Planet Yelnick

After the Santa Rally: A Technical Analysis

"October is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February." - Mark Twain

January has been a cruel month over the past decade. Santa Rallies hit January and fell in almost every year this past decade except 2006 (in 2001 it was already in free-fall). The STU has a nice chart of these January peaks, which shows:

• In 2007 we had a sharp fall on Jan 22 before resuming the final rally
• In 2008 the sharp drop started early, on Dec 26, 2007, and fell hard into March
• In 2009 we peaked on Jan 6 and fell a lot farther to the March low
• In 2010 we hit a major peak on Jan 19 and fell into February before resuming the rally into April

Will 2011 follow the same pattern?

QE2 Explained - The Music Video

Putting The Bernank back in business! The original is here.

Tesla Does Cars the Silicon Valley Way

Tesla has bounced back after Monday's lockup drop. Nonetheless, many comments I received on my Tesla posts show skepticism, and ask what is so special about Tesla. This week's Economist tackles that question. Simply put, Tesla went about designing its battery packs the Silicon Valley way, while Chevy with its Volt and Nissan with its Leaf went about it the car company way. 

Tesla assembles its packs from thousands of battery cores of the sort found in laptop batteries, leveraging a scale manufacturing ecosystem. The car-makers redesign the batteries into large-format cells, laminated together in tiles, creating a custom-maunfacturing requirement for each car-maker. Which approach do you expect is more scalable and cost-effective?

Tesla puts 6,831 battery cores into blocks, and assembles blocks into its battery pack, which is liquid-cooled. The Leaf uses 192 tiles, each the size of a magazine, and ties four tiles to make a module. The Leaf's battery pack is made from 48 modules and is air-cooled. Which approach to cooling do you think better extends battery life and manages environmental changes?

Tesla may see more competition from battery-pack makers like A123. They also design a custom battery, rather than using laptop cells, and modify the chemistry to make them less prone to over-heating and easier to cool. It also makes them less energy intensive, requiring more batteries for the same drive time, although perhaps they can be managed differently to last longer (ie. allow a lower level of discharge before recharging). Another new entrant is Coda, which initially planned to use A123 batteries but switched to designing a custom battery with a Chinese company that is one of the largest makers of laptop cores. 

Game on! Tesla's stock is holding up while A123 is still well below both its IPO price and its first-day pop. My bet is on the Silicon Valley way. 

Tesla Down Not So Big In a Flat Market

Tesla is a bellweather of the cleantech IPO market. Last night I asked how Tesla would fare after the 180 day lockup ends and venture investors start selling. VentureBeat reports that Tesla is down 16% at the moment after an 8% drop last Thursday, the prior trading day. 

So far about 6m shares have traded. The lock up added 75m new shares to the market on top of a prior float of 93m shares. Short interest on Thursday was 6:1. All in all, the Tesla drop is not as bad as one might have expected. The stock got close to $25 and is now up a bit at $26, still well above its IPO price. We shall have to see how much more it drifts down all week as the selling continues.

WIll Tesla's Stock Hold Up Past Lockup?

Tesla comes off lockup Monday. Shares available for trading will triple Monday. Typically a potent IPO will fall, as venture investors take profits.

In this case, the funds hold such a large position, they may make a year-end distribution of Tesla stock rather than rushing to sell, leaving it up to the limited partners' to decide to hold or sell, which might smooth out and delay profit-taking. 

VentureBeat, which supplied this IPO photo, does a nice assessment of the lockup risk to the stock. Most telling Tesla has attracted a large short interest. The GM IPO drove up short interest, and it hit 22:1 at the end of October right before an earnings report. Right now the short interest expects a drop, and an informal poll of venture capitalists found the highest they expected Tesla to settle was at $18, a huge drop from its current price above $30. Grinches all!

