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The Daily Reckoning | Thursday, April 14, 2011 
Confident and Complacent Investor Sentiment Indicates a Possible Market Correction
Reporting from Laguna Beach, California...
Eric Fry
A friend forwarded me an email yesterday from K2 Advisors. I don't know anything about K2 Advisors, except that it is based in Stamford, Connecticut and its emails are packed full of interesting insights.
For example, K2 notes that:
In other words, investors are extremely confident and complacent. From a contrarian standpoint, extremes of complacency tend to precede significant market corrections.
Curiously, as K2 Advisors points out, bullish investor sentiment is hitting high levels at the very same moment that inflation is heating up noticeably and the US dollar is hitting new low levels.
"The US dollar is hitting 52-week lows," K2 observes, "as commodities are hitting new highs and TIPs-based inflation expectations are bumping up against 10-year highs."
What does it all mean? Maybe nothing much...at least for now. But the seeds of stock market distress are germinating.
Stocks love a weak dollar, as long as it doesn't get too weak. Then stocks hate a weak dollar, because a very weak dollar is a sign that inflation is winning...and the rest of us are losing.
During the inflationary 1970s, the stock market was a disaster. After adjusting for the ravages of that decade's runaway inflation, stocks produced a total return of about minus 20%.
Will past be prologue?
Without access to the "Teacher's Edition," we have no idea. But we have some idea that inflation is bad. And we have an accompanying idea that inflation is gathering steam. Therefore, we have a deductive idea that hard assets investments will fare better than stocks over the years ahead.
That's our deductive idea, remember, not an etched-in-stone prediction. If it's predictions you seek, we predict that hard assets will fare much, much better than bonds over the years ahead. In fact, we would go so far as to say that within five years, the current holders of long- dated Treasury bonds will wish they were holding barbed wire instead.
By contrast, the stock market probably won't be an entirely awful place to hang out. Stocks hate inflation; it's true. But some stocks benefit from inflation and others are impervious to it.
The biotech and high tech sectors come to mind. These sectors tend to operate fairly independently of big picture macroeconomic trends. Instead, they respond to company-specific successes or failures - in particular, the company-specific successes or failures of embracing "transformational technologies."
Many of these transformational technologies are what Patrick Cox, editor of the Breakthrough Technology Alert, calls "disruptive technologies." They disrupt the status quo. They change important aspects of societal behavior. In the process, such technologies can doom previously dominant companies, while also elevating micro-cap stocks to mega-cap success stories.
Patrick is a master at identifying the transformational technologies that produce major winners and losers. In yesterday's edition of The Daily Reckoning, for example, Patrick explained how the technology behind text messaging is disrupting numerous aspects of communication technology - creating some surprising winners and losers in the process.
Disruptive technologies do not merely transform aspects of human behavior: they sometimes transform entire investment portfolios. Read on...Patrick Cox's Breakthrough Technology Alert Presents...
Wealth Revelations: Historic Profit Potential from Just-Released Research
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There isn't much time for you to act...The Daily Reckoning Presents Open Source Finally Wins
In yesterday's edition of The Daily Reckoning, I asserted, "There is going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android operating system has basically won the technological battle of the bands. It will become the standard. Microsoft has been beaten in the mobile space and its proprietary operating system is fading fast. Nokia has made a series of blunders as well and is now losing the mobile operating system space it once seemed destined to own forever."
Patrick Cox
Today, I'll tell part of what this development might mean for investors.
I lived and worked in Silicon Valley, mostly doing public policy research, but occasionally consulting for software companies. I was able to rub shoulders, at least, with most of the historic names. Bill Gates wasn't one of them, however. As you probably know, he relocated to Redmond, Wash. He may have done so in part because he was so universally loathed in the Valley.
I have no window into the business culture that created the management philosophy of Microsoft. Regardless, it was Microsoft's unrelentingly hardball business practices and skillful utilization of FUD - fear uncertainty and doubt - that energized the open source software movement. That movement is now at last on the verge of making the company largely irrelevant.
Developers who felt they had been treated unfairly or unethically by Microsoft often devoted enormous time, money and effort to create an alternate OS outside the control of Redmond. Sun Microsystems, a subsidiary of Oracle, gave more than a billion dollars to Linux developers. Linux, as you probably know, is an open source OS based on Unix, the OS developed first by AT&T employees at Bell Labs.
