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!

28 February 2006

India Rising

Every once in a while, we each read an article or essay that we esteem especially highly; it is the rare essay we deem seminal.

It sometimes seems Fareed Zakaria writes seminal essays on a weekly basis; of course that is not true. If, however, you have an interest in geo-politics and international relations this lengthy and rewarding essay warrants your attention...

"That's outsourcing—as it is any time an American company buys goods or services from abroad. It's also called trade or globalization or capitalism. Those who want to stop it—and it's not clear how you could do that—should remember that the United States' prosperity has come from its very willingness to open itself up to the world. Over the last 60 years, manufacturing employment in the United States has plummeted as those industries went abroad—and yet average American incomes have risen to be the highest in the world. Over the last 20 years, as globalization has quickened, American companies have outsourced first goods, then services—and American incomes have risen faster than those of any other major industrial country. Banning auto-parts factories or call centers will not save General Motors. Globalization highlights some problems for America, but the solutions are all at home. As they have in the past, Americans must—and can—make goods and services that people will pay for freely, not because the government forces them to by shutting out the competition. That is the only stable path to economic security ... At this point, anyone who has actually been to India will probably be puzzled. "India?" he or she will say. "With its dilapidated airports, crumbling roads, vast slums and impoverished villages? We're talking about that India?" Yes, that, too, is India. The country might have several Silicon Valleys, but it also has three Nigerias within it, more than 300 million people living on less than a dollar a day. India is home to 40 percent of the world's poor and has the world's second largest HIV population. But that is the familiar India, the India of poverty and disease. The India of the future contains all this but also something new. You can feel the change even in the midst of the slums."
One word applies to the entire essay, wow! As always, I welcome your comments.
-- David M Gordon / The Deipnosophist

27 February 2006

Inflation -- rising or stable? + Capex continues strong

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

-- David M Gordon / The Deipnosophist
Inflation -- rising or stable?

Despite the outsized 0.7% gain in the headline consumer price index in January, which raised the year over year level of inflation to 4%, the bond market breathed a sigh of relief since the "core" CPI was only up 0.2% and 2.1%, respectively. The Fed has decreed that core measures of inflation are preferred, and so the fact that core inflation has remained around the upper bounds of the Fed's comfort zone for 8 years or so is a source of comfort to the bond market. But as the second chart shows, bond valuation (measured as the difference between 10-year Treasury yields and current headline inflation) has rarely been as unattractive as it is today.

I note that energy prices today are roughly the same in real terms as they were in the early 1980s. This means that the recent 4-year sustained rise in energy prices has not really been an outlier occurrence, and energy prices are not exaggeratedly high. It means that energy prices have simply caught up to the rise in all other prices that has occurred over the past 25 years. In that sense, energy prices today are not at unsustainable levels, and therefore it is difficult to dismiss them out of hand. We have not suffered an energy shock, we've simply seen energy prices normalize relative to other prices. If energy prices hold these levels, then headline inflation is indeed 4%, and not 2%. Energy can only be dismissed if one believes strongly that energy is responding purely to supply/demand factors that are confined solely to the energy sector. If energy is up because of the monetary inflation that has existed over the past 25 years, then this is not an energy shock, and core inflation is not the thing to watch.

Capex continues strong
Durable goods orders plunged in January, falling over 10%, but this was all due to volatile aircraft orders. As the attached chart shows, non-defense, non-aircraft capital goods orders are still growing at a 10% annual rate. This reflects strong corporate profits and business confidence in the future, and suggests that the economy continues to have healthy underpinnings.

Tempo Rubato, part 2

Well, the aforementioned WSJ interview appears delayed to this week. Part of the reason for the delay is Kevin Delaney's (the WSJ reporter) interest in knowing precisely why I had purchased Google/GOOG. What was my original motivation -- had I consulted other research commentary? (No, there was none; the company had yet to IPO.)

Unfortunately, I can give many reasons -- and have -- as to why and when I purchased but not how I knew the stock would zoom from ~$100 to ~$500 within 18 months (as if that qualifies as a big move). The truth, I believe, is a matter of perspective; for example, how do I know that from $339 (my most recent purchase) the shares will return to $475 (the former high trade)... and higher? It is so easy to look backwards and see from where we have come; it is entirely different to stand on the hard, right edge of a chart, and embrace uncertainty. Investors do that all the time.

So here we stand, once again, beset by uncertainty -- the rising force of increasing competition! the deceleration of profit margins from diversifying into less-rewarding lines of business! etc -- and I am a buyer. I see higher highs in the months and years ahead. Nonetheless, there remains that elusive answer to Kevin's question; herewith, my answer of sorts...

Over the life of my investing career, I have seen too many long-term success stories -- successes both as company and stock -- pass me by. Sometimes I was aboard them, but always for a trade only, never for the enduring ride. Perhaps the poster child for the type of long term investment I prefer is Johnson & Johnson/JNJ. My first purchase was in 1983, immediately before the Tylenol lacing incidents. I promptly lost 50%, but learned an invaluable lesson: true growth companies and stocks frequently endure 50% declines, and then come charging back (higher).

But that lesson didn't stick; at least not immediately. I watched Microsoft/MSFT come and go, mostly without me aboard. From its IPO in 1986 to its all time high in late 1999, the stock had an amazing run; once again, I only traded it. In 1989, when Cisco/CSCO came public, I joined the chorus (aka, the crowd) in belittling the investment bankers for the seemingly 'sloppy' IPO. Once again, I fixated on the wrong item, and thus missed a stunning opportunity.

My perspective and perceptions have been forged by (missed) opportunities such as these, and others. I vowed that if ever again presented with such an opportunity, I would seize it, and hold on. I firmly believe that opportunity was and is Google/GOOG. I saw and see all the same signs -- massive success (although the true size of that success was not known until the IPO papers were filed; the company kept it as its biggest secret), and in an arena that was growing like weeds.

Simplistically (to posit merely a tenet), as an investor you needed only to glom on to one truth during the 1980s, "desktop computing." You could purchase a parcel of companies -- MSFT, Intel/INTC, Dell, etc -- and make gobs of money. There were failures but the successes more than made up for those. During the 1990s, you only needed to think "networking" and/or "connectivity", and then purchase shares of Cisco/CSCO, Ascend, Bay, Broadcom/BRCM, etc, and again make gobs of money.

