By
David Knox
Barker
:
In "Capitalism, Socialism and Democracy," Joseph Schumpeter
coined the term "Creative Destruction" to explain the capitalist
process of innovation. Innovation is continually disrupting and
transforming companies, industries and entire global economies
built on the demands, risks and rewards of international free
market capitalism. Innovation and creative destruction are an
integral part of economic and financial market cycles, large and
small, and therefore in the rise and fall of company fortunes and
their shareholders.
Apple (
AAPL
) has out innovated its peers over the past few years. The creative
genius and marketing prowess of Steve Jobs caught many technology
companies flat footed. The iPhone and the iPad have sent
competitors reeling, and sent many hurtling toward bankruptcy.
Nokia (
NOK
) is one of the companies shaken to its foundations by Apple
innovation and competition that has unleashed creative destruction.
Nokia management and the company got too comfortable with their
success. Apple has executed almost flawlessly of late with
innovation that has dazzled customers and captured market
share.
If a company does not have innovative management, or is not free
to innovate due to the constraints of excessive regulation and
taxation, it is handicapped for failure. The forces of creative
destruction decree that if a company does not innovate, it does not
survive. This is especially true in the technology industry, where
global competition is fierce, and product life cycles are shorter
than in many other industries. One reason the U.S. economy is now
on the ropes is that excessive regulation and taxation have
seriously reduced the ability of companies to innovate, but even in
the anti-business climate, innovation is occurring.
Schumpeter also penned the two-volume "Business Cycles." He was
an expert on the Kondratieff long wave and smaller business cycles
and saw innovation and creative destruction as playing an integral
role in the rise and fall of both the business cycle and the global
economic long wave cycle of global boom and bust. Schumpeter penned
the following on the role of innovation and creative destruction in
the capitalist process.
Capitalism [...] is by nature a form or method of
economic change and not only never is but never can be
stationary. The fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new consumers'
goods, the new methods of production or transportation, the
new markets, the new forms of industrial organization that
capitalist enterprise creates. [...] The opening up of new
markets, foreign or domestic, and the organizational
development from the craft shop and factory to such concerns
as U.S. Steel illustrate the same process of industrial
mutation [...] that incessantly revolutionizes the economic
structure from within, incessantly destroying the old one,
incessantly creating a new one. This process of Creative
Destruction is the essential fact about capitalism. It is
what capitalism consists in and what every capitalist concern
has got to live in.
These macro facts on capitalist innovation and creative
destruction are lived out day in and day out in the lives and work
of the research and development teams of companies. Apple is
drubbing the competition at present. The innovation of Apple has
played a role in undermining the market dominance of Nokia, forcing
them to do some serious corporate soul searching and sending them
back to the drawing board.
Nokia is now striking back with some dazzling innovation of
their own. Nowhere is this more evident than in the Nokia 808
PureView, armed with a 41 mega pixel camera that is sending cell
phone aficionados and photographers over borders to get their hands
on one. It remains to be seen if and how this new Nokia technology
is going to team up with Microsoft (
MSFT
).
A new video available on YouTube from Nokia documents the 5
years of work and innovation by the Nokia team that went into the
41 megapixel camera of the Nokia 808 Purview:
What is cool about this video covering the process of innovation
on a product is that it introduces you to the Nokia team members
pursuing their purpose of innovation and new technology products.
The results of their pursuit of purpose is amazing innovation that
is sure to trigger some creative destruction in the global cell
phone and tablet market. Additional information on the Nokia 808
PureView is available on the
Nokia website
.
Game changing innovation in companies like Nokia that have seen
their share prices hammered is where it starts getting interesting
for investors. Schumpeter's interest in capitalist innovation at
companies went hand-in-hand with his study of business and market
cycles. The ebb and flow of the global long wave cycle of boom and
bust is produced by the creative destruction of individual
companies multiplied over the entire economy. Schumpeter believed
the Kondratieff long wave, aka The K Wave, is the most important
tool for economic prognostication.
The large and small cycles can be tracked over the entire global
economy in major market indexes, or in individual companies like
Nokia, or Apple . The chart below is the Level 1 Fibonacci Grid of
Nokia, covering the 2000 high to the low at 2.68 on 5/23/12. Nokia
has made a remarkable roundtrip.
