Ataraxia

I am away; I return on Monday, 9 July 2007.

For those readers who might be curious, I am off to a boot camp for one week of intensive, near-24/7 training, as I prepare for my upcoming 3-week trek and climb in the Mont Blanc. Which, of course, is itself training for my ascent of Everest next year. (Well... my attempt to ascend Everest!)

See you upon my return. Please feel free to post questions and comments; I will respond soon after my return.

Enjoy the holiday!
-- David M Gordon / The Deipnosophist

Spukhafte Fernwirkungen

Here are two interesting sites that I have only begun to explore. Upon first glance, each impresses me, and thus bring them to your attention.

MarketSci

and

Seasonal Charts

Please share your thoughts, whether or not you agree.
-- David M Gordon / The Deipnosophist

Ariadne's thread

I once had the goal for this blog of writing one new post each day, but fall increasingly short of that objective. A few of you write and wonder to where I have disappeared the past 1 or 2 weeks. One reader even checks in every 30 minutes, 24/7! Rest assured I am still here, reading the markets' tea leaves, yes, but also honing my list of investment opportunities. In some instances, I whack away mercilessly; in others, I whittle with care. My 9 Core Opportunities remain unchanged; in fact, I remain as excited as ever for their future.

Some readers write publicly, albeit posted elsewhere...

"The tricky part is, the market changes just as you think you capture the trajectory. I guess they use the term martingale to describe this property."(A martingale is "a stochastic process in which the conditional expectation of the next value, given the current and preceding values, is the current value" -- dmg)

Excellent insight. I suppose the markets frighten many investors, always fearful that the markets will somehow attack them when least expected, as though the market's trend, and even trajectory, will lull them into a false sense of complacency. (Please watch video below.)

This possibility (caught unawares by sudden and seemingly random price action) is not one that concerns me. Not to sound arrogant, but I have spent a lifetime knowing trends and trajectories in the markets and when change occurs in advance of that change; thus, price movements that might seem random to most investors are anything but that to me. But I go the next step, and fit my expectations for possible and probable changes into my investing time frame, and discern whether the changes represent mere intra-trend volatility, or a reversal of the trend -- in my time frame.

For example...

[click on chart to enlarge]

This pattern (in the oval) shows a market possibly (probably?) breaking down. A breakdown that I warned about in advance of the reversal, which is my mission here. Even the most non-astute chartist could view this chart and see the minor double top, a pattern whose confirmation awaits a breach beneath the interim low. Simple peak & trough analysis shows a new pattern of lower highs -- and likely soon to occur lower lows. Already the S&P index breaks beneath its 50 day simple moving average (sma) -- a sign of a loss of (upside) momentum, or trajectory.

Please recall the many factors that now weigh heavily against the markets' continued bullish trajectory, which include fundamental, valuation, inter-market relationships, seasonal, and now, finally obvious to all, the technical action of the markets themselves. Does this S&P chart betray how low low might prove to be? A decline to 1450-1430 seems possible, even probable. Does it also betray a time frame? An intermediate term low could be probed anytime during the coming weeks and months. Does a decline of this magnitude (measured from high to low or low to high, and which differs from amplitude, which measures from peak to peak or trough to trough) carry a message to you? It does me, and I sold all trading lots in its anticipation. (As mentioned most recently here, here, and here.) But not investment lots, and never my Core Opportunities. If you differentiate between trading and investment as I do, then never allow the markets' ephemeral oscillations to frighten you. Please watch again the video. Do you see the spotter ever act fearfully, in panic mode? Should you act fearfully, then, when dealing with a different beast? Sure bear market attacks hurt, but not if you act with intelligence and resolve, and never emotionally. It helps, I admit, if you can take right action in advance of the panic of other investors; an objective I hope to help you achieve with my posts on this site.

MA looking awesome today (Friday, June 15). SNDK also having a good day, but not one of your core positions?

Thank you for recalling my high regard and expectations for Sandisk/SNDK, most recently in this post dedicated to the stock's nascent bottoming action. And for recalling that I recommend Master Card/MA, one of my 9 Core Opportunities. You are a mensch. MA rates as a Core Opportunity, whereas SNDK does not, largely in recognition of SNDK's business and product being mostly commodified. However, I cannot allow that recognition to blind me to the sizable move SNDK sets up. Ergo, my recommendation to buy at crucial support at $37. The shares have moved higher, with higher highs yet to come, but the stock does not qualify as a leader because the company does not. I want to invest (as opposed to trade; the difference, as I denote it, is my time frame) in only the best of the best, the crème de la crème. To each his (or her) own; certainly, I have no corner on all the possible great companies, stocks, and ideas. I hope to hear from you with your prospects for great companies, whose stocks will rise for more than a season.

Another reader comments (on a different site that aggregates my posts)...

"Thanks for your thoughtful discussion, David. Your review, given the markets' downturn this past week is timely. Time horizons are complicated and vary for investment type and category (including capitalization). I am especially in agreement with you regarding GOOG. However, in general, the logical side of investing yields to the emotional side when the stock market drops suddenly, and investors need a decision rule set that closely matches their financial outlook and needs."

