Saturday, December 16, 2006

Construction Workers and the 2007 Economy

I am not as worried about the 2007 economy as some, despite my reputation for gloom and doom. I acknowledge the downside risks, of course. In one particular, construction worker employment, I think the risk is typically overstated.

No doubt that the construction of new housing has slowed down and is not likely to perk up significantly in 2007. But did you or any of your friends try to get a contractor to do major repairs, additions or alterations in 2005 and 2006? Everyone was busy; pricing verged on extortion; projects started months behind schedule and sometimes ended years behind schedule.

So while there is not pent-up demand for new homes, I think there is plenty of pent-up demand for construction workers. Overtime will be cut back (if it has not already been) so many workers will have smaller paychecks. In California many overworked Mexicans may simply take a nice vacation back to their hometown, where many are building a house of their own. There will be increased competition in the repair, alter, and addition market, which will be great for frustrated home owners.

Real estate workers (dirt pimps, my friend John calls them) are seeing smaller paychecks, but that is just part of the game. Many new real estate agents who came on board in 2004 and 2005 would never have survived under normal positions. It's disappointing to have a real estate license and be lining up for a job at WalMart or Target, I'm sure, but good times will come again and at least you'll already have the license. Smaller paychecks should remind people of the importance of saving during good times, a lesson much of America seems to have forgotten.

I believe it is a bit early to be buying stock in home construction companies, given the uncertainty going forward, but if you do buy now at least you'll be buying the stock for way less than what people were paying for it back in 2004 and 2005.

Live and learn. A down cycle is just a good time to mentally flip the chart and see it as a rising inverse. Laid off by a big construction company? Hopefully you saved some money during the boom. Get your contractor license, print up some business cards, and knock on some doors. Do good work, put your customers before yourself, and soon people will be knocking at your door. Adapt and thrive.

I'll be on vacation a few days, then back to share more with you in 2007.

Wednesday, December 13, 2006

AMD Leaps Over Intel

I wrote recently about Intel's attempt to leapfrog AMD by selling a quad-core microprocessor well before one became available from AMD. I explained that the Intel processor did not really have four cores on one chip. Rather it has two dual-core chips mounted into one pin package. Despite some other shortcomings the Intel chip packs a lot of computer power into one package.

Now it appears AMD has leapfrogged Intel, and only a few weeks later. According to Tom Yager, Infoworld's chief technologist at its test center, he has been given a pre-release AMD Quad FX (aka four by four). To get four cores on a board it has two sockets each accepting a dual core chip.
What is the difference? It is all about architecture and the future road map.

As usual the Intel processors need a separate chip for memory management. For years AMD has had its memory management on its processor chips, a considerable advantage. Why did Intel not just fit a memory manager onto its chips? Because of other inefficiencies in the Intel design they don't have the real estate available on the chip.

The AMD four by four chips have two complete CPUs on the chip, with independent level 2 cache, independent memory controllers, and independent buses. This makes the chips much more scalable than Intel's and better able to handle multiple programs running simultaneously.

Also, the current socket AMD is using allows for upgrades to true, single-chip quad-core processors that are due out in mid 2007. So in a few months if you have the bucks and need the high-end experience (say you are a 3-D graphic designer, or just like to watch video while you run your stock market or engineering applications) you can be running eight highly efficient cores all at once. This will work particularly well with Windows Vista.

Certainly with its tremendous marketing muscle and army of talented engineers, Intel will be unleashing its own dream processors as time goes by. But for performance, for bang to the buck, and for power savings, AMD is now the safe bet.

Tuesday, December 12, 2006

Microsoft Vista Secret Sauce

I believe Microsoft Vista may be adopted much quicker than pundits are expecting. My guess is that by mid-2008 it will be in nearly universal use. Only businesses and consumers who are willing to be relegated to legacy systems will continue to use earlier versions of Windows. Computers not capable of running Vista will be obsolete, which will be good news for chipmakers Intel and AMD.

Why am I saying this? It isn't just that I've seen these hardware and software transitions before. Every time a big part of the IT crowd announced it will resist change, and every time the tide of necessity pushes them forward faster than they would like.

The reason is Microsoft Windows Presentation Foundation. The key players here are application programmers, a vast number of people who are out there doing the IT grunt work that enables the world to run efficiently. Often, in small businesses and in enterprises, automation requires more than just setting up spreadsheets, Word documents, and Access or SQL Server applications. The automation is created with programming languages such as C, Visual C++, and Visual Basic. Microsoft has always provided sets of code, called class libraries, that simplify various common tasks. Notably the last few years application programmers have learned to use the .NET class library to speed up development of networked applications.

