In search of a major bearish trigger

Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bearish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual (not backtested) signals of the trading model are shown by the arrows in the chart below. In addition, I have a trading account which uses the signals of the Trend Model. The last report card of that account can be found here.
Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

Explaining my SPX 1750 price target
I got a lot of feedback from my post last week in which I postulated an approximate SPX downside target of 1750 (see A very tired bull). While most of it was negative (more on that later), it did raise the question of where that figure came from.

To recap what I have been saying for the past few months (for a summary see Why I am bearish (and what would change my mind)), the technical picture of the US equity market indicates that it appears to forming an intermediate term top, Stock market history tells us that 10% corrections happen on a regular basis, sometimes for no macro or fundamental reason at all (see The Ebola correction? OH PUH-LEEZ). but the elements of a major bear market do not appear to be in place.

On the other hand, we have seen no SPX 10% pullback since 2011. With technical conditions deteriorating, the market is ripe for a decline. While a 10% correction might be par for the course, but the intermediate term technical picture was suggestive of something more, either a substantial pullback (10-20%) or a major bear market. Major bear markets tend to be characterized by excessive valuations and recessions. While the American economy appears to be going through a soft patch, the risk of a full-blown recession remains low. That leaves the 10-20% pullback as the most likely and default outcome and my 1750 SPX target, or an 18% decline, is in that ballpark.

However. deeper 10-20% declines generally require a macro or fundamentally driven trigger. We just don`t know what that trigger is, but I will explore some possibilities later in this post.

Technical conditions continue to deteriorate
I don`t want to repeat myself so I will summarize the weak technical conditions that I have been seeing for the last few months.

US stocks have gone up in a straight line with only minor pullbacks since 2011. James Paulsen of Wells Capital Management said that the steady nature of the advance has been breeding investor complacency. In a further study, I found that the combination of a strong long-term trend and a weakening short-term trend could be characterized as a market trend becoming "overbought" but losing momentum. Using monthly DJIA data going back to 1900, I found that such conditions tended to resolve themselves bearishly. Current conditions are similar to long and short-term trend readings seen at the top before the market crashes of 1929 and 1987 (see How to make your first loss your best loss).

The loss of momentum that I described can be graphically depicted by the deterioration in the MACD histogram, which has declined from a positive to a negative reading (bottom panel), In the last 20 years, this indicator has had a 100% accuracy of either calling a bearish episodes or was coincidental with bearish episodes.

A model with 100% accuracy is bearish

In addition, I have detailed problems with market breadth (see What apples-to-apples market breadth is telling us), which are intermediate-term market indicators.

Since I have written those words, more cracks have appeared in market internals. Most worrisome is the fact that credit market risk appetite seems to be rolling over. The chart below shows that the relative price performance of High Yield (blue, top panel), Investment Grade Corporate (green, top panel) and Emerging Market bonds, all of which have turned down when compared to Treasuries of equivalent duration.

This across the board loss of risk appetite evident in the credit markets is another worrisome sign from an inter-market analytical viewpoint. As a reminder of the importance of the credit markets, recall James Carville's wish to be reincarnated as the bond market so that he could scare everybody.

Sentiment: Ready to stampede?
A glance at sentiment indicators are also suggestive that stock prices are poised to fall Jason Goepfert pointed to the extended nature of the ratio of equity to money assets and the surge in the ratio in April as a contrarian bearish signal:

Goepfert also highlighted how available cash in NYSE margin accounts keep falling to record lows:

In addition, Mark Hulbert warned about the short-term vulnerability of stock prices, based on his survey of NASDAQ market timers.

To be sure, the latest BoAML Fund Manager Survey indicates that fund managers are very underweight in US equities. From a contrarian viewpoint, such a position could put a floor on US stock prices should they decline.

I would point out, however, that the BoAML Fund Manager Survey sample is tilted towards institutional managers with global mandates. The most recent data from State Street, which is a major custodian of institutional funds, show that managers are highly weighted in equities (via Sober Look):

At an anecdotal level, I am detecting a high degree of denial that stock prices can go down. I received a lot of negative comments from my post last week (see A very tired bull). While I am appreciative of constructive comments in the form of "I disagree with your analysis because you didn`t correct for this factor or you missed that factor...", I encountered a level of personal attacks and venom which was nothing short of astounding. Much of the tone was of the ilk, "You`re an idiot, you`re wrong and you`ve been wrong for the last few weeks".