Very insightful comments. Thank you. I have spent nigh on a decade trying to alert patient and interested readers about the over-riding importance emotions play in the quest for consistent investing success. Alas, many investors continue to seek the Holy Grail for Investing, not realizing how easy success is to be had -- if only they would give up their quest for the complex and difficult in favor of the simplex and elegant. It seems you do. Congratulations.

I never feel pressure to do something, anything, based solely on ephemeral market action. The market is up or down a lot today, or any day? Big deal. I never confuse action in the markets for my response or action in my portfolios, nor as a substitute for action in life; I have no need for drama or melodrama. When negative market action moves into a time frame meaningful to me, I step aside and use the newly-found time to study, to review, to deliberate, to measure, to weigh, and to judge. Precisely as I do now.

What does all this jabber mean as to where I have been these past days? I attempt, with the hope of a small measure of cogency and coherency, to share my thoughts re the current market environment and why my posts of late have been few and far between - and might be even more so in the weeks ahead; I do little in the markets and am otherwise busy living life.

Cronus

1.

We’ll say, late at night, or just before it is dawn:

If only God knew how awful it is we’ll feel,

surely, then, God wouldn’t make us suffer as horribly as this.

Though, perhaps, after all, God doesn’t know the whole of our tale.

Or, perhaps, after all, God is powerless, too,

or, perhaps, God is simply the God deep within us...

Yes, so deep within us,

God is what it is we’ll suffer, as well.

2.

Brecht wrote, in old age, a little poem

about happiness, which, he confessed,

had eluded him all of his life.

And so he stated wryly, if pitifully:

It had better hurry up, at last,

if happiness, you know, is ever to be mine,

because, you see, so little time, of course, is left.
- Robert Mazzocco

So, with the help of Ariadne's thread, I find myself where I began and belong, living life; investing, viewed with the proper perspective, is not the end objective but only pays my way. Oh, and before I go... Thank you, SA; you bring me happiness, just as you redeem me.

Full Disclosure: Long the Core Opportunities (Apple/AAPL, Chipotle/CMG, Google/GOOG, Intuitive Surgical/ISRG, J Crew/JCG, Master Card/MA, and Research in Motion/RIMM).
-- David M Gordon / The Deipnosophist

A chuckle for the weekend

A thief in Paris planned to steal some paintings from the Louvre. After careful planning, he got past security, stole the paintings, and made it safely to his van. However, he was captured only two blocks away when his van ran out of gas.

When asked how he could mastermind such a crime, and then make such an obvious error, he replied,

"Monsieur, that is the reason I stole the paintings. I had no Monet to buy Degas to make the Van Gogh."

The Power of Art

Simon Schama's Power of Art
Scholar and critic, Simon Schama, brings art history alive with passion and wit in this eminently worthwhile seven-week series, showing how masterpieces are the culmination of their creator's life experiences. In the first of two back-to-back episodes, he upends conventional wisdom about Wheatfield With Crows by Vincent van Gogh (played in re-enactments by Andy Serkis), viewing it not as a work of suicidal despair but the triumphant birth of modern art. In the second episode, he turns to Picasso's Guernica.

Monday, 18 June at 9pm, PBS-TV; check local listings.
-- David M Gordon / The Deipnosophist

Update to clients, shared here

The troubles the markets now suffer appeared destined to occur during May, but instead hit this month. The markets have tumbled hard, as I warned: yields screamed higher as bond prices plummeted, the US$ rallied (with higher prices seemingly ahead), and stocks tumbled.

This action seems likely to continue for a brief while at least, while fundamental concerns and seasonal factors play out. However, declines of this sort do not disturb me, nor should they you, to shake confidence in my Core 9 Opportunities: Apple/AAPL, Chipotle Mexican Grill/CMG, Google/GOOG, Intuitive Surgical/ISRG, J Crew/JCG, Master Card/MA, and Research in Motion/RIMM. (btw, the final 2 slots have opened recently; front-runners for these 2 open slots include Colgate/CL and Riverbed Technology/RVBD.) Core 9 positions will not be dislodged from your portfolios based solely on ephemeral market action. Of course, I review daily each position, especially the charts, looking for any sign of a meaningful share price reversal; so far I see none.

Ancillary positions, however, come in for deeper scrutiny with a gimlet eye. I have little patience holding secondary and tertiary positions hoping for a positive outcome, no matter the time frame. If price declines breach stop levels, then I sell with nary a hesitation. As I said in a previous post, no one knows how low is low (nor how high is high). With the cash available from disciplined investing (not bidding higher for stocks running to new highs) and from liquidations from actuated stops and profits, we have the cash, desire, and emotional balance to invest when the buying is good. As we shall, I suspect, and soon.

The coming days, weeks, and months afford the investor the opportunity to review, to study, to merit, to weigh, and finally to decide which investment possibilities merit inclusion among his or her portfolio opportunities. Expect changes to occur, with the predominant fact being the key one: during this (or any) decline, your portfolio's value will decline less than the markets, and when the markets right themselves, your portfolio will rapidly increase in value far in excess of the rate of return for the general markets.