Current Linux operating systems are, in my opinion, superior to Windows. Nevertheless, I use the latest MS system because so many of the programs I need run only on Windows. I don't, however, use MS Office, preferring Sun's free OpenOffice. My wife, however, specialized in Oracle on Linux when she was helping look for Z bosons at the Stanford Linear Accelerator. To this day, she simply won't use Windows, even if it makes some tasks more difficult.
She is, however, part of a minority. For the most part, Linux advocates failed to dent Microsoft's' OS dominance. This is not to say that the existence of a free alternative to Microsoft's operating systems didn't have a beneficial effect. I think the existence of a high-quality option to Windows has helped keep, to a certain degree, MS from completely controlling non-Apple software development. Apple, of course, completely dominates its software chain, which is why it accounts for so little of the market. Apple is a profitable company and makes great gadgets, but it's unlikely they'll ever have a bigger piece of the market than they now have.
There's more to Linux, however, than Red Hat and GNOME. Linux programmers did succeed in denying Microsoft control of the server market. For non-techies, servers are just computers that do things other than interface as personal computers. They "serve" other uses, frequently "serving" processes and data on demand. Linux-based server software, especially Apache, have long dominated the server market. Apache, by the way, started out as a very "patchy" program. Linux-based software has also prevailed in the realm of supercomputers and research clusters used by many of the biotech companies in our portfolio.
While some economists say that Microsoft has been good for computing and America, I think that its negative impact on third-party developers may be greater. If you want to sell a product that runs on the Microsoft OS but are not a chosen partner of the company, you're going to be at a severe disadvantage. Those disadvantages don't exist in the server world, because Linux standards are open, giving no one special privileges. This allows more and faster innovation, which is what I care about most.
The most important Linux product of all time, however, is just beginning to have its impact. That is the mobile operating system Android. Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance. This was part of Google's strategy to move computing into the cloud and beyond Microsoft's control. I think they've succeeded in that but, ironically, they seem to have overlooked a critical consequence of that move.
In Q4 2010, the Android OS was the world's best-selling smartphone platform, ending the 10-year rein of Nokia's Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they're set to win the mobile war. This opens the doors for third-party developers like they've never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.
The next generation of Android pad computers is simply going to rock.
Moreover, the OS is a major cost component of smartphones. Since the industry is settling on the open source Android standard, which costs basically nothing, this will shave as much as $150 off the price of a device. The equivalent of smartphones that now sell for $200 will cost $50, or they will be given away free in place of the old feature phones.
Naturally, many third-party developers are going to exploit the killer app, SMS text. SMS will be the cheapest and fastest way to access increasingly complex cloud-based applications. These cloud-based applications will be accessed via the mobile device but the processing will be performed in the distributed network, the cloud. Even now MMS, Multimedia Messaging Service, abilities are being added to SMS. These include pictures, audio and video files, all the stuff that you now access via the Web. In short, SMS will be nearly indistinguishable from the Web, but cheaper and probably faster.
So here's my extra-credit question. Who's going to control the SMS/MMS search engine on your next smartphone or tablet computer?
I think I know, and I've shared my thoughts with the subscribers of Breakthrough Technology Alert. Whether I'm right or wrong, the answer to that question is worth a great deal of money...perhaps a small fortune.
Regards,
Patrick Cox,
for The Daily Reckoning
P.S. For obvious reasons, I can't give away the name of super small cap stocks to such a large audience as this. However, readers who are serious about investing in disruptive technologies will find all my research, including my interviews with CEOs, reams of background research and, of course, specific ticker symbols and our comprehensive investment strategy, in my Breakthrough Technology Alert service. And now over to Bill Bonner with the rest of today's reckoning from...wait...where's Bill? Oh, that's right! He's wandering around the northern reaches of Argentina, visiting Doug Casey's property, then his own. Bill will be up in the wilderness for a while...but we'll let you know as soon as he returns, armed with stories and tales, no doubt.
Regards,
Joel Bowman,
Managing Editor for The Daily Reckoning
Thursday, 14 April 2011
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