What is so great about Windows Presentation Foundation? It combines markup - the tool used for Web pages, Web services, and XML databases - with traditional programming.

Creation of integrated Web systems will be an order of magnitude easier. The visual appearance of application programs will become easier to manage and to integrate with information from Web servers.

Windows Presentation Foundation works in Microsoft Visual Studio (and probably alternative vendors' IDEs) and runs in Vista. Programmers are going to love this. That means programs are going to be written in it. Those programs won't run on legacy systems. So the application programmers (at least the ones who still like the creative aspect of their jobs) within IT departments will be pushing for early adoption of Vista

So upgrades to Vista will come, often in the form of new hardware, rather than just trying to cram Vista onto older machines. Yet this is not an example of planned obsolescence. The lower cost of programming (including creation of Web site content) will more than compensate for the hardware and licensing costs.

For programmers running several tools at once, like Visual Studio and Macromedia (now Adobe) Web design products, on a Vista machine running dual or quad or 8 processor cores, is a real pleasure. For both business and home consumers Vista itself will provide plenty of benefit even if no application programs are added to the mix. But for business efficiency, programmers still rule, and business clients will be very pleased with the overall increase in product quality.

Friday, December 8, 2006

Humans, Chess Computers and Black Box Traders

On December 5, 2006 it was announced that a computer, Deep Fritz, beat the world champion human chess player Vladimir Kramnik, in a six game tournament. Four of the games were draws and two were won by Deep Fritz.

It is also believed that over half (estimates vary) of the trading volume in stock markets is now made using machines, often called black boxes. And let me be clear: these are machines that are programmed to evaluate stocks and make trades without human intervention.

Given that, would individuals be best off turning over their investments to mutual fund managers or hedge funds that can make use of these AI (artificial intelligence) computers?

Well, some individuals clearly were not up the the task of competing in the markets even before machine trading started. For the rest of us, so far at least, I think that if you take a look at the nature of machine trading, you can avoid being hurt by it and might even take advantage of it, at times.

What are the machines doing? Their strategies mainly fall into four categories: momentum plays, arbitrage, covariance, and news analysis. All of these strategies were developed by humans, but computers can be better at them.

Momentum plays are the simplest strategy: if a stock is going up, bet that it will continue to go up. If it is going down, bet that it will continue to go down. Be ready to bail out of a position the moment momentum changes. This simple reality used to be the main advantage of having a "seat" in a trading pit. What are the advantages for a computer here? At best humans work in tenths of seconds. Computers can work in millionths of a second; in a second a computer to look at the entire range of stocks to see which ones make the best momentum plays any given moment.

The result of course, is amplification. Some people say stocks are always in equilibrium, the latest price representing a balance between the buyers and the sellers. But it is just as true to say that stock prices are always out of equilibrium. If a stock is going up it attracts momentum players, human and computer alike. It goes up until it is so out of touch with fundamentals that other computer programs and humans start selling it in quantities sufficient to flatten the curve and then send it heading down. The same process in reverse runs on the downside.

Are you thinking about buying a particular stock today? You know if it is falling you are inclined to wait and see if you can get it cheaper. If it is going up, you buy quickly because time is money.

You don't have to worry about the machines too much if you are an intermediate to long-term investor. Ultimately stock prices depend on fundamentals. While some machines are throwing prices out of equilibrium, others are executing trades that tend to bring prices back to fundamentally sound levels.

So do your research, delve into the future, and try to buy at a good price.

I'll be looking at the other three strategies (arbitrage, covariance, and news analysis) in future blogs.

Thursday, December 7, 2006

Purpose of Dissecting the Bull blog

Setting up this new blog, in particular choosing a name for it, made me think quite a bit about what should be in the content. At my site I am mainly posting summaries of analyst conferences. Listed companies typically have conference, open to the public, where they report quarterly results, give guidance on the future, and answer analysts' questions. I began doing summaries to help me in my research activities and decided to start posting them to the web to share with others.

This blog will be more about my opinions about investing in particular stocks, plus financial and economic matters in general. I know a lot about technology and a lot about investing. But in addition to sharing my knowledge I hope to be getting into some good discussions with fellow analysts and investors.