Why would that be? Because my objective is to have your portfolios weighted to the market's leaders.
-- David M Gordon / The Deipnosophist

Time and price stops

One reader seeks greater understanding re this post, specifically...

Given the strong support for ISIS in this price range (see multiple resistance in 2002, 2004 & 2006) and the bullish outlook, why sell here instead of scaling in?

Excellent question, Paul. Now would be a good moment to re-introduce a core tenet.

There are a million and one ways to make money successfully when investing; nonetheless, each investor has his or her own individual objectives and tolerance for risk. Perceived generally, some investors prefer to purchase beaten-down stocks with the thought that they cannot decline any further; other investors prefer to purchase winning stocks with the thought that the share price will continue its momentum to higher prices. Each style works admirably well -- so well that I wed the seemingly competing philosophies via my perception of the specific stock's trajectory within a given periodicity. And then align that trend with my time frame.

Yes, Isis Pharmaceuticals/ISIS appears closer to a relative low (~$8), which argues auspiciously for a low-risk purchase. But two questions linger:
1) Do you know the final low; i.e., will ~$8 indeed stem a deeper decline? Certainly, I know no such thing.
2) Do you know when the upside momentum will return? I know not that item either.

Let's re-phrase those two questions as when will the decline stop? and when will the up trend resume? When I first recommended the position, I speculated on a continuation of the uptrend that gathered steam in early-November 2006. I based my interpretation on several items, not least certain key 'tells' I saw on the chart. But that pattern, or at least my perception of a particular pattern, has failed. I will not compound an error with a follow-on error; having misperceived #2, I stray away from mis-perceiving #1.

Alas, time has run out for this position at this time. Oh, sure, I could hold it patiently and await the probable upside breakout. Or I could re-purchase it then. (There is always the possibility the shares do not follow the bullish assumption.) Because I prefer to make all decisions as re my portfolio's holdings, I swallow my ego, sell, and move on.

But only trading lots; investment lots remain, as the chart's long term bullish picture remains. The stop level for investment lots remains in place -- now at $8, and rising (slowly).

I hope this reply helps.
-- David M Gordon / The Deipnosophist

Dazed and Confused

From Investment Land comes astonishment, investors suddenly dazed and confused, and their astonishment begets yelps of shock, and finally the shock begets screams of agony.

"What is happening to the bull market in the Dow, the Trannies (Transports), the Utes (Utilities), the S&P, the golds, the uraniums, the...?!" (Insert here your favorite leader that now tumbles off a cliff's edge.)

This recent market action could be summed in few words (terrible!), but even better with one picture...

[click on chart to enlarge]

The chart above, as I annotate, is an updated (and daily bar) version of the same chart from this post. You can see for yourself the destruction that now occurs in the credit markets, and why, in turn, equities suddenly act sickly. Diligent readers of this site were prepared for what has transpired... And remains yet to occur.

"Both the European Central Bank and New Zealand hiked their benchmark interest rates a quarter-point, to 4.0% and 8.0%, respectively. The Bank of England paused at 5.5%. Fed fund futures now show traders only expect an 18% chance of an FOMC rate cut to 5.0% in '07, compared to 40% last week and 98% a month ago. Benchmark rates are at multi-year highs across the globe. A Glasgow-based bond fund manager said the hike by New Zealand "frightened" investors, adding that "Global growth is too strong, yields have to rise. The trend is bearish." Yields on U.S. 10-year Treasury bonds are currently above 5%, their highest level in 10 months. The VIX has increased 16% to 14.87, since the start of June. The Fed next meets June 28; it has kept its overnight lending rate at 5.25% for the past seven meetings." (From Seeking Alpha)

"Moreover, when Bill Gross's comments about turning into a bond bear hit the wires today, there was a fair amount of ambiguity as to what he actually meant. It turns out his comments were part of a larger interview posted to the Pimco website. Here are some quotes from the interview: "... Over the next three to five years, our secular outlook suggests that global inflation, and certainly U.S. inflation, will accelerate mildly for a number of reasons... That combination, I suppose, is not necessarily bond-friendly, especially in light of some of the changes that may take place in terms of financial flows—the recirculation of reserves from foreign central banks, etc. As a result, we've raised our forecast range for global interest rates, moving the range for 10-year U.S. Treasuries to 4.0-6.5% versus last year's forecast range of 4.0-5.5%... First of all, in terms of durations and maturity positions, the secular environment implies that portfolio durations would probably be less than market indices as opposed to greater than market indices. That is one of the biggest shifts that I would anticipate for the next three to five years. And after 25 years of being a bull market manager to all of a sudden become a bear market manager—although mildly so in terms of higher interest rates over the next three to five years—is sort of a major shift. But I think it is a well-deserved shift, at least based upon the forecast that we're suggesting..." (From Briefing.com)

Investors must always differentiate between the stocks they own and general market action, just as they must differentiate between a company and its stock. If you do neither, then now would be a good time to begin. Corrections in the general market create our opportunity to purchase favorite investments at better, if not fair, prices.

