Friday, June 25, 2010

June 25, 2010 Don’t Get Pinched In The Clouds


June 25, 2010 Don’t Get Pinched In The Clouds

Today was the epitome of a fairly low volume range bound market. It finished flat and mixed. Financials carried most of the day because all of our hard working legislators stayed up for 20 hours to put to bed legislation for financial regulations. Though the final details were not completely understood the fact that we had a bill gave some stability to the sector. GDP, which somehow I did not take a guess at, came in a bit soft while consumer sentiment was raised up.

Lot’s to pontificate about tonight. There was a great article in the Journal today that has its basis in the history of the Razor. Razors of some type have been around since the Bronze Age. In the late 1800s straight razors became the tool of trade for barbers. Just prior to 1875 a Frenchie named Perret looked at the design of a joiners plane and designed the first safety razor design. The Kampfe Bros brought the device to market and it was expensive but effective. It was only bought by barbers and the wealthy. Then a guy named King Camp Gillette took the design and made disposable razors. It allowed what would become the Gillette Corp make the Razors cheap and basically give them away in order to capture the replaceable blade business. And the rest is history.

Now have you noticed all of the ads for the price wars on the eReaders from Sony, Barne’s and Noble, and even my favorite the Kindle!  Here is the scoop. They are giving the razor away. Well 150-190 dollars is not giving the things away but I can assure there is very little profit at that price. They are doing because they want the replaceable blade business, the digital downloads.

Lee Gomes does a great job of walking us through the economics of eReaders. He also shares a similar phenom when Kodak flooded the market with Brownie Cameras at cost in order to get the film business. Gomes then goes on to throw the iPad into the mix but wisely points out the profit on the iPad is enormous (It sells for 500 and cost is estimated at 259). What can I say, buy AAPL.

Get Off My Cloud- Rolling Stones

The buzz word of IT buzz words is Cloud Computing. I have been meaning to do more homework on the topic and was pleasantly surprised to find out Forbes had done it for me. To get a good grasp of what cloud computing is all about as well as detailed company profiles CLICK HERE.

As a favor to those of you who are getting to old to click on links here is my homegrown summary of the players and my basal understanding of how they play in the Virtualization Cloud Computer Sandbox. This is a stretch for me as I know of at least 8 technophiles (several whom I work with) read this blog so if I screw up I will know about it. Anyway let’s hope I get them relatively correct.

CRM, one of the largest and leading cloud platform companies. They were one of the first to utter the words death to software. Their original business model of supporting road warriors with their Customer Relations Software, by chance I think, worked well to support the concept of cloud computing.

Amazon AMZ, has a division called AWS that allows thousand of companies the ability to host eshopping carts. AMZ is leveraging that technology to offer a broader range of cloud products and services.

Google GOOG, offers Google Apps, Google Documents, over a global network of redundant servers which is in essence Cloud Computing.

IBM has offered the concept of Cloud Computing to many of its global customers by designing hardware and software solutions behind the firewall. They are trusted advisors to hundreds of large and midsize companies as these companies take on the challenges of vituralizion and cloud computing.

Microsoft, MS ironically is playing catch up on every front of virtualization and cloud computing. I say ironically because if you go back a look at the early Gates books like Business at the Speed of Thought (1999) and The Road Ahead(1995), he in great detail explains the concepts of Cloud Computing and virtualization and mobile apps. What happened Bill? Don’t count them out as the predominate usage of Windows Products and MS office apps positions them well for Cloud Computing migration and support. Keep an eye out for MS Azure as a big hit sleeper product for MS.

If you are not fortunate enough to sit through an IT SWOT meetings, you might not know VMware, but they are branded incarnation of the buzz word Virtualization. Their products allow multiple applications to run on the same server and they are considered by many the datacenter technology rule maker.

Rackspace is an interesting play in the clouds as they support the scalability of datacenter demands. If you are a small company your server needs are minimal, you can use their services to support your needs. If you have astronomical growth, their ability to growth with you makes it cost effective to continue using them versus investing in your own data centers.

Terremark is also a scalable solution to cloud computing but are very closely aligned with VMware. Not a bad thing.

Rightscale is a cloud computing management software company that offers programs and services designed to insure your data center solutions are scalable and portable. (Portable in this definition is from a user centric POV not meaning the data centers are portable.)

CA, the old Computer Associates has bought their way into the clouds as their recent acquisitions allows them to address many facets of cloud computing.

And there you have 10 prominent cloud blazers. Please read the Forbes link as it is a great collection of stories about cloud computing and many other firms are mentioned.

Pinch Me. Did I really stop out or was it a dream!

Have you ever got pinched in a range bound market. I have been discovering something that I think will help traders or investors who are heading the advice (From me and others), about setting stop order and stop limit orders.

In this crazy market, we have been advocating you take a look at how you establish a position on a stock. For example you have lunch at McDonalds, love the food, do some homework on the stock and like what you see. You have $2,500 dollars to allocate to that sector in your portfolio. We do not suggest you plunk down $2,500 on McDonalds. In a range bound market like we are in now, it is wiser to step into the position over a period of days or even weeks. Buy in the dips as there will be dips. (There was huge dip this morning in Boeing which was a great opportunity and we missed it.) Anyway if you follow that wisdom, you buy ten shares and wait for a dip and then another ten shares or even smaller increments. If you immediately set stops after the buys, you will have set a stop and then buy into a lower price. Remember to change your stop to reflect the lower average price. I have noticed that I have bought into a few equities and discovered that I am a point or two away from a stop. We must keep that in mind when we step into a stock.

If you are better with numbers here is an example. MCD is selling for 68 a share. You want to put $2,500 dollars to work at MCD which means you can buy 36 shares. So today you buy 12 shares at 68. Like a good boy or girl you set a stop or stop limit at 62.50 to protect your back side. (I use 8% down as a stop drop.) The next week a MCD customer spills hot coffee in their lap and you see MCD go down to 65, like a hungry brown trout coming up for a juicy grasshopper, gulp, you pick up 12 more MCD at 65. You go in and adjust your stop for 24 shares versus 12 shares, BUT did you change your stop order price down to reflect the average cost of the shares which is now 66.50. Using the same down side your stop should be moved from 62.50 to about 61.25 (I use 25 cent increments when setting my stops). That way if the person who spilled hot coffee in their lap was the daughter of a US Senator and there is now a bill proposed to only sell cold coffee (It could happen) and MCD goes down to 62.50, you don't inadvertently get sopped out of the stock for no good reason. If MCD goes down to 63, Gulp, you pick up your last block of 12 shares, your average cost is 65.33 and your new stop limit price is 60.00. You have now established your position, you can watch the stock hopefully recover, but if not, you still have the protection at 60 which is about 8% below your average cost.

Have a great weekend and remember behind all the range bound chaos in the market, there is a value statement in each and every equity. Do the homework and forget the headlines.

Salve Lucrum


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