Apple shares jumped 6.3% today on news that iPod sales were 3 times better than expected, but the only people to be surprised were the analysts and those who listen to them.

For everybody else with common sense, there has not been a success story more visible than that of the iPod. Just try and count the white earphones next time you take the subway. Or walk into an Apple store and witness the line of people waiting to walk up to the registrar with nothing in their hands - they are almost certainly buying an iPod, a mere 2 minute, simple trade that brings in an average of $250 for the Apple register. If you paid attention to the retailers, there was one buzz word this quarter - iPod, iPod, iPod. Amazon.com has their top 10 sales in electronics; I am sure it must have been delightful for Apple investors to see almost every incarnation of the iPod rank among the top 10.

Three years into Apple’s great run, there have been countless reports of its impending doom, yet today their financials look solid (albeit the stock is a little bit overpriced, but for many, well worth the premium) and the world’s appetite for their products, inexorable. Their mac line is improving, and Steve jobs has done an amazing job addressing the Apple fans regarding the Intel switch:

That’s exactly the kind of enthusiasm that will ease the anxiety of Mac loyals around the world.

Technology wise, however, many were dissapointed today. There were no new iPods, no iPhone, no big content deals, and no buzzword worthy innovations. I think they’ve given the street plenty to think about for a couple of weeks before they throw us another bone.

Think technology stocks are worth earnings multiples in the 50s? Then there is one sector in technology that you should be following closely.

The hard drive industry has been thoroughly neglected for the past few years, with the advent of solid state permanent storage, such as flash, creating some great bargains for value minded investors.

Look for example at Seagate Technology (STX) whose share was battled to $13.82 a share this November, bringing the earnings multiple to around 7.5 in an industry whose earning multiple usually stands in the 20s. The stock had been brought down by Apple’s high profile switch from the disk based iPod mini to the flash based iPod nano. Sandisk (SNDK), a leading flash memory maker, has an earnings multiple of 45 right now while the entire industry is projected to make a loss in 2006.

Flash memory is of course, much ‘cooler’ technology. While hard drives started in the 1950s and looked like bulky vacuum cleaners, flash memory is young and tiny. It has no moving parts and shines where portability is a must with its low consumption and small footprint.
But hard drives are getting faster, smaller and consume far less power, and the research conducted by Seagate has a lot to do with these improvements - they have invested much in perpendicular recording which promises to increase capacity significantly. Capacity is cheap - they have outpaced even Moore’s famous law by doubling capacity roughly once every 12 months (instead of 18 months for processors and memory), making microdrives with multigigabyte capacities better choices for digital camcorders. And of course, they are far more suitable for places where portability is not an issue, like a car’s on-board computer and entertainment, your console, your television or audio system, and soon refrigerators, telephones and security cameras.

Couple these growth prospects with the excellent profits that Seagate posts, the recent acquisition of Maxtor that should give Seagate more bargaining power for the supply of raw materials, and the handsome (for a technology company) dividend the stock pays, and it should really drive you nuts how long this stock has been shunned by Wall Street.

Regardless of what you use on your personal computers, you should be certain of one thing: Microsoft (MSFT), the stock that has been stagnant throughout the bull market of 2002-2005 will rise again.

Windows Vista, set to launch with much fanfare sometime in 2006, will bring about a few interesting changes: a fresh look since the tired Windows XP look, built in search features, and Urge.

Urge is Microsoft’s reply to Apple iTunes (AAPL), however, it seems to be similarly minded with Musicmatch, Napster and Rhapsody that offer ‘all you can eat’ subscriptions, unlike iTunes. Arguably the largest setback to its wide adoption is it’s lack of support for the iPod, which monopolizes portable digital player sales. This is a big handicap which means that unless a new music playing device becomes mainstream (perhaps one that has runs Windows?) the iTunes lead for music downloaded for portable use will remain.

However in our fascination with iPods, we might be forgetting one thing: we still listen to a lot of music indoors. And this is where Windows reign supreme. Given the easy accessibility that Urge is bound to have from the operating system, it should be easy to see how the service will shine just like Microsoft Windows Media Player has shined since it launched with Windows XP, to the dismay of RealNetworks and the European Union that has an outstanding fine against the company for its media player monopoly.

This is not the first time the company has done something late in the game but has managed to beat the competition nonetheless. The Windows operating system, to name one, is based on concepts pioneered by Apple and Xerox. Microsoft may enter slowly into new and untested areas, but has managed to secure its position in each with relative success.

An exception to this rule has been internet search, as critics will point out. I personally switched to Google (GOOG) from MSN Search several years ago, when MSN Search decided popups might be a good idea for their site. Ever since then, I’ve not used it much except to test their revamped services, but needless to say it has not managed to budge Google’s market share much. To do so, it needs to provide users with switching incentives, like easy accessability, say from an operating system into which it was seamlessly embedded. To succeed with MSN Search, Microsoft has to address a growing misinformed bias that it does not do Internet technology well, loosely based on the Internet Explorer shortcomings, and best exemplified during the MSN-Inktomi years, when Yahoo! and MSN Search were run by the same engine yet users would rank (identical) results as worse from MSN than from Yahoo.

This can all change with Vista: Microsoft gets an opportunity to show innovation is still a priority with the software giant, upgrade Internet Explorer and enhance its security features, and the accessibility of MSN search in Vista as well as its proximity to the new Desktop Search will give it a fresh advantage. For Microsoft, 2006 is promising - and MSFT might even break out of its stagnant $25-$30 window where it has been stuck for the past years despite its rising profits and relatively low P/E ratio.

During my Fall 2005 Semester at Hopkins, I took Database Systems with professor David Yarowsky. The course included a final project, which I did with Raymond Buse. Our aim: to build a simulator capable of investigating the performance of technical analysis tools over a long period of time.

Technical Analysis is the study of the price movement for a security in order to extrapolate a dependable trend that could theoretically predict a future price and allow the investor, or as Benjamin Graham would correct, speculator, to act upon this prediction. It is sometimes referred to as chart reading or voodoo finance and contrasts with fundamental analysis, which is the in-depth study of the security, such as the profitability of the underlying company in the case of an equity.

Needless to say, this practice is often the anathema of seasoned investors. To understand why we decided to quantify how a trader would perform if the decision making process relied exclusively on the output of these algorithms. As control data we had two non technical strategies, BuyAndHold and InsiderTrading. The first is self explanatory; the second relies on an oracle of perfect information that knows the exact stock movement of the following day for a particular stock, and performs a transaction only if it will be profitable the next day.

Our results showed that starting with only $10,000, you could buy Microsoft in less than 10 years regardless of when you started to invest using perfect information, however, there’s no stock on the Dow Jones when you would be able to consistently beat the market in the long run using any technical analysis and that in fact, BuyAndHold would beat the other strategies. The results for this study will appear sometime soon on this website.

Given how versatile this simulator is, another interesting study would be to compare Dollar Cost Averaging versus Lump Sum investments; perhaps this will also be done soon, and if so, the results will be posted on this site.