Tesla has defied the skeptics. The stock popped after the IPO then fell below the offering price, but unlike another high-profile cleantech IPO, A123, Tesla then climbed back up and recently got to new highs. Tesla has scored great deals with Mercedes, Toyota and Panasonic (for batteries), buoying its prospects both as a business and a potential acquisition. It expects to unveil its next car in the January Detroit Auto Show.

In the slow Santa trading period, Tesla is the stock to watch. 

Disclosure: I have a small indirect interest in Tesla. 

Is the Great Recession Grinch Coming to Australia?

It has been a freaky season in Oz. First, snow fell on December 19, almost giving them a White Christmas - and December is the start of their summer. Next, a flurry of bad retail reports is putting a lump of coal into their stockings. Third, a prominent analyst recommends shorting Australia.

How did this come about? Did the luck of the Lucky Country run out?

Mish explores the implications of a retail sales slump heading into the holidays, the slowest Christmas in 20 years. Blame is tossed around from online sales to rising utility bills. Electricity costs indeed have been rising all around the world, with blame going to an excessive push towards expensive renewables (wind, solar) over cheap coal and natural gas. The New York Times ran a piece that ran like Rudolph across the blogosphere entitled Coal-Rich Australia Grapples With a Price on Carbon and China's Money, posing the dilemma Down Under: how to extract more from coal exports without driving up domestic energy costs. Advocates for a Green Christmas are raising energy prices in a country blessed with cheap coal. 

Regardless of blame, Australia has been subsidizing real estate much as the US, and now appears to be facing the Day of Reckoning. A retail slump will likely throw the over-build retail sector into the same wave of bankruptcies and empty buildings that hit the US two years ago. In some parts of OZ, residential property is already appearing to be busting. It has been a long time in the coming, with premature predictions of a bust last summer from Jeremy Grantham, and a noteworthy bet by Steven Keen in 2008. 

The play may be to short the $AUD. It closed above parity yesterday and is holding above today with markets largely closed. The logic is that the Great Re-Liquification of global stimulus, easy credit and Bernanke's QE is coming to an end. Austerity rules Europe, China is raising rates to squelch internal inflation, and the Tea Partiers are coming to Town in Washington. The Tax deal may be the last gasp of stimulus for a while, and the new Congress should be tight-fisted. 

How's That Net Neutrality Thing Working Out?

The free-wheelin' days of the Internet are numbered. The Internet now becomes subject to Federal encroachment with the new net neutrality regs. It is not clear if the FCC has the authority to regulate the Internet, and that proposition might be tested in court, but they went ahead and grabbed the power anyway. 

The most immediate impact is on Internet stocks: cable is up, phone companies are down, and content companies have gone up a bit then plateaued. Google and Apple went down when the news broke.

It is perhaps no coincidence that this is breaking when WIkiLeaks is under assault. Julian Assange is in jail under a somewhat odd (if not trumped up) sex charge from Sweden, and he may fall into the clutches of the US government. 

Where are the civil liberty folks when we need them? Is it that hard to compare WikiLeaks to The New York Times, and the private who illegally leaked to Daniel Ellsberg of the Pentagon Papers? Or are web sites about to lose the protections of the First Amendment, including Freedom of the Press?  

Instead, it is left to the WSJ of all places to expose the forces behind net neutrality, which are probably not what you think they are. John Fund unveiled what led to this decision and the motivations behind it - which are to control content, not simply price the fast lanes of the info highway:

The net neutrality vision for government regulation of the Internet began with the work of Robert McChesney, a University of Illinois communications professor who founded the liberal lobby Free Press in 2002. Mr. McChesney's agenda? "At the moment, the battle over network neutrality is not to completely eliminate the telephone and cable companies," he told the website SocialistProject in 2009. "But the ultimate goal is to get rid of the media capitalists in the phone and cable companies and to divest them from control."