"What do you see as the upside potential of this stock, J Crew/JCG? Are we looking for a sort of traditional run of 15-20% above the breakout point or is it the kind of long-term buy and hold that dreams are made of?"

Attempt not to confuse your time frame with the market's periodicity; each accords value to time, but stocks merely oscillate whereas we, being human, suffer a tendency to vacillate (oscillate, but with an emotional component). The current charts for the market say one thing -- clearly, to me -- and the chart for JCG says another. Too, I never invest seeking only a percentage gain (99% or less); I invest only for multiple gains (100% or more). Thus, a direct answer: I believe quite strongly that JCG has a destiny that includes a much higher share price. But does the achievement of that objective fall within your time frame...?

Which leads to all manner of possible predictions; the core three being price, time, and trajectory. (The x, y, and z axes on a chart.) When aligning my time frame with the market's periodicity, my objective is to capture the trajectory within the time frame that speaks directly to me.

Having mentioned briefly a winner, I will discuss, equally briefly, a loser - Isis Pharmaceuticals/ISIS. Corporate life continues positively, no worries there, but the stock has proved unable to gain upside traction -- notably not able to break above resistance at ~$10. In fact, it has been turned away a number of times, which argues the importance of this line of declining tops. I recognize the potential -- and possibility -- to re-test crucial support at $8.5 to 8/share. Having breached beneath its 200 day sma today, the picture changes from intermediate term price momentum to possible long term accumulation. I choose not to linger (hold) because I have no idea at this moment how low the shares might decline before turning up convincingly. So I sell, and keep my eyes on that hardened line of declining tops (resistance).

No use crying over spilled milk, I reason. Yes, I retain ISIS on my monitor, watching for another, future setup to purchase. The objective, as always, is not to be right (emotional need) but to make money. The fundamentals for the company, as of this writing, remain bullish; the sole change is a breach of rising support on the chart.

Which brings to mind the objective correlative when investing: while aligning your time frame with the market's periodicity, never lose sight of the market's leaders. Leaders lead. If you choose to pare back your holdings -- and I do not argue you do so; each investor has different objectives and tolerance for risk -- sell first your non-core, non-investment holdings. Keep your leaders; they signal general market direction weeks and months from now. (Leaders are not those stocks with up trends obvious to even the untrained eye. Obvious = near exhaustion.) One leader would be Google/GOOG -- having just broken above an 18 month high level consolidation, its long and intermediate term trends are now in sync; the only doubt for traders are the short term oscillations.

I do not mean to seem dismissive of short term oscillations, but they provide insufficient reason for you becoming dazed and confused. Or losing track of your primary objective: to make money, consistently and successfully.

Full Disclosure: Long the shares of Google/GOOG and J Crew/JCG; no short positions.
-- David M Gordon / The Deipnosophist

A Good and Happy Child

When does a good novel become great? The mechanics for each writer remain the same -- 26 letters, and various marks of punctuation -- so...

Could the difference be plot? No, most novels driven by plot tend to stint on character. Perhaps the difference might be good and memorable characters? Crucial, but no, not that either, as great characters often populate dull novels. Dialogue that does more than lie flat on the page? In some senses, yes, as few writers are truly able to use dialogue to tell the tale, provide narative momentum, and include depth and breadth via exposition. Perhaps big ideas? No, in fact the difference between a merely good and the great novel is a combination of all those crucial elements plus writerly style... a special quality that Justin Evans achieves with seemingly effortless grace in his first published novel, A GOOD AND HAPPY CHILD.

I stepped back, wounded. She fumbled for the second key, hands shaking now. This violent separation from the past was too much to bear. Maggie and I opening this door together hundreds of times. Giddy. Grumpy. Drunk. Stamping snow off our boots. Sun-baked and sweaty. Maggie bending at the waist, Hurry, I gotta pee so bad. With shopping bags. With new furniture. With friends. With her gentleness and patience and beauty, Maggie had redeemed me once -- from the rootless misery of a volatile, self-loathing youth. Why couldn't she pull that trick again? Yet here I was, stale-smelling and red-eyed, pulling at her like a beggar. I was Grendel, a monster gazing longingly at a campfire from my place in the woods. The past seemed so close. I wished to reach out, dip my hand into that other dimension, be her husband again, rewind back to our first date at an East Village bar, drinking dirty martinis and swiveling on barstools like kids. I gripped Maggie's face with both hands. I forced a kiss on her. It worked. The sensations returned: her full lips, her scent -- same perfume, I noted -- the nearby jangle of earring, the tickle of her curly hair, her presence, her aura, the slight clamminess from a ride on the subway, the end-of-day fatigue... it was all still there -- a destination in itself, a place where I'd been happy...

The passage above is simply brilliant, and on many levels. In addition to its textual relevance -- it causes sympathy, if not empathy, for the readers to the two characters -- it has as well a meta value: it tells the author's tale in minature. The words Evans chooses to limn the everyday scene are words that could describe his obvious tale, and do. Could Evans, in fact, be using style to convey his true message, his novel's sub-text?

