Trends I'm Watching

Here Comes XBRL

Trend: Standardized information formats make transparency possible and reduce compliance costs.

Robert G. Eccles, Liv Watson, and Mike Willis describe XBRL (Extensible Business Reporting Language) in the Harvard Business Review article Breakthrough Ideas for 2007. (Isn't this a better idea than SOX?) Excerpts below.

Link: The HBR List: Breakthrough Ideas for 2007.

When the U.S. Securities and Exchange Commission last September announced a $54 million project to accelerate the implementation of XBRL, a new information standard for financial and business reporting, the event hardly seemed like a landmark for companies. The advantage for investors—an enhanced ability to electronically download, analyze, and compare company information submitted to the SEC—got top billing. The SEC chairman, Christopher Cox, briefly noted that adopting the new standard—which is voluntary for SEC filings, at least for now—would also make it easier and less costly for companies to comply with his agency’s requirements. But that’s just the beginning.

What has largely been overlooked is that XBRL (Extensible Business Reporting Language) will make it much easier to generate, validate, aggregate, and analyze business and financial information, which in turn will improve the quality, timeliness, completeness, and comparability of the information that companies use to make decisions. The new language will allow them to strengthen and ensure the reliability of their internal controls, thereby lowering the cost of maintaining these pervasively manual compliance processes. It will make ERP (enterprise resource planning) systems much more flexible and easier to upgrade or change, dramatically cutting the investments needed to maintain these beasts. And by significantly reducing the amount of effort needed to change and integrate business reporting systems, XBRL will make digesting acquisitions, shedding businesses, reorganizing, and adding new products and business units far less difficult.

XBRL is an open-source standard that was developed by an international public consortium of nearly 500 organizations from 27 countries, including companies, investors, analysts, auditors, regulators, and aggregators of financial data, such as Standard & Poor’s. (For more background, see www.xbrl.org, the standard’s official Web site.)

Nasdaq 100 moving average trend update 2/23/2007

Trend: The Nasdaq 100 ($NDX) 10-day simple moving average crossed above the 30-day simple moving average on 2-21-2007.

The 10-day moving average crossed below the 30-day moving average in early February  (see chart below). The 10-day moving average has been tracking the 30-day moving average since that event. The latest move up for the Nasdaq 100 has pulled the 10-day moving average above the 30-day moving average and created some separation.  

The Nasdaq 100 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

The Nasdaq 100 Index includes 100 of the largest non-financial domestic companies listed on the Nasdaq National Market tier of the Nasdaq stock market. Each security in the index is represented according to the proportion of its market capitalization in relation to the total market value of the index. This index reflects Nasdaq's largest growth companies across major industry groups. All index components have a minimum market capitalization of $500 million, and an average daily trading volume of at least 100,000 shares (Investopedia).

The Wilshire 5000 moved down slightly for the week ending 2/23/2007

Trend: The Wilshire 5000 lost 4 points for the week.  The daily line hit a 52-week high and an all-time high on Tuesday. The daily line moved lower in the last 3 days of the week.

We track the the movement of the Wilshire 5000 because the market as a whole has a significant influence of the movement of individual stock prices.

The Wilshire 5000 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

The Wilshire 5000 moved up 1% for the week ending 2/16/2007

Trend: The Wilshire 5000 gained 187 points for the week. The daily line crossed above the 10-day SMA in mid-week. The daily line hit a 52-week high on Friday, only 18 points below below the all-time high for this index set early in 2000.

Here's a 12-month chart of the Wilshire 5000* (a proxy for the stock market as a whole), showing the 10, 30, 60, and 90-day moving averages**.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

**We've decided to kick off 2007 with a new set of moving averages. Our chart will show the 10, 30, 60, and 90-day moving averages rather than the traditional 50 and 200-day moving averages. We think that these four moving averages will be more sensitive to changes in trends and provide better indicators of what is unfolding in this total stock market index.

Russia, Iran, and Saudi Arabia

Trend: Russia is aligning with Iran to counter the US military and Saudi Arabia energy policies.

Stratfor President George Friedman discusses the long-term strategy that Russian President Vladimir Putin is setting in place in John Mauldin's Outside the Box at InvestorsInsight. Excerpts below.