There is a lot of blather flying around the blogosphere over this, and over McChesney's background, and the story could easily blow this out of all proportion. The current administration did, however, try to shut Fox News out of the flow of press briefings by the While House, and have floated the idea of reinstating the Fairness Doctrine in order to shut down talk radio in general and critics like Rush Limbaugh and Glenn Beck in particular. Their record on a free press is already suspect.

The FCC decision today is much more limited, but might be the proverbial camel's nose under the tent. This is the angle taken by TechCrunch, which views the fight as just beginning. GigaOm focused on the disparate treatment of wireline and wireless networks, expecting wireless broadband prices to rise. VentureBeat found the exemption of wireless networks "a bit of a head scratcher." 

The capstone to this story might be the old adage to be careful what you wish for. Big Internet content companies like Google have been lobbying for some sort of net neutrality rules, and may someday wish they had left things alone. 

Santa Rally Rides Through Storm Clouds of Market Extremes

Don't fight the Santa. Markets are at sentiment extremes, at the highest levels since October 2007 just before the all-time top, and this has led the punditry to expect a reversal; but it rarely comes this time of year.

The Santa Rally comes on the soft whispers of machines turned off, as professionals close the books for the year and head home for the holidays. Markets tend to rise on light volume. More stats here. The rise often persists into the first few days of January, making January 10 the day to watch, but be cautious (chart courtesy Doug Short):

• In 2008, we started down in late Dec
• In 2009, we reversed hard on Jan 6
• In 2010, we ran until Jan 19

A more bearish view comes from Citigroup. They look at three similar prior markets (1906-10, 1937-40, 1973-77) and conclude that the market is likely to turn on January 3 and fall at least 20%. Their chart:

 
This outlook will be quickly dismissed by almost all market traders, given the optimism that reigns. I will provide a technical analysis in my next post, but let's first explore the fundamental viewpoint. The sentiment extremes are driven by four core beliefs:

1. QE2 will spill over into stocks and commodities (indeed already have!)
2. The bond rout rotates investments into stocks
3. The tax deals signals Obama will do what he can to pump into the 2012 election
4. The economy is actually showing signs of life

QE and Bonds. I explored the first two in a recent post on Japan's QE experience, which supports the view that stocks will tend to rise as the Fed continues some form of QE. One should take such analogies with a grain of salt, as many other conditions are different, especially the fact that the two US bubbles (dot-com and real estate) pulled Japan up; which large economy will pull the US up? This makes the final two beliefs of larger importance.

Tax Deal. I explored the tax deal in my prior post, concluding it is much less stimulative than it has been sold. It can be estimated at adding around 0.9% to GDP based on around $270B of stimulative effect over the next two years, with much of that in 2011. This is not very compelling, but sure beats the alternative of austerity and a real double-dip next year. Of course, this all happened in the lame duck Congress, and the Tea Party influence is not yet being felt. 

In general, the Tax Deal bolsters the Four Year Cycle, which is driven by Presidential politics. The Four Year Cycle makes the two years leading into elections bullish. The third year tends to be the best for stocks as the President has taken the hits from his predecessor's mistakes and is pumping the economy towards re-election. If the Prez waits too long to pump, as Bush Senior did in 1991, he risks not getting credit for the pump. (In that case, the economy had bottomed and was in a rebound through the 1992 election, but Bush got too little credit for it.) If he starts too soon, as Jimmy Carter did in 1977, he risks a flagging economy in the fourth year. Obama shot his arrows early, and we are now in the backside of the Stimulus where it will act more as a drag on growth than a spur. Best that can be said is we may avoid the 1937 analogy of a double-dip but are still waiting for a real recovery to start.