How could I resist? I was seeking your help, your skills. These were founded on medical science, medical training -- secular knowledge. Your world (as I perceived it in these sessions) represented the Enlightened Good Life -- education, competence, prosperity -- a French garden of secular virtues. My religious beliefs, on the other hand, splashed on the walls a wild spectacular of fear and hope. Christ heaving and bleeding on the cross. Demons feasting on souls as they plunge into hell. The ecstasy that might one day lift us from the grave. Between the two, a lonely vacuum yawned, where neither set of rules applied. Depression. Lousy marriages. The conformist game of corporate life. That baseline throb of anxiety in a city where you fought crowds for every job, every apartment, even a spot near the pole on the subway. If you keep fighting on both fronts, you seemed to say, the physical and metaphysical, you will lose. Choose your real life. Your hand reached for me. I wanted to take it. Did it come to this -- that if I were to accept all the good you could offer me, I must also accept, as a whole, the world-view that supported it? "My father used to quote Shakespeare on this one," I said, a conflicted smile torturing my face...

There are several moments in the snippet above that floor me; I note but one. How is it that a smile "tortures" a face -- is it not typical that a smile does precisely the opposite? Why, then, do these words - words that help to illustrate conflict in the characters' universe, and the readers' perceptual reactions to that reality - reside within the confines of the same sentence? What is the writer's (i.e., Evans's) true message...?

A lot of buzz surrounds this novel; in fact, I tend to be skeptical that buzz this omni-present is in fact hyperbole. Not this time, however; Justin Evans has written a cracker of a tale, told exceedingly well, that startled me time and again. I could not slow my reading pace, as I wanted to know everything about all the characters (with many surprises slowly and lovingly revealed) as I also hoped to discover as soon as possible how the story resolves itself. I do not want to spoil anyone's reading experience (I encourage all readers of fiction to read this book!), but there are several surprise twists of plot and character, each holding fast and true to the story's own internal sense of logic. This novel merits a one word exhortation: Wow!

I hoped this novel would not end, but, alas, it has. Which leaves me to pay Justin Evans the best compliment a reader can offer to a writer: I will purchase and read your next book. And the one after that. Just keep 'em coming!

Full Disclosure: Long this novel, and damned proud of it!
-- David M Gordon / The Deipnosophist

New highs!

It has been a good period of late for my 9 Core Opportunities -- Apple/AAPL, Chipotle/CMG, Intuitive Surgical/ISRG, J Crew/JCG, Master Card/MA, and Research in Motion/RIMM included. And for Google/GOOG, my favorite of them all, and which today reaches new all-time highs. Last recommended ~3 weeks ago at ~$450, subsequent price action, not solely today's new all-time high, proves to be especially gratifying. How many readers, I wonder, purchased and held this phenomenal continuing opportunity? (In fact, be proud and loud, if you are a happy owner of Google/GOOG please chime in with a reply to this post.)

One reader forwarded this news article/analysis that helps explain some measure of Google's successes, and which I include below in full. (The reader did not provide a link, alas.)

Full Disclosure: Long the shares of Google/GOOG
-- David M Gordon / The Deipnosophist
================================
Google Keeps Tweaking Its Search Engine
By SAUL HANSEL

THESE days, Google seems to be doing everything, everywhere. It takes pictures of your house from outer space, copies rare Sanskrit books in India, charms its way onto Madison Avenue, picks fights with Hollywood and tries to undercut Microsoft’s software dominance.

But at its core, Google remains a search engine. And its search pages, blue hyperlinks set against a bland, white background, have made it the most visited, most profitable and arguably the most powerful company on the Internet. Google is the homework helper, navigator and yellow pages for half a billion users, able to find the most improbable needles in the world’s largest haystack of information in just the blink of an eye.

Yet however easy it is to wax poetic about the modern-day miracle of Google, the site is also among the world’s biggest teases. Millions of times a day, users click away from Google, disappointed that they couldn’t find the hotel, the recipe or the background of that hot guy. Google often finds what users want, but it doesn’t always.

That’s why Amit Singhal and hundreds of other Google engineers are constantly tweaking the company’s search engine in an elusive quest to close the gap between often and always.

Mr. Singhal is the master of what Google calls its “ranking algorithm” — the formulas that decide which Web pages best answer each user’s question. It is a crucial part of Google’s inner sanctum, a department called “search quality” that the company treats like a state secret. Google rarely allows outsiders to visit the unit, and it has been cautious about allowing Mr. Singhal to speak with the news media about the magical, mathematical brew inside the millions of black boxes that power its search engine.

Google values Mr. Singhal and his team so highly for the most basic of competitive reasons. It believes that its ability to decrease the number of times it leaves searchers disappointed is crucial to fending off ever fiercer attacks from the likes of Yahoo and Microsoft and preserving the tidy advertising gold mine that search represents.

“The fundamental value created by Google is the ranking,” says John Battelle, the chief executive of Federated Media, a blog ad network, and author of “The Search,” a book about Google.

Online stores, he notes, find that a quarter to a half of their visitors, and most of their new customers, come from search engines. And media sites are discovering that many people are ignoring their home pages — where ad rates are typically highest — and using Google to jump to the specific pages they want.

