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!

27 April 2007

Music to kick-start the weekend

And I mean kick start.

Brandi Carlile's first album earned enthusiastic reviews, and Carlile was named by Rolling Stone as one of 2005's "Artists to Watch."

"Watch"?! How about marvel over? Her second CD release, The Story, is even better than her first CD. Brandi has a phenomenal voice, has a massive grasp of how to arrange and compose music (it is not merely writing soppy lyrics and strumming a guitar lazily, emphasizing the downstrokes), and she writes lyrics that belie her age (she is now only 25)... Oh, and she is easy to look at.

"... accentuating the arty undercurrents that ran throughout her debut — a move that highlights her ambition and helps push her out of the rootless ether and into something that sounds distinctly contemporary. In other words, Carlile's Buckley and Yorke influences are brought to the forefront here — not just in her soaring, neo-operatic vocals, either, but also how her writing is at once more brooding, dramatic, and open-ended than it was on the debut — which makes her sound modern." Complete AMG review here.

Brandi Carlile (and her band) smokes, especially on this song, the first single from her new CD...

Or watch it here...

Video removed by request of label, BMG.
The Story:

All of these lines across my face
Tell you the story of who I am
So many stories of where I've been
And how I got to where I am
But these stories don't mean anything
When you've got no one to tell them to
It's true... I was made for you.

I climbed across the mountain tops
Swam all across the ocean blue
I crossed all the lines and I broke all the rules
But baby I broke them all for you
Because even when I was flat broke
You made me feel like a million bucks
You do... and I was made for you

You see the smile that's on my mouth
It's hiding the words that don't come out
And all of my friends who think that I'm blessed
They don't know my head is a mess
No, they don't know who I really am
And they don't know what I've been through like you do
And I was made for you...

All of these lines across my face
Tell you the story of who I am
So many stories of where I've been
And how I got to where I am
Oh but these stories don't mean anything
When you've got no one to tell them to...
It's true -- I was made for you
Oh yeah it's true that I was made for you.

I listen to a a lot of music (perhaps more than most people), and this CD ranks with Patty Griffin's, Children Running Through as among only a few of the best CDs I have 'discovered' this past year. Try this song. Purchase Brandi's new CD. (Amazon link in sidebar under "Currently Spinning.")

As always, I would like to know your thoughts in reply.
-- David M Gordon / The Deipnosophist


25 April 2007

About to execute a Kilroy, part 2

In my comments reply to part 1 of this post, I stated, "I would watch trading activity if, as, and when the price clears $10.25/share. Does the screen suddenly light up like a slot machine? Is there a frenzied burst of trading? Is there institutional activity that manifests as large blocks suddenly crossing the 'tape'?"

Because that is precisely what occurred, I thought it would be helpful to show you how such activity appears...

[click on chart to enlarge]

The truth is that when you invest the time to learn chart patterns, you know how each fulfills itself; i.e., pattern recognition. And no longer must you wait wait wait for that moment of certainty; also known as a higher price -- as well as heightened risk and lessened reward. Today's action is a clear signal for a higher -- perhaps substantially higher -- share price for Isis Pharmaceuticals/ISIS.

Which leaves the sole remaining question: How I knew, in advance, the precise price level ($10.25) at which the heightened activity would occur. As Ben Stein famously said, "Anyone...?"
-- David M Gordon / The Deipnosophist


About to execute a Kilroy

Another recommended opportunity, Isis Pharmaceuticals/ISIS (although not a member of the core-9), appears set to make a large price move. Soon.

Based upon the chart, that imminent move appears to be up, with the past near-6 months of price activity resolving as one massive base. (As would be the entire pattern since 1992.) As I said in that earlier post,
"This squeeze can continue to compress, could even breakdown albeit ephemerally" -- which is precisely what occurred. I used that price decline to accumulate lots between $8.5 and $9. Now I await the price thrust above ~$10.25, and then above $11... with higher prices, perhaps much higher, to come subsequent to those initial breakouts.

