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!

31 January 2006

Hamas and A Wall of Many Other Worries

An excellent and pithy perspective of the current environment of investments -- both stocks and bonds -- and obvious risks; perhaps, too obvious.

-- David M Gordon / The Deipnosophist

Hamas and A Wall of Many Other Worries

It took Nixon to go to China. That bit of bumper sticker wisdom reverberated in my head as I read of the apparently surprising victory by Hamas in last week’s Palestinian elections. If a staunchly anti-communist American president could make an opening to Communist China, then maybe a virulently anti-Israel Palestinian regime might be able to … well, here’s hoping.

The world’s politicians and plutocrats are assembled in Davos for the World Economic Forum, a gathering of heavyweights that has almost as much opinion leading power as when Bono hums a few bars under his breath. Steve Roach of Morgan Stanley addressed the august multitude and reinforced his image as a comprehensive and insightful macro analyst and one of the world’s leading scolds. He sees a world of imbalances and risks, of tipping points and flash points. There is so much that can and might go wrong, and he is undaunted by the fact that such potential disasters remain potential and not yet realized. When that happens to me, I figure I’m overdue — either that or wrong.

One of the great difficulties in this revolutionary new age of globalization is figuring out just how to weigh those who are winning against those who aren’t. Winners don’t make as much noise as losers and a cacophony of woe leads to the impression that the shrinkage of the planet is, in economic terms, a zero or even negative sum game. But abstract logic and hard (well, reasonably reliable) global data argues that ever-expanding trade lifts ever more boats, even if not necessarily yours or mine. China and India have become conversational clichés lately when ten, or even five, years ago they were seen as poor, distant, teeming nations, more to be pitied than feared. It is now clear that ten, or even five, years ago we did not have China and India internalized and incorporated into our thought processes to the degree that we do today. You would have covered yourself with glory, or at least with money, if you had had the world view then that you do now. Roach understands the dynamic of global growth as well as anyone does, but he habitually emphasizes the downsides, some of which are flagrantly in evidence, when there might be equal value in turning his analytical powers on to the murkier question of just what and how it is that is going right.

For example, Bill Gates, who has something to lose in an environment of free-booting piracy of intellectual property, offered the opinion that China will eventually fall into line with Western standards of protection of these rights. Why? Because they will eventually — and maybe soon — become a significant producer of intellectual property and not merely an importer. When you’ve got skin in the game, you care much more about the rules of the game than when you don’t. So ask yourself, is it good news that Bill Gates can see a future Chinese Microsoft out there? The downside is easy to see but the logic of trade theory, of globalization, is that there will be more winners than losers from such a development, even if we’re willing to recognize the pirates’ losses.

There is much to worry about in here. The U.S. current account deficit is huge and unprecedented. Looming Medicare and Social Security liabilities make today’s federal budget deficits look at least awkward. House prices have soared alarmingly, if that’s a deserved adverb. Household sector saving rates are calculated, however imprecisely, as minimal. Our energy needs look like the Achilles heel of our prosperity. These are simple facts that require no genius to perceive.

But the bond and stock markets see them, take them into account, and climb over them. So it’s either idiocy on the part of the great unlettered masses that make up the markets, or there is subtle genius in a market that can climb a wall of such daunting worries as we confront today.

If China can turn from violator to upholder of intellectual property rights, if Nixon could go to China, then maybe Hamas can make a truce, if not peace, with Israel. Maybe the hundreds of millions of winners created through globalization have enough skin in the game now that they will see their advantage in cooperating to manage the fearsome risks and imbalances so in evidence today.

And maybe that, in the market’s elusive genius, is what keeps stock and bond prices so stubbornly immune to the very real risks so easy to see today.

Jim Griffin
Economic Advisor
ING Investment weekly
January 30, 2006, Page 3

Google vs China, DoJ... and earnings

Google/GOOG releases later today (1:30pm pst) its Q4 2005 earnings report and conference call webcast (here); the stock chart betrays the likelihood of another large price move post-report. This seems as good a moment as any, then, to compile a selection of articles that discuss the company's recent decisions re both China and the DoJ. I do this -- read, and share, the plenitude of articles and essays -- not solely to compute an impact on the stock price and direction, but also to understand the zeitgeist for Google as a continuing social force; its manifestation as apotheosis. I encourage you to share a similar perspective. As always, I [will] add my comments when appropriate...

1) Google Hits Glitches Over Video Site, China
"Google is arguably more vulnerable to public opinion than conventional product companies, because its power -- and its money -- comes from its ability to capture something fleeting: the attention of consumers as they surf on the Internet, which is filled with free alternatives."
An okay, satellite's-eye perspective (far, far removed) re the brouhaha.

2) If It Isn't Red, You Can't Read It on Google
"By bowing to Beijing, the biggest names in technology also may be holding back China's economic development. Will Google's move help China suppress embarrassing economic or corporate news investors need? Won't it put entrepreneurs who need unfettered access to information and ideas at a disadvantage? A key priority for China is improving the efficiency of its economy, and that means stamping out corruption at all levels of government and business. How much pressure will there be on the Communist Party to clean itself up if most of China's 1.3 billion people don't know what it's up to? China's dilemma is clear enough: deciding between controlling information and the need to be wired to the global marketplace to be a full party in it. So far, Beijing has chosen the former. That doesn't mean Google shouldn't challenge China. It's not good enough for the mighty Google to claim it's merely joining others in accommodating China."
When has a lack of facts ever stopped anyone from expressing an opinion? This journalist hinges his many arguments on several fallacies; I will leave it to you to find the many examples. However, the author's editorial does offer a nice segue to...

3) What Does China Want?
"The next Chinese drama will probably unfold not in foreign relations but at home: A middle-class push for property rights, rural discontent, the Internet, 150 million unemployed wandering between village and city, and a suddenly aging population bringing financial and social strains will dramatize some of the contradictions of “market Leninism.” Traveling one road in economics and another in politics makes it difficult to arrive at a stipulated destination. How China resolves the contradictions between its politics and its economics will determine how strong a role it is to play in the world."
This essay is astoundingly good, even if it does not broach directly on the topic of Google in China. Very worthy of your attention.

4) Google Is Destined To Fail In China
"For those armchair Sinologists uncomfortable with Google censoring content, rest assured that the company is not really welcome in China and thousands of years of history show that it can't last long here either."
An op/ed essay with a rather simplistic perspective: Google will fail in China. The author states why he believes that will be; I disagree with several of his reasons and his outcome.

