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!

23 January 2006

"A condition of complete simplicity"

Questions arose when I stated, "Nor do I study the market (rather than the specific opportunities) in the attempt to find what I should buy (or sell)." My answer then seemed somehow deficient. I prefer a poetic metaphor, but instead accept the prosaic: the stock market and a supermarket share more similarities than differences.
• We know its hours of operation,
• What it sells, and
• Even daily sale specials,
• Etc.

We know sometimes annoyances can occur:
• The product we want or came for is sold out (admittedly a rare occurrence),
• Another customer leaves his or her cart blocking our passage down the aisle,
• Breakage we caused or must sidestep,
• Etc.

Each of these items, and others, strike resonant parallels to the stock market. But do I trouble myself over them? No, I accept each as happenstance; to expect but not predict them. Why bother? I arrive at the supermarket armed with my shopping list: if not Skippy® peanut butter than JIF®. Which is precisely how I proceed in the investments markets; I maintain a list of favored investments that I move into and out of with (perhaps stunning) regularity. Betrothed to none -- well, with one current exception -- each moves up and down my lists,
1) Currently own,
2) Possible purchase today, and
3) Awaiting completion of the set up and/or pattern.

I also stated (in the same post), "one discernment you should make is to note when the leaders decline beneath pre-assigned levels of support within the up trending continuum of each" -- which appears to be happening now. So as the setups and patterns despoil, I move them up or down the lists with the concommitant consequences: I sell if and when appropriate. It makes no sense to move a postion from list 1 (or list 2) to list 3 without at the same time selling my portfolio's holding.

Is todays action what you were talking about as far as a sign that Google is coming back down to earth? In my clueless opinion, one day does not make a stock. However, I take notice that it broke the 50-day SMA (simple moving average) on high volume. Will the 200 SMA hold? Will it reverse? Or, is the 200 SMA simply too much "pain" (loss) to wait for? I'm VERY interested in your opinion.
Yes, this appears to be the first meaningful correction Google/GOOG has had to endure in its 17 months as a publicly-traded company. Part of this reality is due to heightened expectations, another part to Yahoo/YHOO's earnings expectations shortfall, and a third part (accounting for the steepness of the decline) is the news that Google stands up to the DoJ (Department of Justice) whereas the other search engine companies quickly complied with its request. As I said immediately upon the first hint of this news (early Thursday, after a late Wednesday disclosure), "Not good." The stock then was ~$455.

So the 50-day sma failed to stem the decline, as you note. You ask, how low is low? Or how low could the decline go and remain bullish? Unlike you, I believe the 200-day sma (now ~$320) will hold, if the share price declines even that low. In addition, and as recently mooted here, the first decline in a bull market, which is what Google/GOOG shares have enjoyed, tends to be a Fibonacci 38% retracement; that count is the same approximate price level as the near future placement of the 200-day sma, or ~$330. (I identify three distinct up trends, each having a Fibonacci retracement at ~$330!) That price level is also the bottom of gap support. Thus, ~$330 factors as a future level to watch. I would purchase more shares at $330, should it decline that low. Until then, I suspect that soon -- say, over the course of the coming 5-10 days -- the share price will stabilize and rally back towards ~$425. Thus, will Google/GOOG begin to trace out the pattern of its new intermediate term base enduring for a minimum of 3-6 months. Only time will tell the amplitude of its many rises and declines to come, but I feel confident that the initial stage of the advance is complete.

To be clear, I see nothing in the chart at this moment that indicates a darkening pall on the horizon; this decline looks both normal and typical. We each, however, have our individual tolerance for risk and perception of opportunity and time frame. I accept this oscillation as part of being a long term investor in Google/GOOG rather than a trader.

Re the request from the DoJ, the following comments are from

Final Thought: This Google business is a serious problem for the stock market, and the news stories about Internet privacy and who is looking at porn sites are just a smoke screen keeping people from seeing the real issue. The real story is about a government picking on a business, and Wall Street hates that. We wrote a Special Report back in July 2002 called “When Politicians Attack”. The subject back then was the Justice Department’s attacks on Microsoft, and how that was not good for either Microsoft or the market overall. We cited several prior examples of the stock market’s negative overall reactions to governmental “attention” on certain business sectors, such as Kennedy’s attack on the steel industry, and the oil company windfall profits tax. You can read that piece on our web site by going to the Special Reports page.