Signs of Recovery? So far Santa has left jobs behind. This recoveryless recovery is not showing the type of turn we have seen in prior rebounds. Q3 GDP just got revised up by a small amount (to 2.6% from 2.5%), which was below consensus (2.8%). Goldman has done a great job of parsing through the GDP revisions and concludes that they have to pull back from the prior optimistic view of 2011. Key changes:

• more inventory than before (1.6% vs 1.3%) - a bad sign if it doesn't sell through
• less real final sales (0.9% vs 1.2%) - this is a key indicator of recovery
• lower corporate profits (0.2% vs 1%) - this may reflect a margin squeeze

There have been signs of improvement in Q4, and I expect a higher Q4 GDP than Q3, but this report puts a damper on 2011. In particular, the consumer is not back, despite some promising holiday sales. Keeping the consumer on life support, such as the two most stimulative parts of the Tax Deal (the FICA tax reductions and the extension of unemployment benefits), is just kicking the can down the road. The Consumer Metrics Institute shows the consumer still in a funk, and starting to trend down again (the blue curve):

Bulls Take Note: Tax Deal Won't Stimulate Much

There is much less stimulus than touted in the press. Political posturing has resulted in poor policy. Funny to watch the erstwhile critics of the Bush tax cuts turn into Reaganesque supply-siders. They are besides themselves crowing about how a tax cut will stimulate the economy. Where were they when Chirstina Romer was still Obama's head of economic advisors? Her seminal studies showed properly-structured tax cuts had 3x the stimulative impact as increased spending. Instead, they pushed through the Stimulus which they now admit was poorly done.

The tax deal actually creates little incremental reduction in taxes, since it mostly continues what is already in place. Put simply, not letting the Bush tax cuts lapse is NOT stimulative; it just avoids a drag on the recovery. What is actually new is relatively modest in size. If you review this chart from Megan McArdle at The Atlantic, the first three items are continuations; the last four are incremental:

In addition, the highlight of the deal, the payroll tax cut, is poorly structured to have the right type of impact. What the economy needs is business investment that leads to new jobs; this just continues demand-side stimulus of the sort which has kicked the can down the road for the past two years rather than lead to a recovery. Worse, it is temporary, and going back to Milton Friedman, it is well known that temporary tax cuts have no lasting impact. 

The politicization extends to the CBO, which normally does sound work; their assessment of the tax deal is being criticized by center-left commentators like Megan, who notes this:

According to the CBO, the low estimate is that temporarily extending the Bush tax cuts for the middle class aren't very stimulative, while extending the tax cuts for those who make over $250,000 doesn't show up at all; in the high estimate, extending the tax cuts for incomes above $250,000 reduces employment by about a tenth of one percent, while extending the tax cuts for incomes below $250,000 lowers it by about half a percent.

It's true that there is some differential effect. But most of that figure is not driven by the fact that wealthy save their tax cuts, while the middle class spend them; it's driven by the fact that the tax cuts for incomes below $250,000 are much larger, in terms of the federal budget, than tax cuts for higher incomes.

According to CNN, the two-year cost of the tax cuts for high earners will be about $75 billion, while the estimated cost of the cuts for incomes below $250,000 is about $310 billion, or four times larger.

Consider this finalirony: as we head into the 2012 elections, the debate will be about supply-side tax cuts, not demand-side stimulus - the Republican playbook, not the stuff of the Democrats. Worse for the Demos, an Obamcare tax increase (the medicare 3.8% surcharge) will kick in in 2013 and have to be dealt with. 

QE and Stocks: The Japanese Experience

Since QE2 was pre-announced in late August, stocks have been on a tear. They pulled back a bit when QE2 was announced in early November, but have since continued to rise. Many people believe they will continue to rise as long as the Fed continues QE. The Japanese experience would agree. This chart (courtesy The Casey Report) shows how a massive dose of QE lifted stocks, which promptly fell back when QE was ended after a one-quarter lag: 

What seems different this time than with Japan is the meltdown in Treasuries. Could that scuttle the stock rally? Casey Research thinks not. Alex Daley, Casey’s Extraordinary Technology, comments:

[I] do see at least one compelling reason to stay net long in equities right now: The wheels are coming off the bond market.