5) Google and My Red Flag
"Google's answer to the China dilemma is better, and more subtle, than that of other Internet firms. It does not simply assert that engagement with China is always good. It recognizes the arms race between China's repressive state power and China's liberating economic growth, and it accepts the conclusion that follows: Some forms of engagement hasten liberal trends; others empower jailers. This is not a distinction acknowledged by all investors in China, nor indeed in the China debate more generally. Policy types argue the merits of engagement vs. containment as though there were nothing in between; either you're for tough talk and sanctions, or you embrace the dragon unequivocally."
Another excellent essay that gathers the facts before spouting personal opinion. It touches on a core theme of mine (as quoted above): view neither life nor investing monolithically. This essay, too, is well worth your time to read. (And this one is briefer than the other! ;-)

6) Google - Searching for integrity
7) Search Engines - Here be dragons
"As predictably as searching for “Paris” turns up the heiress to a hotel fortune, so critics pounced on Google's craven concessions to China and on the justice department's heavy-handedness. In their different ways, both governments were toying with the very ideals of free speech and transparency that the internet, according to its early myths, holds most dear. Perhaps. But the past few weeks hold another lesson, too: that, by and large, search engines look after their users—and for the best of reasons, their own self-interest. Google has not entirely capitulated in China. It has pared back the services it offers—no e-mail accounts, for example—so that it doesn't put itself in the position where it might have to violate users' privacy. It has also arranged to tell users when search results have been withheld—though the Chinese authorities could always reconsider the arrangement. At the same time, in America, Google has taken a healthy stand against the DoJ, refusing to give the government what it seeks. Google's rivals have been more accommodating."

"The company is making a concerted effort to do just that. It has reached an agreement with the Chinese authorities that allows it to disclose to users, at the bottom of a list of search results, whether information has been withheld. This is similar to what the company does in other countries where it faces content restrictions, such as France and Germany (where Nazi sites are banned), and America (where it removes material that is suspected of copyright infringement). Although the disclosure is more prominent on these western sites, putting such a message on its Chinese site is an important step towards transparency and, furthermore, is something its rivals do not do. Moreover, Google is tiptoeing into the country with only a handful of services. It is not offering e-mail, blogging or social-networking services, because it worries that it will not be able to ensure users' privacy. It wishes to avoid the situation in which MSN and Yahoo! find themselves, whereby they are forced to obey the Chinese government's orders in censoring content and revealing users' identities. Rather than be placed in a position where it may have to compromise its values, Google instead is narrowing what it offers (although its news service will contain only government-approved media sources). Google believes that entering China, even with restraints on content, lets it offer more information than if it remained outside. Yet the decision comes as American internet firms such as Yahoo! and MSN duck criticism that they are complicit with the Chinese authorities. For Google, taking the higher road happens to also be a way to differentiate its service."
(Each article is excellent, as each reveals critical information and understanding. Please email me your request if you would like to read each but are unable to view at the subscription-required ECONOMIST site.)

Which brings us, more or less, up to speed -- at least on this topic. I hope you have come to the understanding that, for Google, these decisions (in no specific order, what would be best for the company, its shareholders, the users of its technology, etc) were not easy, nor easily made, and that the company executives worried over them for a long time. What do you think...?

-- David M Gordon / The Deipnosophist

29 January 2006

Bill Miller/Legg Mason

The following is a letter from Bill Miller, CEO, Legg Mason Capital Management, to shareholders of Legg Mason Value Trust. Some readers might note many similarities of Bill Miller's investing style and my own; I agree. :-) Please note well his items 1-3 near conclusion; item 1 might resonate for those readers enthralled with the ages-old growth vs value dialectic, in addition to its comments re Google; items 2 and 3 should ring that bell of familiarity as well.

-- David M Gordon / The Deipnosophist

A Note to New Shareholders
Bill Miller

During the fourth calendar quarter of 2005 Legg Mason and Smith Barney completed an agreement whereby Legg Mason's financial advisors became part of Smith Barney's sales force, which will now be able to distribute Legg Mason mutual funds, including the Value Trust.

We are extremely grateful to the former Legg Mason financial advisors who have entrusted their clients assets to us over the years. We share our chairman Chip Mason's respect and admiration for the Legg Mason sales team and believe working with people you like and respect is a true gift. Our Legg Mason brokers have been wonderful partners with us over the years and we look forward to continuing that relationship with them at Smith Barney.

As a result of this new distribution agreement, we are now welcoming a substantial number of new shareholders. I thought it might be helpful, in addition to saying how much we appreciate your confidence in allowing us to invest your savings, to say a little about the principles and approaches we bring to that task.

You are probably aware that the Legg Mason Value Trust has outperformed the S&P 500 index for each of the past 15 calendar years. That may be the reason you decided to purchase the fund. If so, we are flattered, but believe you are setting yourself up for disappointment. While we are pleased to have performed as we have, our so-called "streak" is a fortunate accident of the calendar. Over the past 15 years, the December-to-December time frame is the only one of the twelve-month periods where our results have always outpaced those of the index. If your expectation is that we will outperform the market every year, you can expect to be disappointed. We would love nothing better than to beat the market every day, every month, every quarter and every year.

Unfortunately, when we purchase companies we believe are mispriced, it is often difficult to determine when the market will agree with us and close the discount to intrinsic value. Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of 3-5 years without assuming undue risk. If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.

What you should expect is for us to follow a sensible investment philosophy that you understand and agree with, and that you think will enable you to achieve your investment objectives, consistent with your risk tolerance and your investment time horizon. Our investment philosophy applies what we believe are the best analytical skills and resources available to reach investment decisions for your portfolio.

What follows is a brief, and by no means complete, description of how we think about investing. If you find it congenial, that is great. If you don't, or you are uncomfortable with it, or it does not fit your psychology, then you probably should not be in this fund.

We are value investors. We take both of those terms seriously: we value businesses, and not just stocks, and we invest in them long-term. We do not buy stocks based primarily on accounting-based relationships such as price earnings or price to book value or cash flow (although we carefully consider these metrics and many others besides), and we do not sell when the securities we own reach some pre-determined target based on the relation of price to such metrics as may have prevailed in the past (though we also take that into consideration).

As value investors, we are valuation driven. The most common error in investing is confusing business fundamentals with investment merit. A company that is doing terrifically well, that has great management and returns on capital, and great products and prospects, may be a terrible investment if the expectations embedded in the current valuation are in excess of those fundamentals. A company with poor business fundamentals, a mediocre management, and indifferent prospects may be a great investment if the market is even more pessimistic about the business than is warranted.

The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation? We believe markets are pragmatically efficient, which means that it is very difficult to analyze the available information about a company and use that to outperform a relevant benchmark. The evidence in favor of that proposition is overwhelming, as any look at the percentage of money managers who are able to outperform over long periods of time will readily attest.

