David Zanoni's  Instablog

     This masterpiece from the Princeton University Press is an amalgamation of some of the most intelligent minds in economics.  The contributors include: Eytan Sheshinski, Robert J. Strom, William J. Baumol, Robert M. Solow, Kenneth J. Arrow, Michael M Weinstein, Melissa A. Shilling, Corey Phelps, Sylvia Nasar, Boyan Jovanovic, Peter Rousseau, Edward N. Wolff, Deepak Somaya, David J. Teece, Naomi R. Lamoreaux, Kenneth L. Sokoloff, Yochanan Shachmurove, Ralph E. Gomory, Jonathan Eaton, Samuel S. Kortum, Alan S. Blinder, Robert J. Shiller, Burton G. Malkiel, and Edmund S. Phelps.  These brilliant minds address the micro- and macroeconomics of growth, the importance of independent and corporate entrepreneurs and innovators, the employment of technology & the patent system, innovation and trade, and the relationship between innovation and finance.
     Arrow and Solow provide the foundation for the remainder of the book by explaining the micro and macro conditions that are conducive to growth.  They explain how particular markets and knowledge influence micro and macroeconomics and that the legal system  of licensing and patents is the major institution of property rights.  Competition is discussed as an incentive to create further innovations which lead to an “optimal portfolio of innovations”.   
     Nasar, Jovanovic, and Rousseau  explore the continuing role of independent innovators and entrepreneurs.   They focus on the flexibility of new firms over the older more established  companies.   They also provide data on Initial Public Offerings (IPOs) and touch on the optimal timing for initiating an IPO.  Explanation is given as to how some firms exploit irrational exuberance leading up to and during their IPO, yielding themselves significant amounts of capital.  They conclude that the small younger firms thrive when fast technological change exists, where the older larger firms do better when it is “business as usual”.  
     The section on technology and the patent system focuses on the opportunities and challenges in multi-invention  innovation.  It explains how the patent owner may need good negotiating skills when dealing with a multi-invention innovation.  Solutions are also provided for patent owners and their potential infringers.  This section explores the costs associated with licensing and where they are most appropriate.  The establishment of the U.S. patent system is also discussed along with the growth and trading of patents in more recent years.
    “Innovation and It’s Effects on International Trade” is a section outlining how the global economy plays a growing dynamic role in innovation.   Labor, capital, and knowledge is brought to the table by multiple countries creating a synergistic fuel for bringing new products to market.  Next, the topic of research is discussed, where the wealthier countries are more heavily invested.  It also explains the pitfalls of two countries pursuing an identical technology, where opportunities and advantages can actually be eliminated.  
     Next, Blinder introduces chapters by Shiller and Malkiel.  Shiller’s section explains “Radical Financial Innovations”.   Here, Shiller explains discusses hedging and risk management performed by insurance firms.  He indicates that imperfect risk sharing exists between income and consumption within and across countries.  He then explains the innovations in home insurance and provides proposals to use price indexes that cannot be distorted by individuals.   
     Malkiel’s section focuses on the “Free-Market  Innovation Machine”.  He explores the importance of venture capital firms providing the key money and managerial support for innovation to become a reality.  The dominance of U.S. venture capital over that of European finance is discussed in relation to IPOs.  Malkiel also points out how the large amount of investment outlets leads to overinvestment and market bubbles.  
     Finally, Strom makes an introduction to be followed by Phelps and Sheshinski about free-market innovation and its relation to western European economies and the economic welfare of developing economies.   Phelps touches on how the western European countries are failing to create a successful free-market of innovation.  Sheshinski focuses on “Pharmaceutical Patenting in Developing Countries and R & D”.  He analyzes competitive and monopolistic pricing strategies on global welfare, the economics of developing countries, and incentives for firms and industries to participate in R & D.
     To conclude, I feel that this book is a great comprehensive collection of intelligent economic thinking and analysis.  It reminds us of the importance of innovation in driving economic growth in our free-market economy.    I would recommend it to anyone interested in this subject.     