And that means money is flowing into equities in a major way. Excess liquidity, especially in the sheer proportions now flowing into the stock markets, tends to drive up asset prices. And the stock markets are seeing liquidity at levels not seen in years. ...

[S]ince the beginning of 2009, the net inflows to bond funds have been more than 11x (!) the inflows into stock funds. But as you can see from this graph, that trend is deteriorating rapidly. It’s such an about face that, bond inflows have gone negative for the first time since the crash (and at that time they were only negative because every asset class saw massive withdrawals):

QE2 Report Card

A plethora of reports on QE2 are coming in with low grades. It launched to a bumpy start, and many observers thought it wouldn't have much of an impact in the real world (vs the worlds of speculation and expectations).

Global Bond Rout

Most noteworthy is that rates have gone up rather than down, and up quite a bit - 60 bp in the ten-year - enough so it has pummeled the bond market and led to descriptions of a Global Bond Rout. PragCap shows how dramatic the reversal has been, albeit we are still below yields earlier in the year:

 

Doug Short piles on, showing how since the actual QE2 announcement in November, the rate increases have been dramatic:

Econbrowser did a careful, somewhat scholarly review, and generally concluded that whatever impact it was supposed to have had is being swamped but other events. Their primary criticism is that the Fed has executed QE2 in the mid-range of Treasuries, rather than the ten-year (or longer) bonds. 

Banks Lending Again?

Another purpose of QE was to right the banks, encouraging them to lend again. Banks make money borrowing short and lending long, so a rise in long rates should encourage capital formaton.

John Mauldin adds a long, careful assessment of QE2 in his weekly newsletter, reprinted here. He sees unintended consequences to QE2: a global sell-off in sovereign debt. Why?

virtually every country in the world is grappling right now with how fast we get out of our fiscal stimulus and much do we worry about this longer term problem of debt

This may explain why rates spiked after the Obama tax deal was announced - it reflects more of the stimulus mentality, piling on more debt, than a change of approach to grapple with excess debt. The bond vigilantes disapprove. 

John went on to ask whether QE2 had begin to fix the core problem of capital formation - in other words, are the banks ending again? The answer is a resounding no. Credit continues to contract, and now with the long bond over 4%, mortgages have gone up, further hammering the housing recovery. Indeed, housing has started a double-dip. 

Inflation Increasing?

A third goal was to reflate the Dollar, with the view that rising prices would also encourage capital formation. I have always found this goal an odd one, perhaps a post hoc, ergo propter hoc fallacy looking back at the Great Depression. When FDR broke with gold, the USD fell and we had inflation. Did the recovery come for other reasons, brining inflation, or did inflation drive the recovery? In any event, in coming the financial blogs I have seen sophisticated arguments for increased inflation expectations, but no signs of inflation (other than asset speculation). Indeed, the inflation-adjusted Treasuries, TIPS, have not signaled higher inflation, rising with the ten-year not ahead of it. Instead, bonds are weak because of QE, not inflationary expectations:

The market sees the deflationary forces mixed with the inflationary signs and trades it to a draw. The market is shooting bonds because it is afraid and confused about the distortions that QE is causing. 

The Tech Boom is Showing Up in the Nasdaq

I have been writing about the tech boom that is emerging in Silicon Valley. Beyond the anecdotes, the boom is showing up in indexes of private company valuations and growth. Despite the dearth of IPOs, the broader forces that are driving this boom are showing up in the Nasdaq100. The explosion in social mobile web apps & devices is energizing stocks like Apple and Amazon. The Naz has shown relative strength since the September-to-Remember rally:

SlopeofHope crowed on Friday about how the Naz100 is about to break to new post-bubble highs (referring to the 2000 dot-com bubble), being the first major index to crest the 2007 highs. The Naz100 is the subset in the Nasdaq of the top 100 non-financial Naz companies based on market cap, and reflects better than the whole index the breakout of this social mobile web boom. Many Naz companies are small-caps not related to this trend. 