Systematic outperformance requires variant perception: one must believe something different from what the market believes, and one must be right. This usually involves weighting publicly available information differently from the market, either as to its magnitude or its duration. More simply, the market is either wrong about how important something is, or wrong about when that something occurs, or both.

This all sounds fine, maybe even conventional. You may be thinking, of course one needs to think independently, one needs to value things carefully. It becomes clear how well these generalities are understood only when they become specific investments.

Was Google good value at $85 when it came public? Well, it appears so, since it is now trading at $436 a year and a half later. But when it came public it was universally panned as another Internet hype stock with all the trappings of 1999's over-optimism.

How about now, at $436? Is it worth as much as IBM? The market says it is, at least on the basis of simple equity capitalization. How can that be? IBM's earnings are more than Google's sales. We owned Google on the IPO and we own it now. We own IBM, too.

Is the largest financial services company in the world, Citigroup, really worth a substantial discount to the average company based on its price earnings ratio, despite having substantially better returns on its equity and a powerful global presence? The market says yes. We disagree, and that is why we own it.

How about Kodak? Doesn't everyone know chemical-based film is going away? How could you own that? We are asked that all the time. We are Kodak's largest shareholder.

Sometimes we are right when we think the market is wrong, and sometimes we are not. One never knows until later, and then hindsight bias colors the analysis. It always appears obvious in retrospect. We were right, for example, to buy Tyco under $10 when it was involved in an accounting scandal.

We were wrong to buy Enron when it was also involved in such a scandal. Our analysis of Enron was excellent, in my opinion, despite our investment being unsuccessful. Process and outcome are two different things.

Our positions are usually regarded as contrarian, which means that most people who look at them will not like them. If you are uncomfortable owning controversial stocks, stocks involved in scandals, stocks whose prospects are uncertain, or which are considered "too risky" because the valuation looks too high, or the company has too much debt, or it has poor prospects, you should
not own this fund.

We are often asked, what is the secret to the fund's success? The answer, of course, is there is no secret; but there are some aspects of what we do that differentiate us from other investors, and from other value investors.

I would highlight three:

1. Our portfolio contains a mix of businesses, some of which we believe are cyclically mispriced, and some of which we believe are secularly mispriced. The former are often called value stocks, the latter growth stocks, not helpfully in either instance. Value investors rarely own so-called growth stocks because they are uncomfortable with doing the kinds of analysis and projections necessary to value them, especially when they involve high technology, or when they involve new business models such as Google. There is a lot of uncertainty in doing that, which means risk, and value investors think of themselves as risk averse. We believe we have an analytical advantage over more traditional value investors because we will look at such businesses, and over growth investors because our analysis of them is based on valuation, not some short-term factor such as whether they beat next quarter's earning's estimate, or whether guidance is raised or lowered. Our ability to properly price risk is our advantage over both types of investors.

2. We average down relentlessly. Two things seem pretty clear to me: first, no one can consistently buy at the low or sell at the high (except liars, as Bernard Baruch said), and second, lowest average cost wins. We constantly strive to lower the average cost of our positions by buying more if and when the price drops. Throwing good money after bad, others call it. Many investors think a drop in the price of stocks they own is evidence they were wrong. We think of it as an opportunity to increase our implied rate of return by lowering our average cost. Someone once asked me how I knew when we were wrong to do that. When we can no longer get a quote, was my answer.

3. We practice the Taoist wei wu wei, the "doing not doing" as regards our portfolio, otherwise known as creative non action. We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 to 20% range, implying holding periods of more than 5 years. Many funds have turnover in excess of 100% per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.

The combination of these three things means we manage money substantially differently from most other managers. Different doesn't necessarily mean better, but it does mean different!

I hope the foregoing has been helpful. If you understand what we do, you should be better able to judge how well we are doing it. We have our own money invested alongside yours because our team believes this is the way we will build wealth for our own families along with our shareholders. As we have said to our shareholders over the years, we cannot promise performance, but we can promise no one will care more about your money or work harder for you than our investment team.

Copyright (c) 2006

27 January 2006

Imagining the Google Future

An intriguing sequence of articles re Google/GOOG, published originally in Business 2.0...

We all know that the company Sergey Brin and Larry Page founded a mere eight years ago is one of the new century's most cunning enterprises. If there were any lingering doubts, 2005 erased them. Google's sales jumped an estimated 50 percent to $6 billion, its profits tripled to a projected $1.6 billion, and Wall Street answered with an unprecedented vote of confidence: a $120 billion market cap, a share price soaring above $400, and a price/earnings ratio close to 70.

That's a huge bet on future growth that seems unthinkable during the postbubble period. But in Google's case, the exuberance is rational. That's because Brin, Page, and CEO Eric Schmidt cornered online advertising: They've made it precision-targeted and dirt cheap. U.S. companies still devote more ad dollars to the Yellow Pages than to the Internet (which accounts for less than 5 percent of overall ad spending). Yet Americans now spend more than 30 percent of their media-consuming time surfing the Web. When the ad dollars catch up to the trend, a mountain of cash awaits, and Google is positioned like no one else to scoop it up.

Even if Google has to share that payday with rivals like Microsoft and Yahoo, the company has an edge, with storage space and sheer processing power -- an estimated 150,000 servers and counting -- that will enable it to do just about anything it wants with the Web. And boy, does this company want. It signed up about eight new hires per day in 2005 -- a lot of them from Microsoft, many among the smartest people on the planet at what they do. Google is on track to spend more than $500 million on research and development in 2006, and last year it launched more free products in beta than in any previous year. Name any long-term technology bet you can think of -- genome-tailored drugs, artificial intelligence, the space elevator -- and chances are, there's a team in the Googleplex working on an application.

Which raises the most widely debated question in business: What kind of company will Google become in the coming decades? Will it succumb to hubris and flame out like so many of its predecessors? Or will it grow into an omnipresent, omnipotent force -- not just on Wall Street or the Web, but in society?...
Continue reading here.

Capex still strong, weekly claims also reflect strength

The following comments are from Scott Grannis, Chief Economist at Western Asset Management...

Strong gains in capital goods orders in December plus upward revisions to November numbers put capex growth back on its 10% annual growth track. Things were beginning to look soft a month ago, but now these concerns have been put to rest. The broader category of durable goods orders also continues strong, up 12.7% in the past year.