I am prepared for such an event -- and eventuality. Are you?
-- David M Gordon / The Deipnosophist


24 April 2007

HUGE bottom in process!

SanDisk/SNDK, recommended often although not one of my core 9 opportunities, nears the end of it massive bottom... and nears the beginning of its next major upleg.

Next levels of resistance lie at ~$46.5, ~$50, and finally $62.25 -- which level would make the bullish setup obvious even to the blind.

I own the shares at $37+ (at which level I recommended the shares). What price level commands your interest...?

-- David M Gordon / The Deipnosophist


HUGE breakout!

A huge breakout is under way for previously recommended opportunity, Snap On Tools/SNA. Ten minutes into the day's trading, and the stock is already higher by ~10%.

Great trading... er, investing! :-)
-- David M Gordon / The Deipnosophist


23 April 2007

Syncategorema, or the sum of its parts

Okay, so for 3 years now, and in my clearest pronouncements ever, I pounded the table for you to purchase Google/GOOG shares. And, okay, you ignored my recommendations to purchase the investment because you had reasons you perceived trumped my arguments to own the investment.

Meanwhile, Google the company continues to make all the right moves. Oh, sure, you can dis the GooTube move, the recent DoubleClick purchase, the outrageous capex, etc but the fact remains: Google is a juggernaut. Both the company and its stock are vastly undervalued, under-appreciated, and with substantially more and better times ahead. Consider, for example, Henry Blodget's most recent comments:

"One of Google's earliest self-conceptions has certainly been borne out: It's no ordinary company. Ordinary companies just don't grow this way. In fact, it's probably safe to say that no company has ever grown so big and so dominant so fast (If anyone knows of one, do tell). In Year 8, Google is about to smash through the $14 billion revenue-run-rate barrier. Annualized free cash flow has now cleared $2.5 billion..."
Or consider Bill Miller's comments from a recent Kiplinger's interview:
"'There is no company in the market that we can find with a faster top-line growth rate, a higher profit margin, a dominant position like Google enjoys but with a lower price-earnings multiple,'" said Miller, in an interview with Kiplinger's April 19. Miller notes that Google has a lower P/E ratio (26, based on the $18.92 per share analysts expect the company to earn in 2008) than Starbucks (SBUX) but is growing twice as fast as the ubiquitous coffee company. He puts it in a league with Wal-Mart (WMT), Microsoft (MSFT), Cisco Systems (CSCO) and Dell Computer (DELL) at the start of their meteoric stock-price ascents. Those companies also sported lofty P/E ratios, but Miller says they were cheap in relation to their future successes."
Gosh, this all begins to sound like a broken record. (Does Bill read The Deipnosophist? :-) Remember this, however: price is risk, as I often say, but never value!

All that said, if not as investor, then how about you as Google consumer? Steve Rubel at Micro Persuasion comments, "... in recent weeks I have started using Gmail as much more than an email host. With its gobs of storage, speed and tremendous search/tagging capabilities, you can transform it into a personal nerve center that's available from any computer or mobile device. When you tap into this power and combine Gmail with some other tools, it is perhaps the most essential site ever developed." (Italics mine - dmg)

all (see Steve's article for the "all") sounds like some good stuff, particularly for someone on the go. Things appear to be moving in the right direction, and this company (Google) continues to add stuff that keeps them (light years) ahead of their competition. One bright idea is the company's mission to 'open things up' via 3rd party plug-ins and APIs; i.e., build a big base, and let others benefit from using its platform, which is a classic strategy in technology. From there, a company could 'eat' its young (buy the new companies with the startling and perhaps disruptive technologies) -- which, admittedly, Google does now, and will do more of in the forseeable future. Soon you will see the various and seemingly inchoate threads form a wondrous tapestry.

All of which means three items, at minimum:
1) Google's lead over its competitors widens;

2) A first wave of technological innovation is soon to crest and wash over us. Prepare to be startled.


