The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

30 August 2005

Katrina's wake - Energy and infrastructure

The cogent analysis that follows is by Harry Wilker, a regular visitor at the table of The Deipnosophist...

We are all hearing now about the human devastation in the Gulf area. I have no information to add to what you undoubtedly already know. Infrastructure issues are hardly as critical as the life-threatening catastrophe in New Orleans and elsewhere, but I've also been monitoring infrastructure issues today. For those interested this is what I've collected.

95% of oil production in the gulf is shut down and 88% of the natural gas production.

10 refineries are shut down representing 10% of the US refining capacity, including refineries owned by Marathon, Valero, Murphy, Conoco Phillips and Shell Chemical. 4 others are running at reduced capacity.

So far, only 1 of about 4000 oil production platforms has been reported as destroyed (owned by Newfield Exploration). 7 drilling rigs are adrift: one is lost (Diamond Offshore) one is grounded (Gulf Santa Fe) and one is listing (also Global Santa Fe) 3 have been secured (Diamond, Noble and Ensco). I don't know the status of the others.

Chevron's refinery - the second largest in the US - has yet to be evaluated as teams have not been able to reach the facility yet due to flooding.

The LOOP sustained little damage and is capable of restarting the offloading of oil within hours of power restoration. The road leading to Port Fourchon is passable.

The Henry Hub which is the offloading facility for natural gas is functioning normally.

The condition of the pipelines leading from the gulf to areas from Denver to the East Coast is unknown.

The Port of New Orleans is completely shut down. The Coast Guard has closed all ports on the Mississippi for at least several days.

There are no estimates as to obstructions or silt in the water either in the rivers or the coastal waters. The LOOP indicated that it may be impossible for tankers to reach the offloading point and that the area around the LOOP might have to be dredged. They simply didn't know yet.

The two major utilities in the area, Entergy and Southern Co, suffered extensive damage to transmission systems. Entergy reported that it might be a month before power is fully restored, though they will focus first on such things as hospitals and infrastructure.

Here's my take on what this all means:

Restarting oil flow to refineries is probably less dependent on physical damage to pipelines and port facilities, than it is on three factors:
• restoration of power,
• clearing shipping lanes and other waters that support the offloading and shipping of oil, and
• availability of personnel.
This last one may be toughest of all, given the devastation and flooding. How quickly will people be able to lift their focus from the immediate family and/or shelter to report to work and how long before they can get there.

I continue to think that the energy bottleneck is the refineries. Most telling to me is what Valero said. They said that they suffered no significant damage and that they could be back in operation two weeks after power is restored. If that's the case for a refinery that didn't suffer damage how long will it be before refineries that suffered damage will be back in operations. One analyst estimated that if Chevron's very large refinery should be unable to function it alone might account for a $1 a gallon spike in gasoline prices. It also pays to remember that the far less extensive damage that Ivan inflicted last year was not totally restored until almost a year later. Of course much of it was restored much earlier but that is how long it took to complete all repairs on all facilities. Katrina is likely to dwarf Ivan in the amount of damage that is inflicted.

The media has largely focused on the rise of crude oil prices since the storm hit, but the rise in natural gas and refined products is much worse. Since Friday's close on the futures market:

Crude up 5.6%
Heating Oil up 14.5%
Unleaded Gas up 18.7%
Natural Gas up 23.2%

All these products are up even more in the after-hours electronic market apparently in response to the proposed evacuation of New Orleans. Several analysts suggested today that shortages of refined products could develop within the next week in the Eastern half of the country.

'nuff said. This is going to get very ugly before it gets better. I can't even imagine what it would be like to be stuck in New Orleans tonight.

"Lake" New Orleans

A New Orleans TV station sends a helicopter to fly over "Lake" New Orleans. The anchors (no pun intended) provide commentary. (Turn on your speakers.) This footage was shot yesterday; the flooding by all accounts is worse today...

A googol of Google

Excellent article that just so happens to mimic many of the comments and insights 'AP' has shared here the past several weeks.

And for a different perspective on the same topic, read
this article...

Update re Apple/AAPL

Apple/AAPL is clustering volume this morning (see chart above; click to enlarge), which likely means an assault on resistance at ~$46.50. Should that come to pass -- and hold above that level -- then it also would equal a breakout from the handle of a well-formed cup&handle pattern. See chart below.

Watch total volume and total number of block trades, if, as, and when the price crosses multiple points of breakout at $46.50 and other, higher hurdles...

28 August 2005

Category 6?

If Hurricane Katrina makes landfall just west of New Orleans, then her full fury will smack the city hard. If Katrina makes landfall just east, then other cities will be devastated. This is due to the fact that a hurricane's force is worst at approximately 2 or 3 pm, when envisioning the storm as a clock face. There is no solution for a storm of this size, but to pray it does not make landfall at all. Of course, a hurricane gathers its force over water, and dissipates it over land, so even that hope is forlorn.

Katrina could be worse than 9.11, with a potential death toll in the 10s of thousands -- despite a warning.

Allan Harris just now forwarded this image...

The alphabet of investments, from A to Y

Robert Cringely covers the letters A, G, and M -- Robert's ardor for Google/GOOG begins to cool. (A base for the stock does that, doncha know, and that is precisely what Google now trades -- a base.) His ardor for Apple/AAPL, however, hots up. WIRED magazine covers the letter Y, as in Yahoo/YHOO. First Wired re YHOO. (Thank you to Deipnosophist reader, Rick Mitchell for forwarding this article!)

The Super Network
Why Yahoo! will be the center of the million-channel universe.
By Josh McHugh

Returning home after a vacation in 2004, Andy Volk dumped his luggage in the hallway and settled into an armchair for an evening of his favorite shows: The Simpsons, Futurama, and The Streets of San Francisco. But when he called up the Now Playing menu on his TiVo, he discovered a couple of things he'd never seen next to the usual items.

A friend who'd been house-sitting had loaded the DVR with a whole new world of television. At the top of the list was Dr. Terror's House of Horrors, something Volk, a product manager at Yahoo!, had never considered watching. He pushed Play. And he loved it.

Every so often, Volk would find that his TiVo had recorded another obscure gem. He told the story to his boss, Bradley Horowitz, senior director of Yahoo!'s Technology Development Group, and suggested that Yahoo!'s video search technology, then in the early stages of development, needed a house sitter of its own. Horowitz had to laugh.

Since his days as a grad student at the MIT Media Lab, he'd been trying to develop a machine-based version of Volk's houseguest. If only a computer could grasp the appeal of a 1965 vampire fest.

Now, 14 years after Horowitz began investigating video search, a tsunami of video is bearing down on all of us, and his once-obscure quest has become urgent. A household with 300 cable or satellite channels has access to 7,000 hours of programming a day, almost 3 million per year. That's a lot, but it's only a fraction of the 31 million hours of total annual programming. Every major cable company is making investments to allow TV to be distributed over the Internet, giving you access to each one of those 31 million hours. And then there's this year's 36-fold explosion in consumer-generated video on the Internet.

This onslaught is already turning the entertainment business inside out. More music videos are being watched on AOL than on MTV. Procter & Gamble is cutting down on pricey 30-second TV spots to beef up the online presence of its packaged goods.(Highlighting mine - dmg) TV Guide announced in July that it would drastically cut the amount of space it devotes to listings, an acknowledgment that viewers now turn to the Internet and onscreen programming guides. And CBS is squaring off in a content-indexing smackdown with Google. Meanwhile, the guy down the block has turned his backyard into a back lot, his basement into an edit bay, and he's landed a global distribution deal - with his ISP.

For its part, Yahoo! is working with SBC and Microsoft on an IPTV/fiber-to-the-curb initiative called Project Lightspeed that uses Yahoo! software to deliver video-on-demand, instant messaging, photo collections, and music. Meanwhile, chief executive Terry Semel, who spent 24 years as an executive at Warner Bros., has recruited a crew of network personnel in Santa Monica to crack open the contractual vaults containing 50 years of rights-encumbered TV and film archives. And Yahoo! has already become the Internet home of broadcast fare like Fat Actress and The Apprentice. "They're clearly thinking of themselves as the fifth network," says Jeremy Allaire, founder of Brightcove, a Net video distribution startup.