And now, for this decade, the computers are in place (desktop, laptop, cell phone or other wireless appliance), the network is built out (more or less), and now comes its usage. So sites that bond users into a community (MySpace, etc) are a natural. ("Walled Gardens" likely will soon be a thing of the past.) And advertising; where people gather, advertisers are sure to follow. Google/GOOG is magisterial in this field, sui generis. Yes, other companies also will succeed -- Yahoo/YHOO, Microsoft/MSFT, others still incubating in a garage -- but I believe Google is this generation's and iteration's and opportunity's Microsoft or Cisco equivalent. Long term success will prove a long, tough row for the company to hoe, but it will. Surprisingly successfully. Despite the many challenges, past, present, and future.

How did I know Google/GOOG would be the star (at least, too date)? Call it a feeling, or wisdom that piles one atop another from gleaned experience; I just knew. And this is the moment at which Kevin balked -- as would I. What the hell does that mean, "I just knew"? But really, how do you know something when there is no empirical evidence to vouchsafe what amounts to opinion? (Although I prefer to perceive it as experiential wisdom.)

I did not purchase the shares on the IPO; that specific process was too cumbersome for me. But my initial purchases soon after the IPO cluster between $100 to $110, then another cluster between $175 and $210 during March and April of 2005, and then more purchases at ~$300 during October 2005. My last purchase, and most recent, was at $339 on 15 February 2006, as you know. If you prefer to see it in black & white, my blog records my vociferous pounding of the table at each purchase; just check the archives for the appropriate months.

I did not believe then, nor do I now, that Google/GOOG was "overvalued" when it traded at its all time high of $475. In fact even now, I suspect that most investors still do not 'get' this story. Consider the company as akin to a black hole -- it sucks into its blue event horizon the best employee talent, the most advertising $$, at the lowest costs (which will rise, but will nonetheless remain less than its competitors'), as it creates a vortex about itself not dissimilar from the health care vortex that surrounds the Mayo Clinic in Minnesota, or the wireless vortex surrounding Qualcomm in San Diego. This is a good thing, lousy descriptor notwithstanding.

Perhaps oddly, I import terms such as "overvalued" to describe the stock's chart. A good understanding of a stock's dynamics -- patterns do reoccur! -- helps one to lessen risk and embellish return. So, for example, in late-June 2005, I began to warn of a stagnant chart to come, thereby dashing hopes and cries of "$400 by Labor Day!"...

Even at $475, the chart, as I view(ed) it was not "overvalued", so it seems obvious (to me) that this recent decline is and was another stunning buying opportunity. The share price might be higher, but its value is lessening due to the stunning numbers the company continues to report. And risk is assuaged via two methods: price and/or time. (I will discuss this topic in greater depth when I finally write "On a darkling plain.")

I care little for the argument about the reliability and validity of technical analysis. Hell, I think most practitioners of the 'art' should immediately cease & desist as in truth they know only enough to be dangerous to themselves and their followers. This rubric applies equally to me, no matter the basis for my perceptions.

It is possible, perhaps probable, that Google/GOOG will become increasingly transparent to the analyst community. (See note below.) The company might never provide guidance in the typical fashion Wall St adores, but less obfuscation would prove helpful to everyone's agenda. I suspect the company has received this message loud & clear.

Google to Host Analyst Day
MOUNTAIN VIEW, Calif., Feb 24, 2006 (BUSINESS WIRE) -- Google/GOOG will host an Analyst Day meeting on Thursday, March 2, 2006 in Mountain View, California. Presentations by Google's management team are scheduled to begin at 10:00 a.m. PT and conclude by approximately 2:00 p.m. PT.

This event will be made available via Webcast at
The Webcast version of the presentation will be available through the same link for approximately two weeks following the presentation, after which time Google will include the Webcast in the "archive" section of the Google Investor Relations website.
As always, I welcome all comments.

-- David M Gordon / The Deipnosophist

26 February 2006

Can Google Stay Google?

This article from Fast Company starts out of the gates fast and interestingly...
"The real questions (and they're questions any fast-growing, innovation-based company must ask itself at some point) are: How can Google keep its edge for the long run? What can it do to make sure it's still a hot company in 2010? How can a maturing organization with 3,000 people hold on to what made it a great startup?"
but then fizzles well before its conclusion. Nonetheless, you will read within many gems of insight...
"Here's the way I think of it," he [Sergey Brin] says. "Is this the place I would want to work if I were graduating from a PhD program now?" ... "Yes," he answers. Why? The key reason is that Google lets brilliant computer scientists work on "great technical problems" that provide the intellectual stimulation and challenge they crave. "Artificial intelligence, complex systems, user interface -- all the things I studied as a graduate student, we hit the limits of..."
Many items within the article mimic my beliefs re the company -- e.g., its rapidly inhering opportunity, and the consilience that could grow from its culture -- some of which I revealed in my post, Tempo Rubato. And although the Fast Company article was published seven months ago, I read it only this morning! I swear. :-)

By the by, if you have yet to read this Google page, it behooves you to do so.

-- David M Gordon / The Deipnosophist

25 February 2006

A profound alloy

Mix together the following ingredients:
A classic of Western literature, A Clockwork Orange by Anthony Burgess,
A classic of Western cinema, Stanley Kubrick's rendering into a daring movie of that bold novel, and
Arguably our most acute observer of today's culture and morals, "Theodore Dalrymple" (a nom de plume).

The result is a brilliant, insightful, and horrifying essay just like this one. The interesting item: I do not know whether Dalrymple wrote the essay to honor Anthony Burgess, the novel, or the movie. Is it an anniversary of any one of the three? It must be, because Dalrymple never fully closes the circle from Burgess' insights and "genius" to today's seeming, teeming loss of morality.

Or does he...?

-- David M Gordon / The Deipnosophist

Running on algae

Pond life: the future of energy
Hydrogen-producing algae breakthrough
By Chris Williams
Friday 24th February 2006 15:28 GMT

Genetic engineers have made a leap in developing a strain of algae with the potential to supply fuel for a future hydrogen economy, Wired reports.

Unpublished work from the University of California at Berkeley may have brought the technology past the economically viable 10 per cent efficiency level. By shortening the chlorophyll stacks in the photosynthetic organelles, plant physiologist Tasios Melis has "probably" passed the threshold.

Research has already ramped-up the rate by a factor of 100,000 by isolating the algae from sulphur, and groups are working to further improve it. One problem is the hydrogenase enzyme, which releases the precious fuel, cannot currently function in the presence of oxygen - but photosynthesis requires oxygen.

It's hoped changing the algal DNA to close pores that allow oxygen in will increase the hydrogen production.