3) We (consumers and investors) benefit. Period.
-- David M Gordon / The Deipnosophist


21 April 2007

Anti-Semitism and Google

Although it verges on hagiography, this article nonetheless makes for worthwhile reading. It offers some explanation behind Google's founding, perhaps even its success.
-- David M Gordon / The Deipnosophist


20 April 2007

Growth stocks, but at value prices

Two of my 9 core investment opportunities were in the news yesterday...
1) Google/GOOG, which continued its strong performance with first quarter earnings announced after yesterday's close, topping both the Street's EPS and revenue estimates. Excluding one-time items, EPS came in at $3.68 (net of $1 billion), while revenue was $3.7 billion, or $2.53 billion after subtracting advertising commissions and other payments to its partners. Both numbers beat consensus analyst forecasts, which called for EPS of $3.30 on revenue of $2.49 billion. The company's billion dollars in net income was largely derived from search advertising revenue. According to researcher eMarketer, Google will account for an estimated 75% of all U.S. search ad revenue this year, versus just 16% for rival Yahoo. On the conference call, CEO Eric Schmidt said he was "ecstatic about our results." Google also announced that in addition to his duties as CEO, Schmidt would now also serve as Chairman of the Board.
Stifel notes GOOG reported net revenues of $2.55 bln and diluted EPS of $3.68. Firm notes gross margins declined slightly to 60.0%, down from 60.3% last quarter. Net margin was down sequentially from 46.2% to 39.3%. International revenues contributed 47% of total revenues, compared to 44% in the fourth quarter of 2006 and 42% in the first quarter of 2006. Firm notes they would be aggressive buyers of the stock at current levels...
Cantor notes GOOG posted strong 1Q07 results, reinforcing their view that the company is taking considerable share in the rapidly expanding online ad market and solidifying its status as the linchpin to the Internet economy. Firm notes GOOG delivered extraordinary y/y net rev growth in conjunction with impressive EBITDA margins, a unique combination for any company but particularly so for one of GOOG's size and in comparison to other Internet bellwethers.
ThinkEquity raises their tgt on GOOG to $620 from $600 following strong 1Q07 as the company continues to gain global share and drive out-sized advertising yield in its core search business. They believe GOOG has additional revenue drivers emerging in offline advertising, video, and mobile -- each of which could be $1 bln+ opportunities in several years. Firm notes GOOG also continues to demonstrate strong share gains and monetization trends in the faster-growing international markets and should increasingly expand the reach of its network business to become more relevant for branded advertisers...
Bear Stearns believes that while there are plenty of reasons to be pleased with GOOG's results, that the next leg of the stock will be driven by what's on the horizon for GOOG - the cash flows from outside the core business. Firm believes that the mere proving of progress in any of these areas would be enough for investors to give some credit, and hence drive the next leg of the stock closer to their $600 2007 tgt.


2) Intuitive Surgical/ISRG
Wachovia notes that ISRG reported a strong quarter despite a slight system shortfall. Firm notes that ISRG placed 44 systems in the quarter against consensus of 45-46 systems for systems growth of 32%. They note that Q1 2007 marks the first time that recurring instruments and service revenue made up the majority of ISRG's sales (50.9% of total sales). They view the increased contribution from recurring revenue as a significant positive since it should reduce revenue volatility...
Jefferies says that while they remain long term supporters of the company and its core technology, they are skeptical about a deceleration in unit placements. That said, all key metrics demonstrated solid improvement (including recurring revenues) and they remain optimistic in the da Vinci's prospects for 2007 and beyond. Firm maintains their Hold rating, and raises their tgt to $110 from $108.

So how is it that I name this post -- how does the investor purchase (stunning) growth but at value prices? One is the more common approach: true growth stocks (of which GOOG and ISRG are great examples) maintain their phenomenal growth for more than a season or two. Thus, their PEs shrivel, especially in comparison to their PEG (discussed previously); both Google/GOOG and Intuitive Surgical/ISRG now sell for a forward multiple of ~32 -- extraordinarily cheap for growth companies such as these. The second and less common method would be on the basis of the chart; prolonged periods of non-(general market) leadership cause the formation of a long term base. And such is precisely the case for these two leaders that will again lead to new and substantially higher highs.