The market risk from this Google story is perhaps bigger even than the market’s supposed overreaction to the news stories on Friday. The basics of the story on Google are that the Dept. of Justice (DoJ) has issued subpoenas to Google and other search engine companies to provide data on search results, supposedly as part of a study on how the government should proceed with regard to controlling child pornography on the Internet. It has long been known that Google keeps a record of every search result, every mouse click, and every email message sent over its Gmail service, presumably to improve the functioning of its earch engines to yield more germane search results for its users. The DoJ wants to take a look at some of that data to see what insights it can gain about the porn industry.

Most of the news stories have focused on the aspect of Internet privacy rights, and users’ identities being protected, but all of that is a big fat red herring. The real story, and the real danger for the stock market, is the assault on Google’s property rights, and the amazing attitude on the part of the DoJ about what powers it has to seize that data. There is no criminal case currently related to that data which Google has been compiling, and thus no need to subpoena portions of it in support of that trial. Rather, the government wants the data to support its own interests in studying the functioning of the Internet.

When the government decides that it needs some of your property, such as your house so that it can build a freeway, it states pretty clearly in the 5th Amendment to the U.S. Constitution that, “...nor shall private property be taken for public use, without just compensation.” The data that Google has, and that the government wants, is Google’s property, and the Dept. of Justice (DoJ) appears to believe that it can just get that data by demanding that Google hand it over. Their message seems to be, “You have it, we want it, so give it.”

DoJ also appears to believe that it can compel Google to have its programmers spend time (without reimbursement) to reconfigure that data to the DoJ’s specifications in support of this study. In our view, that takes a lot of chutzpah to say to somebody that not only do you have to hand over what’s yours, but I’m going to make you do some extra work to hand it over the way I want it. It is the governmental equivalent of saying, “Go out and fetch me a switch so I can whip you.”

In case it has been a while since you read it, the Constitution goes on to say in the 13th amendment that, “Neither slavery nor involuntary servitude, except as a punishment for crime..., shall exist within the United States or any place subject to their jurisdiction.” Somebody needs to show that amendment to the Attorney General, in light of his expectation for Google to have to do unpaid work for the DoJ, just because he wants the data.

Microsoft has evidently had enough of hassling with the DoJ (understandable after all of its antitrust battles), and it has reportedly just acquiesced and complied with the subpoena. Yahoo reportedly did the same. But Google is so far standing its ground. We fervently hope that Google continues to stand its ground on this issue. When the government sees itself as having an increased entitlement to what’s yours, or what’s that other fellows, it is not a good situation for the health and safety of financial assets.

Coming back to why all of this legal stuff matters to us as investors: in that 2002 Special Report we mentioned above, we illustrated how in periods when the government is paying such special attention to an important sector of the market, that tends to be a really bad time for the stock market’s performance. We hope that this period of such attention will be a very short one, and that sanity and respect for the Constitution once again prevail.
©2006, McClellan Financial Publications, Inc.
This article is a good counterpoint, of sorts, to McClellan's comments.

With breakdowns occurring in many of my current holdings and favored opportunities, I await a low risk opportunity (read, lower share price) to (re-)purchase Apple/AAPL, Autodesk/ADSK, Chicago Merc/CME, Corning/GLW, Fording Canadian Coal/FDG, Genentech/DNA, Google/GOOG, Nordstrom/JWN, Starbucks/SBUX, Washington Group/WGII, and Whole Foods/WFMI to name a double handful. (There are many others.) Of course and as you could imagine, I see many patterns ripe for a short-sale, but I choose to ignore this type of opportunity. Why is that? I gave up long ago the need to be all things to the market; that is, investing for me is a means to an end. And that "end" is to achieve a balance; to make money, yes, but also to enjoy life.

Which came first, I asked a week ago, the chicken or the egg? The decline last week might appear sudden and sharp, but it was not abnormal, atypical, or extraordinary by any measure. The tension on the tape and the positions I watch, however -- yes, like a mother hen her eggs -- sent signals of their own that speak to me. So I move on and around. Manwhile, some sector, group, and stock begins to exert its status as leader; our job is to find it and them. While the market declined last week, many stocks and groups experienced bullish breakouts; if you want to always buy and sell, buy and sell then have a peek for opportunities from among those breakouts.

-- David M Gordon / The Deipnosophist

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