The prospect is of huge desert algae farms supplying the world with a bonanza of cheap, clean energy.

Little surprise then, that ubiquitous bio-entrepreneur, ¤Craig Venter has his finger firmly in the pie, with research aimed at polishing the hydrogen molecular pathway itself so it can operate constantly.
¤Craig Ventner is an employee of Google. This breakthrough could represent a new stream of revenues for the company. Of course, it (the technology, the process, the distribution, etc) must first be made practical, it is initially unclear the relationship between Ventner and this process, and it is wholly unclear whether the employee/employer relationship between Ventner and Google includes items such as this one.

Any comments from readers?

-- David M Gordon / The Deipnosophist

23 February 2006

Where is Google going?

This 'conversation', done under the auspices of the Financial Times, makes for interesting reading.

-- David M Gordon / The Deipnosophist

22 February 2006

Discovery Labs/DSCO

I have an acquaintence who is smart as a whip; she crackles with intelligence on a bevy of subjects. She specializes in matters medical, and prefers to invest in bio-technology stocks. Her name is Ilene Carrie. The comments that follow are her insights re...

Discovery Labs/DSCO is a long-time favorite biotech of mine and the maker of Surfaxin, one of the most exciting biotechnology products set to enter the neonatal care market. Last October, Laboratorios del Dr. Esteve, a family-run business group, and one of the largest pharmaceutical-chemical corporations in Southern Europe, bought 650,000 shares of DSCO at $6.88 dollars, almost $4.5 M worth of DSCO stock. Esteve is partnered with DSCO in the development and marketing of Surfaxin, which is anticipated to get FDA approval this April. Esteve has the rights to market the drug in Southern Europe and it is no stretch to consider Esteve a prominent and knowledgeable insider.

DSCO's market cap is a little over $400M, but their surfactant-based products have the potential to address multi-billion dollar market opportunities for many lung diseases where there are few or no adequate therapies. Surfactants in the lungs are essential for keeping the air sacs in the lungs open, allowing for breathing. DSCO's pipeline is based on their precision-engineered surfactant, designed to mimic the human lung surfactant-system. DSCO's lead product, Surfaxin, is awaiting approval for treating Respiratory Distress Syndrome (RDS) and is also being studied for other respiratory diseases, Chronic Lung Disease (CLD) in infants and Acute Respiratory Distress Syndrome (ARDS). Surfaxin will soon become the Gold Standard in neonatology, the greatest breakthrough in reducing infant mortality from RDS.

DSCO's vision is to become the global leader in pulmonary critical care. In addition to RDS in infants, many serious lung conditions, for the first time, may be treatable using DSCO's Surfactant Replacement Technology products (SRT). SRT products are likely to be useful in treating a long list of diseases which are associated degradation of lung surfactant. DSCO's pipeline of products can revolutionize treatment in the pulmonary disease arena.

The current standard of care in infant RDS is animal-derived surfactants, but these are problematic and not approved for other conditions because animal surfactants are too immunogenic to be used safely, except in premature infants whose immune systems are not well-developed. Animal surfactants are also difficult to produce, costly, have significant lot-to-lot inconsistencies, and carry a risk for transmitting diseases. DSCO's products, Surfaxin and Aerosurf (an aerosolized version), can be produced readily in sufficient quantities for other pulmonary conditions in which normal surfactant has been degraged.

Beyond Surfaxin, the next revolution in the neonatal and adult arena is DSCO's aerosolize surfactant product, Aerosurf, with a delivery system capable of painting the lungs with surfactant. Aerosurf is planned to enter phase 2 trials for a number of indications this year. If the high-quality humanized surfactant can get delivered inside the lung, it may effectively treat a host of serious lung diseases which are associated with impaired surfactant. Getting the surfactant into the lungs of a baby without mechanical ventilation very well could be considered the "Holy Grail of neonatal medicine."

As revealed recently, DSCO has formed a strategic alliance with Chrysalis Technologies, a division of Philip Morris, to develop and commercialize aerosolized SRTs that can address numerous respiratory conditions. DSCO will provide the therapeutic surfactant technology and Chrysalis will contribute their aerosolization device for delivering the surfactant deep into the lungs, avoiding the need for harmful and expensive mechanical ventilation. The companies will focus their work on new treatments for conditions including acute lung injury, neonatal respiratory failure, chronic obstructive pulmonary disorder, asthma and cystic fibrosis. These serious respiratory conditions represent multibillion dollar opportunities. (See below.)

DSCO is a compelling investment opportunity for 2006, as many milestones will be reached and the company should be well on its way towards commercializing a revolutionary product for pulmonary medicine.

Milestone 2006 Summary:

Q1: Data for Phase 2 study of Surfaxin in ARDS. ARDS may be caused by a variety of insults to the lungs, with a common denominator of degradation of lung surfactant. The standard of care is mechanical ventilation and the mortality is high, 30%-40%.

April: Anticipated FDA approval of Surfaxin for RDS in premature babies. Surfaxin will displace animal-derived products, being more consistent, cheaper to produce, less immunogenic, and with no risk of transmitting diseases.

Q2: Launch of Surfaxin, entry into a $150-200 million neonatal care market. Surfaxin approval anticipated in Europe.

Q3: Results of Phase 2 study for Surfaxin in infant bronchopulmonary dysplasia (BPD), also called chronic lung disease (CLD).

2006: Initiate Phase 2 trials for Aerosurf, a potential breakthrough in respiratory medicine, with a $1 billion opportunity in neonatal ICU and a multibillion opportunity in pulmonary critical care.

Potential Market for Surfactant-Based Therapies:

Neonatal Market: RDS (approvable letter, awaiting final approval)
Chronic Lung Disease (Phase 2 testing)
Others (e.g., Respiratory failure, Pneumonia)
Combined Potential Revenue $0.5-1.0 Billion
Respiratory Distress: Acute RDS (Phase 2 testing)
Acute Lung Injury
Potential Revenue >$3 Billion
Obstructive Disease: Asthma (pilot study completed)
Chronic Obstructive Pulmonary disease (COPD),
Potential Revenue >$1.5 billion
Infection: Pneumonia
Respiratory Syncitial Virus (RSV) Potential Revenue >$1 Billion
Lung Fibrosis: Potential Revenue >$0.5 Billion
Upper Airway Diseases: Potential Revenue ~$1 Billion

That's over $7B worth of market opportunity and potential in months and years ahead. DSCO is currently being valued by the market near $400M, a disconnect to it's potential going forward that the insiders recognize as a compelling opportunity.

