Macro

• Once again, Mark Zandi and his team at Moody’s Economy.com (MCO) comes through with something interesting. Click through on the image below and interact with the map to find out if your state and county is in risk of recession. My home state of California is definitely at risk, dragged down by rapidly falling housing prices. I currently spend most of my time in Utah, one of the few places that has seen strong economic expansion and even strong real estate price appreciation. Forbes recently named Salt Lake City first in its “Best Cities for Jobs in 2008″ rankings.

• BRICs (Brazil, Russia, India, China markets and stocks) call temptingly to investors frustrated by the recent turmoil in domestic equities markets. They have dominated the issuance of global depositary receipts, accounting for 50% of the record $55 billion raised in 2007. Executives at the Bank of New York Mellon (BK), a large operator in the ADR space, say the trend is expected to continue as BRICs companies are anxious to tap into capital from developed economies as well as listing shares in their own countries’ exchanges. Caveat emptor, while these depositary receipts must pass some regulatory and compliance hurdles, their accounting and reporting standards do not match the rigor of domestic stocks.

• Life, Liberty, and the Pursuit of Happiness: Questions exploring the link between income and happiness are not new. Recent studies show that per-capita GDP is an imperfect measure of welfare. No really? Any attempt at measuring “happiness” will, by definition, be subject to inaccurate opinion and “self-perception” – we humans are an idiosyncratic lot. Furthermore, when income inequality expands (a necessary symptom of meritocracies), large portions of a country’s population loses satisfaction. We live in interesting times (read turbulent) and envy is either a sin or a highly irrational emotion.

Micro

• Building BRICs on education: The national Chinese universities are notoriously competitive and accept only a tiny fraction of China’s brightest students. In the past, the next brightest were relegated to factory jobs and other less “prestigious” careers. As China’s wealth grows, the citizenry will demand more social mobility. Enter private, for-profit educational institutions like New Oriental Education & Technology Group (EDU). I suspect we’ll see more such issues coming to our public equities markets from the BRIC economies. Full Disclosure: I currently have a long or short position in EDU in one or more of my private investment partnerships.

• The Tiger bets on the Dragon in the Year of the Pig: Julian Robertson has served as a great role model for me especially for his legacy of mentoring numerous “Tiger Cubs” at his now defunct Tiger Management who have gone on to run highly successful hedge funds of their own. His influence cannot be measured only on the returns he generated. Now Charles Coleman’s Tiger Global reported a knockout 2007 in which the Tiger Cub generated a 71% return. Big technology names such as Google (GOOG) and Research in Motion (RIMM) fueled the outstanding performance. A large portion of the portfolio benefited from the strong performance of Chinese stocks. Big winners included Baidu.com (BIDU), Longtop Financial Technologies (LFT), Focus Media Holding (FMCN), the aforementioned New Oriental Education & Technology Group (EDU), and Gushan Environmental Energy (GU). Julian Robertson established a reputation for rigorous fundamental analysis coupled with insightful contrarian strategies. That begs the question; when does China become too expensive? Full Disclosure: I currently have long or short positions in RIMM and EDU in one or more of my private investment partnerships.

• Conservative lending principles will hold banks steady through the credit crisis. Even when the yield curve is more positively sloped, giving in to the temptation to relax credit standards will come back to bite undisciplined management. A few banks off the top of my head that have reaped the benefits of prudent lending include Wells Fargo & Company (WFC), US Bancorp (USB), and even Oriental Financial Group (OFG). Oriental belongs to the group of banks that serve Puerto Rico, a small group that has underperformed for so long that Wall Street expectations cannot go much lower.

Technology

• Charlene Li, an analyst with Forrester Research (FORR), writes a good piece on the future of social networks. She impresses me with her forward thinking and ability to simplify some deep concepts. The future of social networking will feature universal identities, a unified social graph, deeper social context for “activities” and a new business model where social influence defines marketing value. These predictions are very relevant to my work at SocialOptimize and I especially like marketing value defined by social influence. Fortune 2000 companies would do well to heed Charlene’s prognostications. Why is Charlene working for a big stodgy publicly traded company? She ought to jump ship and join SocialOptimize.

• Apple (AAPL) takes a serious run at Research in Motion (RIMM) and its Blackberry devices. The iPhone debuted to much fanfare, but Wall Street has been relatively unimpressed with the product and results. Apple recently announced the release of the iPhone SDK, essentially opening up the iPhone as a platform for outside developers to create software for the iPhone. Predictably, this has gotten the tech industry very excited, but Wall Street continued to respond with ambivalence. The day of the announcement, Apple’s stock actually dropped. Kleiner Perkins Caufield & Byers also announced a $100 million venture fund devoted to backing iPhone focused startups. Full Disclosure: I currently have a long or short position in RIMM in one or more of my private investment partnerships.

• Space is still the final frontier. If global warming continues, we’ll need to find alternative places to inhabit. The Europeans launched a humongous “cargo ship” into space to resupply a space station. Live long and prosper!

I referenced last week Mark Zandi of Economomy.com (MCO)regarding the increased likelihood of homeowners walking out of their mortgages and homes as the amount they owe becomes greater than the value of their properties. Bloomberg just reported that foreclosures are on the rise as owners “give up” on “underwater” homes.

U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.

“We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,” said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.

A couple days ago, Ben Bernanke essentially said that banks should “take the hit” and help distressed borrowers by writing down principle. Two days later, the Federal Reserve just released the Balance Sheet of Households report showing that homeowners’ equity as a percentage of household real estate has shrunk to a record low. As the panic grows, housing prices will continue to plunge and we will see more owners with negative equity situations.

We likely have not seen the end of the bad news. It will be interesting to see what creative methods borrowers will employ to escape their financial predicaments. What kind of shenanigans will we see?

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 a 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.