Slope added a word of caution, that this peak may be a top, consistent with other signs of an impending top in stocks (see my recent post). This seems pro forma. More likely it marks a potential divergence, where the tech boom drives the Naz100 despite a more lackluster or down broader market. This happened in the early 1980s and reflects a boom based on economic fundamentals in a sector rather than a general market bubble. Imagine what comes of the Naz100 if Facebook, Twitter, Groupon, Zynga and Twitter go public in the next two years. 

Iceland or Ireland

It is not often in economics one can get a realtime test of two different theories, but we have one right now with how Iceland and Ireland have handled their debt crisis. Pierre du Plessis comments on a report from BCA Research that highlights the stark difference in policy to remedy their debt debacles.

Simply put, Iceland bit the bullet & repudiated the debt, plus devalued the Kroner, while Ireland kicked the can down the road & took on even more debt. Both were forced to pursue fiscal austerity, but Ireland stayed with the Euro and could not devalue their currency. How is it working out?

Iceland is growing GDP and real wages, and Ireland is dropping in both GDP and wages:

Put in stark terms, Iceland decided to protect its people rather than the global banks:

Iceland takes some very severe one-time pain as the country pays for excesses, but will emerge with a clean slate and limited liabilities for the taxpayer, while the bondholders of debt (in this case Iceland's banks) take the hit.

This is in contrast to what other nations have been doing, which is along the lines of the decisions in Ireland over the past 3 years - that is (a) first shift the debt from the banks from the private sector to the public, and more recently (b) accept bailout funds - that eventually need to be paid back - to keep the whole thing from collapsing.... but to make the global banking oligarchy fat and happy as they suffer no losses.

Ambrose Evans-Prtchard of the UK Telegraph comments how this presents a "risky temptation" to the rest of the PIIGS, to drop the Euro and repudiate the debt in order to protect their citizens from the penury of paying back the global banks. There is an odd moral justice here. When the PIIGS joined the Euro, they got a one-time benefit of lower borrowing rates and higher national wealth, which they squandered with massive borrowing to pad their welfare states rather than invest in future production. Now will they leave, take a one-time hit, and restructure their economies? 

Is Peak Optimism Giving a Sell Signal?

Stock sentiment readings have reached extremes. Friday's STU outlines how many of the market's internal extremes are "stunning." The market enters the Santa Rally "severely overbought and deeply overbelieved." This should not be surprising, since as the The Economist notes, this year has done much better than expected:

Global output has probably risen by close to 5%, well above its trend rate and a lot faster than forecasters were expecting 12 months ago. Most of the dangers that frightened financial markets during the year have failed to materialise. China’s economy has not suffered a hard landing. America’s mid-year slowdown did not become a double-dip recession. ...

Earlier this year investors were too pessimistic. Now their breezy confidence seems misplaced.

Fractal Finance notes how markets ratchet from one extreme to the opposite, rather than behaving rationally. When fear gives way to greed, sentiment runs hot quickly, faster than reality. You can see how the market has rushed from overbought to oversold and back rapidly over the past year (chart courtesy Bespoke, showing the S&P above/below its 50 DMA):

The ARMS Index (TRIN) is at its most overbought since 1956. As ZH so colorful puts it, the TRIN is an indicator of market breadth which "essentially tracks lemming like momentum-chasing behavior." They add that historically any short-term gains after such extremes get "erased during the months ahead." The Big Picture notes that the ARMS Index has a pretty decent track record, and then supplies the following chart with this juicy comment:

This suggests that the Fed's QE2 and euphoria over tax cuts and FICA holidays are up against a rather overbought condition. 

