: Wired News:

A new security system for nightclubs uses facial recognition technology to identify troublemakers -- and share their faces with other clubs in a security network.

...at clubs and bars, troublemakers can cause major problems over time -- frightening off customers, and even forcing the place to close.

BioBouncer's camera snaps customers entering clubs and bars, and facial recognition software compares them with stored images of previously identified troublemakers. The technology alerts club security to image matches, while innocent images are automatically flushed at the end of each night. Various clubs can share databases through a virtual private network, so belligerent drunks might find themselves unwelcome in all their neighborhood bars.

Privacy watchdog groups, however, don't like the sound of it, and it's not clear club patrons will dig it, either. Many people are already accustomed, or oblivious, to cameras recording their every move at ATMs and 7-11s.

Lee Tien, a staff attorney with the Electronic Frontier Foundation, said people may find BioBouncer insulting or invasive. Facial recognition software is notoriously inaccurate, he said, and he is concerned that data-sharing could be used to blackball innocent partiers.

BioBouncer was born when a Toronto club owner asked if Dussich could help curb a burgeoning crime problem. Dussich may be on to something, as crime is plaguing the club scene nationwide, said Robert Smith, a police officer and nightclub security expert, who runs the Hospitality and Security Alliance.

"It used to be you settled your arguments with a push and a shove," Smith said. "Now it's … knives and bottles over the head."

Smith believes biometric tools like BioBouncer are vital to the club scene. Similar technology is being used in Amsterdam and Great Britain, he said. At least one U.S. company, Food Service Solutions, is peddling fingerprint recognition to alcohol retailers.

via Bruce Schneier