Weekly unemployment claims have fallen at a pretty impressive rate in recent months, now that the Katrina disruption is clearly in the past. The labor market is now looking almost as 'tight' as it was in 1999-2000, when the economy was booming and the Fed was desperate to slow it down.
Strong profits, surging government tax revenues, strong investment spending, a healthy labor market, low tax burdens -- it doesn't get much better. This economy is not about to slow down in any meaningful fashion, even if it does increasingly look like the housing market has peaked, and even though the yield curve is flat (and slightly inverted out to 5 years).

26 January 2006

The worst word in the language

This article about our deteriorating usage of the language is both good and kindasorta funny -- in a curmudgeonly manner.

There are several twee and unnecessary words in the English language. Tasty. Meal. Cuisine. Nourishing. And the biblically awful “gift”. I also have a biological aversion to the use of “home” instead of “house”. So if you were to ask me round to “your home for a nourishing bowl of pasta” I would almost certainly be sick on you. But the worst word. The worst noise. The screech of Flo-Jo’s fingernails down the biggest blackboard in the world, the squeak of polystyrene on polystyrene, the cry of a baby when you’re hungover, is...
And please, can you stop saying “at all” after every question. Can I take your coat at all? Would you care for lunch at all? Or, this week, on a flight back from Scandinavia, “Another beverage for yourself at all, sir?” What’s the matter with saying “Another drink?” And what’s with all the reflexive pronoun abuse? I’ve written about this before but it’s getting worse. Reflexive pronouns are used when the subject and the object of a sentence are the same person or thing. Like “I dress myself”. You cannot therefore say “please contact myself”. Because it makes you look like an imbecile. If you send a letter to a client saying “my team and me look forward to meeting with yourself next Wednesday”, be prepared for some disappointment. Because if I were the client I’d come to your office all right. Then I’d stand on your desk and relieve myself. I’m not a grammar freak — I can eat, shoot and then take it or leave it — but when someone says “myself” instead of "me" I find it more offensive than if they’d said...
While I readily admit that English is, in essence, a mongrel language, I also acknowledge the rules for correct and standard grammar and syntax. Yes, I, too, am a stickler for correct usage. Several of my pet peeves...
• The misuse of "only" when we mean "solely";
• The incorrect placement within a sentence of the same word (only); thus delimiting the incorrect item;
• The incorrect placement of the negation. For example, "I don't think Johnny would like that" when we really mean, "I think Johnny would not like that." Note the difference? (Of course, you think!)

There are others, of course. Do you have any...?

25 January 2006

Jacob van Ruisdael, Dutch Master of Landscape

From The Week magazine, my favorite weekly newszine...

Jacob van Ruisdael
(The Philadelphia Museum of Art)

Through: 2/5/2006

The dramatic landscapes of 17th-century Dutch painter Jacob van Ruisdael can often be recognized just by a particular shade of blue, said Holland Cotter in The New York Times. It radiates through the clouds of his skies, this “ozone-azure, cool and clear, a high, vibrato-less note.” This distinctive blue can be seen repeatedly, in all manner of intensity, in the Philadelphia Museum of Art’s retrospective of his work. That’s largely because skies take up at least half of so many of his works. Ruisdael managed to create such grand landscapes from Holland’s “duney flatness” by taking advantage of what his country had in spades: sky. “It was Holland’s Himalayas, awesome, many-hued, dominating all.” Ruisdael also invented or imported scenic elements to supplement the flatlands in front of him: towering waterfalls, hilltop castles, and thick forests.

No other landscape painter ever mastered the range of subjects Ruisdael addressed, said Robert Baxter in the Cherry Hill, N.J., Courier-Post. He produced more than 800 works, incorporating mountains, seascapes, winterscapes, and dunes. Not only that, but he began doing so at a tender age. By 17 or 18, he no longer needed a teacher. One of the best among the 47 paintings, 30 drawings, and 13 etchings now on display is his The Marsh in a Forest (1665). In it, Ruisdael creates a “haunting vision of a dark marsh, flecked with lily pads and surrounded by gnarled tree branches set against a dramatic sky of billowing clouds.” Westphalia’s Bentheim Castle also inspired memorable paintings, with Ruisdael setting the German castle dramatically atop a mountain. Ruisdael paid such meticulous attention to detail in all of his works that botanists can easily tell his beeches from his elms and willows.

It’s not merely his attention to detail, but Ruisdael’s “emotional edge and gravity that make his pictures timeless,” said Edward J. Sozanski in The Philadelphia Inquirer. At a time when landscape was often relegated to the role of background player, he painted scenes that mingled naturalistic fidelity with spiritual intensity. In doing so, he transformed landscape into “a metaphor for the majesty of creation and the transience of existence.” One of his most famous paintings, Jewish Cemetery, embodies this spiritual intensity. It brings together ruins, a blasted tree, tumbling waterfall, and ominous clouds, all framing the two glowing white tombs at its center. With so many elements crammed together, the painting should feel contrived, yet doesn’t. Rather, it “looks like a stage set for a Wagnerian tragedy.” Against such grand backgrounds, man’s works seem “puny and transitory.” Ruisdael’s paintings are reverent of nature and secular, but “fully congruent with what organized religion preaches about the place of mankind in the universe.”

The Jewish Cemetery
Jacob Isaacksz. van Ruisdael
[click image to enlarge]

Since the days of my first art appreciation course, Jacob van Ruisdael has been one of my favorite artists. We studied THE JEWISH CEMETERY, among several. I can not recommend strongly enough this artist and this show; if you are in Philadelphia, GO! From here the show tours to London, where I hope to 'take it in'...

24 January 2006


"Google is undoubtedly a great company, and online advertising is still in its pretty early days, but be very careful. Google's future will be much more competitive than their past, which is going to really start testing management. Over the coming months, It would not surprise me in the slightest to see MSFT perform a 'scorched earth' strategy to ad sharing margins with publishers (share 100 percent of revenue), while Yahoo has already decided to share much more with publishers. Assuming what I am reading about the DOJ request is correct, challenging them is just plain idiotic. The DOJ seems to be asking for generic information (not personalized) and as I've said before, I really believe that this type of information should be part of the public domain to begin with. If Google is really worried about a slippery slope, challenge the Govt. when that point comes and they request personalized information. Today, this is a huge distraction just as every company in the Valley has their knives out and is heading towards GOOG. I think this can ultimately become a strategic nightmare for Google if they force a fight and have to capitulate in the end. For two reasons: 1) It will shine a spotlight on just how much info Google has about its users (and whether we should trust them with all that information) and 2) It will expose the populist tone that Google is now using as hot air. Long term, despite the tone of this message, I remain bullish on Google- as much for the growth in online ads as for the company itself. While the next 3-6 months should be see remarkable growth, I think that the next 12-18 months are going to be quite difficult for Google. We shall see." -- AP
Hi, AP,

Thank you for your comments. I apologize for replying with a new post (rather than in the comments field of the other post), but, no surprise, I found my reply quickly exceeding the 3,000 character limit.