I'm curious to see how this week trades.  The jobs report Friday should especially provide the market's near-term direction. Last week's sell-off looked like all of the typical sell-offs since early March, but I wonder if that will change this week. 

Is now the time for natural gas?  As it breaks through $3 and the natty stocks making new highs, it may be the time to get in stocks such as CHK, DVN, XTO, APA, etc.

After the recent run in the stock market from March 2009 to August 2009, many investors are taking some profits and waiting to see if the leading indicators continue to improve or if they slide to the downside.   Will manufacturing, retail, housing, and financials continue to see improvements?   It looks like the economy and the stock market could go either way in the near term.   So, if you’re a trader or a long term investor, what looks promising right now?   How about the low priced commodity, silver.    
     I would choose silver over gold for the simple reason that it’s much cheaper than gold.  Furthermore as silver rises along with gold, the percentage gains are significantly higher with silver.  For example, when gold rose from $900 to $1000 investors enjoyed a nice 11% gain while silver investors enjoyed a nicer 23% gain with just a 3 dollar rise $13 to $16.  
     With the value of the dollar falling, and large inflation risk on the horizon due to the government’s unprecedented money printing machine, commodities will rise over time.  Silver should be a key player in this commodity rise.  Gold is currently trading more than 60 times time the price of silver.  Historically, gold trades 15 times higher than silver.  I’m not saying that silver will definitely return to price in at 15 times below the price of gold, but things do tend to revert to the mean over the long term.
     Silver also has its usefulness beyond jewelry and silverware.  Its characteristics include: strength,   reflectivity, malleability and ductility, electrical and thermal conductivity,  antimicrobial, and the ability to endure extreme temperature changes.  Silver is used in mirrors, electrical contacts/conductors, photographic film, and disinfectants.  As the economy eventually improves, so will the various uses of silver, thus contributing to a higher demand .  However,  I think its popularity as a moderately priced hedge against inflation will drive its demand more than its functional applications.
    The purest play is to purchase the physical silver.  If you prefer to trade it in stock form than SLV is the next purest play.  Other stock ideas include: SLW, PAAS, AGQ, AEM, and AAUK.

Disclosure: No positions

With the market pulling back this week, the next key level to watch for is 979 on the S&P.  If we can remain above 979, that will be bullish.  If we go much lower than that 979, then 879 is the next key holding level.  If that 879 gets broken, then the bears will say I told you so.  The 979 is 5% below the peak of 1031 from Aug. 27, so the bulls will be looking good if that level is held.

     The correction from August the 14th & the 17th was only 3.4%, a mild and healthy pullback (not a bloodbath) for the S & P index.  That pullback was followed by four positive days, with Friday August 21 making a new high for 2009 at 1026.  

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     This new high for the year was a victory for the bulls, confirming that "the trend is in fact, your friend".  The bears are still talking about the next Great Depression, while missing out on one of the best bull runs in market history.  The bears will  probably wait until the S & P hits 1600 before investing their money back into the market.   That's fine with the bulls because we will be buying the shares that the bears are selling.  
      The bears have been talking up the high unemployment rate for quite some time as their primary argument for another downturn in the markets .  However, the bears are failing to see that the new unemployment claims are trending downward.  The 200k loss of jobs will eventually be 100k lost, then we'll get to zero jobs lost, and finally back to job growth.

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     Other bullish news was the reporting of existing home sales for June which marked the third consecutive month of rising home sales at 4.89 million.  First time home buyers are taking advantage of the 8k tax credit, attractive home prices, and low interest rates.  Experienced buyers are enjoying the later two. 
     Consumers are spending less but saving more.  Spending less may hurt the short term economy, but will be better for long-term growth.  This will probably result in a healthy, gradual improvement in the economy which is better in the long run.  If consumers continue to increase savings then there will be plenty of money to pump into the economy when people feel they are ready and there will be less burdensome debt in the system.   Furthermore, with increased savings, banks will have more capital, increasing their strength.