The Friday STU continues with a whole series of extremes & inter-market divergences, worth reading if this drives your trading decisions. While they don't peg a level for the top, they say at current levels it satisfies normal relationships - for example, the S&P is slightly above the 62% retrace of the whole drop in 2007-09. Some bloggers have fixated on Sp1246, where this final wave 5 is 62% of wave 1 (of the C wave that begun at the July low of Sp1011). Other relationships could emerge, such as 1291, where wave 5 would equal wave 1.

Picking a top is a difficult game. Neely called for a short on Wed but it got taken out. His wave structure should not breach 1240. And a drop may not be the top, yet. The bullish Carl Futia expects the market to hit strong resistance at 1250, and further expects a 50-75 drop "imminently" before heading back above 1300. Even more ebulliently bullish is a self-described "former bear" over at ZH who thinks the market has a ways to run:

Bears continue to get firehosed by the infinite fiat spewed forth by "The Ben Bernank"

He points to the lack of full retail participation in the market, which normally accompanies a top. Indeed, the small investor has been steadily abandoning this market rather than piling on, not normally a characteristic of a bull market either. So his indicator could be used either way: not a top, or not a bull. 

Precious metals remain on a tear but also may be hitting resistance. Silver has been phenomenal since the late August confirmation of QE2. It has risen above $30 and breached a long-term resistance line, suggesting a pullback over the next week. It had hit that line in early November and fell hard off it, before continuing back up. If stocks reverse hard here as well, the STU believes this might mark a long-term top in silver. Of course, they have been bearish silver and gold during this whole rise. They think gold too is at a top, as the USD seems to be on a tear itself, and normally Dollar strength would result on Gold weakness. 

(There is a lot of hoopla in the blogosphere that silver is rising due to a massive short position by JP Morgan, but this JPM Massive Silver Short story appears to be bunk.)

A final indication of extremes is that investors hold the biggest commodity positions on record. Speculative contracts in commodities are 17% higher than at the prior peak in June 2008, right when oil hit $147/bbl and fell down to $32 before bouncing. This is apparently not just a bet against the Dollar, but against fiat currencies in general. The CFTC may try to kill this, which will cause a fast reversal. Despite the speculative fervor, the CRB remains below the 2008 level:

Dogs of the Dow are the Cat's Meow

Bespoke highlights the Dogs of the Dow strategy - buying the 10 Dow stocks with the highest dividends at the start of each year. The Dogs outperformed the Dow in 2010 (so far) by 2x: 13% vs 6.6% for all 30 Dow stocks. The Dogs ran away from the other 20 Dow stocks, beating them by 4x: 13% to 3.4%. 

This is one of the simplest trading strategies, with one decision a year, even simpler than Sy Harding's seasonal pattern, with two decisions: buy in Oct/Nov when the MACD goes positive, and sell in Apr/May when it turns down. 

Here are the Dogs right now, for 2011.

Seems to me a real winner would be to combine the two: buy the Dogs in Nov to get the kickoff to the seasonal strong pattern. Any reader done the analysis? Please share. 

Gore Effect Strikes Cancun Climate Conference

As if ClimateGate wasn't bad enough, the climate politicos in Cancun are amidst record cold temperatures. The Gore Effect, of course, is the inconvenient coincidence that when Al Gore attends a conference to give a climate speech, cold spells and freak snow storms attend. He is not even there this time. 

Global temperatures seem to have flatlined over the past decade, despite increases in Co2. The Cancun conference has little hope of changing the political climate, which is decidedly chilling against the concept of hampering economic growth to limit Co2 emissions. Instead it seems to be devolving into demands by the third-world for "climate justice" - meaning transfer payments from the developed world. See picture below.

While the climate parade marches into irrelevance, we do see progress on solving real problems, particularly rotating the fleet from oil to electricity. The electric car momentum continues, with Tesla's stock remaining buoyant and expectations for the Chevy Volt still high. 