What caused all this hate? Did I declare I worship the Devil? Did I deny the Holocaust? Did I kill a baby rabbit on the radio?

No. I said that stock prices would go down! The table below from A Wealth of Common Sense shows the kinds of losses that a buy-and-hold US equity investor should expect. Is it such a crime to suggest that a 10-20% loss could be expected after such a prolonged bull phase that has not seen a 10% correction since 2011? Do these people think that stocks are a one-way bet and anyone who questions that paradigm is an idiot? Not only did these comments reflect a lack of emotional maturity, but market maturity which recognizes that stock prices can go up as well as down.

Despite the noise inherent in sentiment models, one of the most enduring messages I have seen is the level of uncertainty that is evident. I interpret this to be indicative of a jittery market that could stampede. Consider the record high levels of AAII neutral opinions (via Callum Thomas).

In summary, sentiment models are tilted bullishly, which is contrarian bearish. However, there is a great deal of uncertainty. If a bearish trigger were to appear, it has the potential to start a selling stampede.

In search of the bearish trigger
Today, the most common attitude seems to be everything is fine and you should own stocks. Should a stampede start and stock prices go down 10-20%, then you will be highly hesitant about buying them at the bottom. For that to happen, we need a macro or fundamental trigger.

One of the lessons learned from recent market history is that bearish triggers can come out of nowhere. A backup in Bund yields was not in my top 10 list of worries, but it managed to spook the markets. With that in mind, here are my top three most likely bearish triggers, in order of likelihood, with the least likely (China) verging into Zero Hedge and tinfoil hat conspiracy theory territory:
  • US growth scare, combined with Fed tightening
  • Greek default
  • China

US growth scare
The current picture of the US is an economy that is nearing stall speed. While Q1 weakness could be dismissed as weather related, we are now seeing data from the Spring - and those data releases remain on the weak side. The latest Atlanta Fed GDPNow estimates of Q2 growth appears to have stabilized at the 0.7% to 0.8% level, which is consistent with New Deal democrat's observation that the US is in a mild industrial recession:
The parttern that has existed since mid-February of awful industrial data and poor consumer spending, but good comparisons for everything else, is firmly intact.
The latest update from John Butters of Factset show that consensus EPS estimates revisions to be roughly flat, with FY2015 rising and FY2016 falling. More worrisome is Factset's report that with Q1 Earnings Season more or less complete, the revenue beat rate came in at an abysmal 45%. Ed Yardeni also observed that forward revenue estimates are falling, though his estimates of forward EPS estimates are rising.

Combine those wobbly conditions with a round of Fed tightening and we have weak EPS growth and rising interest rates - which are exactly the elements of a stock market downturn. With employment growth still relatively robust, it would be not be hard to imagine a series of NFP releases that show employment growth above expectations and rising wage pressures, or a mini-stagflation episode.

Indeed, the latest Financial Stability Review from the European Central Bank fretted about what might happen when the Fed starts to raise rates. The combination of illiquid markets (remember the recent Bund market selloff), a crowded long in risky assets and financial leverage, especially in the shadow banking system, could set off a stampede for the exits.

Greece: Time to cry wolf again?
Raise your hand if you`re tired of the Greek drama. Like the story of the boy who cried wolf too many times, this may be the time that the wolf finally appears but the villagers are too tired to care.

Here is my understanding of the situation with the Greek negotiations and the fragility of the current negotiation dynamics. Unlike previous occasions, there may not be any backroom deals to be done as the current Greek government does not seem interested in preserving the status quo.

We have to understand the internal pressures each side face. The Syriza dominated government in Athens has a very narrow majority and risks an internal rupture with its own Leftist elements should it budge from its own red lines of pension and wage cutbacks. This Project Syndicate essay by Greek finance minister Yanis Varoufakis argues eloquently that forcing austerity budgets on Greece in order for its government to run high levels of fiscal account surpluses is counter-productive to its growth outlook and therefore debt repayment sustainability.