First, allow me to call attention to these two articles (article 1 and article 2) that are germane to this topic. Of course, I must quibble with several of your tenets:
1) It is indubitable that "Google's future will be much more competitive than their past"; this is, after all a principle of capitalism -- to bid down excess returns. But as article #2 attests, Yahoo gives up the chase to supplant Google for search dominance. Can other companies be far behind? Google rapidly becomes akin to a cosmological black hole; it will prove beneficial for other companies to partner rather than compete.
2) I agree that the future environment will "really start testing management"; I hope Eric Schmidt and other executives measure up to the coming challenges.
3) I disagree that Microsoft has a field position from which the company could "perform a 'scorched earth' strategy to ad sharing margins with publishers"; Google is the dominant player in this area, and fast becoming its pre-dominant player. In addition, Google has the financial wherewithal to withstand forays (such as you limn) from Microsoft. (But does it have the business savvy?)
4) The stance Google takes with this fishing expedition from the DoJ could be misguided, as you suggest. Perhaps the company should fight the battles it knows it can win. And yet, this moment is a character-defining battle; just where is the line in the sand, and who draws it? Already, Google reaps both positive PR and increased usage and trust. (NB: article 1 link.)
5) I do not know, but I suspect, that Google will report another startlingly positive earnings report come Tuesday, 31 January. The report, by itself, might prove insufficient to snap the shares out of this price correction, but it could highlight Google's increasing nature as a vortex for online advertising spending. As you say, we shall (soon) see.

I predicate my continuing bullish stance on precedent. Those familiar with my prognostications might recall my original posts here (and my comments elsewhere that precede the creation of this blog) that Google/GOOG is a generational, singular opportunity, and that only one other company shares many similar hallmarks: Microsoft/MSFT. The simple fact remains: there is no historical precedent for a company that has achieved and accomplished so much, so quickly. Starting from a standing start to...
• multi-billions of $$ of revenues,
• explosive growth of earnings,
• dominant market share,
• increasing public trust,
• increasing usage of its core product,
• all after building a better mousetrap (taking Overture's creation of online advertising, and improving it to the degree that advertisers begin a rush to the online ad world).

Microsoft/MSFT had to endure many, many challenges in its existence, including the ~20 years it has been a publicly-traded company; Google/GOOG will have need to endure the same. From a Microsoft-centric perspective, Google arguably represents the company's greatest challenge to date. However, in the race to a decentralized, mobile computing environment, an environment in which one is no longer tethered to a desktop, Google/GOOG probably emerges triumphant.

And so I wonder: How high is high (precisely)? I am on record that I expect Google/GOOG to become the first company/stock wth a 1 trillion dollar market cap. With its current float, that computes as ~$3,333. Far-fetched? Perhaps, but I use that figure as a directional beacon, and not fixed. You see, I perceive Google/GOOG to be the apotheosis of so many disparate trends (social, cultural, financial, etc) that nothing would surprise me -- and certainly not a dramatically higher share price (granted sufficient time).

Of course, there is a lot of time between now and then, and a world of hurt that could afflict the company (business environment, socio-political, etc). Doubts will always arise, but should not stop the determined investor. The manner in which most investors now perceive Microsoft/MSFT as an unstoppable juggernaut (with the certainty that hindsight brings with it) is the same manner I view Google/GOOG, albeit with the uncertainty that comes with staring into the unknown future. I have, and welcome, history as my guiding light. Caught in the swirling, seemingly non-coalescing winds of change, I detect a pattern; a pattern that has worked so often in the past I see no reason it should not work again. Especially now.

Scott Stulberg forwards a photo

... and offers us a small peek behind the curtain!

[click image to enlarge]

Hi, David,

I wasn't sure if I had sent you this photo I did during that surf shoot. I "mirrored" it, and [then] changed some things in it so it would not appear totally mirrored.

Regards from LA,

23 January 2006

The Global Id

This is an interesting essay cum book review from novelist, John Lanchester...
What scares people about this is the feeling that Google has a masterplan, and that they are advancing towards world information and financial dominance. It isn’t clear that that’s right, though. My sense of it (and it’s only a sense) is that Google advances more by letting its engineers invent things and solve problems, or perceived problems, one at a time, and that as long as the problem being solved broadly fits with the overall mission statement, they’ll go ahead with it. Some of these stabs seem well thought out, others less so. At the same time the core focus on search stays. People who work in the field say that search is only 5 per cent ‘solved’, and that the huge amount of information located on the internet but (for a variety of reasons) unavailable to searches remains an enormously difficult problem to solve. It seems likely that this focus will give the company plenty to chew on for many years, even after the overheated share price cools off.

So: is Google a good thing? The geek in me wants to say yes. It certainly has made finding information incomparably easier. Some of the information is even true...

Despite such glitches, Google is from the research point of view invaluable. I’ve used it on a more or less daily basis for the last five years, but it was only when I began working on this piece that I fully realised just how many features it has added, as part of an ambition to do ‘something intelligent’ with every query. Google Scholar, which searches academic papers, is very useful, and will become more so. The powerful calculator feature, which will do advanced maths as well as highly practical things like converting square feet into metres, is useful. The character ˜ lets you search for synonyms, and is useful. Google News, which was invented by an engineer, Krishna Bharat, using his 20 per cent time to come up with a broadly global news service in the wake of 9/11, is useful, and terrifies conventional news organisations. The translation service isn’t useful yet, but I bet it will be one day. The command ‘define’ is a useful quick way of finding what a word means. The blog search is fairly handy and will get better. Google Earth isn’t particularly useful, but it is brutally cool: you begin with a satellite view and gradually descend to earth, homing in with a level of detail which can give you a view of your own house (also, it turns out, of secret military installations). Gmail, with its super-swift searching and 2GB of free space, is amazing, if you don’t mind the fact that your email is scanned and used to target ads (and stored indefinitely). Google Maps is useful, and, because Google lets people write APIs (application programming interfaces) to adapt its programs in ways they find personally helpful, will grow more and more useful over time. One dark example: an API giving a map of sex offenders in the USA, which lets people see whether there are any registered sex offenders near them, and where the sex offender lives. Nice.