Political Compromise Is Not What You Think

The tax deal that is bumbling through our esteemed Congress shows how in the political realm a "compromise" is not what you think it is:

• In business, a compromise is when two parties give up something to come to agreement
• In politics, a compromise is when two parties each get something to come to an agreement

When a politician compromises, it means they get what they want and the begrudgingly let the other side get what it wants. And the voting public gives up something. Consider this deal, which is supposed to be tax cuts for all, but is actually something else:

• the "rich" get no cuts, but an increase in estate tax
• the working class gets a one-year social security tax break, increasing the deficit
• the 99ers get no new unemployment, but the current unemployed get 13 months more

Will the Poor Unemployment Report Kill the Santa Rally?

The Santa Rally traditionally comes in mid December, but has it already started? This year we saw the seasonal strong period get off to an early start, in September rather than the normal November, which might be a harbinger of an early start to the year-end rally. Retail sales over Black Friday and CyberMonday were "way up" year-over-year, according to SpendingPulse, continuing a trend first gleened in September of increasing spending.

Before we get drunk with excitement, like our Santa here, a little caution. Friday's unemployment disappointment included an increase in seasonal workers, up from last year, but still below pre-crisis levels, and on a seasonally-adjusted basis, still below normal. This means retailers are being cautious. 

We all should be cautious about this recovery. Employment has been flat for a year, and you can see that the unemployment is ticking up slightly (the red dots in the next chart). Normally it ticks up as an economy recovers before ticking down, as workers on the sidelines come back to seek employment faster than new hires are made. A little of that is going on, but largely we have not seen job growth other than temporary or part-time work. This remains the Recoveryless Recovery. 

We also should be cautious on stocks. We have a conundrum: possibly the early discounts pulled forward sales that normally would have happened in December; or perhaps the American shopper has now become so discount driven, we will see a pause in shopping until the retailers entice with even better discounts, giving a late surge to the holiday sales pattern. How to translate these choices into a prediction for the stock market?

Silicon Roundabout: London Joins the Social Mobile Web Party

The social mobile web phenomenon with all those colluding superangels and bubbilicious valuations has been so far centered in two places: Silicon Valley (SF) and Silicon Alley (NYC). The Economist now reports that a third center has emerged: Silicon Roundabout in the east end of London:

In 2008 followers of the technology industry began to talk excitedly about a cluster of internet start-ups in the Shoreditch area, near the ugly Old Street junction, to the north-east of the financial district. There are now around a hundred high-tech businesses in what has inevitably been dubbed Silicon Roundabout.

Measured by the concentration of technology firms and the availability of generous and informed investors, California’s Silicon Valley is still in a league of its own. But in the second division of hubs, this chunk of east London is near the top, along with the likes of Boston and Tel Aviv. That its growth took place so quickly, and during a recession, is remarkable enough: the high-tech zone in Cambridge has taken decades to evolve. But the fact that Silicon Roundabout also emerged without government support, or even direct links with universities, should pique the interest of countries that have tried to cultivate technology hubs without the same success.

Observers of Silicon Valley have reported a cluster of forces led to its emergence: universities, venture capital, favorable employment laws, and a density of engineering talent. The Silicon Roundabout story has none of those attributes. How did it emerge so fast?

The Silicon Valley story fit an era of investing in core technology, which spun out of universities, and required heavy venture capital to get launched. The founders of social mobile web companies are working at the top of the technical stack, in the apps layer, where the tools allow rapid product development. They can be funded by angels and super-angels, and get far enough along in market traction to attract funding from VCs that need not be close by. 

Simply put, this is no longer about technology, but about imagination. 

What is driving Silicon Roundabout is the same phenom that started first South of Market Street in SF and second north of the Village in NYC: birds of a feather flocking together. The 20something Millennials who are driving the social mobile web like to live in cities, and their energy and co-opetition is feeding on itself to lead to long hours and cool products.

So where next? My bet is Silicon Outback: Sydney. It has the same attributes of a place attractive to Millennials, and shares a cultural affinity to social mobile web products. Get on it, down under, will ya?