From the EU viewpoint, those pleas are falling on deaf ears. The EU cannot be seen to bend against its own stated austerity doctrines, as it would threaten to topple governments in other peripheral countries. Already, anti-austerity elements are gaining power in Spain and Portugal. As well, there are local elections in Italy this weekend, which will be a key test of the Grillo anti-Europe 5-Star Movement. With much of Greece firewalled from the worst of the tail-risk of financial contagion, a Cyprus-style Greek default within the euro may be preferable outcome instead.

What would happen if Greece were to default? In the past few years, much of Greek debt has been restructured. Instead of owing money to the banks, most of Greek debt is now owed to the "institutions", the IMF and other EU countries through an alphabet soup of programs. Benn Steill outlined the level of eurozone government exposure to Greece:

Italy stood out like a sore thumb:
The most worrying case among the creditors, though, is heavily indebted Italy, which would bear up to €39 billion in losses, or 2.4% of GDP. Italy’s debt dynamics are ugly as is—the FT’s Wolfgang Münchau called them “unsustainable” last September, and not much has improved since then. The IMF expects only 0.5% growth in Italy this year.

As shown in the bottom figure above, Italy’s IMF-projected new net debt for this year would more than double, from €35 billion to €74 billion, on a full Greek default—its highest annual net-debt increase since 2009. With a Greek exit from the Eurozone, Italy will have the currency union’s second highest net debt to GDP ratio, at 114%—just behind Portugal’s 119%.

With the Bank of Italy buying up Italian debt under the ECB’s new quantitative easing program, the markets may decide to accept this with equanimity. Yet assuming that a Greek default is accompanied by Grexit, this can’t be taken for granted. Risk-shifting only works as long as the shiftees have the ability and willingness to bear it, and a Greek default will, around the Eurozone, undermine both.
Should Athens default, it would put enormous strain on the Italian budget as it and other eurozone countries were counting on those funds to maintain some semblance of fiscal balance. While a Greek default would not have the kinds of catastrophic consequences it might have had in 2010 or 2011, the outcome would still be negative. Peripheral yield spreads would start to blow out and we could see a risk-off stampede in an illiquid market (see the concerns expressed above in the ECB Financial Stability Review).

In the meantime, the Greek banking system continues to bleed euros. The ECB can put the squeeze on Athens at any time should negotiations falter and the Greek banking system would implode.

A payment of about €300 million is due to the IMF on June 5. The latest news reports indicate that Athens will make that payment, but no deal is in sight. If Athens were to overcome the June 5 IMF payment hurdle, there is another €348 million due the IMF on June 12, followed by €581 million on June 16 (see calendar from Bloomberg). As well, there are substantial pension and civil service salary obligations due during the same period.

In the meantime, we may have to endure this cycle of stories out of the Greeks that a deal is imminent, but denials out of the EU-IMF camp that much more work needs to be done, much like how Zeus punished Prometheus for giving fire to humans by chaining him to a rock and having an eagle rip out his liver on a daily basis. How much of more this liver-ripping can the markets take?

If an agreement cannot be reached, a Greek default could certainly be the catalyst for a significant risk-off market decline, especially if the contagion effects spread to other countries like Italy.

China: In search of a casus belli?
I hate to mention China as this puts me in the camp of the tinfoil hat brigade. While I am concerned about the volatility in the Shanghai stock market and the risks of a disorderly sell-off. There is about USD 1 trillion of Chinese debt sloshing around in the offshore USD market and no one really knows how inter-connected the global financial system is and what the effects of one or more major Chinese corporate defaults might be. That's not where the major tail-risk from China is coming from.

I am more concerned about the possible effects of a military confrontation in the South China Sea. Despite the speculative element of this story, which probably belongs more over at Zero Hedge, one of the ways investors make money is to watch for stories on page 14 that migrate to page 1. While this story may stay on page 14 and die, it has the possibility of moving up to page 1.

In the past few weeks, I have been seeing more and more stories about how China has built seven artificial islands in Spratly Islands, located in the South China Sea. These moves were presumably intended to bolster Chinese claims to the area. While friction occurs in international relations all the time and could be resolved by quiet diplomacy, the US and her allies appeared to have deliberately chosen a course of action designed to provoke and confront China.
The American justification for the sudden focus on the South China Sea is the right of freedom of navigation, which is critical to global trade. Peter Lee, writing in Asia Times, debunked that excuse:
There are alternate routes to Japan, Korea, and the Philippines via the Lombok and Sunda Straits in the Indonesian archipelago, and up through the Celebes and Sulu Sea.