Watching whatever you want (or didn't even know you wanted) wherever you are whenever you feel like it has been a fantasy since the early days of the Internet. Now it's a reality that Horowitz refers to as a "high-class problem." He and his charges at Yahoo! are trying to figure out how to solve that problem. When they do, it's good-bye network TV, hello networked TV.

Of course, Yahoo! didn't start out as a TV play. Before Semel took over in 2001 and began steering the company toward entertainment, Jerry Yang and David Filo were running a Web-indexing outfit. Back then, Yahoo! was about straight-up information.

These days, the company has two distinct faces. In Silicon Valley, a band of happy hackers, the descendants of Yang and Filo, work to out-engineer the guys up the street at Google. In Santa Monica, 350 miles south, the Yahoo! Media Group has slapped down $100 million for a 10-year lease on the 230,000-square-foot Yahoo! Center, formerly MGM's home. The office park covers an entire city block, squatting amid the offices of HBO, MTV, Lion's Gate, and Universal. The company won't comment on its mission in LA, but in an internal email making rounds on the Web, Yahoo! COO Dan Rosensweig says, "The growing consumer demand for compelling content on the Internet and the proliferation of broadband is an exciting opportunity. We need to enhance our presence in the entertainment capital of the world."

Last year, Semel hired Lloyd Braun, the head of ABC television, to marshal the media group. While Horowitz is busy working on the technical problem of video search, Braun is practicing the more visceral science of show business in a world of power lunches, calling in favors, subtle arm-twisting, and table-banging. Earlier this year he told the Hollywood Reporter that being in Santa Monica was about fostering relationships "in a way you simply can't do when you're a plane ride away."

Braun is shaking up Yahoo!'s executive ranks by bringing in experienced TV industry personnel: Ira Kurgan from Fox Broadcasting, Shawn Hardin, who ran NBC's Internet division, and, most recently, Dave Katz, a senior VP at CBS.

Braun's quick hires and brash management style have prompted the resignation of Yahoo!'s sports, finance, and television and movie division heads, and the reassignment of three other general managers. But those who remain have seen some early success. For example, Yahoo! crafted a deal with Mark Burnett Productions to become the online host of The Apprentice. The arrangement puts streaming clips of the show on Yahoo! and delivers Trump junkies to advertisers brought aboard by Yahoo!, Burnett, and NBC. Yahoo! also struck a deal with Showtime to promote and stream Fat Actress, the faux-reality show starring Kirstie Alley, and teamed with Pepsi to resurrect a version of the Pepsi Smash music show, which aired two seasons on the WB. On a smaller scale, the company has signed a two-film deal that transformed Gregg and Evan Spiridellis' webtoon studio, JibJab, from an election-year curiosity to the flag-bearer of a new generation of Web-only microcontent.

None of the deals are blockbusters, but together they represent more progress than Yahoo!'s peers have made. Take Google. The ultimate human-machine interface may have stolen the technological limelight from Yahoo!, but it has a lot to learn about human-human interface. At a meeting with CBS last year, Google execs proudly mentioned that after working on an index of the grand old network's video collection they had compiled a digitized database of CBS programs. Never mind that 11 million households around the country are doing essentially the same thing with their DVRs; CBS executives were aghast. The problem wasn't so much that CBS was unaware of the TiVo phenomenon. It was Google's Spock-like gaffe of plainly stating an obvious but painful fact: The networks' stranglehold on content is slipping away. The meeting ended abruptly, and the Googlers were shown the door.

Far from kicking Yahoo! out of the room, Hollywood refers to Semel, Braun, et al. as kindred spirits. "There are companies that are more technology-oriented, and companies like us and Yahoo! that are more consumer-centric," says Showtime executive VP Mark Greenberg, who worked with Braun's group on the Fat Actress deal. "It helps that they talk the same language as we do."

A billion hours of programming is meaningless without an efficient way to search it. Think of trying to find a book in the Library of Congress with no database, no card catalog, no Dewey decimal system. Today's prominent search engines work great for Web pages and OK for still images, which usually contain captions or other identifying information. But video is much harder to sort through.

Turn on your cable to watch Alias and you'll see a basic episode description that reads something like, "Sydney learns a dark secret from her father's past." There's more information in the guides sent out by the studios - metadata denoting whether the show is closed-captioned, the names of its stars, et cetera - but not nearly enough to find the show using keywords. If you're looking for the Seinfeld scene where Kramer runs down the street in a pair of plyometric jump-training shoes, you're out of luck unless you know the name or the number of the episode in which the scene appears (in this case, "The Jimmy," episode 105, from season six).

Several companies are logging closed-captioned transcripts so that shows can be searched with traditional text-search methods, and San Francisco startup Blinkx recently began captioning videostreams with voice recognition software. But computers are still a long way from watching and understanding TV. The thousands of data-center blade servers inhaling and annotating programs around the clock for Yahoo!, Google, and Blinkx are no more able to extract meaning than an ATM is able to know you're having an affair by analyzing your withdrawal patterns. "I know how far we are from true computer vision," says Horowitz, leaning back in his chair in a conference room at Yahoo!'s Sunnyvale headquarters.

In his days as an MIT undergrad, Horowitz heard what has become a legendary anecdote about the hardest homework assignment of all time. According to the tale, artificial intelligence pioneer Marvin Minsky had once told his class to come in with an idea for how a computer could be made to "see" a photograph and identify its contents. What Minsky puckishly proposed would be an overnight assignment has turned into a career-long struggle for Horowitz. In 1995, four years after receiving his master's, Horowitz founded a company called Virage to sell video-monitoring systems, mainly to government agencies like the CIA, FBI, and Department of Defense, which were looking to automate their analyses of foreign-newscast videostreams. In 2004, Semel hired Horowitz to build Yahoo!'s video search engine.

Using technology descended from his work at MIT and Virage, Horowitz is now applying pattern-matching analysis to video files. In addition to transcribing dialog, the system will eventually identify and index shapes, faces, and movements. The analysis software might peg a media file as, say, a Carl's Jr. ad by identifying the logo and text titles that pop up at the end of the spot. Combine that with some of the pattern-matching algorithms being developed at MIT and Carnegie Mellon, and Yahoo! will be able to get even more specific. In the case of a homemade hidden-camera video, the algorithms would make out, for example, two human figures thrashing about in a room. Overlaying another algorithm that identifies faces based on a geometric ratio formed by the distances between a person's eyes would allow the system to compare the results to a database of images and determine that both files star the same person: Paris Hilton.

To illustrate how Yahoo! is applying its resources across the wide range of video on the Web, Horowitz steps to his whiteboard and draws a graph and a power law curve - or "long tail" - starting high on the graph's left-hand vertical axis and plunging downward before curving and straightening out above the horizontal axis to the right. The video content that most everyone has heard of sits at the high end of the curve. These are the hit TV shows and blockbuster films that represent the bulk of what people look for on Yahoo!'s video search engine.

Because there's already such an online presence for megahits - in the form of information, discussion, and dedicated Web sites - Horowitz is confident that the Web's hyperlinking structure will soon make such searches a snap.

Farther down the curve, well-funded and well-marketed programs generally leave a trail, even if they don't break through. To promote shows that have a long shelf life or that get pushed out of top programming slots due to soft ratings - the segment that networks are targeting for VOD delivery - Yahoo! has arrangements with Showtime, Discovery Network, and others in which the cable entities feed hyper-detailed metadata into Yahoo!'s index.

Horowitz's toughest technological challenge kicks in where the curve begins to flatten - a neighborhood of cult faves, obscure but critically acclaimed documentaries, and oddities that enjoy a brief burst of notoriety. To make sense of this part of the curve, Yahoo!'s Web crawlers report back when they've located a video file that's attracted some buzz (as indicated by links from other sites). Horowitz's bots then go to work on the files, scouring the video like an army of hypersensitive couch potatoes and creating searchable metadata.