(Click to enlarge)
In our cycle tracking work, in addition to the long wave, we
track the Wall cycle, aka known as the 20-week trader's cycle. This
cycle has an ideal length, but they run long and short in Fibonacci
ratios in time to the ideal cycle. By tracking the Wall cycle in
price, time and sentiment, using Fibonacci and stochastics,
investors and traders can identify buying opportunities. The bottom
of a Wall cycle is where you find real values in large cap global
franchise companies. The indexes are at a high probability Wall
cycle low.
Apple was briefly oversold on the 55-daily slow stochastics and
made a Wall cycle turn. The Level 1 Fibonacci grid on the Apple
chart below uses the December 200 low at 6.8125 and the 2012 high
at 644. Notice that Apple turned on a Level 2 50% target. Apple is
in no immediate danger from Nokia. Many tech stocks are one Wall
cycle ahead of the indexes. They are benefiting from emerging
market demand far more than the average stock in the indexes.
(Click to enlarge)
The Nokia chart below reveals the current Wall cycle, which
appears to be approaching a low in price, time and sentiment. Nokia
clearly has its work cut out to challenge Apple. The drill-down
Fibonacci grid method using the important highs and lows as the
Level 1 grid in any index or security is a method of price analysis
that helps detect the algorithms generating turns of high frequency
traders (HFTs). A hot grid, with many hits on key grid targets, can
identify important turns in any market index or individual
security.
(Click to enlarge)
Benjamin Graham, the father of value investing advocated the use
of formula timing plans as methods to identify when to buy value
and sell it when it gets dearer in price. Tracking the Wall cycle
is a formula timing plan to determine when to buy value. The final
Wall cycles of this long wave winter season will offer some great
discounted value in global franchise companies like Nokia, and
others with more solid financials and fundamentals.
The Wall cycle that began last fall has bottomed, or is close to
bottoming in the indexes and individual securities presently, and
is generating buying opportunities for aggressive investors and
traders in the hunt for discounted value. A company like Nokia that
has really taken a beating from the creative destruction delivered
by the Apple iPhone, is now responding with its own innovation, a
counter to the creative destruction delivered by Apple.
It will be interesting to see how the new Nokia innovation and
Microsoft partnership unfolds when Windows 8 is released later this
year. Nokia has reportedly eaten into Apple's market share in China
in recent months. The word is that Nokia is working on a tablet
computer that will be running Windows 8, to be released in the
fourth quarter. Maybe the 808 PureView is a red herring, and that
41 megapixel camera is going into an iPad killer tablet from Nokia
running Windows 8 and the next generation of Windows Office, and
keyboard accessory. The 808 in the name of the PureView may be a
Freudian slip.
Of course, Google (
GOOG
) with their recent closing of their Motorola acquisition and the
next generation of the Xoom tablets running the Android OS will
attempt to deliver its own creative destruction in the global cell
phone and tablet marketplace. Schumpeter would have recognized
creative destruction taken to a completely new global level of
innovation and competition by these global franchise enterprises.
He would also recognize a key piece of the innovation that will
drive the next K wave spring season that is just around the corner
for international free market capitalism.
Nokia is certainly not a classical value play, since the company
is currently losing money and is facing major challenges
operationally and competitively. However, Nokia has a nice patent
portfolio. The company has approximately $15 billion in cash and
pays a 9% dividend. Nokia is making progress in restructuring.
Innovation can turn even lumbering failing giants around. Not long
ago Apple was also behind the curve and innovation brought it back
to life in a remarkable way.
Nokia is not for the faint of heart. It should not be a core
holding, and I would keep the position limited, but Nokia may just
parley its history of innovation into a new round of successful
competition in the tablet wars. That spirit of innovation is still
alive and well, as evidenced by the PureView 808 41 megapixel
camera.
In conclusion, the K wave is accelerating the current phase of
creative destruction in the global economy. Nokia may have what it
takes to survive the current Kondratieff wave decline and blossom
in the next advance of a new K wave spring season in coming years.
Nokia has been hammered into the bottom of the current Wall cycle,
which is where great value and deals are to be had. A number of
large cap global franchise stocks with yields represent discounted
value are close to Wall cycle bottoms. Nokia innovation, along with
price, time and sentiment are suggesting Nokia is worth a look.
Disclosure:
I am long [[NOK]].
See also
Ford Versus General Motors: Comparing Losses From
International Operations
on seekingalpha.com