“Google has become the lifeblood of the Internet,” Mr. Battelle says. “You have to be in it.”

Users, of course, don’t see the science and the artistry that makes Google’s black boxes hum, but the search-quality team makes about a half-dozen major and minor changes a week to the vast nest of mathematical formulas that power the search engine.

These formulas have grown better at reading the minds of users to interpret a very short query. Are the users looking for a job, a purchase or a fact? The formulas can tell that people who type “apples” are likely to be thinking about fruit, while those who type “Apple” are mulling computers or iPods. They can even compensate for vaguely worded queries or outright mistakes.

“Search over the last few years has moved from ‘Give me what I typed’ to ‘Give me what I want,’ ” says Mr. Singhal, a 39-year-old native of India who joined Google in 2000 and is now a Google Fellow, the designation the company reserves for its elite engineers.

Google recently allowed a reporter from The New York Times to spend a day with Mr. Singhal and others in the search-quality team, observing some internal meetings and talking to several top engineers. There were many questions that Google wouldn’t answer. But the engineers still explained more than they ever have before in the news media about how their search system works.

As Google constantly fine-tunes its search engine, one challenge it faces is sheer scale. It is now the most popular Web site in the world, offering its services in 112 languages, indexing tens of billons of Web pages and handling hundreds of millions of queries a day.

Even more daunting, many of those pages are shams created by hucksters trying to lure Web surfers to their sites filled with ads, pornography or financial scams. At the same time, users have come to expect that Google can sift through all that data and find what they are seeking, with just a few words as clues.

“Expectations are higher now,” said Udi Manber, who oversees Google’s entire search-quality group. “When search first started, if you searched for something and you found it, it was a miracle. Now, if you don’t get exactly what you want in the first three results, something is wrong.”

Google’s approach to search reflects its unconventional management practices. It has hundreds of engineers, including leading experts in search lured from academia, loosely organized and working on projects that interest them. But when it comes to the search engine — which has many thousands of interlocking equations — it has to double-check the engineers’ independent work with objective, quantitative rigor to ensure that new formulas don’t do more harm than good.

As always, tweaking and quality control involve a balancing act. “You make a change, and it affects some queries positively and others negatively,” Mr. Manber says. “You can’t only launch things that are 100 percent positive.”

THE epicenter of Google’s frantic quest for perfect links is Building 43 in the heart of the company’s headquarters here, known as the Googleplex. In a nod to the space-travel fascination of Larry Page, the Google co-founder, a full-scale replica of SpaceShipOne, the first privately financed spacecraft, dominates the building’s lobby. The spaceship is also a tangible reminder that despite its pedestrian uses — finding the dry cleaner’s address or checking out a prospective boyfriend — what Google does is akin to rocket science.

At the top of a bright chartreuse staircase in Building 43 is the office that Mr. Singhal shares with three other top engineers. It is littered with plastic light sabers, foam swords and Nerf guns. A big white board near Mr. Singhal’s desk is scrawled with graphs, queries and bits of multicolored mathematical algorithms. Complaints from users about searches gone awry are also scrawled on the board.

Any of Google’s 10,000 employees can use its “Buganizer” system to report a search problem, and about 100 times a day they do — listing Mr. Singhal as the person responsible to squash them.

“Someone brings a query that is broken to Amit, and he treasures it and cherishes it and tries to figure out how to fix the algorithm,” says Matt Cutts, one of Mr. Singhal’s officemates and the head of Google’s efforts to fight Web spam, the term for advertising-filled pages that somehow keep maneuvering to the top of search listings.

Some complaints involve simple flaws that need to be fixed right away. Recently, a search for “French Revolution” returned too many sites about the recent French presidential election campaign — in which candidates opined on various policy revolutions — rather than the ouster of King Louis XVI. A search-engine tweak gave more weight to pages with phrases like “French Revolution” rather than pages that simply had both words.

At other times, complaints highlight more complex problems. In 2005, Bill Brougher, a Google product manager, complained that typing the phrase “teak patio Palo Alto” didn’t return a local store called the Teak Patio.

So Mr. Singhal fired up one of Google’s prized and closely guarded internal programs, called Debug, which shows how its computers evaluate each query and each Web page. He discovered that Theteakpatio.com did not show up because Google’s formulas were not giving enough importance to links from other sites about Palo Alto.

It was also a clue to a bigger problem. Finding local businesses is important to users, but Google often has to rely on only a handful of sites for clues about which businesses are best. Within two months of Mr. Brougher’s complaint, Mr. Singhal’s group had written a new mathematical formula to handle queries for hometown shops.

But Mr. Singhal often doesn’t rush to fix everything he hears about, because each change can affect the rankings of many sites. “You can’t just react on the first complaint,” he says. “You let things simmer.”

So he monitors complaints on his white board, prioritizing them if they keep coming back. For much of the second half of last year, one of the recurring items was “freshness.”

Freshness, which describes how many recently created or changed pages are included in a search result, is at the center of a constant debate in search: Is it better to provide new information or to display pages that have stood the test of time and are more likely to be of higher quality? Until now, Google has preferred pages old enough to attract others to link to them.