Don’t take my word for it. Ask Japan, which has obsessively investigated “energy security” since the OPEC oil shock of the 1970s and has gamed the economics of non-Malacca/non-SCS routes to a fare-thee-well. Bottom line: to avoid Malacca/SCS completely by switching to the Lombok route, shipping costs to Japan go up maybe 13.5% over the Malacca route. In other words, less than half a penny a barrel (see page 65).

Back of the envelope, increase in Japan’s oil import bill of maybe $150 million. Maybe $200 million?

For comparison, value of Japan’s crude oil imports from GCC in 2014: $100 billion. Japan’s 2014 defense budget: $42 billion.

Incremental cost of securing Japan’s energy imports from the PRC threat in the South China Sea: A rounding error.

Pretty much same order of magnitude for South Korea.

Added costs for Philippines to access its ports at Manila, Subic Bay, the Batangas terminal: Basically zip. The Lombok route run right through the Philippine archipelago.

As for Vietnam, it’s a net oil exporter. In any case, its vital ports lie outside the dreaded “cow tongue” and are accessible without traversing the South China Sea.
The media frenzy is somewhat reminiscent of the search for a casus belli, or a justification for war, in the period leading up to the invasion of Iraq. This NY Post piece by AEI scholar Michael Auslin is a typical example of publicly beating the war drums. (If the US doesn't react to China in a muscular way, then America is weak.)

Something odd is going on here as the campaign makes no economic sense. Is the Obama Administration trying to make some sort of foreign policy statement by focusing on the Asia-Pacific using a military lens? (If you didn't believe US government statements on Obamacare, should you believe its statements on the South China Sea?)

If the US, along with her allies, is staging a deliberate campaign of provoking China, then we may building up to some sort of military confrontation in the summer. In that case, watch regional trade crater and the "Greater China" stock markets, which have been holding up relatively well, go into freefall.

I don`t want to sound some paranoid maniac writing for Zero Hedge, but Spratly related tail-risk is rising. If the shooting starts, then we would definitely be in a situation where the price of risky assets crater. World trade would collapse and you will hesitate about buying stocks, even though they have gone down 10-20%.

My base case scenario
In summary, with technical conditions deteriorating, US equities are ripe for a pullback. There are three possible scenarios:
  1. A minor 5-10% hiccup;
  2. A 10-20% pullback
  3. A major bear market
I would discount scenario 1 as the kinds of intermediate term indicators tend to be predictive of higher magnitude market weakness. I would rule out scenario 3 as there doesn`t seem to be a recession on the horizon, which is the catalyst for a major bear market. That leaves scenario 2, a 10-20% pullback, by default.

My most likely scenario is therefore a 10-20% decline, much like the experience of 2010 and 2011, both of which saw the market fall 15-20%. My M2 analysis last week indicated a rough downside potential of about 18%, which sounds about right under the circumstances.

The week ahead
As for the week ahead, a minor decline appears to have begun, just as Springheel Jack predicted. Despite all of the bearish intermediate term indicators, which are not good at forecasting daily squiggles in stock prices, I am not fully convinced that we have seen the start of a major decline yet. If the market were to behave has it has in 2015, short-term momentum indicators suggest that it is nearing a point it is likely to bounce.

Here are my bearish tripwires for a major downleg in US equities. First, we need to see some conviction and follow-through in market moves. As the chart below shows, RSI(14) momentum remains range-bound and hasn`t shown either an overbought or oversold reading in weeks. A major fall in stock prices would involve a series of "bad" oversold readings where the markets get oversold and stays oversold. In addition, the % of SPX stocks showing bullish formations on point and figure charts should be cratering, which it hasn`t so far. At the very least, I would watch for the violation of the uptrend line at about 2085 (in purple). The next test is a violation of the first support level, which is roughly 2070, and a test and violation of the second major support at about 2040 before declaring that a major correction has begun.