Way out in the far reaches of the long tail, an endless sea of obscure files with few points of reference make for a region where even Yahoo!'s search bots dare not go. Which is not to say that Horowitz is ignoring this area. He has figured out a way for micro-producers to get their video content indexed and seen. It's a self-publishing protocol called Media RSS. Niche content creators syndicate their content with an MRSS feed, which includes metadata about the work. The information goes out to subscribers just like a blogger's RSS feed and incorporates video and audio.

With the encouragement of Jeremy Zawodny, a prominent blogger Horowitz calls the company's "inside outsider," Yahoo! made sure MRSS was open and nonproprietary. Thanks to that hands-off policy, MRSS has caught on: Both Google and AOL encourage content creators to use MRSS to help their search engines identify and index video.

Horowitz's favorite project is incorporating people-powered metadata systems from two other Yahoo! properties: the recommendation technology from Yahoo! Music and the tagging features from Flickr, the photoblogging company Yahoo! acquired this spring. Google's original stroke of genius was figuring out how to piggyback on human judgment by following the links people make between Web sites. Horowitz is borrowing functionality from two Yahoo! properties to develop something similar for video. The Yahoo! Music collaborative filtering engine uses a scoring system to match listeners with the recommendations of like-minded music fans. Members of Flickr attach tags, or social bookmarks, to photos they see on the site, imbuing the pictures with mental associations that might never make sense to a computer. By combining the tagging and recommendation function into video search, Horowitz is hoping for a Google-esque breakthrough.

Such network-generated filters will enable psychographic siblings to find one another and, ultimately, evolve into social programming networks. There will still be content that's almost universally appealing, of course, but instead of being imposed on us in multimillion-dollar marketing blitzes (see Fantastic Four and Britney Spears), the new blockbusters will be discovered, illuminated, remixed, amplified, and perhaps enhanced by sponsorship money, during a quick passage from obscurity. "If you can create the right social exchange," Horowitz says, "you don't have to do the heavy lifting."

After working on the same problem for 14 years, the man is understandably eager to let the masses do some of the hard work.

Contributing editor Josh McHugh ( wrote about Xbox 360 creator J Allard in issue 13.06.
August 25, 2005
Has Google Peaked?
By Robert X. Cringely

The Biggest Threat to Microsoft Might Not Be Those G-men at All, but Apple

Standing in line at the bank not long ago, I was behind a young man who insisted on maintaining a distance from the person in front of him of about 10 feet. The queue was perhaps 20 feet long and right in the middle was this 10-foot gap. I was in no hurry, I thought. That gap was not going to cause me to get to the teller more than a second or so later than I might if the gap was closed. No problem.

Only it WAS a problem. As the minutes passed that gap started to drive me insane. Finally I asked the kid to move forward.

"It was making you crazy, right?" he asked, clearly enjoying the moment.

Which brings me to Google.

What the heck Google is up to is a favorite topic of conversation this week in high tech circles. What's driving this is a combination of things including the new Google Toolbar, Gtalk, but most especially the company's announcement that it will shortly sell another $4 billion in shares. What does Google plan to do with all that money, people are wondering?

Nothing at all.

It's just a hunch of mine, but with more than $2.5 billion in cash already on-hand, I don't think Google has any plans at all for that extra $4 billion. The company just knows that this is the time when it can probably get the most money for the least stock EVER, so selling a few million extra shares now is just a cheap insurance policy against some later day when Wall Street might not be so enamored of the giant search company.

Yes, Google could buy Skype with that kind of money, but Google won't buy Skype. Google prefers to build rather than buy. And when they do buy, what they are buying is market position, and generally at a fairly low price. I don't expect any multi-billion-dollar acquisitions by Google, whether for cash or stock. Larry and Sergey know too well the story of Yahoo's boneheaded purchase of, making Mark Cuban an instant billionaire and an affliction on both reality TV and the NBA. I blame Yahoo for that, and Google is working hard to learn from Yahoo's mistakes.

What Google WILL do is roll-out incremental products at a blinding pace. Not long ago, PayPal co-founder Max Levchin explained to me that rapid development is an important key to market dominance.

"What you want to do," he said, "is listen to your customers and bring out every two weeks improved versions that would each take your competitor two months to complete. That's when you are on a rocket -- they can't keep up so they can't compete. They lose hope and pretty soon you have the market pretty much to yourself."

That pace of technical development, which probably isn't sustainable for long at any company, isn't POSSIBLE at all at more mature companies like AOL, Yahoo, and especially Microsoft. That adolescent energy is the mojo that makes a startup scarier to Bill Gates than a mature competitor. He knows that if Microsoft ever takes a big dive, it will be because of a Google, not a Yahoo, and certainly not an AOL.

Google plays on its technical reputation even though, if you look closely, it isn't always deserved. Many Google products haven't been revved since they were introduced. And while some Google products are excellent, some aren't, too.

Google likes to play the Black Box game. What are they DOING in all those buildings with all those PhDs? I'm sure they are doing a lot that will change the world, but just as much that will never even be seen by the world. For the moment, though, it doesn't matter because Google can play the spoiler. They offered a gigabyte of e-mail storage, for example, at a time when they had perhaps one percent the number of e-mail users as a Hotmail or Yahoo. And by limiting the Gmail beta, they avoided the suffering of both those other companies when they, too, had to increase their storage allocations, but for tens of millions of real users.

Now Google will do something similar for chat and VoIP with Gtalk, pushing the others toward an interoperability that undermines the hold each company thinks it has on its users.

Google likes being a mystery, too. They are famously paranoid, sure, but they'd be a lot less paranoid if it didn't make them famous. Google, like Microsoft, is a brand built at least partially on envy, which you know is a sin. But at Google, at least, they seem to get a lot of pleasure from that sin.

So are they really buying-up all the dark fiber in an effort to build their own Internet? Are they really going to build a data center in Oregon that uses so much power it needs to be next to a hydroelectric dam? Who knows? Who cares? Google needs ever more bandwidth, sure, so dark fiber makes sense to buy when it is probably as cheap as it is ever going to get. And those 30 acres on the Columbia River don't ever have to become anything since they've already paid for themselves by driving Microsoft and the others a little crazy with wondering.

Google is like that kid ahead of me at the bank, driving others mildly insane and enjoying every minute.

Microsoft is totally obsessed with Google because Bill Gates is obsessed with Google. In a way, Bill needs a bogeycompany like Google to motivate the troops, since they are no longer being wowed by Microsoft's stock performance. Not long ago, I spoke with someone from MSN who said the mood there was so tight that his co-workers were acting like "mad dogs."


But what if everyone is mainly wrong? What if search and PageRank and AdSense are Google's corporate apex. Most companies would be content with that, but Google isn't supposed to be like most companies. But what if they are? I hear a lot of talk about Google doing deals for video and music distribution, but where are those deals? So far it is all just talk.

I hope Google does pull off a couple more spectacular product feats, but I won't be all that surprised if they don't. It will take the company another five years just to mature the businesses they already have.

So it could be that Google isn't the Microsoft-killer many people -- including Gates and Ballmer -- fear the company is. Going a step further, it is even possible that Gates's conviction that he'll eventually be taken down by a startup is wrong, too.

Here's where I go out on a limb, but I think Microsoft's clearest threat still comes from Apple, though not the way most people expect. Yes, Apple is about to take Microsoft to the woodshed when it comes to Internet movie distribution. Yes, Apple already super-dominates the music player market where Microsoft doesn't even really exist. But the real jewel is one Microsoft has to lose, not gain -- the PC platform, itself.

What could Apple do to take down Windows, with or without the help of Intel?

What seems to me to be the answer came to me this week from a reader who had a disruptive idea that I gleefully embellished.

Here are the clues. Microsoft is woefully late with its next Windows upgrade, while Apple is far ahead with even the current version of OS X. Apple is moving to Intel processors and hackers have already shown that OS X can run fine on non-Apple hardware. But Apple doesn't want to give up its profitable hardware business to compete head-to-head with Microsoft. And remember, Apple totally dominates the portable music player market and will probably sell 25 million iPods or more this year.