But last year, Mr. Singhal started to worry that Google’s balance was off. When the company introduced its new stock quotation service, a search for “Google Finance” couldn’t find it. After monitoring similar problems, he assembled a team of three engineers to figure out what to do about them.

Earlier this spring, he brought his squad’s findings to Mr. Manber’s weekly gathering of top search-quality engineers who review major projects. At the meeting, a dozen people sat around a large table, another dozen sprawled on red couches, and two more beamed in from New York via video conference, their images projected on a large screen. Most were men, and many were tapping away on laptops. One of the New Yorkers munched on cake.

Mr. Singhal introduced the freshness problem, explaining that simply changing formulas to display more new pages results in lower-quality searches much of the time. He then unveiled his team’s solution: a mathematical model that tries to determine when users want new information and when they don’t. (And yes, like all Google initiatives, it had a name: QDF, for “query deserves freshness.”)

Mr. Manber’s group questioned QDF’s formula and how it could be deployed. At the end of the meeting, Mr. Singhal said he expected to begin testing it on Google users in one of the company’s data centers within two weeks. An engineer wondered whether that was too ambitious.

“What do you take us for, slackers?” Mr. Singhal responded with a rebellious smile.

THE QDF solution revolves around determining whether a topic is “hot.” If news sites or blog posts are actively writing about a topic, the model figures that it is one for which users are more likely to want current information. The model also examines Google’s own stream of billions of search queries, which Mr. Singhal believes is an even better monitor of global enthusiasm about a particular subject.

As an example, he points out what happens when cities suffer power failures. “When there is a blackout in New York, the first articles appear in 15 minutes; we get queries in two seconds,” he says.

Mr. Singhal says he tested QDF for a simple application: deciding whether to include a few news headlines among regular results when people do searches for topics with high QDF scores. Although Google already has a different system for including headlines on some search pages, QDF offered more sophisticated results, putting the headlines at the top of the page for some queries, and putting them in the middle or at the bottom for others.

GOOGLE’S breakneck pace contrasts with the more leisurely style of the universities and corporate research labs from which many of its leaders hail. Google recruited Mr. Singhal from AT&T Labs. Mr. Manber, a native of Israel, was an early examiner of Internet searches while teaching computer science at the University of Arizona. He jumped into the corporate fray early, first as Yahoo’s chief scientist and then running an Amazon.com search unit.

Google lured Mr. Manber from Amazon last year. When he arrived and began to look inside the company’s black boxes, he says, he was surprised that Google’s methods were so far ahead of those of academic researchers and corporate rivals.

“I spent the first three months saying, ‘I have an idea,’ ” he recalls. “And they’d say, ‘We’ve thought of that and it’s already in there,’ or ‘It doesn’t work.’ ”

The reticent Mr. Manber (he declines to give his age), would discuss his search-quality group only in the vaguest of terms. It operates in small teams of engineers. Some, like Mr. Singhal’s, focus on systems that process queries after users type them in. Others work on features that improve the display of results, like extracting snippets — the short, descriptive text that gives users a hint about a site’s content.

Other members of Mr. Manber’s team work on what happens before users can even start a search: maintaining a giant index of all the world’s Web pages. Google has hundreds of thousands of customized computers scouring the Web to serve that purpose. In its early years, Google built a new index every six to eight weeks. Now it rechecks many pages every few days.

And Google does more than simply build an outsized, digital table of contents for the Web. Instead, it actually makes a copy of the entire Internet — every word on every page — that it stores in each of its huge customized data centers so it can comb through the information faster. Google recently developed a new system that can hold far more data and search through it far faster than the company could before.

As Google compiles its index, it calculates a number it calls PageRank for each page it finds. This was the key invention of Google’s founders, Mr. Page and Sergey Brin. PageRank tallies how many times other sites link to a given page. Sites that are more popular, especially with sites that have high PageRanks themselves, are considered likely to be of higher quality.

Mr. Singhal has developed a far more elaborate system for ranking pages, which involves more than 200 types of information, or what Google calls “signals.” PageRank is but one signal. Some signals are on Web pages — like words, links, images and so on. Some are drawn from the history of how pages have changed over time. Some signals are data patterns uncovered in the trillions of searches that Google has handled over the years.

“The data we have is pushing the state of the art,” Mr. Singhal says. “We see all the links going to a page, how the content is changing on the page over time.”

Increasingly, Google is using signals that come from its history of what individual users have searched for in the past, in order to offer results that reflect each person’s interests. For example, a search for “dolphins” will return different results for a user who is a Miami football fan than for a user who is a marine biologist. This works only for users who sign into one of Google’s services, like Gmail.

(Google says it goes out of its way to prevent access to its growing store of individual user preferences and patterns. But the vast breadth and detail of such records is prompting lust among the nosey and fears among privacy advocates.)

Once Google corrals its myriad signals, it feeds them into formulas it calls classifiers that try to infer useful information about the type of search, in order to send the user to the most helpful pages. Classifiers can tell, for example, whether someone is searching for a product to buy, or for information about a place, a company or a person. Google recently developed a new classifier to identify names of people who aren’t famous. Another identifies brand names.