In the meantime, my inner investor remains cautious but not overly panicked. There is no recession in sight and therefore no major bear market around the corner. We are only likely to see a summer squall, not the onset of winter. A wise investment advisor I know put it this way:
A cold day in summer means we have to wear a sweater and long pants, not shovel snow like we would in winter. In contrast, a warm day in winter doesn’t mean we go for a swim and get a sunburn. Seasons change the parameters for the weather.
My inner trader remains bearishly positioned. The first trading day of the month tends to have a bullish bias and he will be watching and he will be watching market internals carefully for signs of whether this is just a pullback within a range, or the start of a major decline,

Disclosure: Long SPXU, SQQQ

Noted for Your Afternoon Procrastination for May 31, 2015

Screenshot 10 3 14 6 17 PM

Must- and Should-Reads:

Over at Equitable Growth--The Equitablog


And Over Here:

Might Like to Be Aware of:

Pitiful Alignment: War Hawk Hypocrites and Liberals Pressure Paul as Clock Ticks on Patriot Act

At midnight, the Patriot Act expires. Given that the Patriot Act should never have passed in the first place, that's a good thing.

In a Time magazine op-ed, senator Rand Paul proclaimed I Will Stop the Illegal NSA Spying.
Sunday, I will continue my fight to end the illegal collection of American phone records. The Second Appeals court has ruled the NSA’s bulk collection of phone records illegal. We should not be debating modifying an illegal program. We should simply end this illegal program.

We have all the tools we need to preserve both security and liberty. What we now need is a president with the will to do just that.

I would take the billions spent on collecting records of suspicionless Americans and spend it instead on FBI agents to monitor suspects who have given probable cause that they are a danger to us.

Individual warrants every day are used to arrest dangerous people. I see no reason we can’t defend ourselves using the same Constitutional processes we’ve used for over two centuries.

Our country was founded on the principle of individual—not general—warrants.

After the current illegal powers end Sunday night the government could still get a warrant. It will just have to say on it Mr. John Smith, not Mr. Verizon.

One suspect, one warrant. Not hundreds of millions of records swept up in one illegal order.

I would argue this will make us more safe, not less. It has been said that finding a terrorist is like finding a needle in a haystack. Well, for years, your government’s answer has been to make the haystack bigger by gobbling up every American’s information.

That must end.

This president could fix the problem by himself but he hasn’t done so. I stand ready to help lead the way on this important matter. On Sunday I will stop the illegal NSA spying.
Rand Paul Under Pressure

Of course, all the war-hawk constitutional hypocrites want the bill extended as does president Obama. Thus, Rand Paul is Under Pressure as Deadline Clock Ticks.
Rand Paul came under mounting pressure to prevent a full lapse in US surveillance authorities on Sunday, as allies of the Kentucky senator joined hawks at the opposite end of the political spectrum in calling for the swift passage of the compromise USA Freedom Act.

The USA Freedom Act would ban the government collection of bulk phone records first revealed in the Guardian by Edward Snowden, forcing the National Security Agency (NSA) to make specific requests from telecom providers instead. It is supported by the Obama administration.

On Sunday morning, the Utah Republican senator Mike Lee, a sponsor of the USA Freedom Act and close ally of Paul, distanced himself from his colleague’s tactics.

“I do believe we have the votes,” said Lee. “So at this point the question is not really whether we get this passed but when it will happen: tonight or Wednesday, or sometime between then.”

Despite the ability of Senate leaders to eventually force through a vote against his wishes, Senator Paul was in defiant mood, reveling in his lonely stand against both parties and ability to force a temporary lapse in the Patriot Act provisions.

“On Sunday I will stop the illegal NSA spying,” he wrote in an opinion piece for Time magazine.

“We should not be debating modifying an illegal programme. We should simply end this illegal programme,” he added.

In comments to supporters in South Carolina and a statement issued to Politico, Paul hinted that he would not give majority leader McConnell the unanimous consent needed to move to a final vote on USA Freedom Act when the Senate resumes for an unusual Sunday session at 4pm.

It’s not a violation of civl liberties,” insisted presidential hopeful Jeb Bush in an interview with CBS, in which he warned the nation’s security would be endangered if the bulk collection programme was allowed to expire.

There is no evidence, not a shred of evidence that the metadata programme has violated anybody’s civil liberties,” Bush claimed.
Jeb Bush Unable to Reason

Apparently Jeb Bush can neither read nor think because on May 7, 2015, a Top Federal Court Ruled Against NSA's Phone Records Program.
A federal court has decided that the National Security Agency’s bulk, warrantless collection of millions of Americans’ phone records is illegal.

