Allan Young’s Incoherence

Macro

• More pain in the housing market anticipated as some homeowners find themselves “underwater” or owing more on their homes than what their homes are worth on the market. According to Mark Zandi at Economy.com (MCO), 10% of all homeowners currently face this negative equity situation. Zandi also sees home prices falling 20% as the economy worsens into a recession. Zandi could be underestimating the damage; homeowners abandon their homes and mortgages at a high rate when they enter negative territory on their equity. Foreclosures and abandoned mortgages exacerbate the problem by increasing unsold inventory and unwanted supply.

• More goodies from Economy.com - their data shows that core capital goods orders have been steadily declining since early 2007. One of the few bright spots in economy has been the computer servers market dominated by the big manufacturers such as Dell (DELL), Hewlett-Packard (HPQ), and IBM (IBM). In our increasingly virtual/digital economy, computer servers are as tangible a core capital good as we’re going to find. Server sales increased 3.8% from 2006 to 2007 according to Gartner, a market research firm. This data confirms what I’ve been noticing in my industry. All my peers in Internet or web technology startups are increasing their investments in technology infrastructure and talent. If there is a recession afoot, it has not reached the Web 2.0 space. We’ll see how long this lasts; venture capital, the lifeblood of many of these startups, ebbs and flows to the rhythm of the public markets and their reception to IPOs. If Facebook can pull off an IPO, which it will most likely have to do because there are few companies with the firepower to acquire it at current valuations, then the party might still continue.

• Economic Karma - It All Balances Out Eventually: India’s growth as a center of information technology accelerated as the forces of globalization caused U.S. and European companies to outsource much of their technology needs to the land of spices where the labor was relatively inexpensive and talent was comparatively competent. Now there are rumblings that India is beginning to lose some of that competitive advantage as labor costs rise and the best talent has already been snapped up with very little real scientific expertise left to bid for. I suspect that much of the offshoring budgets of the Fortune 2000 will now start allocating resources to other parts of Asia and Eastern Europe. My company, SocialOptimize is outsourcing some of our mundane coding tasks to Guatemala and the Philippines. Also, the dollar’s continued weakening might make most overseas outsourcing alternatives less attractive when compared to domestic software engineers.

Micro

• In times of recession, when unemployment is high, the unemployed go back to school to add marketable skills and increase future earnings power. The leading companies in for-profit education include Strayer Education (STRA), DeVry (DV), ITT Educational Services (ESI), Career Education Corporation (CECO), Capella Education (CPLA), Corinthian Colleges (COCO), and industry giant Apollo Group (APOL). Apollo operates the ubiquitous University of Phoenix campuses. This investment thesis has worked in past recessionary times, but the unique risk this time around is the possibility that the credit crisis will hamper students’ ability to repay or obtain school loans.

• Continuing with what may appear to be a Chicken Little theme of extreme pessimism, consumers tend to put off the purchase of brand name luxury apparel in favor of generic brands and off-quality goods sold in discount retailers such as TJX Companies (TJX) and Ross Stores (ROST). Collective Brands (PSS), the owner of generic shoes retailer Payless ShoeSource should hold up pretty well as more consumers look for alternatives to Nike (NKE). This isn’t Chicken Little, this is survival of the fittest portfolio.

• Obscure Small Company: Water is the next oil. Watts Water Technologies (WTS) makes industrial products that address the water safety, quality, flow control, and conservation needs of the market. It sells product in North America, Europe, and China. Many so-called experts have predicted that food prices will rise because of the increasing demand for nutrition from a growing world population. Few have pointed out that a lack of clean water will make food prices skyrocket even more by rendering agriculture less effective, resulting in a shrinking supply of crops.

Technology

• Adobe’s (ADBE) Flex 3.0 and AIR to launch today at Engage 2008. Adobe’s suite of software has become increasingly important for web developers. Much of my previous startup’s strategy included using Flex intelligently. My current business, which is more consulting and agency-based continues to rely on Adobe software. Simeon Simeonov, a VC at Polaris Ventures, has a very good post about how AIR can be a game-changer as a live bridge between the Web and users’ desktops. It’ll be interesting to see how creative some developers can get leveraging AIR with their social networking web apps

• The success of Guitar Hero by Activision (ATVI) and Dance Dance Revolution by Konami (KNM) validates new video game interaction models based not on hand-held controllers but on input models based on other parts of players’ bodies. Now San Francisco-based Emotiv Systems has announced the launch of new device that detects electric signals from the users’ brains and interprets those signals to control in-game action. This new interaction model should be very interesting in virtual world environments like Second Life. Of course, the early adopter of this technology could very well be the porn industry; it is usually one of the first movers in experimenting with new technology to distribute content and products.

• LinkedIn, the social network for professionals, launched a mobile version of its website. At its current state, it is “underwhelming” but the company ought to be able to figure out new user interaction models for encouraging connections. Technically, there won’t be a dichotomy between online and offline since mobile means we can be persistently online. On the “regular” version of the website, it has always been just slightly annoying to receive requests to connect from total strangers who share no relevant interests and whose only desire is to expand their “networks.” That behavior is a slightly more grown up version of Myspace (NWS-A) users’ notorious friend collecting. The firm should ensure strong filters to prevent this annoyance on the mobile platform - mobile spam is far more intolerable than desktop email spam.

Categories: Investing, Linkfest, Randomness, Technology
Tags: Activision, ADBE, Adobe, Adobe AIR, Adobe Flex, APOL, Apollo Group, Asia, ATVI, Capella Education, Career Education Corporation, CECO, Chicken Little, China, COCO, Collective Brands, computer servers, core capital goods, Corinthian Colleges, CPLA, Dance Dance Revolution, Dell, Dell Incorporated, DeVry, DV, Eastern Erupe, Economy.com, Emotiv Systems, ESI, Europe, Facebook, foreclosures, Gartner, globalization, Guatemala, Guitar Hero, Hewlett-Packard, housing, HPQ, IBM, India, information technology, Investing, IPOs, ITT Educational Services, KNM, Konami, LinkedIn, Linkfest, Mark Zandi, MCO, Moody's Corporation, Myspace, News Corporation, Nike, NKE, North America, NWS-A, offshoring, online and offline dichotomy, outsourcing, Philippines, Polaris Ventures, pornography, PSS, Randomness, recession, Ross Stores, ROST, San Francisco, Second Life, Silicon Valley, Simeon Simeonov, SocialOptimize, spam, STRA, Strayer Education, talent, Technology, TJX, TJX Companies, user interaction models, Venture Capital, Watts Water Technologies, Web 2.0, WTS