These signals and classifiers calculate several key measures of a page’s relevance, including one it calls “topicality” — a measure of how the topic of a page relates to the broad category of the user’s query. A page about President Bush’s speech about Darfur last week at the White House, for example, would rank high in topicality for “Darfur,” less so for “George Bush” and even less for “White House.” Google combines all these measures into a final relevancy score.

The sites with the 10 highest scores win the coveted spots on the first search page, unless a final check shows that there is not enough “diversity” in the results. “If you have a lot of different perspectives on one page, often that is more helpful than if the page is dominated by one perspective,” Mr. Cutts says. “If someone types a product, for example, maybe you want a blog review of it, a manufacturer’s page, a place to buy it or a comparison shopping site.”

If this wasn’t excruciating enough, Google’s engineers must compensate for users who are not only fickle, but are also vague about what they want; often, they type in ambiguous phrases or misspelled words.

Long ago, Google figured out that users who type “Brittany Speers,” for example, are really searching for “Britney Spears.” To tackle such a problem, it built a system that understands variations of words. So elegant and powerful is that model that it can look for pages when only an abbreviation or synonym is typed in.

Mr. Singhal boasts that the query “Brenda Lee bio” returns the official home page of the singer, even though the home page itself uses the term “biography” — not “bio.”

But words that seem related sometimes are not related. “We know ‘bio’ is the same as ‘biography,’ ” Mr. Singhal says. “My grandmother says: ‘Oh, come on. Isn’t that obvious?’ It’s hard to explain to her that bio means the same as biography, but ‘apples’ doesn’t mean the same as ‘Apple.’ ”

In the end, it’s hard to gauge exactly how advanced Google’s techniques are, because so much of what it and its search rivals do is veiled in secrecy. In a look at the results, the differences between the leading search engines are subtle, although Danny Sullivan, a veteran search specialist and blogger who runs Searchengineland.com, says Google continues to outpace its competitors.

Yahoo is now developing special search formulas for specific areas of knowledge, like health. Microsoft has bet on using a mathematical technique to rank pages known as neural networks that try to mimic the way human brains learn information.

Google’s use of signals and classifiers, by contrast, is more rooted in current academic literature, in part because its leaders come from academia and research labs. Still, Google has been able to refine and advance those ideas by using computer and programming resources that no university can afford.

“People still think that Google is the gold standard of search,” Mr. Battelle says. “Their secret sauce is how these guys are doing it all in aggregate. There are 1,000 little tunings they do.”

Sagacious or merely sequacious?

One reader and investor wonders...

Hello David,

Why the run up in JCG before the earnings announcement? Mind you, since I have a significant position in JCG, I’m not complaining.

Well, by now my answer is moot, as the company since has reported its earnings, and the stock is higher yet. Always keep in mind that different constituencies gain primacy at different times: traders, speculators, or investors (regular readers will recall my denotation as the investor's time frame), in addition to the different types of each class of investor - buy or sell side, fund or pension, etc - that each has its own individual objectives, etc.

Based on the high volume breakout that occurred today, I suspect that someone (or someones) caught wind of the positive earnings report, and purchased on pure speculation. (Even knowing the news does not guarantee the market's reaction to that news item.) Too, I suggest today's activity (+$3.20 to $44.87 on volume that is 376% of its daily average) was powered by traders purchasing the high volume breakout. Hmm, that seems kindasorta recursive, eh? When is the breakout? What price represents the breakout? How much volume signifies high volume? Sure, we have the closing numbers now, but what about all those investors who purchased during the day, during the breakout in process real time -- what did they know, and when?

[click on chart to enlarge]

"Clothing retailer, J. Crew Group/JCG, posted a more-than-tripling of Q1 profit Thursday on strong sales and high margins. The company's shares climbed 7.7% to close at $44.87 and then tacked on another 4.2% to reach $46.75 in after-hours trading. Q1 net income came in at $24.6 million ($0.39/share), up from $4.4 million ($0.12) in the year-ago quarter. Total revenue surged 24% to $297.3 million on a 13% rise in same-store sales. (After adjusting for a shift in the retail calendar, comps were up 8%.) Analysts were expecting $0.30 EPS on sales of $271 million. Gross margin increased to 46.6% of revenue from 45.5% last year. J. Crew is forecasting same-store sales growth in the mid-single digits. The company has raised its full-year EPS guidance to the $1.37-1.41 range, up from $1.27-1.31. Analysts had been expecting $1.32. J. Crew also forecast Q2 EPS of $0.26-0.28, in line with Street forecasts of $0.28. The company has beat expectations in every quarter since its IPO last June."

Tomorrow is another day. A gloriously bright future beckons for this company, its stock, and its investors; i.e., us. Congratulations to the three of you :-) who followed my lead, and purchased shares of JCG for your portfolios. This price move today is only the beginning; the best is yet to come.

Full Disclosure: Long the shares of J Crew Group/JCG
-- David M Gordon / The Deipnosophist