The sweeping decision from the Second Circuit Court of Appeals on Thursday represents a major court victory for opponents of the NSA and comes just as Congress begins a fight over whether to renew the underlying law used to justify the program. 

That program “exceeds the scope of what Congress has authorized,” Judge Gerard Lynch wrote on behalf of the three-judge panel.

The law “cannot be interpreted in a way that defies any meaningful limit,” he added.

Additionally, the government’s rationale behind the program represents “a monumental shift in our approach to combating terrorism,” which was not grounded in a clear explanation of the law.

The Second Circuit’s decision provides the most significant legal blow to the NSA operations to date and comes more than a year after a lower court called the program “almost-Orwellian” and likely unconstitutional. The appeals court did not examine the constitutionality of the surveillance program in its ruling on Thursday.
No Shred of Evidence

Let's modify Jeb Bush's statement so that it actually makes sense: "There is no evidence, not a shred of evidence that the metadata programme has stopped any terrorist acts. Bulk data gathering is not only a colossal waste of money, it violates the constitution."

Nonetheless, I suspect Lee is correct when he says "I do believe we have the votes".

Pitiful Alignment

Republicans pitifully align themselves with Obama in support of a preposterously named USA Freedom Act, a bill 100% guaranteed to curtail freedom.

Mike "Mish" Shedlock

‚Has the Rethinking of Macroeconomic Policy Been Successful?‘

The beginning of a long discussion from Gavyn Davies:

Has the rethinking of macroeconomic policy been successful?: The great financial crash of 2008 was expected to lead to a fundamental re-thinking of macro-economics, perhaps leading to a profound shift in the mainstream approach to fiscal, monetary and international policy. That is what happened after the 1929 crash and the Great Depression, though it was not until 1936 that the outline of the new orthodoxy appeared in the shape of Keynes’ General Theory. It was another decade or more before a simplified version of Keynes was routinely taught in American university economics classes. The wheels of intellectual change, though profound in retrospect, can grind fairly slowly.
Seven years after 2008 crash, there is relatively little sign of a major transformation in the mainstream macro-economic theory that is used, for example, by most central banks. The “DSGE” (mainly New Keynesian) framework remains the basic workhorse, even though it singularly failed to predict the crash. Economists have been busy adding a more realistic financial sector to the structure of the model [1], but labour and product markets, the heart of the productive economy, remain largely untouched.
What about macro-economic policy? Here major changes have already been implemented, notably in banking regulation, macro-prudential policy and most importantly the use of the central bank balance sheet as an independent instrument of monetary policy. In these areas, policy-makers have acted well in advance of macro-economic researchers, who have been struggling to catch up. ...

There has been more progress on the theoretical front than I expected, particularly in adding financial sector frictions to the NK-DSGE framework and in overcoming the restrictions imposed by the representative agent model. At the same time, there has been less progress than I expected in developing alternatives to the standard models. As far as I can tell, a serious challenge to the standard model has not yet appeared. My biggest disappointment is how much resistance there has been to the idea that we need to even try to find alternative modeling structures that might do better than those in use now, and the arrogance that asserts that we have little to learn about theory or policy from the economists who wrote during and after the Great Depression.

Liveblogging World War I: May 31, 1915: Zeppelins

Matt Brown: Zeppelin Airship Attacks On London:

From 1915-1917, German airships unleashed hundreds of explosives and incendiaries on London.... For Londoners of the time, the attacks were unprecedented, unexpected and lethal. Around 200 people lost their lives in these night raids.... The first attack came on 31 May 1915. Number 16 Alkham Road in Stoke Newington carries the unenviable distinction of sustaining London’s first ever aerial bomb damage. No one was seriously injured. From there, however, the airship looped south over Hackney and round past Stratford, killing seven and injuring 35. The population and emergency services were caught by surprise in what must rank as one of the most terrifying nights in our city’s history....

The airships flew at such a height that the ponderous air force fighters of the time were often unable to climb to the defence. Even when British pilots could engage with the enemy, the airships proved remarkably resilient to gunfire. When, finally, tactical and technical advances allowed British planes to engage, the Zeppelin crews stood no chance. Without parachutes, they were faced with the terrible decision of death by fire or fall. The airship threat soon disappeared after a number of missions were gunned down. The final attack came on 19 October 1917. Flying higher than normal, the craft once again took the capital by surprise, killing 33 people.