Every one of those iPods is a bootable drive. What if Apple introduces OS 10.5, its next super-duper operating system release, and at the same time starts loading FOR FREE the current operating system version -- OS 10.4 -- on every new iPod in a version that runs on generic Intel boxes? What if they also make 10.4 a free download through the iTunes Music Store?

It wouldn't kill Microsoft, but it would hurt the company, both emotionally and materially. And it wouldn't hurt Apple at all. Apple hardware sales would be driven by OS 10.5 and all giving away 10.4 would do is help sell more iPods and attract more customers to Apple's store.

Like that kid in line at the bank, it would drive Bill Gates crazy.

The seduction

In my pantheon of all time great writers, Vladimir Nabokov ranks high, very high. From the playful and intelligent Pale Fire, to the brilliance of Pnin, all the way to the famous (or infamous, depending upon your perspective), Lolita, Nabokov stretched himself, always reaching for greatness. Each of his novels is a marvel. This Boston Globe article, with its especially haunting penultimate clause, offers some explanation re Lolita...

The seduction
At 50, Nabokov's 'Lolita' still seduced -- and disturbs
By Leland de la Durantaye

IN THE SPRING OF 1940, on the last crossing of a French ocean liner that would be sunk by German U-boats on its return voyage, Vladimir Nabokov, his wife, and his young son arrived in New York. The family's first, precarious years in America brought many changes, but one element remained constant. Every summer, Nabokov and his wife would drive cross country to the Rocky Mountains, which offered the country's best butterfly hunting.

On those trips, during sudden rainstorms, bouts of insomnia, long drives, and flashes of impromptu inspiration in this or that alpine meadow, the Russian emigre Nabokov began to jot down on three-by-five-inch cards a singular story. This story was to become the greatest and most controversial American novel of the 20th century: ''Lolita."

The summer over, Nabokov continued work on the scandalous tale of the middle-aged Humbert Humbert's love for 12-year-old Dolores Haze. He spent long hours in the libraries of Cornell University--where he had become a professor of Russian literature--reading psychological case studies so as to more effectively impersonate the tones and torments of a madman. He rode around in schoolbuses in order to get the feel of American children's slang. Despite his efforts, the diabolically difficult task he had set himself frustrated Nabokov so much that one day in 1950 he decided to put an end to his suffering and took the unfinished manuscript and note cards to the incinerator behind his house. His wife caught him just in time.

When the 54-year-old Nabokov at last finished ''Lolita" in 1953, it was his 12th novel and his third in English. He presented it to a publisher and was told that the book was excellent, but that if he published it they would both go to jail. He remained tight-lipped on the subject of his new work, and decided to publish it under a pseudonym. With time, however, it became clear to him that nothing was more likely to attract the attention of the censors than anonymous publication, and agreed to publish the work under his own name.

''Lolita" appeared in two pale green volumes from the Paris-based Olympia Press in September 1955. Few readers took notice of the foreign publication until December, when Graham Greene, writing in the London Sunday Times, included the book by the virtually unknown Nabokov in his list of the three best he had read that year. John Gordon, a conservative Scottish editor, examined the unexpected entry in Graham's list and shortly thereafter denounced it in the Sunday Express as ''the filthiest book I have ever read," adding that it was ''sheer unrestrained pornography." Sales soared, interest increased, and when, after much fearful hesitation on the part of publishers, the work was published in an American edition in 1958, it spent six months as No. 1 on the bestseller charts.

''Lolita" was a disturbing book--both in its manner and its matter. Its matter is the relationship--sexual and other--of a European professor and his pubescent American stepdaughter, who he calls by the pet-name Lolita. The book's manner is more difficult to describe. Its form is a faux first-person memoir written, in the words of the dubious European in question, ''first in the psychopathic ward for observation, and then in this well-heated, albeit tombal, seclusion." Nabokov's narrator composes the text in 56 days, at a feverishly brilliant pace. He takes personal, narrative, and linguistic liberties (his native language is French) which are as surprising as they are amusing. He shows brilliance in virtually every respect. The name he elects to write under is Humbert Humbert.

. . .

In 1958, ''L'Affaire Lolita," as the French had christened it, was just beginning its long career. The following year, Nabokov wrote a screenplay based on his novel for Stanley Kubrick and James Harris. The 1962 film propelled Kubrick's career and its success allowed the Nabokovs to retire to Switzerland.

But stranger forms of reception were already underway. As Kubrick was beginning to film, an Israeli guard in a Jerusalem prison gave a copy of ''Lolita" to Adolf Eichmann, who was awaiting trial. An indignant Eichmann returned the book two days later, calling it ''a very unwholesome book." The sulphurous halo of Nabokov's novel was still burning brightly in the popular consciousness of 1960 and it seems that Eichmann's guard gave the book to him as an experiment--a sort of litmus test for radical evil: to see whether the real-life villain, he who impassively organized the transport towards certain death of countless innocents, would coldly, or even gleefully, approve the various and vile machinations of Nabokov's creation.

The incident nicely encapsulates the debates which have animated the book's reception in the past 50 years. Many gifted readers have found ''Lolita" a beautiful and rending tale of love and loss. And many gifted readers have found it a shameless apology for sin and style irrespective of moral content.

A hint as to how best to read it is offered in a foreword to the novel. Therein ''John Ray Jr., PhD" explains how Humbert Humbert's manuscript, titled ''Lolita, or the Confessions of a White Widowed Male," came into his possession and why he has agreed to see it into print. He warns that in reading one will be ''entranced with the book while abhorring its author." The forward was written by none other than Nabokov himself (over the course of the novel this becomes clear--but not so clear that an English press as late as 1979 was fooled and published an edition with the foreword replaced by one commissioned from Nabokov enthusiast Martin Amis). What has so fascinated and divided readers is how one should react to the novel. Or, in other words, how to be ''entranced with the book while abhorring its author."

The author in question, however, is not Nabokov, but his mesmerizing creation Humbert Humbert. In interviews and essays Nabokov was careful to underline that Humbert was a ''scoundrel" and a ''rogue." But Nabokov was also careful to underline that Humbert was not only a scoundrel and a rogue. ''In his last stage he is a moral man," wrote Nabokov of the turn in Humbert's thinking which takes place at the end of the novel, ''because he realizes that he loves Lolita like any woman should be loved. But it is too late, he has destroyed her childhood."

Lolita is the story of Humbert Humbert's ''nymphelepsy"--and, more particularly, his love for a particular ''nymphet." A nymphet is not just any young girl, and not just any lovely young girl. Discerning one, as Humbert ecstatically explains, requires an artistic sensitivity--and leads one to the heart of his undertaking.

''A normal man given a group photograph of school girls or Girl Scouts and asked to point out the comeliest one," Humbert tells us, ''will not necessarily choose the nymphet among them. You have to be an artist and a madman, a creature of infinite melancholy, with a bubble of hot poison in your loins and a super-voluptuous flame permanently aglow in your subtle spine (oh, how you have to cringe and hide!)..."

Humbert prides himself on this artistic sensibility, and more and more compares his love for Lolita to that of an artist for the elusive image he is trying to realize in a given work of art. With startling refinement and real cunning Humbert begins then to lead his readers down a dangerous path.

. . .

One of Lolita's finest readers and first defenders, Lionel Trilling, wrote as early as 1958 that in reading the book, ''we find ourselves the more shocked when we realize that, in the course of reading the novel, we have come virtually to condone the violation it presents.... we have been seduced into conniving in the violation, because we have permitted our fantasies to accept what we know to be revolting."

Humbert's seductive force comes in large part from his freakish rhetorical gifts--and also in large part for one of the seductive comparisons he repeatedly evokes. Just as an artist is first and foremost responsible to his or her own inspiration, Humbert describes himself as first and foremost responsible to his passion. He is soon so consumed by the kindling of his own senses that despite his powers of perception and despite his sensitivity, he acts with callousness and coldness to the nymphet he claims to so ardently love. The lesson he learns he learns ''too late."

It is this lesson learned too late which spurs him to a special undertaking--the writing of his ''confession." Nabokov has Humbert compose a memoir in which he narrates not from the point of view of the regret and repentance which is his own at the time of writing, but from that of the euphoria and haunted rapture which preceded it. He writes from the perspective through which he had gradually persuaded himself that what he was doing to young Lolita could be explained, could be justified, was not so bad after all.