On a lighter note, Froogle, the shopping search service, is sort of useful, and has a feature which chills the blood of conventional retailers: when you’re out in the high street and see something you want to buy, you can text its name to 64664 and Froogle will text back the best price it can find online. Also cool is Google Zeitgeist, which tells you which search terms have most increased in frequency in the past year. For 2005 the top five items are Myspace, Ares, Baidu, Wikipedia and Orkut – all of which, I notice in my trendspotting hat, involve some sort of sharing, searching, meeting or collaborating online. It must be said that the coolness of Zeitgeist is reduced by the fact that it no longer lists the most declining search terms. In 2002, the last year they gave this info, the five most increased searches were for Spider-Man, Shakira, Winter Olympics, World Cup and Avril Lavigne; the five most decreased searches were for Nostradamus, Napster, Anthrax, World Trade Center and Osama bin Laden. Thus did we recover from the trauma of 9/11.

Technologically, Google is an amazing thing...
Worthwhile reading, if [you are] so inclined.
-- David M Gordon / The Deipnosophist

"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

21 January 2006

You don't know Jack!

An exercise is etymological humor...


-- David M Gordon / The Deipnosophist

20 January 2006

Commodities update: still rising + Mixed news yesterday: housing softer, claims lower

The following comments are from Scott Grannis, Chief Economist at Western Asset Management...

Oil is back up to $67, just shy of its $70 peak last August. Wholesale gasoline prices are up 25% from their November lows. At $9, natural gas is way down from its $15 peak last month, but remains 50% higher than a year ago. More importantly, perhaps, non-energy industrial commodity prices are at or near all-time highs. Gold typically leads other commodity prices by about one year, so gold's 33% jump since last summer to $560 suggests that the commodity rally is not yet over. All of this suggests that money is not tight (and is possibly still easy) and/or the global economy is very strong.

More evidence accumulates that the housing market is slowing down. Housing starts in December were way below expectations, but that could be because of bad weather. Nevertheless, starts on balance haven't increased much at all in the past year. Meanwhile, anecdotal evidence suggests prices are topping out in the overheated markets on the coasts. Separately, unemployment claims fell much more than expected, reinforcing the view that labor market conditions remain very healthy. It's quite possible for the overall economy to continue to do well even if housing weakens. Money flows that have fueled construction and home equity extraction can't just be turned off from one day to the next. The money is going to find somewhere else to go if the housing sector can't accommodate it. And there's plenty of money out there, as evidenced by the 14% rise in federal revenues last year, very strong corporate profits, and the fact that (according to Art Laffer) 43 of 50 states are enjoying budget surpluses--even California.

Yesterday, consumer prices were reported to have fallen a bit (-0.1%) in December, thanks to lower energy prices, but ex-food and energy, prices rose 0.2%. Energy prices are back up this month, so we're likely to see a strong CPI advance reported for January. Core inflation remains relatively low, but this is not exactly price stability; at the current rate of core inflation, prices will rise 25% over the next 10 years. At the current rate of headline inflation, prices will rise 40% in the next 10 years.

19 January 2006

What's eating Google...?

Feds after Google data
The Bush administration on Wednesday asked a federal judge to order Google to turn over a broad range of material from its closely guarded databases...
Not good. Read this article, and then weep.

-- David M Gordon / The Deipnosophist

Life is a frivolity

Either that, or I am in a particularly frivolous mood, as this video is hilarious!

-- David M Gordon / The Deipnosophist

Behind the 8 ball

My apologies; I have been away since the markets' close yesterday, and then slept in this morning. Now, I struggle to get caught up.

I have an item of research from Thomas Weisel Partners, Internet Monthly - Cross-Sector Analyses of Internet Stocks and Trends. It includes at least several pages of interest to readers here, Internet Display Ads Could Be the Surprise of 2006.

The file is ~1Mb in size and is in *.pdf form. Please email me (, if interested in receiving a copy.

-- David M Gordon / The Deipnosophist

18 January 2006

Ordering pizza in the near future

Really, this ad is too funny! And clever. And serious. (Remember to turn on your speakers.)

-- David M Gordon / The Deipnosphist

17 January 2006

Only the truth is funny!

Stupid, stupid, stupid (even for a guy ;-), this story simply defies credulity. Sad to say, 'tis true... Read it to believe it!
-- David M Gordon / The Deipnosophist

The chicken or the egg?

One objective (of this blog) is to share how to perceive chart action in order to derive consistent profits from your investing program. Nonetheless, many investing tyros prefer easy answers; in the process confusing simple and elegant for easy. Perhaps worse, however, is the reversal of the investing process; buying and selling your portfolio's holdings based on your subjective read of the market's tea leaves.

I have argued, and repeat now for emphasis, that the market's leading stocks lead higher the market; the weak stocks do not lead lower the market. Ergo, 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. And vice-versa. To reiterate: leading stocks fulfill the role of engine as they pull higher the market; the market fulfills the role of caboose.

So please stop with the attempts to treat the market as analysand; rather analyze your portfolio's holdings -- and those you hope to purchase. This way lies opportunities galore... and consistent profits.

For example, long, long ago, one regular reader shared an investing idea with me -- Autodesk. "Sure," I said, "Its ticker is ACAD, right?" He corrected me immediately, "No. It is now ADSK. You have not looked at this position in a long time, and it warrants your attention. Here are several reasons why..." So I paid heed. And just this weekend requested he update his comments, which follow...

Autodesk/ADSK is in the design software business. It's an old company for the microcomputer software business having been around since the early 80's predating MS-DOS. Early on it came to dominate the 2 Dimensional CAD/CAM through it's program AutoCAD.

AutoCAD was neither the best nor the cheapest software in that category but it occupied the sweet spot in the middle - competent and capable of real world design projects and affordable for professionals working in small design businesses who might be brave enough to attempt to do their work on the primitive micro-computers available at that time. (As opposed to the mini-computer and main frame computers used by larger companies.) There was little in the way of a retail channel to reach these customers, and the software was sufficiently complicated to use that there developed a large base of
VARs who would buy the AutoCAD software and then resell it along with custom packages for such tasks as architecture or civil engineering along with service and training. As this was a profitable business for the resellers, this network prospered and grew.

Because they owed their living to selling, supporting and customizing AutoCAD these VARs were both enthusiastic and loyal. This reselling network provided the company with two distinct advantages that they retain even today: Autodesk is supported by a vaste suite of product add-ons and symbol libraries that greatly extend it's reach, and a sales channel which is virtually impossible to duplicate and which is highly effective at selling such a product.

However, despite these advantages, by the early 1990s the company was floundering due to the eccentric conduct of it's founder and CEO (the original designer of AutoCAD) and it's engineering-driven management. It was then that Carol Bartz, the current CEO, was brought in to rationalize the company. Over the last decade she has done a remarkable job of stabilizing the company, creating a more focused business-oriented management, and both growing the market for their existing products and expanding their offerings into related niches.