I think their ARDS trial results are likely to confuse the market because I doubt the results will be straight-forward fantastic. Therefore, it wouldn't surprise me if the stock sold off somewhat, while people were trying to figure out what the results mean.

If they do not get full FDA approval in April as anticipated, the stock will also temporarily get hit. They will ultimately get approval, but the FDA could come up with more pre-requisites. I would be cautious in the entry price. I do have a lot of it, but at lower prices, and I would buy more if there was bad news, but I might also lighten up before the results come out. Make sense? I suggest waiting to buy a full position until the ARDS results come out, which could be a great buying opportunity.

Congratulations to...

Allan Harris, who has enjoyed an extraordinarily hot hand of late. Read about his selections and gleaned wisdom here. Pay close attention to this post -- Patriot Scientific/PTSC -- which has zoomed to $1 (from 25¢/share!) in one week's time. And I must not neglect to mention NNVC, which too has zoomed to ~$2.00 from his recommended purchase of 10¢ share.

Hot hand indeed.

-- David M Gordon / The Deipnosophist

InPhonic/INPC for "AP"


If you are out there, you had requested my opinion some months ago re InPhonic/INPC. Today the shares are set to open down ~20% to ~$6.25. The news: disappointing earnings and analyst downgrades.

As if this trend were not sufficiently obvious for all to see... and which is the point of this post. Certainly, I have no interest in this company or stock, but even I recognize a possible and potential reversal from this morning's low trade. If it occurs, today would be the day, as this opening manifests as a moment of obscene weakness following an extended (and obvious) trend of extreme weakness. Watch for it, if still interested.

-- David M Gordon / The Deipnosophist

Blowout earnings + BBB (big base breakout)

... that would be Garmin/GRMN.
Garmin Ltd. designs, develops, manufactures and markets a diverse family of hand-held, portable and fixed-mount, Global Positioning System (GPS)-enabled products and other navigation, communications and information products for the general aviation and consumer markets. Garmin's GPS products utilizes its integrated circuit and receiver designs to collect, calculate and display location, direction, speed and other information in forms optimized for specific uses. The Company's products, marketed and distributed worldwide principally under the GARMIN brand. The Company operates in two business segments, Consumer and Aviation.
Garmin/GRMN just now reported its eps... Reports Q4 (Dec) earnings of $0.80 per share, $0.11 better than the Reuters Estimates consensus of $0.69; revenues rose 44.5% year/year to $319.3 mln vs the $294.4 million consensus. Company issues upside guidance for FY06, sees EPS exceeding $3.19 vs. $2.94 consensus; sees FY06 revs exceeding $1.3 bln vs. $1.23 bln consensus.

And the stock...

which closed yesterday at $66.00 is now trading at $74! (In pre-opening trading activity.)

-- David M Gordon / The Deipnosophist

21 February 2006

Retail sales strong

The following comments are from Scott Grannis, Chief Economist at Western Asset Management...
"The consumer is alive and well. Retail sales in real terms are up almost 6% in the 12 months through January, and that is about as strong as it gets. The "soft patch" that resulted from the Katrina disaster is a thing of the past. Ex-autos, real sales were up about 7% in the past year, which is about as strong as we've ever seen. Retail sales have proved robust despite the big slowdown in mortgage refinancing activity that has occurred over the past six months, and despite a big dropoff in mortgage equity withdrawal and growing signs of a peaking in the housing market. No sign here of any economic slowdown. Indeed, this is the sort of strong growth that, if continued, will soon cause the Fed's output gap model to signal an overheating economy."

20 February 2006

A Scanner Darkly

Philip K Dick is a science fiction author who, arguably, has had more novels and stories made into movies than any other author, including Jane Austen. The almost metaphysical worries Dick felt personally, and made real in his many works of fiction, are equally present in A Scanner Darkly.

The book and movie are set in suburban Orange County, California in a future where America has lost the war on drugs. When one reluctant undercover cop (Keanu Reeves) is ordered to start spying on his friends, he is launched on a paranoid journey into the absurd, where identities and loyalties are impossible to decode. It is a cautionary tale of drug use based on Philip K. Dick's own experiences.

Scheduled to open 7 July, the movie stars Keanu Reeves, Robert Downey Jr., Woody Harrelson, Winona Ryder and Rory Cochrane and is written for the screen and directed by Richard Linklater.

Like a graphic novel come to life, A Scanner Darkly will use live action photography overlaid with an advanced animation process (interpolated rotoscoping) to create a haunting, highly stylized vision of the future. The technology, first employed in Richard Linklater's 2001 film Waking Life, has evolved to produce even more emotional impact and detail.

I know where I will be the afternoon of Friday, 7 July! How about you...? I can only hope the movie proves to be as good as this trailer. (Watch it here. And grant it an extra moment or two to load...)

-- David M Gordon / The Deipnosophist

Investment podcasts

Regular reader, Marty Safir, forwards the following information, of interest to many readers here...

-- David M Gordon / The Deipnosophist

I wanted to post this on the blog, but I didn't quite know where it'd fit in. If you think the info is worth passing along then please do something with it.

I thought I'd pass along some fruits of recent research. In the last half-year there's been an explosion of investment and technology related Podcasts. These are a couple of Deipnosophist favorites that have ventured into the podcasting arena (latest version of iTunes required) These are mp3 files so one doesn't necessarily need an iPod to hear them:
Bill Gross of PIMCO

Dorsey Wright
Robert Cringely NerdTV

In addition, I think getting the latest view of the technology landscape through Leo Laporte and crew is invaluable:
TWIT - This Week in Tech with Leo Laporte, John Dvorak and others


Tempo rubato

I had the pleasure of 'meeting' this past week (via telephone and email), Kevin J Delaney, whose beat for the Wall Street Journal is Google/GOOG. Kevin wanted to get my thoughts for an article to be published this week. The comments that follow represent the highlights (or lowlights ;-) from that conversation; as such, this post serves as the long-promised but never written, Googleplex...

Wall Street has a tendency to view the world through a filter of extremes: the market is either bull or bear, overbought or oversold, overvalued or undervalued, etc. Thus, it perceives Google's seeming fixation on advertising as its single source of revenue to be either focused (the bullish perspective) or one trick pony (the bearish perspective). Sentiment always shifts with the near term sustained direction of the stock price; what happens, however, when one trend dissipates as suddenly as it appeared?