ReCode To Vox

They couldn’t make it on their own.

Walt Mossberg, one of America’s two most famous tech columnists, shot himself in the foot. He left the “Wall Street Journal.” They’re finding out in news what we already know in music, you can go it alone, the internet allows you to do this, but in a chaotic world he with the established presence wins, the major record labels figured out the internet and the big news sites still rule.

What about BuzzFeed, and the “Huffington Post”?

The HuffPo is in decline. You can read about it in the “New York Review Of Books,” which no one opens except for intellectuals, but at least enough to keep the publication going. If you were gonna try and start a new printed book review today…FUHGETTABOUTIT!

But once upon a time the HuffPo was new and different. It focused on left wing news and link-bait, before link-bait littered every webpage you went to.

And BuzzFeed invented the listicle.

What did ReCode invent?

Absolutely nothing.

We don’t need me-too, we need new and different. And unless you’re gonna do new and different, stay where you are.

Ezra Klein left the “Washington Post.” He said his Vox site was gonna be different, and it is, a bit, but not significantly enough to gain traction.

Nate Silver left the “New York Times” for obscurity. The election prognosticator, our national data interpreter, put a stake in his heart and keeled right over. He started a whole website, 538, for data-driven articles, but the “Times” just doubled down with data and created the Upshot. Even worse, Silver didn’t realize if you’re starting from scratch you’ve got to have stars. And he’s the only star on his site. He’s earned my attention. But the rest of the writers on his site parsing the numbers…WHO ARE THEY?

And then you’ve got David Pogue, Mossberg’s nemesis, who left the “Times” for Yahoo and was promptly buried in the tsunami of bogus information on that site. He went from being one of the two experts to a nobody.

So what have we learned…

Just because you’re a star don’t think you’re bigger than the enterprise.

That’s what the film business has learned. They don’t pay stars as handsomely as they used to. As for these same stars funding their own movies… They have the twin hurdles of raising capital and distribution. Never mind having no ongoing catalog to keep them flush. That’s the movie studios’ greatest asset, as it is the record labels’, their historical product. It gives them guaranteed cash flow and bargaining power. That’s why the labels got favorable deals with Spotify…their copyrighted material!

As for records… George Michael sat on the sidelines and sued Sony and he never had another hit record. Trent Reznor did it his way and he got artistic freedom but fewer people cared, and he had to do so much himself other than create art that he ended up going back into the system.

When the world is wild and woolly, new and exciting, pioneers fight it out for eventual dominance. But once the landscape starts to coalesce…pick another venue! This is Tidal’s big mistake, not the press conference, but wading into a pool already filled with sharks.

The major labels control the modern music world. You can get started alone, you can even get some traction, but to break through big you’ve got to play with the established entities, they own radio and to a great degree publicity. Sure, you can do it your way, it’s just gonna be expensive and long. Are you up to that?

And it gets even tougher if you’ve got investors. They want their money back. They’ll pull the carpet out from under you when you least expect it, put heretofore unknown pressure upon you.

Bottom line… ReCode had the best tech news in the business. Walt Mossberg and Kara Swisher built a team of experts. But nobody cared, nobody went to the site, they thought their minions would follow them but it turned out they were aligned more with the “Wall Street Journal,” their former home, than the writers themselves. It’s kind of like when the lead singer leaves the band…good luck! Sure, there are exceptions, but… But now you can’t even find the new sites, you can’t get the word out. Furthermore, the “Journal” hired Joanna Stern, a cheeky tech writer who is not as good as Mossberg but oozes personality, and Christopher Mims, who’s technically sound, albeit dry. Turns out we don’t need THE expert as much as AN expert. (And the “Times” got Farhad Manjoo, who in his own way is just as good as Pogue.)

So if you’re starting something new…by all means go for it, it’s the essence of Silicon Valley.

But if you’re an individual star, chafing under the reins of your boss, believing you can go it alone…

You probably cannot. Especially if the world you live in is solidified.