The basic product is enhanced by a wide variety of add-ons for specific vertical niches - construction, architecture, electrical design, civil design, mapping, etc. and by graphics libraries containing symbols used in drawing up plans in these various industries. Additionally Autodesk has acquired or built related software products in 3D design software, and animation and graphics design for movies, TV, and computer animation and design. In these new areas they have continued to rely on their traditional reseller model, which is very well suited to such industries, as all of this software needs heavy levels of customization and support.

On a sales level it has enhanced its original niche in small design businesses and is now also found (according to their web site) in all of the Fortune 100 companies.

In brief, Autodesk has a commanding position in several important and rapidly growing markets, and a committed sales channel uniquely well-suited to sell into those markets.

This all seems pretty bullish to me. Autodesk/ADSK is a design software and digital content company. The Company's principal products include AutoCAD, AutoCAD LT, Inventor, Revit, and Civil 3D. In addition to software products, Autodesk offers a range of services, including consulting, support and training. The Company also develops, integrates, markets, sells and supports film and television compositing systems, high-definition and standard-definition broadcast editorial and finishing systems, digital cinema production systems for color grading and film finishing and animation, visualization and streaming media products. In addition, the Company's Location Services division offers a technology platform designed to deliver location-based applications to wired, mobile and wireless users. This link will take you to an intriguing 33-page .pdf slideshow of the company.

For the nine months ended 31 October 2005 (Q4 will be announced ~21 February), Autodesk's revenues increased 26% to $1.11B. Net income increased 58% to $245.9M. Revenues reflect higher new seat & subscription sales and higher penetration of vertical & 3D products. Net income also reflects higher operating margins, decreased cost of maintenance revenues, increased interest & other income and the absence of restructuring charges.

And guess what...? The stock reflects these successes. And it appears more are to come... So rather than fret over the market's rally during the first two weeks of this year (and thus seek reasons to sell existing holdings and not to purchase new opportunities), I instead seek to buy those that are set up for additional upside glory and sell only those existing holdings that have maxxed out their rise and reversed. Autodesk/ADSK is an example of the former -- upside room to run and about to do just that.

[click image to view enlargement]

As a trend matures, its bases lessen in length (of elapsed time). Note rectangular area A, which comprises a well-formed, intermediate term base that spans aproximately 8 months. Subsequent to its breakout during mid-August 2005, the shares ran from ~$39 (breakout) to ~$49 in ~2½ months. (Hey, the 2½ unit rule again!) Since then, ADSK shares have built a bullish short term base -- ellipsoid B.

Note the two trend lines -- the rising trend line, long term and confirmed multiple times and the declining trend line, short term and confirmed a handful of times. When an irresistable force (the long term up trend) meets a seemingly immovable object (the short term down trend), the long term trend tends to emerge triumphant. Of course, the pre-requisite is to study the subtle clues. (As I have shown, and continue to show, how to perceive.) NB: the critical test and reversal this past Thursday at the long term trend line of rising bottoms.

I contend (really, I know) that Autodesk/ADSK nears its breakout from this short term base; it is now only a matter of weeks, perhaps even days before the 'event' itself occurs. There are several price points to watch: $44 (above the rounded-up 50-day sma; unimportant), $45 (breaches the short term line of declining tops; important), $46 (confirms and ends the double bottom - not highlighted; critical), and ~$48 (confirms that the uptrend re-asserts itself; important). A decline in price beneath $39 would signify a reversal of the long term trend; treat that level as stop. My initial price objective following the breakout: $58-60/share. This translates, at current prices, as $16 of probable upside reward and $4 of possible downside risk, or a 4:1 reward:risk ratio. This opportunity thus qualifies, to me, as a worthy risk. I already have purchased Autodesk/ADSK shares, and will purchase several more lots under $45 (the last trade on Friday was at $42.88) in the days and weeks ahead. Of course, the lower the acquisition cost, the better; preferably near critical support in the $41-39 zone.

Yes, I always note the market's trend and trajectory -- to do otherwise is folly -- but I do not allow it (the market) to frighten or confuse me, as it does too many other investors. ("The market has risen too far too fast -- it will decline now!") Nor do I study the market (rather than the specific opportunities) in the attempt to find what I should buy (or sell). It is the continuum of the leading companies' stocks that always prevails. At worst, professional investors (yes, such as me) instead will sell the obvious winners across all periodicities (what I term as the middle of the chart; another visual clue) in favor of the long term winners that merely hesitate intermediate term. This is one method of moving from overvalued to undervalued on the basis of technical analysis. Some of this approach is predicated on experiential wisdom: I know many patterns and setups (mine is a very visual approach, thus helping to make more objective a process that relies on subjective interpretations), and thus I know how they tend to fulfill themselves. This is an uncommon approach and little understood; I am sure I have done a piss-poor job of clarifying it, both in this post and previously. As always, your questions could help clarify the matter for us all; please ask.

NB: this past Thursday, when Autodesk/ADSK stemmed its short term decline and reversed upwards, the trend became long and short term up and intermediate term sideways (base) to up and rapidly approaching powerful upside intermediate term breakout, hence, up in all periodicities. Nonetheless, the shares have yet to break out, and up. Yes, I am very bullish on this particular opportunity, and thus will purchase more shares (and lots) than I otherwise would.

It is time to make some serious (spending) money. Or lose only a few $$ in the attempt!

-- David M Gordon / The Deipnosophist

16 January 2006

Federal revenues surge + Weekly claims still declining, jobs market healthy

The following comments are from Scott Grannis, Chief Economist at Western Asset Management...

If I had to pick the most bullish indicator of the economy's health, this would be it. Taxes paid to the federal government in 2005 were 14% higher than in 2004. It is undeniably the case that corporate profits, personal incomes, and capital gains realizations are very strong, much stronger than anyone would have expected. Government statistics don't always pick up everything going on in the economy, but when tax revenues surge like this, you can be sure that the economy is very healthy. Even though federal revenues grew a robust 8.1% last year, the budget deficit fell from $400 billion to $320 billion, a mere 2.5% of GDP.

First-time unemployment claims rose last week, but the 4-week average remains in a declining trend, as the chart (below) shows.

The jobs market by this measure is almost as healthy as it was in the late 1990s. Comparing the level of claims to the size of the workforce (below), we see that things are quite healthy indeed. The ratio was only briefly lower in the first half of 2000, when the economy was doing so well that the Fed was concerned about overheating. The real Fed funds rate peaked just short of 5% by the end of that year and a recession followed shortly thereafter.

