Nick

Bucheleres January 20th, 2011 Technology Bubble Outlook This is a simple one: We are in the beginnings of the next technology bubble. The technology market (as proxied by GOOG) is off of its 2009 highs by exactly one Fibonacci retracement, and technology companies are ready to start earning again. Apple currently has $60billion in spare cash and cannot supply the level of demand that they are experiencing

(GOOG above) According to Elliot Wave theory, investor psychology shows that the impulse wave of the next 5-wave trend is developing (as repeated December 2008). It is becoming clear that we are entering into a global economic recovery, and technology is playing an increasingly important role in the lives of everyone around the world. The technology industry is currently dominated by giants Google, Apple, and now Facebook which is causing large amounts of speculation. Speculation is the key component to any price bubble, and this one has the beginnings of a strong one. Google offered its IPO in 2004 when it had $550million in cash-- Facebook has over $1billion in cash. Facebook has been valued as high as $50billion and financial giant Goldman Sachs has contracted a $1.5billion stake in the privately held company. This action has elicited attention from the SEC. Facebook may be forced to go public for transparency reasons sooner than expected. Back to the price bubble This situation is beginning to ominously resemble the 2000 tech bubble crash: Venture capitalists saw record-setting growth as dot-com companies experienced
meteoric rises in their stock prices and therefore moved faster and with less caution than usual, choosing to mitigate the risk by starting many contenders and letting the market decide which would succeed. The low interest rates in 199899 helped increase the start-up capital amounts.

 Further fueling the progress and speculation among the technology industry are the smaller satellite technology companies that are becoming increasingly popular. The collective demand that is attracted by these companies is increasing cash flow for the entire industry, and it is clear that they are looking to continue expansion (phone war, tablet war). Historically low interest rates coupled with QE1-? mean that there is money in the economy that needs a place to go. Facebook is going to take over the world. I cannot fathom the amount of attention the stock will generate when it goes public. I think that Facebook itself will be as catalytic as the invention of the internet, which sparked the 1990s tech bubble. When prices move, they often move together. Fixed Income and Equity Outlook

US 10-year bonds 2-year chart. Bond yields have been rising the past three months, after the Fed began its bond buyback referred to as QE2. Rising bond yields, especially after the Feds announcement that they would purchase $75billion in long-term US debt per month, is in line with the gradual trend that is developing within the fixed-income market. Yields rise when interest and/or confidence in the bonds falls. Rising yields can be interpreted as inflationary, but inflation prone commodities crude oil and gold are tightly range bound and have even been reaching term lows. What is more likely the interpretation is that investors are becoming increasingly risk averse and are ready to place their cash in traditional assets, i.e. equities. Exacerbating the move from fixed-income is European debt. Bond yields are running out of control, with nations such as Ireland racking up extremely high yields nearing 10%.

High Euro zone bond yields are making many investors weary of investing in the European recovery and especially holding their risky debt. These fears are starting to rise to the surface as Greece just refused to restructure their debt, even in the face of many analysts saying that holders of Greek debt will probably not be paid for their investment in the countrys recovery. Up to this point, high bond yields have been a wet blanket upon the American and European indices as their high yields tend to steal equities thunder, but as the global economic recovery progresses and bond yields begin to fall, stocks will move inversely. Irish bond yields inversely track the below chart of the German DAX and the S&P 500. The DAX has outperformed the S&P since the beginning of the summer when Bernanke announced that the US would engage in a second round of quantitative easing. Euro bond yields nearing 10% is a sign that the European Central Bank (ECB) will engage in monetary policy that will elicit a similar reaction in Europe to the Feds in the United States. A correction in European indices is imminent, which will bolster confidence in the US and American equities, as we are a few steps ahead of the European conundrum that we set in motion in 2008.

European indices start splitting away from US indices in the summer of 2010, when it was confirmed that the Fed would be stimulating the US economy with $600billion of easing. Investments I think that Apple is a great investment. They are not only the industry leader, they control the industry. The fact that their earnings are from physical sales is reassuring and attracts a deeper demand for the stock. I am wondering how much Facebooks IPO will be, and when they will release it. Buying shares of Facebook directly would be the best option to gain leverage into this price bubble. My timeline for this bubble is to begin early second quarter, depending on how quickly the Euro zone moves to bring stability to restructuring their economies and banking systems. An important aspect of price bubbles is high (and increasing) competition within the industry. A compelling article follows: http://www.marketwatch.com/story/facebooks-profitability-tops-youthful-googles-2011-01-20 Speaks for itself. Questions or comments? Nick Bucheleres nickbuch@umich.edu 630.247.7010