This device allows for the fine pattern of remorse running along the blade of his ''conspiratorial dagger," as he cryptically calls it, to remain for a time invisible. When it ceases to be so, and when he ceases to recreate and relate his coldness for the sake of what he calls ''retrospective verisimilitude," the reader can at last understand why he had chosen to call that dagger ''conspiratorial" in the first place.

Against whom was it turned? Against whom did he conspire? ''Tum-tee-tum. And once more--TUM!," wrote Nabokov in his 1934 novel ''Despair," told from the perspective of an earlier murderer and madman who thinks himself an artist. ''I have not gone mad. I am merely producing gleeful little sounds. The kind of glee one experiences upon making an April fool of someone. And a damned good fool I have made of someone. Who is he? Gentle reader, look at yourself in the mirror."

Bertrand Russell once noted that there is nothing so useful to a democracy as the immunization against eloquence, and Humbert's memoir should be seen in a similar light. What he ultimately tells his readers is: What I have done is monstrous, let no amount of eloquence ever convince you that such acts are anything but. Look at them for what they are. Look at them for the pain they cause.

Stated somewhat differently, the most brilliant American novel of the 20th century, now a round and ripe 50 years old, tells us that the artist cannot live in the world as he lives in the world of words--and that this is a lesson worthy of expressing in the world of words.

Leland de la Durantaye is an assistant professor of English and American literature and language at Harvard University

26 August 2005


In these two posts (click on the embedded link for the first post), I warned about the coming bearish action for the homebuilders group. Please note the careful distinction between "bearish" and "correction"; always careful with my word selection, I many times still confuse rather than enlighten.

Anyway, as I scan various Wall Street research and investing blogs, I am not surprised to discover these stocks continue to be recommended for purchase. That will again be the case -- someday. Until then, however, lower prices beckon.

First arrives the possible support at the fast-approaching 200-day simple moving average (sma) -- and my forecasted initial decline of ~30%. If this specific sma successfully arrests the price decline for each stock, then the decline could be characterized as a "correction" within a continuing bull market for this group. However, there is nothing in the charts that indicate the 200-day sma will be anything other than a speed bump on the way to lower prices. This then qualifies or denotes as bearish action; i.e., a pattern of lower highs and lower lows.

Continue to stand aside, as long side trades are solely for the nimble, and fleet of (trigger) finger. Short sale bets will likely continue to pay handsomely.

Comments? Questions?

Perfectionism and investing

The excellent essay that follows is by
Janice Dorn, M.D., Ph.D.
Director, Wellness and Longevity Center

Trading is not about perfection. It is about probability and progress. All charts, analyses (fundamental and technical) and trading plans are built on probabilities.

Why then, do so many traders strive for perfection? Why do so many traders miss trades, waiting for exactly the right entry and then beat up on themselves when it doesn't come and the position runs away while they sit there scratching their heads and condemning themselves?

Why are so many traders trying to turn a game of probability into one of 100% certainty?

The answer lies in one of the cardinal sins of trading which is PERFECTIONISM.

Perfectionism can be a great help to people in many professions, but can be fatal to a trader. Perfectionists, always trying to find the Holy Grail of trading go from one service to another, from one system to another, looking for a way that they can be right all the time. YES! Now, I found it. It’s this trading room, or this service, or this indicator! Wait... something is wrong here. Not all of these trades are working and I have draw downs! How can it be that this particular method failed and I actually had to take a loss? Must be something wrong. I will try harder and look for an even better system, a more expensive service, a new and improved guru, some absolutely no-fail software so that I can have ONLY WINNING TRADES.

This is perfectionism in action. Not only does this type of irrational behavior and belief undermine and demoralize a trader, but it takes away all the enjoyment and fun of being in the markets. It leads to depression with depletion of psychic and physical energy, and leaves the perfectionist to confront his basic and overriding fear--- fear of failure. In the extreme, it leads to physical and mental illness, including addiction to prescription drugs, alcohol, or illegal substances as well as other addictions. The pain of failure or the haunting fear of failure is simply overwhelming, and one turns to whatever works to medicate the pain.

I want to share something of my personal history with you, as I believe that many of you can identify with and learn from some part of this story (and if you do, please let me hear from you?)

My parents were seriously ill from the time that I was born. I truly believed that if I was absolutely perfect, scored the highest in school, did the best at music and dancing and elocution and debating that I could make them better. So I did that. I had no life outside of study and learning. I was the perfect little daughter and even became the perfect little doctor for my sick parents, even though I was only 13. Shortly after this, while I was still in my teens, both of my parents died. I was not good enough or perfect enough to make them better. So- I tried even harder and studied more and more, to the complete exclusion of any personal or social life whatsoever. This time, I was going to be perfect for my dead parents to show them how wonderful I really was and how much they should be proud of me. This reached absolute culmination when, after receiving two doctorate degrees, I still had to continue with more and more exams and more and more training. Can you imagine anything so ridiculous? Even after my parents died, I was still trying to get their approval by showing them how brilliant and talented I was.

Many years later, I suddenly became critically ill, stopped breathing and lapsed into a lengthy coma. This was the culmination of years and years of unrealistic internal demands that I set on myself and which manifested as addiction to perfection. It was only when I awakened from coma that I started on a new road and a new path. I was not superwoman... never was and never could be. Yes, I would continue to work hard and to achieve, but I could never in a bazillion years be perfect. I am not and you are not. So, when I tell you to "Get over yourself" I mean that I had to get over myself. I had to address the demons of perfectionism and move past them. I accepted that I am a flawed human being and acknowledged that I had certain real and wonderful strengths. I chose to concentrate on the strengths and stop beating myself up for the weaknesses.

"Life can be lived forwards, but can only be understood backwards" ~Soren Kierkegaard

What does this have to do with trading?

This is what happens with perfectionists. Perfectionists are made, not born. We are taught from an early age by demanding (and often well-meaning) parents that we have to be the best in order to win their approval and the approval of others. Unfortunately, this is totally upside down. Perfectionists share a belief that perfection is required in order to be accepted by others. The reality is that acceptance cannot be gained through performance or any other external factors. Self-acceptance is the root of happiness and the true beginning of personal evolution.

If you have a perfectionist mentality when trading, you are setting yourself up for failure, because it is a "given" that you will experience losses along the way. You must begin to think of trading as a game of probability. Your losses ( that you hope will return to breakeven) will kill you. If you cannot take a loss when it is small ( because of the need to be perfect), then you will watch that small loss grow into a larger loss and so on into a vicious cycle of more and more pain for the perfectionist. Trading on hope does not work. The markets can remain irrational for a lot longer than you can remain solvent.

The object should be excellence in trading, not perfection. Moreover, it is essential to strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. This is a marathon... not a sprint.

The greatest traders know how to take cut losses and let winning positions run. Perfectionists often do exactly the opposite. They get in at the wrong time, stay in too long and then get out the wrong time. Perfectionists are always striving and never arriving. The market will find the flaw in a perfectionistic trader and exploit it day after day. The market is your greatest teacher and your most demanding critic, so take this wonderful opportunity every day to learn about yourself and make yourself strong.

If you see in yourself this trait of perfectionism rearing its ugly head, it's OK to get angry at it and even yell or curse at it. Do whatever it takes to acknowledge it and then find a way to fix it.

Here are a few suggestions:

• Try to appreciate and enjoy the process as well as the outcome.
• Set more achievable and realistic goals for your trading.
• Remember that your self-worth and your worth as a human being to those who love you does not fluctuate from day to day depending on if you win or lose that day.
• Focus less on achievement and more on enjoyment.
• Trading is serious, but it should be fun and not something which one approaches with fear and dread.
• Lighten up. Laugh more (especially at yourself).
• Learn from your mistakes, and forgive yourself and make peace with your past. Strive to be better - not perfect; just an amazing human work in progress.