My original template for Google/GOOG was Microsoft/MSFT:
Each company was private for 5-10 years before its IPO
Each company was wildly profitable at the time of its IPO
• Microsoft operates in a tethered environment (desktop applications), whereas Google operates in a decentralized, mobile environment
• Microsoft’s initial success was from MS-DOS, Google’s initial success is from
AdWords (and its variants)
• Twenty years since its IPO, Microsoft spread its tentacles everywhere (publishing - Slate, broadcasting – MSNBC, online networks - MSN, etc), twenty years from now, what will Google be doing that is different than its core product today?

I believe Google does not have a master plan -- other than the willingness to fail at any project the company pursues.
• For all the intellectual firepower of Larry Page & Sergey Brin (and the company's many other employees) the algorithms they create and use are the actualization of James Suroweicki’s THE WISDOM OF CROWDS: “You might be smarter than anybody, but you are not smarter than everybody!”

• Consider the APIs Google makes openly available to all (coders and programmers): the thesis seems to be, “We create, and then 'allow' you to improve, to make better, more fun, more useful, etc”
• Compare and contrast programs such as
Picasa (purchased) to those of its competitors: Picasa is playful, easy to use, and not bloatware. (It also does not require several years to load.)
• Or consider
Google Earth. This excellent Atlantic Monthly article, by James Fallows, limns the wonders of that program as purchased and then updated by Google before Google then made available its API to the world. This action serves to make the program more fun and more useful.

"As best I can figure, I have spent 35,000 to 40,000 hours of my life sitting at a computer. This knowledge does not improve my mood or self-esteem. But it brings into sharp relief the handful of moments at the keyboard I can distinctly remember, each involving a time when I realized that the computer had just done something important and new. In the late 1970s, I marveled at the discovery that I could use my very first computer (a Processor Technology SOL-20) to save something I had drafted, then change it later on without having to retype the whole thing. In the early 1980s, I watched a message I had written go to its destination electronically, through a 300-baud modem I clamped onto a telephone handset. In 1993, I tried a program called Mosaic, one of the very first browsers, and was amazed to see pictures and documents stored on someone else’s computer show up on my own screen. In 1995, I entered a few words into a search box and within seconds got back some more-or-less relevant information, via the early search engine AltaVista. That was it for truly memorable moments, until last year when I first tried Google Earth."
(Read the article soon, as its availability online will be brief.)

I perceive Google/GOOG as a generational, singular opportunity — and have since long prior to its IPO. It manifests as the apotheosis and convergence of many once-divergent political, social, cultural, and financial trends.
• Consider the 90s mantra, “Information wants to be free.” Amend that phrase to, “Information wants to be freely available
• The company could morph into the
Dewey decimal system for the entire world. Too grandiose? Perhaps, but the company could “own” both the analogous digital card catalog AND the digital books, placing non-intrusive AdWords in each. To what size does the revenue stream grow with that possibility? Remember that, in time, everything will be scanned and indexed, including, I suppose, the human body. (Do not scoff: Consider the work Craig Ventner is doing as a Google employee.)

The company is radically different from anything prior:
• Each employee contributes directly in a way wholly different than any other company; employees feel they are more than mere cog in a giant machine.

• Responsibility, accountability, and credit are directly attributable to the galvanic person
• Its (power) hierarchy is comparatively flat.

Thus, my new template for Google/GOOG becomes the 21st Century analogue of the Royal Society:
• Google hires and surrounds itself with the best and the brightest minds (sometimes in wholly unrelated fields of endeavor) —
Vint Cerf, Craig Ventner, etc
• With the company's 70/20/10 credo, anything could result from the
consilience that will occur when and where bright minds congregate and in a fostered community of creativity and shared intuition
• Larry Page & Sergey Brin will never have to worry about money, so they likely view the world as a giant playroom: fun and loaded with toys. Why not have fun?

Google/GOOG -- the company and its employees -- will make mistakes. It also will not monetize every project it does or pursues. The question becomes, however: Is there a limit to what this company can accomplish and achieve? What will it be doing twenty years from now when Page & Brin are only 52?

Our job as investors is not to react as a thermometer to every tidbit of data but as a thermostat; stable. For example, I need know this one item only: that the topology (for Google/GOOG) might be uneven, sometimes rocky, but it will be generally uphill. Granted sufficient time, how high is high? Certainly, I believe, and have stated, that its destiny could be the first $1 trillion market cap company.

In a happy moment of serendipity and synchronicity, the esteemed Jack Cory -- friend, wise investor, smart old coot, and member of this 'community' -- offered his thoughts before knowing I was writing this post. Surprisingly, Jack believes Google/GOOG is a
penny stock! However, read very carefully for what Jack truly says...
The contemplation of … [Google/GOOG] … puts the present price in the penny stock category - from the view of a very few years from now. Remember that both MSFT and CSCO were penny stocks when viewing the IPO price from today's vantage. In fact, that statement was true as recently as 7-8 years ago. I feel confident that will be true of Google/GOOG in the future.
Apotheosis indeed.

-- David M Gordon / The Deipnosophist

19 February 2006

Yahoo's unreliable servers

I have complained, and we have discussed, Yahoo's unreliable servers. For a while there, the problem improved -- perhaps my private email (appended with your comments) to the company helped improve the matter. Now, however, the problem is back, and worse than ever. This screen (below) keeps popping up...

[click image to enlarge]

So is the improvement that the company put into place merely to inform us, the users, that it cannot keep up with demand? Do its servers suffer some form of DoS attack? Certainly, I don't know -- but I am glad that I since migrated to more reliable sources all the services I once trusted with Yahoo!.

-- David M Gordon / The Deipnosophist

18 February 2006

Say Anything

This blog's sidebar includes a list of less renowned but nonetheless excellent books, music, and films. Among that list of films, I include the movie, SAY ANYTHING.

The movie's writer&director, Cameron Crowe, is a former writer for Rolling Stone. Due to his purported "baby face" appearance, the magazine sent him on an undercover assignment to a local high school and report on what had changed, if anything, in high school life. From that assignment grew a book, and then the hilarious film, Fast Times at Ridegmont High. (Who can ever forget Sean Penn's blowout performance as Jeff Spicoli?) That movie was his authorial debut; his directorial debut, SAY ANYTHING arguably qualifies as his most endearing film. Cameron's filmography includes SINGLES, JERRY McQUIRE, and ALMOST FAMOUS (largely autobiographical); each lusciously good.

