Saturday, June 25, 2011

The Growing Need for Cyber Security

There have been a number of shocking events over the past year and a half in the world of cybersecurity.

Some of the events include: mass breaches of consumer information at Sony and elsewhere, the Stuxnet worm's stealthy attack on the Iranian nuclear program, the security breach at defense contractor Lockheed Martin and the Chinese electronic break-in at Google.

These events led US Attorney-General Eric Holder to comment recently, “Cybercrime threatens the security of our systems as well as the integrity of our markets.”

Such breaches of security have forced a broad recognition that, despite the difficulties, all those using the net must accept cybersecurity as part of their mission.

The New Normal

Cyber intrusions are fast becoming the norm at even the world's most technologically sophisticated companies. This surprisingly includes some companies that have security as their main mission.

One such example is the problem this year at RSA, the security company owned by EMC. This problem prompted the National Security Agency to warn that RSA's SecuriD keys, with fast-changing numeric passwords, should no longer be sufficient to grant access to critical infrastructure. The compromised security keys were involved in the May hacker attack of Lockheed Martin.

Security breaches are also reaching wider and lower. And not just through one-time assaults like the one on Sony which revealed details on 100 million users of its online gaming networks.

Consumers' computers are increasingly at risk directly from virus infections that are undetected by standard security software and that do more harm than their predecessors.

The fastest growing types of infections install software that records keystrokes, including logins and passwords. Then the data is whisked off to overseas criminal gangs that make use of consumers' personal information.

Additional Factors

Compounding and uniting these cyber threats are two fast-growing phenomena.

The first phenomena is social networking.

At social networking sites, individuals often give all sorts of clues about themselves that can be used against them in phishing scams. Also users at these sites have been “trained” to click on shortened web links...web links that could lead to malicious pages.

Targeted emails to employees are the delivery method of choice for intrusions such as those at Google and RSA. These emails were made more credible by public information gathered on employees at various social networking sites.

The second phenomena is the rise of mobile devices.

These are devices generally controlled by employees but often have widespread workplace access. These devices are just beginning to be targeted by in earnest by hackers.

What is surprising here is how antiquated the thinking is at many businesses. Many times smartphones and tablets are issued to employees without encryption, authentication or anti-malware software.

What the Future Holds

The advances in software and the increasing use of the internet have made cyber defense more difficult, not easier.

Mr. Holder put it best when he said, “For every technological or commercial quantum leap, criminals and criminal syndicates have kept pace.”

In effect, these criminal gangs are great capitalists. They make money from one scam and reinvest the money into new research and development to stay ahead of the cyber security profession. And they pay their “professionals” top dollar to keep them happy and hacking.

Then there is the problem quite apart from criminal activity. There is growing evidence of politically motivated attacks over the internet, targeting various organization and companies, from so-called 'hacktivists'.

Hacktivists usually use techniques involving relatively unsophisticated malware but which use the sheer weight of numbers. These type of attacks have brought down systems belonging to companies including PayPal and Visa.

The danger is that hacktivists don't operate on a profit and loss basis. So tools and techniques that may deter criminals because of the high cost involved to get around security measures will not work on hacktivists.

The result is that businesses today are forced to defend themselves on two fronts: against highly skilled cybercriminals using the latest technology and hacktivists using less sophisticated, but still successful methods.

The IT industry has been playing catch-up with hackers and cybercriminals for decades. And the problem is just getting worse. Look for this 'war' without end to continue.

Saturday, June 18, 2011

The Shift Toward Cloud Computing

The words cloud computing have become the latest technology buzzwords.

But what exactly does it mean?

People may be asking, “What the heck is the 'cloud'?” Technically, it simply means storing digital files on someone else's computer servers and then accessing it via the internet.

Many people don't realize that cloud computing isn't really new. It has actually been with us for awhile now through email services like Gmail from Google, photo services like Flickr and Picasa, and storing documents with a firm such as Dropbox.

It's just that now with consumer services like music services – Google Music, Cloud Player from Amazon and the iCloud from Apple – that we are becoming more aware of it.

Apple recently announced the biggest push to date by a technology company to bring cloud computing to consumers. Its new, free iCloud service, to be launched this autumn, will allow users to spread their documents, programs, photos, music,etc. among all their Apple devices seamlessly.

It is all part of a generational trend away from owning physical media content and towards renting media content from the computing universal 'cloud'.

And it is happening rather quickly. Just look at how people have quickly moved away from owning CDs and have become accustomed to streaming movies from companies like Netflix.

Clouds in the 'Cloud'

Of course, all is not blue skies for cloud computing...there are major concerns about the shift to the 'cloud'.

One such concern is security. Large internet companies that hold vast quantities of personal data come under constant attack from hackers.