"If we were always to wait for the most favorable combination of circumstances, no enterprise would ever be undertaken. There can be no end without a beginning--there was never an enterprise in which everything fitted in perfectly, for chance plays a leading part in the affairs of all men. Obedience to rule does not ensure success, but success, on the other hand, furnishes a canon - a rule of conduct" ~ Napoleon Bonaparte

25 August 2005

Dealing with the inevitable losses

I follow Price's comments, when appropriate, with my own [found within brackets and italicized]...

Handling Losses
Price Headley

Most traders typically like to talk about their winners while avoiding any recollection of their losers. Smart traders will be aware of the patterns that occur with losing trades, so as not to hold losing trades any longer than necessary.

If you have been an investor for any length of time, you will have experienced a loss. While experiencing a loss is less than enjoyable, the real danger of a losing trade is the threat it poses to your confidence and your mental approach. That said, here are some ground rules to keep in mind:
1. Understand the difference between confidence and unreasonable expectations. You should believe that every trade you place, based on your systematic criteria, is going to be a winner. If you are not confident of that, then don't place the trade. However, realize that over a given length of time, at least some of your trades will work against you. Even a great trading system fails sometimes, so your job is to make sure your system has an overall net positive return. If you are redefining your trading system for every trade in an effort to insure success, that is simply a signal that the system is ineffective. [I dislike the use of the word, "system" (I prefer "method" or better yet, "plan"), but concede Price's argument. In particular, his final sentence.]

2. Cut losses. It is critical that you be willing to take small losses before they turn into big losses. I can't tell you the number of times I've heard someone say about a stock "I'm sure it will come back.", only to see the share price continue to deteriorate. Besides doing damage to your account value, riding a loss can be a substantial blow to your confidence. If you are that confident about a stock, then sell it at a small loss and buy it back when you see it begin to turn around. [This is one method; there are others. Most traders, however, have no method, no plan.]

3. Don't try trade your way out of a loss. (This is an extension of rule number one.). By this I mean don't follow up a loss by placing a trade you wouldn't have normally placed in an effort to make up for the loss. The past can't be changed, so let go of it and approach the next trade in an unbiased manner.

4. Constantly learn. I'm not going to say there is something to be learned with every loss, because sometimes there is not. When there is something to learn though, then you certainly should learn it. More importantly, if what you learn is something that will improve your trading system, take it and apply it to your system. (Notice here that I said to apply it to your system, not just to your next trade.) Your system must have an overall net positive result, but there is nothing wrong with constantly improving your system.

5. Don't let losses paralyze you. It's just part of investing. While a loss may give us reason for caution, take a step back and look at your overall goals and your overall trading approach. If your confidence is injured, then paper trade for a while until you can see that your system has merit and you can invest successfully. It's imperative that you don't simply avoid investing. [Investors invest and traders trade. One critical difference between the two is time. Have time work for you rather than against you. There is a difference between using time to your advantage (timing) -- and doing nothing. Of course, it is altogether a different matter if you have no investing methodology (read, plan) in place.]

24 August 2005

Whoa there, tiger!

"Over the past 25 years, Stalking Cat, 47, has received so many surgical and cosmetic procedures he has lost count. And he says all of them--from full-face tattoos to fanged dentures to steel implants for detachable "whiskers"--have been done to achieve oneness with what he calls his totem, the tiger." (Article)

23 August 2005

Pat Robertson calls for assassination of Hugo Chavez

USA Today

Religious broadcaster, Pat Robertson called on Monday for the assassination of Venezuelan President, Hugo Chavez, calling him a "terrific danger" to the United States. Robertson, founder of the Christian Coalition of America and a former presidential candidate, said on "The 700 Club" it was the United States' duty to stop Chavez from making Venezuela a "launching pad for communist infiltration and Muslim extremism."

I have some questions...
• What type of religion is it that calls for the killing of other people?
• Does it even qualify as a religion?
• Because he (or anyone) disagrees with you somehow qualifies as sufficient reason to "terminate with extreme prejudice"?

I could continue, but really this is despicable. I realize politics and religion are topics that tend to polarize both people and conversations, and thus I stray from it on this blog -- and yet, this latest affront from Pat Robertson is an offense against our humanity. Or are we in danger of losing that as well? End of all days, here we come.

Please feel welcome to share your thoughts and comments...

22 August 2005

Google Desktop

Brad Hill re Google Desktop...

"Today Google releases a beta of
Google Desktop 2, a thoroughly revamped version of the computer-searching program. This iteration further erases the difference between local content and network content, a dividing line already smeared by the original Google Desktop Search.

"The most significant interface change is in the appearance of a vertical sidebar that slams onto the side of the desktop, top to bottom, and presents various information nuggets from news, weather, photos, email, and stocks, to … [gasp!] ... RSS feeds. These are not called RSS feeds, but Web Clips (further justifying Microsoft’s too-controversial testing of “Web feeds” as an alternate name for RSS). The sidebar contains bookmarks and a scratch pad. Tell me if I’m wrong, and pinch me if I’m asleep, but this thing is starting to look a little like … a browser. It can be minimized manually, but it actually remains open on the desktop even after clicking Show the Desktop in the taskbar. Let it be known from this moment: Google is serious. It wants to take your desktop away from Microsoft..."

Brad's complete comments can be found here, which include an embedded link to the Desktop download. (Also in this blog's sidebar, under "Google".)

In a separate item comes this article from John Markoff at the NY Times (requires free registration):

"Where to Spend $4 Billion? Google Has Plenty of Projects in Mind"

"This week, in two product introductions, Google will both reinforce its central mission and give an early hint of how it is planning to broaden its business strategy beyond advertising-supported Internet searches. On Monday, Google is planning to introduce a second-generation version of its downloadable computer search tool, Google Desktop... Google executives say they plan to unveil on Wednesday a "communications tool" that is potentially a clear step beyond the company's search-related business focus..." (See the complete article for all the juicy details.)

As a futurist, I vote in favor of the space elevator. Heck, even as an investor, I vote for the space elevator. Especially in light of the developments and breakthroughs that accumulate rapidly in the field of nano-technology, an enabling technology:

"Scientists have created the ultimate ribbon. A thousand times thinner than a human hair and a few centimetres wide, the carbon sheet is stronger than steel for its weight, and could open the door to everything from artificial muscles to a space elevator capable of sending astronauts and tourists into orbit.

"The team of nanotechnology experts from the University of Texas at Dallas and the Commonwealth Scientific and Industrial Research Organisation in Australia have developed a way to assemble a form of carbon called "nanotubes" into flat sheets."

(All this futuristic speculation matches off well with the very entertaining novel I now enjoy, The Collapsium by Wil McCarthy. (Link in sidebar.) The ideas Wil tosses out are exciting and way out there, and yet each is doable. In fact, Wil pursues now the notion of programmable matter, a topic of a future presentation of the Las Vegas Future Salon.)

21 August 2005

quod erat demonstrandum

By now, everyone knows I have been screamingly bullish on Google/GOOG for months before its IPO one year ago. Although I remain as bullish as ever, despite the higher price and valuation, I turned short term cautious during June (as most of you will recall). Now is a good time to show you why that was, and what I expect going forward...

[click to enlarge]

Area 1 (in the chart above) is a top. Not just any top, however, but a rising top. Note points a, b, and c. These are reversal days from new all time highs. If you look closely at this or any chart, you will discern many such reversal days, but not all reversal days are similar. Point b created for me a more cautious, less bullish (short term) environment. Point c reified that concern. I believe it axiomatic that valid price support is prevalent only in bull markets, and valid price resistance is found only in bear markets. Bull markets repeatedly exceed resistance just as bear markets repeatedly exceed support. The typical decline following such a top, however, tends to be shallow in price.

Yes, I know everyone is now advising you to sell (and even short) Google/GOOG, but not all broken trend lines result in a pattern of lower highs and lower lows. Some instead are prefatory to a fresh intermediate term base within the continuing long term uptrend. Thus are most investors fooled; by the inability to have spatial awareness, to place a price and value within any meaningful context. In fact, note Point A, which is the first bullish reversal.