But SAY ANYTHING is sui generis; head and shoulders above the crowd. This could be due to Cameron's writing and directing, or John Cusack's astounding performance as Lloyd Dobler. John Cusack is that rara avis actor: he imbues each role with a sensibility that surmounts the many hurdles of the medium. Whatever the reason or reasons for this film's enduring success, it begs the question of how resonant the film is for many of us.

This Washington Post article details the effect Lloyd Dobler has for many (in particular, women); even today eighteen years later! What the article's writer fails to note is that the pithy speech Cusack delivers re his future profession was written by John Cusack, and as such is pure, undistilled Cusack. Moments such as that one (and the mentioned 7-11 parking lot scene) continue to haunt me.

-- David M Gordon / The Deipnosophist

16 February 2006

For Net stocks, wild rides aren't over yet

This article, from the Christian Science Monitor, is as misguided as they come. (But please read it anyway; it is comparatively brief.) Its author builds an argument -- based (almost) solely on Google/GOOG's recent ~$140 price drop -- that "may mean more opportunities for Google to win big - and lose - for investors."

Look, I have suggested before, and reiterate now, drop a zero from Google/GOOG's share price; that is, move the decimal point one space to the left. It is very common for stocks to decline to $33.78 from $47.51; in fact, it happens all the time. If this parallax view offers clarity or comfort, great; if not, oh well. Please recognize that volatility is what creates the opportunities for investors to profit. Although a $140 decline might seem a headline event, it is not. Rather it is an opportunity for true investors to buy more shares. And it has nothing to do with what transpires inside the company; life there continues apace.

-- David M Gordon / The Deipnosophist

15 February 2006

Homework + Google

[click to enlarge]

And another

I mentioned back in October 2005 that the "low is in" for PF Chang's/PFCB. Today's activity not only confirms that early perception of the low trade, but furthers the bottoming process to near [its] conclusion.

This intermediate term base requires more work -- there remain significant hurdles immediately above the current price -- but the stock chart begins to assume an increasingly obvious bullish tilt.

-- David M Gordon / The Deipnosophist

For what it's worth

This morning's activity -- at least, so far -- has the hallmarks of a successful test and reversal for Google/GOOG. I purchased another lot at $339.

Do not become immediately bullish, however. I suspect that, in spite of my perspective that today's low will mark the low, you will have ample opportunities in the weeks and months ahead to purchase at these prices.

But, and as we all know, I have been wrong before, and could be wrong again; with both the reversal and future comparatively low price buying opportunities.

Do your due diligence!

-- David M Gordon / The Deipnosophist

13 February 2006

Questions re Google/GOOG

... and they are strikingly similar. The first reader sends his questions via email...
"I have a question for you in regards to James Stewart's article on Google. He makes a point of GOOG possibly being the "next MSFT or CSCO" as far as stock price appreciation over the next decade or so. You seem to see this potential also. I have seen many articles on the internet in the last few months alluding to the same. My question then, is what was the common consensus on MSFT and CSCO early in their stock life? Were they as much loved as GOOG seems to be now? In other words, it would seem to me that if so many people are banking on GOOG doing so spectacularly, that in itself would tend to limit the potential gains."
Please consider this factoid. Solely because you know or perceive something does not mean that everyone knows the same things or perceives in the same or similar manner as you. For example, you avail yourself of this blog's comments and insights; this places you in a stunning minority of its (this blog's) possible, potential, and as yet unrealized readership.

And the second posts her questions...
"As I bathe in glow of Stewart's endorsement of Google shares, a little devil's advocate threatens to turn on the cold water spout. When Microsoft went public, it was not an eagerly awaited IPO like Google and didn't overnight make everyone millionaires and a billionaire of Bill Gates. To me, it seems MSFT was just another software company who made Microsoft Word for the MacIntosch. I think Google is already much further along in their path than MSFT was 1-1/2 years after its IPO. Stewart mentions to look at the trading patterns but he is ignoring the capitalization and the already buit-in expectations and the fact that the founders are already billionaires. When did Bill Gates become a billionaire? My point is: when the IPO came out should not necessarily say it is analogous to when MSFT's IPO came out. It might be more appropriate to say it was like five years after MSFT's IPO came out. Maybe Google is further along in its trajectory than Stewart implies."
I disagree with you re the market's anticipation and reception of both Microsoft/MSFT twenty years ago and Google/GOOG twenty months ago. (How soon they forget!) There was eager anticipation re Microsoft's IPO, its reception hot and immediately so. There also was eager anticipation for Google's IPO, although Wall St, in a bid to protect its investment banking turf, began a quiet war to belittle everything about the company, publicly, privately, and via the notorious whispers. The shares' reception, as a result of this campaign (in addition to mishaps on the part of company executives), thus, was stone cold; falling immediately, however ephemerally.

Be careful with terminology. When I refer to a company, I spell out its name (e.g., Google); when I refer to a stock, I use its ticker symbol (e.g., GOOG). And when I refer to each, I use both (e.g., Google/GOOG). Alas, I am dizzied by your seeming interchangeable use of the company name when you mean the stock and the stock symbol when you mean the company (e.g., "I think Google is already much further along in their path than MSFT was 1-1/2 years after its IPO"). Nonetheless, you could be correct re Google/GOOG's placement in its life-cycle (trajectory). Only time will tell.

Certainly, the bears begin to shower us with a
fusillade of negative press. This Barrons' essay is its typical reportorial hatchet job professional investors expect from the magazine.,, and trade on (or fade). There is so much anyone, including me, could refute; for example, its conflation of facts with speculation to make the various speculations appear as facts. However, allow me this one fact and one speculation, kept distinct...
Fact: When the news leaked Friday re this article, Google/GOOG shares quickly and immediately slumped ~$10 (to $352) in after hours trading; as I type this note, the shares are down $10 more to ~$342.
Speculation: Today's low trade will be tagged most likely within the the opening 60 minutes of trading, possibly even the first 10-15 minutes. I expect the shares will reverse off that low, spend the day stabilizing, and thus put in the first low (and probably lowest low) of this decline.

This decline, at least so far, has been a typical bull market correction.

• The shares have declined deeply,
• quickly, and
• today's low trade could come near the long ago forecast $330+ critical support (Fibonacci, gap, 200 day sma, etc).

Ergo, upon this "news" -- the crystallization and publication of so many negative comments and insights -- Google/GOOG shares likely will achieve
nadir; their moment of obscene weakness. Pending today's opening and assuming the moment of obscene weakness will occur, then, and for the first time in many months, I likely will purchase more shares in anticipation of the first intermediate term price reversal and stabilization. Y
es, this is a guess, but it is an educated guess, one [that is] based on precedent. I stated ~4 weeks ago that, "If you cannot withstand the heat of the kitchen, get out." It always is easy to buy when the shares are rising in price; your perception is immediately ratified if not vindicated. Not so easy is what true investors are now about to do.