“Vox Media Adds ReCode to Its Stable of Websites” (read this for the traffic numbers):

“Digital Journalism: How Good Is It?” (The HuffPo has traffic, but is in the throes of an identity crisis that presages decline):



It had a lousy name, a dot net address and a terrible website.

Sure, Mossberg and Swisher were starting all over, but they could have given themselves a fighting chance!

“AllThingsD” was a brand, never underestimate the difficulty in building one and the power in an established one. Scott Weiland was in Velvet Revolver, what acts did he populate thereafter? Velvet Revolver got some recognition, because it had multiple stars and united their individual fanbases, but after that… You’d need a chart to know who Weiland played with. As for Bill Simmons, how dumb to name the site “Grantland”! It had to be SIMMONSLAND! And he needed to own it. Instead, he built brand equity for ESPN and walked without it!

Let’s start with the number one deal-killer, ReCode’s site.

It’s like they never surfed the net before.

It wasn’t only me, everybody hated it. It was unfathomable. Didn’t Steve Jobs say design was paramount? That usability was key? Didn’t Walt and Kara interview him? Did none of his message penetrate? ReCode’s site is so busy, you can’t get the grasp without scrolling, and the headline, which was never big, was rarely important. That’s what the HuffPo has right, design. The big headline is right up front and clear. The site may not have been updated in years, but it works.

As for the name… What does it mean? Either your moniker has to indicate what you’re about, like Facebook, Snapchat or Instagram, or it must relate to nothing, like Shazam or Corolla. ReCode, what is that? A place where you rewrite C++? And what’s with the forward slash in the middle…yes, technically it’s Re/Code. Most people don’t even know where that key is to type, so you’re inherently limiting discussion. Hell, even the press doesn’t get it right, every story about the sale to Vox calls it “ReCode”!

And dot net? Is it Type recode into Safari and you’ll get Google results, you won’t automatically go to the site, as you will with Amazon and the rest of the .coms.

And if you’re on mobile, and you’d prefer not to use your browser, you’ve got to remember it’s dot net. Do you know any other significant site that’s a dot net?

And speaking of mobile… ReCode’s site works a bit better there. And mobile rules. But the truth is the people into this kind of info are sitting in front of their desktops all day and want to go to the regular site. And regular surfers go back multiple times a day, to see if there’s breaking news. But nothing is emphasized, there’s nothing you can see at a glance on ReCode’s homepage.

Which brings us to another question… Are you a breaking news site or an analysis site? If it’s the former, you’ve got to have more stickiness, a reason to return. If it’s the latter… You’ve got to deliver the goods, feature something that is forwarded. But since the site’s creation I don’t ever remember forwarding a link.


The truth is ReCode was hampered by its need to start from scratch, albeit with two stars.

But that’s not the whole story. A lot of little things go into making a successful site. Why did AOL triumph? IT WAS EASY!

You’ve got to make it easy. You’ve got to make it forwardable. You’ve got to make it accessible. You’ve got to either break news or explain it or both.

But the truth is Walt and Kara were so busy establishing relationships with the insiders they want to appear at their conferences that they lost touch with the rank and file who had to visit their site to make it work. Once again, in the internet age there’s rarely a middleman. The customer is the hoi polloi, the regular users. Play to them, not to the big swinging dicks you’re trading favors with who never break news at your conferences anyway.

Our planet is addicted to tech. Everybody’s wired. We want tech news. Tech drives the culture today, like music did in the sixties.

But ReCode couldn’t see that the game had changed. They were playing to the same people they always did, instead of broadening their game to appeal to EVERYBODY!

In other words, it was never gonna scale.

And scale is everything.

And scale is not only built on a good idea, executed properly, but delivery is also key. Isn’t that what those truly in the know always say, that distribution is king?

Well, being with the WSJ solved that problem.

But going alone Walt and Kara were completely unaware of the challenge, I’d say they punted, but they didn’t even understand the game. It’d be like leaving the major label, sacrificing radio, putting out an album with no hit singles and expecting to be successful.

But that ain’t the way it happens.

Give yourself a fighting chance.

Maybe Walt and Kara can pivot. Maybe they will realize you don’t reinvent the wheel. Just like you rent server power from Amazon instead of owning it yourself (even Netflix!) Walt and Kara spent too much time trying to replicate what others do better.

Like design a usable site.


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