Link: InvestorsInsight : John Mauldin's Outside the Box

The two main Islamic powers between the Levant and the Hindu Kush are Saudi Arabia and Iran. The Russians have things they want from each, but the Saudis and Iranians have dramatically different interests. Saudi Arabia -- an Arab and primarily Sunni kingdom -- is rich but militarily weak. The government's reliance on outside help for national defense generates intense opposition within the kingdom. Desert Storm, which established a basing arrangement for Western troops within Saudi Arabia, was one of the driving forces behind the creation of al Qaeda. Iran -- a predominantly Persian and Shiite power -- is not nearly as rich as Saudi Arabia but militarily much more powerful. Iran seeks to become the dominant power in the Persian Gulf -- out of both its need to defend itself against aggression, and for controlling and exploiting the oil wealth of the region.

Putting the split between Sunni and Shiite aside for the moment, there is tremendous geopolitical asymmetry between Saudi Arabia and Iran. Saudi Arabia wants to limit Iranian power, while keeping its own dependence on foreign powers at a minimum. That means that, though keeping energy prices high might make financial sense for the kingdom, the fact that high energy prices also strengthen the Iranians actually can be a more important consideration, depending on circumstances. There is some evidence that recent declines in oil prices are linked to decisions in Riyadh that are aimed at increasing production, reducing prices and hurting the Iranians.

This creates a problem for Russia. While Moscow has substantial room for maneuver, the fact is that lowered oil prices impact energy prices overall, and therefore hurt the Russians. The Saudis, moreover, need the Iranians blocked -- but without going so far as to permit foreign troops to be based in Saudi Arabia itself. In other words, they want to see the United States remain in Iraq, since the Americans serve as the perfect shield against the Iranians so long as they remain there. Putin's criticisms of the United States, as delivered in Munich, would have been applauded by Saudi Arabia prior to the 2003 invasion of Iraq. But in 2007, the results of that invasion are exactly what the Saudis feared -- a collapsed Iraq and a relatively powerful Iran. The Saudis now need the Americans to stay put in the region.

Sentiment about Energy Policy Changing

Trend: Conservative, capitalistic individuals are starting to question US energy policy and the underlying motives, which could stimulate investment in energy-saving and clean technology.

Brett Arends at The Street summarizes a report by Cheney's fund manager criticizing US energy policy in a rant called While America Slept, 1982-2006. Excerpts below.

Link: Cheney's Fund Manager Attacks ... Cheney.

From Jeremy Grantham -- Cheney's investment manager:

"What were we thinking?' Grantham demands in a four-page assault on U.S. energy policy mailed last week to all his clients, including the vice president.

Titled "While America Slept, 1982-2006: A Rant on Oil Dependency, Global Warming, and a Love of Feel-Good Data," Grantham's philippic adds up to an extraordinary critique of U.S. energy policy over the past two decades.

"Successive U.S. administrations have taken little interest in either oil substitution or climate change," he writes, "and the current one has even seemed to have a vested interest in the idea that the science of climate change is uncertain."

Yet "there is now nearly universal scientific agreement that fossil fuel use is causing a rise in global temperatures," he writes. "The U.S. is the only country in which environmental data is steadily attacked in a well-funded campaign of disinformation (funded mainly by one large oil company)."

That's Exxon Mobil.

As for Massachusetts Institute of Technology professor Richard Lindzen, who appears everywhere to question global warming, Grantham mocks him as "the solitary plausible academic [the skeptics] can dig up, out of hundreds working in the field."

And for those nonscientists who are still undecided about the issue, Grantham reminds them of an old logical principle known as Pascal's Paradox. It may be better known as the "what if we're wrong?" argument. If we act to stop global warming and we're wrong, well, we could waste some money. If we don't act, and we're wrong ... you get the picture.

The Wilshire 5000 moved down (less than 1%) for the week ending 2/9/2007

Trend: The Wilshire 5000 lost 87 points for the week. The daily line crossed below the 10-day SMA on Friday. The daily line hit a 52-week high on Wednesday, then dropped sharply on Thursday and Friday.

Here's a 12-month chart of the Wilshire 5000* (a proxy for the stock market as a whole), showing the 10, 30, 60, and 90-day moving averages**.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

**We've decided to kick off 2007 with a new set of moving averages. Our chart will show the 10, 30, 60, and 90-day moving averages rather than the traditional 50 and 200-day moving averages. We think that these four moving averages will be more sensitive to changes in trends and provide better indicators of what is unfolding in this total stock market index.