Sony was recently forced to admit that cyber thieves may have taken 100 million of its customer records. Google also revealed recently that several Gmail accounts, including some belonging to prominent US politicians, had been hacked.

Internet security experts say, however, that home computers are even more vulnerable. They believe it is arguably safer to keep files in a data center run by technology professionals.

Another major concern centers around the ownership of data.

Photo-sharing service Twitpic upset its users earlier this year when it changed its 'terms and conditions' to allow it to sell photos uploaded by its users!

There have also been similar concerns at Facebook as to who owns the data. Facebook has also angered privacy groups by using the personal data it has to target advertising at users of their service.

And then there is the question of 'stickiness'. Providers of cloud services like Apple, Google and Facebook will have strong profit incentives to hold on to their users to maximize revenues. They will do their best to limit consumers' freedom to roam freely from cloud to cloud.

So consumers may get stuck in the 'Apple cloud' and not be able to get out without a hassle. Mark Little, an analyst at Ovum, remarked “Switching costs [from cloud to cloud] are likely to be one of the biggest parts of the cloud story.”

Finally, there are infrastructure problems connecting to the cloud. Many wireless networks today have difficulties with reliably handling constant uploading and downloading of media and other types of content.

The Cloud Winners

However, despite the currently cloudy outlook, the trend towards cloud computing looks unstoppable.

That means investors need to know who the winners will be in this new technology era.....

Among the larger companies, the winners will consist of the usual suspects – Apple, Google, Amazon and Facebook.

The announcement by Apple of its iCloud service has leapfrogged it ahead of Google and others for now.

The back and forth will continue though between these companies. Google, for instance, is about to launch a low-cost “dumb” computer equipped only with a browser because its users will keep all their software and content in the cloud.

Among the major companies, cloud computing looks to only add to the gap between the technology leaders and the laggards.

Saturday, June 11, 2011

Investing in Social Media Stocls

Wall Street was abuzz recently with the IPO of the business-focused social network, LinkedIn.

The company received enormous attention as the first in a wave of US social networking and Web 2.0 companies set to go public. This wave will include the likes of Facebook, couponing company Groupon and social games service Zynga.

To describe it as a successful IPO is putting it mildly as its shares doubled in their first day of trading. With a valuation in excess of $8 billion, LinkedIn is trading at 30 times its revenues of $243 million for the past 12 months and over 170 times its cash flow.

A stunning valuation to say the least for a company born in 2003. And a valuation that had Silicon Valley investors feeling giddy.

If Facebook were given the same valuation level, it would be valued at more than $60 billion. The discount coupon business Groupon would be worth $25 billion.

A Closer Look at LinkedIn

Why were investors willing to pay so much for LinkedIn? Good question.

The most likely answers are the very limited number of shares – 7.8 million – offered and short-term traders.

For longer-term investors, LinkedIn doesn't look like a value proposition.

The share structure of LinkedIn actually has much in common with the share structures of both Google and Chinese social media company Renren.

All three companies have a dual voting structure. New investors will have only a fraction of the votes attached to existing shares held by company insiders and its initial investors.

This arrangement does provide protection against hostile takeovers. But it does ensure that near-complete control of the company remains with the founders, employees and venture capitalists.

In effect, corporate governance is weak...the average public shareholder doesn't really count. His or her only purpose is to drive the share price higher for the benefit of the original shareholders.

Companies like LinkedIn must love the day traders who don't care about anything longer term than a day or a week at the most.

But LinkedIn is not alone. Many other companies in the sector have adopted similar share structures.

Social Media Sector

What should investors think about the social media sector as a whole?

Warren Buffett, who has long shunned the tech sector, spoke about social media companies a few months ago. He said, “Most of them will be over-priced...Some will be huge winners, which will make up for the rest.”

Based on history from over a decade ago, he is right. For all the many internet dogs like which soon disappeared, there were some big winners like

As long as social network companies are growing and pulling in millions of new members, such as Facebook and Twitter, they have great revenue potential.

But when growth stalls, or even slows, things tend to go bad quickly. Just look at MySpace or Friendster, the pioneer of social online networking in 2002.

Both Facebook and Twitter are clearly worth some number of billions of dollars. Facebook is now the world's leading social network with more than 500 million active users and estimated advertising revenues of about $2 billion last year.

Consultancy eMarketer says Twitter last year had revenues of $45 million. And the company had zero overseas revenue...which clearly means it has room for growth there.

Even the bears on social media have to agree that more advertising dollars will flow into social media companies as marketers adjust to the shift in online consumption. The only question will be how many advertising dollars will flow. After all, many users go to social networks to socialize, not to buy something.