For more perspectives re Google/GOOG, check out Victor Niederhoffer's site, including the essay entitled "Epiphany." Too, is the most recent issue of Time magazine with this germane cover article and feature.

-- David M Gordon / The Deipnosophist

Western Asset Management

I frequently post many essays and insights re economics from Scott Grannis, Chief Economist at Western Asset Management. Clicking on this link will take you to a brief article revealing more information about that firm.

-- David M Gordon / The Deipnosophist

09 February 2006

Net Neutrality

Referenced several times previously on this blog, net neutrality is an important topic that rises to the fore now. After all, the ISPs want their vigorish. This article does an artful job of defining net neutrality, its importance, and what might change for consumers, for companies, for all of us, in the future...

"Telecoms argue that they are not getting enough return for the tremendous investments they have made to lay down fiber-optic cables and otherwise pave the information highway. Content prioritization is just one more revenue stream they want to explore.

"The capitalist in me says, "Go for it." The consumer in me says, "Wait a minute." If ISPs truly need more revenue to cover the costs of deploying broadband networks (and let's give them that one, for the sake of argument), I can understand that they'd want to raise rates for Internet access and bandwidth use, or impose penalties for excessive bandwidth usage. In fact, many contracts already include such a provision; a Web site can be shut down if it goes over its bandwidth allocation. What I'm far less sanguine about is allowing ISPs any control over content, especially if that control comes with a price tag."
Continue reading here...

BTW, the telecom companies are full of *&^%. Who was it, after all, that paid the piper for the buildout the past 10+ years? How quickly they forget.

-- David M Gordon / The Deipnosophist

08 February 2006

The Google Opportunity

James Stewart, one of my long-time favorite business journalists, cozies up to Google/GOOG for many reasons that should be familiar to readers of this blog. Read on to discover why... (Link embedded in colophon.)

-- David M Gordon / The Deipnosophist

Smart Money

February 7, 2006

The Google Opportunity
By James B. Stewart

GOOGLE SHARES FELL to earth last week, singed by earnings that fell short of wildly optimistic expectations and higher-than-expected tax rates.

You knew this day was coming, didn't you? No party goes on forever.

The plunge was swift. Google (GOOG) shares were trading at $475 just a few weeks ago. After the earnings were announced last week, they dropped in after-hours trading to $379. This week, they dropped below $370. The thundering sound of fast money running for the exits was deafening.

My reaction: Good riddance. The higher Google shares climbed before some kind of correction, the harder they were going to fall. It's a relief to have this out of the way. And here's the silver lining: If Google is the company I think it is, this is almost certainly a buying opportunity for long-term investors.

Let's look briefly at the earnings that caused the havoc. Earnings were $372 million, up 83% from a year ago; revenue was $1.92 billion, up 86%. Margins, already above 60%, improved slightly. In other words, stellar results. "We actually think we had a strong quarter," said Google Chief Executive Eric Schmidt, seeming somewhat befuddled by the stock collapse.

All companies should have such problems. But good as they were, these results fell slightly short of Wall Street estimates, because analysts were using the wrong tax rate in their earnings models. The higher tax rate reported by Google accounted for all the shortfall and then some. Lost in the rush to sell was the fact that operating results were actually better than the consensus forecast.

Even so, the case for Google shouldn't be based on one quarter's results. Obviously the broad shift to Internet advertising is continuing to propel Google's earnings and revenues, and the margins suggest Google retains considerable pricing power. But Google isn't going to continue reporting 80-plus annual percentage gains indefinitely. No company does. But some companies have nonetheless done amazingly well over the years, turning their long-term investors who bought a hundred shares in the initial public offering into millionaires in the span of a decade. This is the kind of company I believe Google can be: an Intel (INTC), Cisco Systems (CSCO) or Microsoft (MSFT) for this decade.

Take a look at the early trading patterns of Cisco and Microsoft after their IPOs (Intel's happened too long ago for the data to be available). Both are strikingly similar to Google's. Microsoft went public in March 1986. A year later, it had more than tripled. A year and a half later, it was up 450%. Then in 1987, it plunged along with the rest of the market on Oct. 19, losing more than half its value, a worse correction than Google has experienced thus far. Cisco went public in February 1990. A year later, it was up more than 150%. But then it lost more than a third of its value. Four months later it was up 250%. By comparison, Google was up 250% a year after its IPO, and 450% at its peak a few weeks ago.

These early corrections in Microsoft and Cisco were significant buying opportunities. At today's prices, Microsoft has risen 335 times, and Cisco is up nearly 300 times, from their initial offering prices. Of course there were no doubt companies with similar trading trajectories that ended up going nowhere. But it's only been a year and a half since Google went public. If Google does turn out to be another Cisco, it's still in its infancy, with plenty of gains ahead of it.

I still own my Google shares, and may well add to them. I've vowed to be the kind of investor Google's founders said they wanted at the time of the IPO: patient, supportive of management, not obsessed with quarterly earnings results, and not trading frantically in and out of the stock. In return, my hope is that Google turns into one those few companies that both transforms society and makes its investors wealthy. Opportunities like these don't happen very often.

06 February 2006

Apple/AAPL & Jim Cramer

I understand that, during Friday's market activity, Jim Cramer counselled his legion of followers to purchase Apple/AAPL. "That it is done going down, [and it now is] time to buy it."

I disagree. And so do the readers of this blog. Here is only one email...
"It looks to me like AAPL is starting to break down. It's failed the attempt to move above resistance at 75 and now down side volume is increasing. Also, the 50 SMA has just been breached on a closing basis. Last stop (or line of defence) looks like 70. If that's broken I suspect the 200 is the next stop (but that's a lot of pain). Wow... I think I'm starting to see much better."
Good on you! Apple/AAPL shares likely will not decline as deeply as you fear, but more than Jim Cramer suspects.

BTW, included among this blog's comments is
this prescient observance that indicates one person sold (at $85.41) -- very near the all time high.

Rumblings quickly become a roar...

Google has concerns, to state it mildly, re the current crop of ISPs deciding to charge the company and its competitors (MSN, Yahoo!, etc) for their usage of broadband.
I referenced in this post (from ~5 months ago) that the company quietly, even surreptitiously, has been purchasing dark fiber.
• I noted in this post that the company hired Vint Cerf.