This time things are different. The bond market seems convinced that economic growth will be moderate enough to allow the Fed to stop raising rates after one or two more hikes. But if the labor market continues to improve, before the year is over the Fed's models could be signalling the need for more tightening (too many people working means a very tight labor market that could supposedly feed into higher inflation). Continued above-trend economic growth would also raise the level of Fed concern.

The backdrop of asset prices is also a key difference. In 2000, gold was falling, all commodities were falling, and the dollar was rising. Today gold has surged to $550, energy prices have surged, nonenergy industrial commodities are reaching all-time highs, the dollar is almost 25% lower than its 2000 high, and the real Fed funds rate is only slightly higher than 2%. There is a lot of potential for the Fed to throw the market a curve ball, considering that several indicators are in or are approaching uncomfortable territory (e.g., the tightening jobs market, economic growth that has exceeded potential growth for 10 quarters, the price of gold, commodities, the dollar). For the funds rate to be 4.5% at year end, as the market currently expects, requires these variables to align just so, for a perfect soft landing. I'd have to say I agree with Greenspan's recent remarks to the effect that the bond market is remarkably calm in the face of so much potential uncertainty.

15 January 2006

Photos from the Wil McCarthy event

Wil McCarthy has come and gone, and successfully conquered Las Vegas in the process.

Wil enlightened, illumined, and even entertained a crowd of 39 people — comprised of the Las Vegas Future Salon, SNAFFU (the local Science Fiction club), and including several members from the local chapter of MENSA. The presentation was so thrilling that 50 copies of his various books, available for the event, sold out completely!

And so the evening proved to be a success for all. Wil found the group to be quite engaging, the audience members were alert and participatory throughout, and BORDERs Bookstore sold out its supply of books authored by Wil. Note also the many happy smiles in the photos...

[click each image to enlarge]

-- David M Gordon / The Deipnosophist

13 January 2006

Raining on Google's parade

1) Crazy or Brave? Skeptic Remek Says Sell Google

"There are 35 soothsayers covering Google Inc., the Internet search company whose stock has risen more than fivefold since it sold shares in August 2004. Seven have a ``hold'' rating, while 27 have the company as a "buy," according to Bloomberg data.

Remek, who works for Guzman & Co. in Coral Gables, Florida, is the only one advising clients to sell. Google currently trades at about $470 a share, for a market value of almost $140 billion. Remek calculates the stock is worth just $260.

'It seems most of the world remains bullish on Google,' says Remek, who turns 39 next month. ``You have to have very aggressive assumptions about growth over the next, say, five years to justify the current valuation. I cannot come up with a target price at this level or above, as most of my peers have."
Continue reading here.


"But before getting into the details of what is now happening in the world Blodget left behind, first a bit of background to help remind us as to how even well-run, profitable businesses — which Google certainly is — can nonetheless become rocket rides to ruin . . . not just for individual investors, but ultimately for the whole market."
Continue reading here.

3) Soul searching

"By any standard it is the most astonishing company to hit the planet (will we have to rename it Google Earth?), the 20th century's version of the philosopher's stone, turning the useless ones and noughts of computer code into shareholders' gold and consumers' enlightenment."
Continue reading here. (BTW, I enjoyed this writer's authorial style; he is a real hoot at times!)

4) Google: The Bear Case

"No one else is writing this piece, so it will have to be me. I should say upfront that I'm not predicting that this will happen (yet), and I'm certainly not making a recommendation. I'm just laying out a scenario that could kneecap Google and take its stock back to, say, $100 a share..."
Continue reading here.

5) St Lawrence of Google

"DOES Larry Page ever get vertigo when contemplating his life and future? After all, Mr Page and Sergey Brin, the co-founders of Google, the world's most popular internet search engine, can legitimately claim to have caused an information and media revolution. At 32, they are already worth far more than $10 billion each and fly around in their own Boeing 767. Bill Gates fears them; others in the industry admire or envy them, and some seem to consider them capable of anything. Expectations are dizzyingly high."
Continue reading here.

UPDATE - the link (below) just now included!

6) The Rising Tide of Google
"This week, these acolytes of the Oracle of Omaha grew bigger than Berkshire, with a market capitalization of $139 billion, raising the question: Is Google on par with Berkshire? Admittedly, it's a little perverse to compare the poster child of growth stocks to the home of the world's most famous value investor. Berkshire has about 180,000 employees, Google about 5,000. Berkshire helps people insure cars, Google helps people find pictures of Lindsay Lohan. Berkshire's revenue grew 7% from the third quarter of 2004 to the third quarter of 2005, Google's nearly 100%. But if Google is to justify its chunky market cap, it may need to get a lot more Berkshire-like..."
Continue reading here.

I said this previously, but it bears repeating: Having missed the bullish call, analysts and other armchair market commentators are falling all over themselves to make the bearish call. And while they all trash Henry Blodget, they remain seemingly blind to the sameness of their call to that of his; the sole difference is merely one of direction. Yawn.

And speaking of Henry Blodget, at least he roots around for the cause of Google/GOOG's possible share price decline. Of course, being an analyst, Henry prefers to view this coming decline through the filter of negative corporate performance, temporary or otherwise. Sometimes, however, stocks decline due solely to the weight of their rise.Yes, issues and even problems will emerge at the company. Yes, the market will sit up and take notice of those changes, issues, and problems. And yes, the shares will decline. Will the cause of this coming decline be centered on corporate performance or the stock's performance? After all, success ( a rising share price) sows the seeds of its own decline. To think otherwise is folly. But will the decline be prefatory to a base or a bear market?

Which is one reason [why] I sell a rocket ship such as Google/GOOG as it reaches escape velocity -- no company and no stock has ever grown to the sky. Google/GOOG, too, will re-enter earth's gravity sink. But as I just now asked, will this event cause anything more than a slackening of Google/GOOG's upward trajectory? This is the reality of stocks -- that they have a life-cycle.

In the end, the charts tell all. I hope to alert you to that change the moment it occurs. Of course, please keep in mind that we each have differing objectives, risk tolerances, and time frames.

Finally, Google/GOOG reports Q4 2005 2½ weeks from now...

What: Google Inc. will report its financial results for the fourth quarter ended December 31, 2005.

Date: Tuesday, January 31, 2006

Time: 4:30 PM ET/1:30 PM PT

Webcast: The live Webcast of Google's earnings conference call can be accessed at The Webcast version of the conference call will be available through the same link for approximately two weeks following the conference call, after which time Google will include the Webcast in the "archive" section of the Google Investor Relations website.

David M Gordon / The Deipnosophist

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