Investing in Social Media

If someone decides to invest into social networking companies, they must remember that they are betting on the cash flows of these businesses not only expanding rapidly but turning out to be sustainable.

During the tech bubble, many of these businesses turned not to be sustainable. But will it be different this time?

Many who believe it is argue that much has changed since the last time. And they make some valid points.

Far more people globally are connected to the internet, There are an estimated 2 billion online users today compared to only 248 million in 1999.

And this time the frenzy was ignited somewhat more rationally – by profit generation within the growing connections between social networking, gaming and other social phenomena.

That narrower focus should limit the number of companies coming to market and hopefully limit most of the IPOs coming to market to the higher quality companies.

As with any new issues, potential investors into this sector need to exercise their due diligence. The prospectus of LinkedIn with its 19 pages of 'risk factors' point that out.

Go ahead and invest in social media stocks. Just do so with both eyes open.

Saturday, June 4, 2011

A Look Back at the Silver Market

Mark Twain has been quoted as saying, “History does not repeat itself, but it does rhyme.”

Good observation...especially for investors in the silver market.

In recent months, these investors enjoyed a stunning ride to highs near $50 an ounce. This is a level not seen since the early 1980s. Then they had to endure a stomach-churning rapid drop in silver's value due largely to the raising of margin requirements by exchanges.

Rumors were rampant in the market that the only “real” reason that silver was going up was that a mysterious “someone” was accumulating a large position.

Many boogeymen were being blamed. Several prominent Russian billionaires were mentioned in the rumors, as were the Chinese. Several rumors pointed to a secret silver buying program initiated by the People's Bank of China.

Jack Farchy of the Financial Times discussed some of these rumors recently in an article.

The characters may have changed but this is very reminiscent of the late 1970s and early 1980s when the Hunt brothers tried to “corner” the silver market. This appears to be one of historic 'rhymes' that Mark Twain spoke about.

Therefore, investors today will be well served by a look back at what happened during that time.

The Hunt Brothers and Silver

It started with the Hunt Brothers buying approximately 55 million ounces of silver in late 1973 and early 1974 at around $3-$4 a ounce.

In fact, they actually physically moved the silver to Switzerland because they thought the US government would confiscate silver much as it confiscated gold in the 1930s.

The brothers continued buying silver during the 1970s.....

Subsequently, in the summer of 1979, they even went into partnership with several Saudi sheiks and set up a Bermuda-based company to buy silver, the International Metals Investment Company Ltd. This company bought 90 million ounces of silver and again took delivery of the physical silver.

Over the next few months, silver spiked from $8 an ounce to $16 an ounce as fears intensified over silver supplies at the Comex, which today is part of the CME Group (NASDAQ: CME).

Unfortunately for the Hunt Brothers, the odds were stacked against them.

The board of directors of the commodities exchanges had a number of sitting directors which came from the big Wall Street banks. And these banks, with 9 of 23 directors, were short 38 million ounces of silver. Needless to say, they were not happy with what the Hunts were doing.

Regulators Step In and On the Hunt Brothers

The first step the Chicago Board of Trade (CBOT) took was to raise the margin requirement. The CBOT also declared that silver traders would be limited to 3 million ounces of futures contracts. Anyone with more than that would have to divest their holdings by February 1980.

After these actions, the price of silver really began to take off. The rumors of a silver shortage had, in effect, been confirmed by the exchange.

Silver stood at $34.45 an ounce at the of 1979.
On January 7, 1980, the rules changed again. The exchange announced new position limits for all silver futures contracts of 10 million ounces.

After this announcement, silver really began to skyrocket! And as the price climbed, the Hunts kept buying.

Silver hit $50 an ounce.

But then the ax fell on the Hunts on January 21, 1980. The Comex said that trading in silver would be limited to liquidations only. The exchange changed the rules so that no one was allowed to open any new positions from that point on.

The next day silver fell off a cliff and plunged from $44 to $34 an ounce. Prices kept falling and falling and eventually the Hunts couldn't cover the margin for the futures they had bought.

They were forced to liquidate everything...their entire fortune would soon disappear. Mostly thanks to the exchanges changing the rules in the middle of the game to favor the “home team”.

By the way, the most famous of the brothers, Nelson Bunker Hunt went bankrupt in 1988.

Today's 'Rhyme'

Fast forward to 2011 and we see that silver recently climbed to nearly $50 an ounce again. And what happened? Once again, it appears that some big Wall Street banks were caught heavily short on silver.

And a similar pattern is beginning to emerge. The exchanges have raised the margin requirement on silver and silver dutifully plunged by 27% in a short period of time.

If silver begins to recover again back to the $50 level, look for more “rules changes” to come from the exchanges.

It's what Mark Twain would expect. And so should silver investors.