And this is precisely what Google/GOOG has every appearance of now building -- a new intermediate term base. This base does not preclude the possibility of lower lows; in fact, the decline could reach down to ~$250 +/- 5%. (Recall the rising top included successfully higher highs.) Note too the dessication of volume the past month. It is only one month into a pattern that typically requires either three or six months to complete before stretching to new highs. If I had my druthers, this base would continue for the full six months; after all, the larger the base, the larger the ultimate move. QED.

In a Lonely Place

It requires a mere two albeit pithy paragraphs (from London's Observer) to second my notion that the film, IN A LONELY PLACE, is worth your viewing time. (For link, see sidebar, notable films.)

"Three Hollywood legends were involved in the production of In a Lonely Place, and yet it is the most underrated film any of them ever made. Its director, Nicholas Ray, is now best know for Rebel Without a Cause; Humphrey Bogart was already famous for his romantic pairings with Lauren Bacall; and Gloria Grahame remains an underrated actress altogether. The plot revolves around a screenwriter suspected of murder, and contains two flawlessly powerful scenes. In the first, Bogart meets Grahame for the first time, in the police station where he is being held. Grahame - a new neighbour of his - is interrogated about him in his presence, and what she says gets him out of jail. They sit side by side facing the police inspector; she never addresses Bogart directly. And because of this distance between them it is one of the sexiest pick-up scenes in the history of cinema.

"The second flawless moment comes right at the end. Bogart has been under investigation throughout the film. Meanwhile, their relationship reaches such a pitch of broken trust that by the time Grahame gets the call from the police to say he is innocent, it's too late. Whether or not he's a murderer has become irrelevant. What matters is that he has killed off what there was between them. So what began as a thriller turns out to be a love story of the least sentimental kind. Perhaps the greatest: harsh and sexy and warm and bitter and true."

19 August 2005


As a result of the new share offering to raise ~$4Billion, an interesting albeit old argument reforms itself around whether the current valuation for Google/GOOG represents too-high a valuation. Or whether the offering presents a fetching price. (Embedded links follow.)

Thesis Antithesis Synthesis

(Jim Cramer's thesis of the valuation argument follows. Unfortunately, his site requires registration, so I reluctantly paste the comments in full below. From Allan Harris of All Allan)

Your comments re the whole megillah...?
Jim Cramer's argument in favor:

Whether it's $4 billion in Google/GOOG stock that's for sale in this offering or $40 billion, in the end, it will be absorbed and absorbed at a less-than-huge discount. Because Google's got earnings, and someone's going to pay for those earnings.

Sure, we can fret that this is new spending money. What are they going to do with it? Buy Time Warner? Just kidding.

Still, the issue is that there's a potential for $10 in earnings power in 2007 for this company, given the astounding lack of competition and the potential for it to monetize paid search. Something has to be paid for that $10.

It's simply a "solve for M" situation, M being the multiple you want to pay for it.

There are a couple of ways to solve for M. There's the value, pristine way, which will produce nothing that can work. And there's the practical, relative way, in which you look at where other stuff that is like Google is trading, and you create the mosaic of M, which I will share with you now because it is what I used to do at my hedge fund.

First, I recognize that solving for M is distinctly soft algebra. How much certainty is there to the $10 EPS number? Frankly, it is possible; it isn't even a stretch if everything goes to plan, which, of course, means above plan.

But I like to say immediately that such a possibility leaves no room for doubt. So let's give it a haircut. Let's take 10% off that number. Say it will only earn $9. Give us some margin for error.

Now, what's the growth rate? Google's been growing about 35%. I expect that the growth rate can accelerate as it begins to monetize even more than just paid search. Again, though, let's say it doesn't. Leave it at 35%. I have been willing to pay as much as twice the growth rate in price-to-earnings ratio, but no higher. That yields a 70 P/E maximum. Right now, I could plug that in and come up with 70 times $9, which equals $630. Wow, and whoa! Too ridiculous. Right?

Consider, though, if you own Yahoo/YHOO: You are paying that same P/E for a growth rate that is less than Google's. If you own Whole Foods/WFMI, one could argue that you are paying almost the same multiple for growth that is two-thirds as good.

So what do you do? Do you sell Yahoo! and Whole Foods, two winners, because they are ridiculously overpriced? Or do you say, "Hold it, I have made good money with those two. Maybe I will pay 70 times earnings for Google." Right there, you've got pure mutual fund-think, and you can see why I believe this Google offering will be put away pretty effectively. Because the stock is $350 below where the guys who own Yahoo! or Whole Foods, or eBay/EBAY or Broadcom/BRCM, for that matter, are already willing to pay.

So, stick a pin in that thinking.

Now, I like to say, "Wait, what's the global outlook like for growth?" I believe it is slowing. I believe that rates could peak soon, and that growth is throttling back because of high prices for commodities and homes. In a slowing growth environment, what should I be willing to pay for the stock of a company stock that doesn't have much economic sensitivity at all and could keep growing at the same pace while the world slows?

Look out, you aren't going to like this answer: I believe that a company like that deserves a super-premium. Maybe I will even waive my 2 times growth rate rule and put a 3 times growth rate multiple in place, as I have paid in other times when the economy was shifting down because of the Fed. I have done that on Procter & Gamble (PG) , Pepsi (PEP) , Best Foods and on Anheuser-Busch (BUD) . Maybe I'll do it here. What would that yield?

Ninety times 9 = $810. Holy moley, don't mention that, please! They will lock me up.

OK, so now let's backtrack. Let's say that the $9 I am using is really $8. Let's say the growth shifted to 25%, a decline no one is forecasting. Let's give that 2 times the growth, meaning a 50 multiple, and multiply that by $8. That comes out at $400.

Oh, no, still ridiculous.

At this point, I usually then turn to nearer-term earnings, and say, "OK, what's the multiple on the $7 I believe Google can earn next year, because these other formulas are too bullish and don't take into account things I can't foresee in Google's business or the macro environment."

Let's say that the growth rate slows to 25% next year. Let's give that 2 times. Fifty times $7 yields $350.

And that's been my target. That's how I get there. You can see that I have to stretch and cajole and shrink all my data to come up with a target as low as $350, and I only do that because, well, I don't want to give you the real skinny 'cause it is too bullish and too many things can go wrong.

But when you use that kind of analysis, which is as "conservative" as it comes in the "solve for M" game, you realize that where you buy Google on this print will be a pretty good investment, maybe even better than you have a right to expect, because the temporary supply imbalance yields a lower price than you would otherwise expect.

Consider it a birthday present from Google to you.

Happy birthday.

Although the terrain might be uneven, even rocky at times, the topology remains uphill (up in price).

The Next Big Thing

The Financial Times gathered together Bill Gurley and Richard Waters for a discussion on the next big thing for the Internet. The conversation that results makes for fascinating reading.

"I’m firmly in the “brave new world” camp. True, broadband has been coming for years and we’ve been hearing about wireless internet access for so long it’s getting tedious (I remember chairing an FT wireless conference in London five years ago and hearing several speakers claim that we would soon all be carrying handsets with location-sensing technology that would pick up details of special offers in stores as we walked past: someone pitched the same idea to me last week. It sounds as daft now as it did then.)

"But a couple of things make this much more of a breakthrough moment. One is that penetration of broadband (define it how you like – I think it’s less about speed than being “always on”, so slow-motion US broadband counts in my book) – is reaching the point where it becomes the norm. Once a mass of people is connected to the web in “always on” mode, new forms of behaviour – in how you communicate, find information, whatever – take over. (Wireless will extend the “always on” experience, though I still think it’ll be mainly limited to communication like e-mail for some time.)

"The other thing is that, when you mix pervasive technologies like broadband with other, newer, more disruptive technologies, interesting things happen. WiFi is clearly the leading contender here. With broadband and WiFi in the home, behaviour starts to change and the impact of the technology is magnified. One and one add up to more than two. The equation becomes: Broadband + WiFi = Voice over IP all over the house, and the end of phone bills as we know them. This is powerful and disruptive stuff, and its impact has not been felt yet."

I am curious: what do you think is "the next big thing"...?