Now the various pieces of the puzzle begin to cohere; this article indicates, "Google is working on a project to create its own global internet protocol (IP) network, a private alternative to the internet controlled by the search giant, according to sources who are in commercial negotiation with the company."

However, continue reading this article, and all might not be as rosy as first blush; a susurrus begins re speculation that Google bids to become the overlord of everything. Change is afoot, and awareness of the winds of change repay the heedful investor.

BTW, I note that both Broadwing/BWNG and Level 3/LVLT each have doubled in price since my recommendation.

-- David M Gordon / The Deipnosophist

03 February 2006


... that even a broken clock can be correct two times each day, comes this comment...

"those picks (SIRF, SBUX, COH, CAKE, NUVA, etc.) have done great. thanks."
To which I could add others (AAPL, DBRN, GOOG, etc). The point is not to herald my successes, but to acknowledge, in advance, that each position -- taken or not taken, profit or loss -- can teach us something about the market, its mechanisms and processes, and about us each.

Price does not denote value, but it it does connote risk. The higher the price on a lengthening trajectory, the greater the risk. But that risk itself must be placed within the appropriate context: your time frame.

Who is it that sells Google/GOOG that should cause such a sudden and ferocious decline? Each constituency has primacy at any given moment, and this decline has traders (shortest time frame, in my denotation) written all over it. So they will also cause the subsequent bounce when it occurs. (Soon, at its current pace of decline.) But they will be joined by investors -- yes, by such as me -- who have patiently awaited the correct moment (low risk, high reward) to purchase more shares. An initial bounce could occur off support at ~$358, with more support at $330, as mentioned previously.

Does this decline trouble me? Only in that I would prefer it not have occurred, but knew it ultimately would.

Does the decline in other favored stocks or fledgling opportunities trouble me? No; today's action is nothing more than another bar (or candlestick) in the chart. Days, weeks, and months from now, we each will have forgotten the pain and grief this day, this bar, caused us, as we scan the charts backwards looking for our setups and patterns.

What was the question? :-)

Today’s Epidemic

"We’ve been bombarded for months by horror stories about a possible pandemic from the Asian bird flu. Each new case, anywhere in the world, receives instant media attention the moment it appears. The bird flu story is dramatic, and potentially fraught with major global implications. But while bird-flu risks are frighteningly real, a separate, silent epidemic is already well underway, and is taking a huge toll. The epidemic promises to get worse before it gets better, no matter what. What is this quiet scourge? ..."
Continue reading here this article worthy of everyone's attention. And whereas I typically would hold this post for the weekend (i.e., later today), I deem the importance of its topic as quite high and relevant; thus, I post it now. As always, I welcome your professional or personal insights and comments.

02 February 2006

Productivity continues to weaken

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

-- David M Gordon / The Deipnosophist

Productivity in the fourth quarter plunged to -0.6%, driven largely by the fact that the economy grew at a 1.1% rate while the number of people working grew at a 1.7% rate. But just as 1.1% likely overstates the weakness of the economy, a negative productivity rate most likely understates the underlying productivity trend. Productivity for all of last year was 2.3%, down from the 2.6% pace of 2004. The chart (below) gives a broader picture, showing productivity declining from the 4% rate of a few years ago to a 2 - 2.5% rate today. With the labor force likely to grow at least 1% this year, real GDP growth is thus quite likely to be in a 3-4% range.

As the chart suggests, and as I have been arguing for several years, one reason for declining productivity is rising inflation. (Most observers are saying just the opposite, however, noting that declining productivity could put upward pressure on inflation.) I think that the reemergence of pricing power has reduced the incentives of firms to seek out productivity gains. Productivity doesn't just happen, it requires effort and expense, and therefore it should be responsive to changing incentives. It's much easier to raise prices than it is to reduce costs, so cost cutting is strongest when monetary policy (and the ability to raise prices) is most restrictive. The Fed's accommodative policy stance in recent years has made it easier for some firms to raise prices, so productivity has suffered.

One could also argue that the productivity-enhancing impact of technology and the internet has finally faded. These factors can't result in a permanent increase in productivity, but rather a one-time increase that could have been spread out over the past 10 years or so and is finally running its course. Whatever the case, productivity is now returning to its long-term average of 2+%, and I see no reason for it to decline meaningfully from these levels.

01 February 2006


I am wrong re Autodesk/ADSK -- at least for the set-up and pattern I noted in the earlier post. And because I had raised the stop to $40 (from $39, as noted in the post), I just now (~1 hour ago) stopped out for a $2.25 loss (~5%).

You will find me moving on to other, better, and I hope profitable opportunities. Two of these are Coventry Health/CVH and Research in Motion/RIMM. (More anon, if not too late for a post.) Meanwhile, because I like Autodesk/ADSK, I will continue to monitor the position while awaiting a different set-up and pattern.

-- David M Gordon / The Deipnosophist


A reader writes, plainly and pithily...

"Umm, this does not sound good (for Google). Buy more, sell, or hold?"
Regular readers of this blog will recognize that yesterday's post-earnings report and after-hours selloff fails to represent a surprise. On Monday, 23 January, I stated, "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..." and "the first decline in a bull market ... 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..." And in this comment, posted yesterday, I stated, "the stock chart betrays the likelihood of another large price move post-report".
Taken together, and you have the result now obvious to all -- GOOG down $49 from yesterday's closing price, yes, but up ~$30 from the lowest levels in after-hours trades. The shares stabilize, even as I write this post. This all means (for me, and I hope for you) that the market's reaction to the earnings report, startling as it might appear at first blush, is anything but; it was expected (by me) and fits within the bullish pattern the shares have enjoyed since the company's IPO, and that continues.

Certainly, the company continues apace. If you listened to the conference call you would have heard company executives subtly suggest that they position the company for a watermark year (in 2006) of company innovations and products. Many of the expenses related to those initiatives will be front-end loaded, meaning costs now without the associated benefits (revenues); of course, the flip side of this reality also is true, that benefits (added revenues) will increase without the extra costs (SGA) typically borne of this effort, because the costs will have been already expensed.

At the correct price and granted sufficient time, Google/GOOG again will manifest as a sterling investment. For the nonce, we must determine the ultimate depth of this decline -- to $330? Lower than $330? Perhaps, and most likely, the ultimate low will prove higher than that ($330); i.e., shallower than most investors now expect.

More anon, as available.

-- David M Gordon / The Deipnosophist

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