The Tycoon Report

The Wisdom of Crowds

Monday, July 16, 2007 | Wayne Mulligan

It seems that last week’s article provoked a bit of a firestorm on the website – Click here to check it out.

Some comments praised my writing, others tore it apart – I have to say, I LOVED reading all of them!  At the end of the day, not everyone will agree with me, but I’m ecstatic that they took the time to say so.  That’s what the new Tycoon Community is all about – fostering two-way communication.

So in keeping with the spirit of "two-way communication," what I’d like to do today is respond to some of those comments and make a few general statements so you can see where I was coming from when I wrote that article. 

Just to be clear, I wasn’t making negative statements exclusively about the companies I listed.  I was really criticizing 99% of the companies in this industry – Tycoon Publishing included!

That’s right ... I don’t think we’re doing everything 100% right ... yet.  I think we’re on the right track, but the only way we’ll get there is if we take a candid look at ourselves and our competitors, and that’s all I was doing last week.

So now I want to go over some of the general comments I saw on the site.


There Are Some “Good Guys” Out There

I probably could’ve written a more balanced piece – there are, in fact, some impressive companies in this industry, and I’ll do my best to address the ones that some of the Tycoon Members brought up in their comments.

One of them that I personally admire a lot is The Motley Fool.  I feel that their web site, Fool.com, is one of the best in this space and is doing a lot to encourage two-way communication.

They have a wide range of features including discussion boards and stock research services – some of which I hear are quite valuable to their users.

We’ve definitely taken a page or two from Fool’s “play book” over the years ... but again, I feel there’s more that could be done.

I think another great finance site that Tycoon Member Daniel Taylor brought up is SeekingAlpha.com. 

These guys don’t offer a wide range of services on their site, but they pull content from hundreds of different independent financial blogs and feature them in a single place.  You can find some great unconventional news and analysis here that isn’t as tainted as the stuff you’d find coming out of some of the larger sites in this market.

A number of members brought up some software products out there like InvesTools (from Tycoon Member Stacy Mecham) or some of the products that O’Reilly puts out (from Tycoon Member Bill Perrett).

While I’ve used some of these – and do agree that they make for great research tools – they don’t “educate” enough for my taste.  If I were a novice investor, or even an investor just looking to take my game to the next level, I’d be looking for more out of a service.

But again, that’s just my opinion.


The Wisdom of Crowds

The bottom line is this:  I think more user participation and collaboration is called for in this space.

I’m a HUGE proponent of the “wisdom of crowds” – meaning, groups of people will tend to make smarter decisions when pooled together as opposed to one or two “experts” making the decision on their own.

In fact, there’s a wonderful book, The Wisdom of Crowds, by James Surowiecki that I highly recommend you read if you’re really interested in the topic.

That’s why we’re doing everything we can to increase user participation on the new site.

For instance, we launched the Tycoon Member Articles feature a couple of weeks ago, and have gotten some great submissions from Tycoon Members – but more can be done.

That’s why we’re going to be kicking off a HUGE contest soon, where we’ll give away a cash prize and subscriptions to all of our services to the member who writes the best, most educational and most entertaining article.  The best part is, we won’t be selecting the winner ... YOU will.

We’re going to let members choose and decide what should be considered “good.”  Based on the “wisdom of crowds” theory, we know we’re not smart enough to make those decisions on our own – but together with other Tycoon Report members, you can!

And that’s only step one – when we take that “wisdom of crowds” theory and apply it to other areas of investing and investor education we can do something really special here … and that’s just what we’re planning to do.

You don’t know it yet, but you and every other member of The Tycoon Report are part of something that will literally change the face of investing and financial education as we know it.

I can’t go into too much more detail yet, but stick around.  You’ll see more and more of what I’m talking about before this year is over.

And with that, I’ll wish you a very good week.  I hope to see some more comments from you on the site!




Wayne Mulligan
Contributing Editor
The Tycoon Report


Mark Your Economic Calendar: What's ahead for the week of July 16, 2007

Tuesday, July 17

8:30 - PPI (for June): Consensus 0.1%, Core PPI (for June): Consensus 0.2%

Big Picture: September 2005 PPI growth of 6.9% yoy stood at a 15-year high and has fallen off to 4.1% yoy currently.  The core stands at just 1.6% yoy from July 2005's decade high of 2.8%.  The stronger pipeline pressures of the last year are not providing much lift to finished goods, as energy prices and now food prices provide the lift and volatility.  The directional trends for goods-based producer prices have turned toward lower yoy growth and hardly contribute to the service-based pressures in consumer prices.

Implications: The Producer Price Index measures prices of goods at the wholesale level.  There are three broad subcategories within PPI: crude, intermediate, and finished.  The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user.  Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).  At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate.  Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate.  Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts.