18 August 2005


The market enjoys its first rally from intra-day lows -- right on schedule and as expected. (From yesterday's post, Squiggles: "This post also should align with a short-term (intra-day) downside completion to this phase of the decline (more intermediate term weakness likely during the next 4-8 weeks). I expect a reversal up and back into the sideways trend, as early as mid-day today or tomorrow.")

The rally - so far - is robust, and gathers momentum. But will the marke close higher than the intra-day recovery highs, perhaps even a positive change for the day? Only her hairdresser knows for sure!

17 August 2005

A New Dimension

Venture capitalist, Fred Wilson, believes we need “a new dimension” — something beyond search and into relevancy.

“I feel in my gut that we need a new dimension, a new vector, a new lode to mine. And I feel that we are close to finding it … Many have said that search is the new dimension. Google’s success would certainly suggest that they have found the next lode to mine, and are doing a damn good job mining it. But I think search is just one of the vectors and that the new dimension is relevance. And search isn’t the ultimate in relevance.”


Choose your life

This Flash program helps you choose the person you will grow to become. Be honest now...


Always hesitant to make market 'predictions', I nonetheless have done so during the past 4 months. (Fortunately, each one has been spot-on, even though it seems self-aggrandizing to make such a claim.) I did this to show a methodology for aligning the market's (many) oscillations with your expectations for individual securities.

This post, however, will mark my last 'prediction' re the market's squiggles. By now, you should have noted that the stocks I select trade stronger than the market -- they are leaders. This means they rise more and faster than the market when it rises and they decline less and slower than the market when it declines. Moreover, you should be able to make this differentiation on your own. Thus, you can view the specific recommendations as distinct from the market's oscillations. (What remains are your own vacillations. ;-)

This post also should align with a short-term (intra-day) downside completion to this phase of the decline (more intermediate term weakness likely during the next 4-8 weeks). I expect a reversal up and back into the sideways trend, as early as mid-day today or tomorrow. Yesterday's session has the appearance of a short term selling climax due to:

Intermarket analysis: bonds rising, yields falling, oil looking short term toppy, and the $'s attempt to reverse up,
● Heavy downside volume,
● A low NYSE TICK Index reading of -1024,
● A relatively high closing NYSE ARMS Index reading of 2.17
● A possible positive divergence between price and the McClellan Oscillator.

I seek a downside opening,followed by a reversal higher. Should that upside reversal occur, I expect it to endure for several days - weeks before selling returns. I also would look for a continued fracturing of the market; for example, former leadership groups such as the homebuilders continue to have the appearance of heading lower, much lower in price. New leaders, however, counter-balance such weakness.

Comments and questions are welcome...

16 August 2005

GoogleNet — massive Google WiFi in the works?

This Business 2.0 article is making a fast sweep of the internet, so it likely officially qualifies as a meme.

Free Wi-Fi? Get Ready for GoogleNet

A trail of hidden clues suggests Google is building its own Internet—and might be looking to let everyone connect for free.
By Om Malik, September 2005 Issue

What if Google (GOOG) wanted to give Wi-Fi access to everyone in America? And what if it had technology capable of targeting advertising to a user’s precise location? The gatekeeper of the world’s information could become one of the globe’s biggest Internet providers and one of its most powerful ad sellers, basically supplanting telecoms in one fell swoop. Sounds crazy, but how might Google go about it?

First it would build a national
broadband network -- let's call it the GoogleNet -- massive enough to rival even the country's biggest Internet service providers. Business 2.0 has learned from telecom insiders that Google is already building such a network, though ostensibly for many reasons. For the past year, it has quietly been shopping for miles and miles of "dark," or unused, fiber-optic cable across the country from wholesalers such as New York’s AboveNet. It's also acquiring superfast connections from Cogent Communications and WilTel, among others, between East Coast cities including Atlanta, Miami, and New York. Such large-scale purchases are unprecedented for an Internet company, but Google's timing is impeccable. The rash of telecom bankruptcies has freed up a ton of bargain-priced capacity, which Google needs as it prepares to unleash a flood of new, bandwidth-hungry applications. These offerings could include everything from a digital-video database to on-demand television programming.

An even more compelling reason for Google to build its own network is that it could save the company millions of dollars a month. Here's why: Every time a user performs a search on Google, the data is transmitted over a network owned by an
ISP -- say, Comcast (CMCSK) -- which links up with Google's servers via a wholesaler like AboveNet. When AboveNet bridges that gap between Google and Comcast, Google has to pay as much as $60 per megabit in IP transit fees. As Google adds bandwidth-intensive services, those costs will increase. Big networks owned by the likes of AT&T (T) get around transit fees by striking "peering" arrangements, in which the networks swap traffic and no money is exchanged. By cutting out middlemen like AboveNet, Google could share traffic directly with ISPs to avoid fees.

So once the GoogleNet is built, how would consumers connect for free access? One of the cheapest ways would be for Google to blanket major cities with Wi-Fi, and evidence gathered by Business 2.0 suggests that the company may be trying to do just that. In April it launched a Google-sponsored Wi-Fi hotspot in San Francisco’s Union Square shopping district, built by a local
startup called Feeva. Feeva is reportedly readying more free hotspots in California, Florida, New York, and Washington, and it's possible that Google may be involved. Feeva CEO Nitin Shah confirms that the company is working with Google but won't discuss details. Google’s interest in Feeva likely stems from the startup's proprietary technology, which can determine the location of every Wi-Fi user and would allow Google to serve up advertising and maps based on real-time data.

[click to enlarge]

So is Google about to offer free Net access to everyone? Characteristically, the company is cryptic about its goal. "We are sponsoring [Feeva] because [it is] trying to make free Wi-Fi available in San Francisco, and this matches Google’s goal to organize the world’s information and make it universally accessible," says Google spokesman Nate Taylor. "We don't have anything to add at this point about future plans." To which we speculate: Today San Francisco, tomorrow the world."

This all qualifies as old hat to long time Deipnosophist readers; re-read, "It's a Google World", for example. Moreover, there is that teensy albeit critical difference between owning an asset and renting (using) the same. Some Deipnosophist readers question whether Google should purchase dark fiber, or even an extant dark fiber network, which arguably is less expensive to buy on Wall Street than to build new. However, this snippet from a 3-months old article by Robert Cringely is worth reading...

"The same for Google and its Google Web Accelerator. Readers were doubtful about my idea that this was a land grab on Google's part. More likely it was market research or an effort to make Google's own spider programs work better by uncovering previously hidden web real estate. Maybe, maybe not. But Google thinks big and they don't do frivolous public betas.

"What we can say about any public beta from Google is that it is a statement of direction and possibly an effort to influence the future. So let's think a bit further about where this accelerator thing could be going. Let's refine our vision a bit.

"Google just bought land in the Columbia Gorge east of Portland, Oregon -- 30-plus acres with options on additional parcels. What the heck is that for? This is beautiful land outside any major city. Not enough land for a corporate campus, but that's okay, because there isn't much in the way of local housing, anyway. So what's it for?

"It is probably for a data center -- a one million-plus square foot data center that could easily be inhabited by a million or more CPUs. The attraction for Google is reliable electrical power since their new property is not far from one of the many dams and powerhouses that make up the Bonneville Power System. (Highlighting mine -- dmg)

"Now drop back to the Google Web Accelerator. Yes, it is just one of many Google initiatives. Yes, it can be circumvented in a number of ways. But Google is planning something big, so how could the Web Accelerator be a part of that?What did Bill Gates say? That the iPod was at best a transitional technology to be supplanted by mobile phones? Well, it is true that we'll all eventually carry phones. And it is true that we are all wanting more and more information. And it is undeniably true that the current view of the World Wide Web from most so-called "Internet-enabled" mobile phones is pretty pitiful. Enter one possible version of the Google Web Accelerator as an intelligent web interface generator for mobile users. There is no other project I have heard of that could -- on-the-fly -- convert web content for this new interface, which happens to be used by more than a billion people worldwide."

As Om Malik alluded, Google/GOOG is habitually and congenitally mum about everything. So those on the outside are left to rank speculation. This latest rumor raises certain questions re possible competing objectives. Nonetheless, the company has been consistent with positive surprises. Why stop now?

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