China's pollution problem is an opportunity

Trend: Companies that can help China clean its air and water will find a huge market with money to spend.

Jim Jubak at MSN Money describes China's pollution problems and how the Chinese cannot continue to produce goods as cheaply in the future. Excerpts below.

Link: How long can China pollute for free? - MSN Money

...Chinese companies have a sizable cost advantage over their rivals in the developed world because many of the environmental costs of doing business in the United States, Europe and Japan are still externalities in China. Polluting the air, water and ground at no cost to the company's bottom line makes it easy to undercut the prices charged by companies that don't have a right to pollute for free.

Closing the "externality gap" between China and the developed world would eliminate one source of China's cost advantage and slow the country's economic growth rate. If we want to know how sustainable China's current growth rate of 10% per annum is, we need to look at how quickly current environmental externalities will get on the corporate books.

There are two factors that determine the speed of that process. First, how long will it take until China's environment is at a breaking point that will force an end to polluting for free? Second, how quickly will the global economy force the Chinese economy to change its ways?

Demand for solar energy systems soaring in Europe

Trend: The demand for solar energy systems continues to grow in spite of dips in the price of oil.

GreenBiz News reports that Sharp Electronics is doubling the capacity of its Welsh photovoltaic plant. Excerpts below.

Link: GreenBiz News | Sharp Electronics Doubles Capacity of Welsh Photovoltaic Plant

WREXHAM, Wales, Feb. 7, 2007 -- Sharp Electronics is doubling the size of its photovoltaic solar panel plant in this northern Welsh town to meet soaring demand for solar energy systems across Europe. The company announced an investment of approximately $18.2 million in its Wales facility.

Production capacity will be doubled and the existing 110 Megawatts (MW) capacity will be expanded to 220MW. This expansion will make the facility one of the largest PV solar module plants in the world," Sharp said in a statement. The Wrexham plant was opened in 2004 with an annual capacity of 20MW.

Sharp is one of the world's largest producers of photovoltaic panels, which convert sunlight into electricity.

The Sharp Corporation has a long history of involvement in the solar power industry -- beginning research and development in solar energy in 1959 and commencing the mass production of solar cells in 1963.

What Is Driving The US Stock Markets Higher?

Trend: Global investors are putting their money in the US stock market, driving prices higher.

Gary Halbert in InvestorsInsight : Forecasts & Trends offers his opinion about why the US stock market continues upward, in spite of negativity on many fronts. Excerpts below.

Link: InvestorsInsight : Forecasts & Trends

It is easy to be a skeptic of the US stock markets. For many of us, quite honestly, it is always easier to be a skeptic of the investment markets than to be a cheerleader like the always-bullish Wall Street types. But market skeptics have left a huge amount of money on the table for the last 20+ years, watching and waiting for the market to tank.

Now, here we are in 2007, with the Dow Jones making new high after new high, and yet with all the problems we see, I am still encouraging you to get off the sidelines and get onboard, especially with the professional money managers and strategies I recommend. Why? Let me explain, as succinctly as I can.

The world is awash in liquidity, especially in Asia and the oil-producing nations. I have discussed this in the past. Unheralded amounts of money are looking for a place to invest. If you are a foreign investor, is there anywhere safer to invest than in the USA? NO. So, you invest in the US, and where better to invest than the US equity markets?

We can talk about all the problems the US is likely to encounter in the next 5-10 years; we can talk about economic and financial crisis scenarios that could develop; we can talk about social/political/moral issues; etc., etc. We like to talk about these issues, and we should.

But if you are a wealthy Asian, and you need to diversify your investment portfolio, the United States looks very safe and very good. End of story. You get some of your money invested in the US equity markets which have a long history of good returns over time.

The point is, the US equity markets are being driven higher in part by the unprecedented demand for investments in the US. Sophisticated investors around the world are looking to diversify their portfolios, and the US equity markets are increasingly attractive.

What this should point out to us, as investors, is that things have changed. Old models don't work the same anymore. Some of the market equations we learned years ago don't work so well these days. Things have changed!

To give you one example, when I cut my teeth in the investment markets, "P/E" ratios and similar indicators were the gold standard. Just not true anymore. P/E ratios have been out of whack (ie - too high) for years, yet the equity indexes just move to new high after new high. Something else is going on, as I have suggested above.