9:15 - Industrial Production (for June): Consensus 0.3%, Capacity Utilization (for June): Consensus 81.5%

Big Picture: Industrial production is showing significant lift after the weakening in late 2006.  Strong December and March gains in manufacturing output fight off the declines to leave 6-month growth back in the black after declines in early 2007.  Factory orders are back on the rise as well.  The stall from autos, construction and business investment is returning back to positive growth.  Capacity use stands at 81.3% -- below the level historically consistent with inflationary pressures -- as manufacturing shows a growing amount of excess capacity at 79.9%.

Implications: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities.  Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report.  One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather.  Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.  In addition to production, this monthly report also provides a measure of capacity utilization.  Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure.


Wednesday, July 18

8:30 - CPI (for June): Consensus 0.1%, Core CPI (for June): Consensus 0.2%

Big Picture: The core rate of consumer inflation reached a decade high of 2.9% yoy in September and has eased off to 2.2% yoy in April -- in line with the Fed's 'comfort zone'.  The sticky prices for shelter, medicine and tuition will continue to hold firm as yoy core commodity prices have fallen from a year ago.  Energy prices provide the swing, a drop in late 2006 and now an upturn.  In the big picture, it's aggregate demand which provides the price direction as sub-potential (near 3%) growth is easing the core inflation pressures over time.  The Fed more closely watches core PCE prices as an inflation guide, which stands at 1.9% yoy.  Overall CPI reached a 14 year high of 4.7% yoy in Sept '05 given the push from energy prices, and now stand at 2.7% yoy.

Implications: The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers.  CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs, and it is the basis of COLAs for many private labor agreements as well.  It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods, which are often declining in price.  Despite these criticisms, it remains the benchmark inflation index.  CPI can be greatly influenced in any given month by a movement in volatile food and energy prices.  Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation.  Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars.

8:30 - Housing Starts (for June): Consensus 1450K, Building Permits (for June): Consensus 1490K

Big Picture: Housing starts reached a nine-year low in January 2007 after hitting a 33-year high a year earlier.  The plunge has been a significant drag on growth, as further risk surrounds the defaults coming from sub-prime borrowers.  Higher interest rates affect the marginal buyers as the downturn has turned more toward a flat line since February.  Q2 starts should be larger than Q1 but the National Association of Realtors expects the bottom in Q4.  The correction for the inflated housing market was expected (and needed) but with a more gradual decline.  Stability will have to wait for new home sales to begin to tick higher given the large supply of unsold inventory.

Implications: Housing Starts are a measure of the number of residential units on which construction is begun each month.  A start in construction is defined as the beginning of excavation of the foundation for the building, and is comprised primarily of residential housing.  Building permits are permits taken out in order to allow excavation.  An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates.  Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.


Thursday, July 19

8:30 - Initial Claims (for 7/14): Consensus NA

Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range for ten weeks after topping 330K in mid April.  Aberrations are watched for clues on the labor market and economy, as the recent levels reflect an even tighter labor market.  Continued claims are also falling off their March highs as the 4-week average stands 110K above the six-year low of May 2006.  Claims provide a nearly real time read on layoffs and the labor market, as the low 4.5% unemployment rate reflects the broader read of layoffs and hiring.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four-week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

10:00 - Leading Indicators (for June): Consensus 0.1%

Big Picture: Six monthly declines in 2006 reflect the weaker economy in late 2006, as declines were shown in 3 of the first 5 months of 2007.  The 6-month growth fell to a -0.8% low in July but has firmed above 0 since.  Over the last 17 years, the index correctly signaled the 1990 and 2001 recesssions while providing a false signal during the 1995 soft-landing.  The recession alarms go off when the cumulative 6-month decline exceeds -1% amid a string of three or more consecutive monthly declines.  No recession warning bells yet and none expected.

Implications: The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices.  Therefore, the report is extremely predictable and of very little interest to the market.  Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.

12:00 - Philadelphia Fed (for July): Consensus 13.0

Big Picture: The regional manufacturing index is volatile, but tracks the direction of national orders and production.  The gains in orders follow the weakness tied to auto, housing and business investment and are rebuilding strong positive momentum.  ISM's 2007 estimates argue that the stall is just that, with stronger demand ahead which has been seen in recent months.  The Philly index is independent of its components, so can provide a misleading read and is especially volatile given the small region covered (mid and east PA, southern NJ and Delaware).  The manufacturing sector moves in mini-cycles compared to the overall economy and the regional measures move in even shorter cycles, with far more month to month volatility.

Implications: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting.  Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month.  A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value.  The purchasing managers' reports are measured like the national NAPM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector.  For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.  These surveys can be of some help in forecasting the national NAPM -- particularly the Philadelphia and Chicago surveys, which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.



Source:  www.Briefing.com