For the record, ISRG is in the process of breaking out above its crucial resistance of $132, with explosive volume. GOOG continues in its base; its appears necessary to do more sideways base-building, albeit at the top end of its base. Congratulations to any reader who had the foresight to follow my recommendations to purchase these leaders. Even better times than today's outsized price moves lie dead ahead.

A side note. After a 2 year effort, it appears increasingly obvious, even to a dunderhead such as me, that there exists an insufficiency of interest in a website that is, in the words of one reader, "literate, intelligent, helpful, and money-making" for me to continue the effort. Although I have yet to make my final decision, I feel bound by honor to mention that this blog seems to be on its last legs. I appreciate all the many kindnesses you have shared publicly and privately, no less your continued readership.

Best wishes,

-- David M Gordon / The Deipnosophist

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19 April 2007

Self-reliance... or all alone?

I do not know about you, but I can handle only so much stock chatter for one week -- and it appears I have exceeded my quota. Good thing, then, that the article below happened along when it did. It provides the opportunity to share something not related to making money, which seems only fitting. So pull up a chair. I want to confide something personal, even private.

When people learn I work (mostly) for myself, he or she invariably remarks, "Oh, you work for yourself? And from your home? How... dashing!" Well, okay, people do not express the sentiment in precisely that manner. (
Poetic license, don'cha know.)

It so happens that man (and women, natch) is a social animal; i.e., we each qualify as a pack animal. I suppose we could argue that point, but my true argument is the necessitous paradox, at least to me: to be successful as an investor requires independence of thought and independence of action. However, I contend the investor's professional life bleeds into his or her personal life (and vice-versa). If successful as investor, then this mind apart leads ultimately to a life apart. I wonder often, which is it to be -- successful investor, which requires an independent mind(set) or successful person, which requires a community mind(set)?

Over the past 8 years I have striven, not altogether successfully, to meld the two: successful investor forms communities of not necessarily like-minded people for good cheer, conversation, and... well, community. Yes, I crave having other people in my life on a daily basis. Those of you who work in offices can tsk, tsk me all you want ("His notion of community at work is merely office politics!", etc), but that does not change the desire to belong to a pack.

And wouldn't you know, along comes this article (below). Perhaps it will offer for you as much meaning as it did for me. Perhaps, even, you will offer your comments or thoughts in reply. And thus keep the circle in motion.
-- David M Gordon / The Deipnosophist

Old MacDonald Had A Farmers’ Market
total self-sufficiency is a noble, misguided ideal
By Bill McKibben

Generations of college freshmen, asked to read Walden, have sputtered with indignation when they learned that Henry David went back to Concord for dinner with his family every week or two. He’s cheating; his grand experiment is a fraud. This outrage is a useful tactic; it prevents them from having to grapple with the most important (and perhaps the most difficult) book in the American canon, one that asks impossibly searching questions about the emptiness of a consumer economy, the vacuity of an information-soaked era. But it also points to something else: Thoreau, our apostle of solitary, individual self-reliance, out in his cabin with his hoe and his beans, the most determinedly asocial man of his time — nonetheless was immersed in his community to a degree few people today can comprehend.

Consider the sheer number of people who happened to drop by the cabin of an obscure eccentric. “I had three chairs in my house; one for solitude, two for friendship, three for society,” he writes. Often more visitors came than could sit — sometimes twenty or thirty at a time. “Half-witted men from the almshouse,” busybodies who “pried into my cupboard and bed when I was out,” a French-Canadian woodchopper, a runaway slave “whom I helped to forward toward the north star,” doctors, lawyers, the old and infirm and the timid, the self-styled reformers. It’s not that Thoreau was necessarily a cheerful host — there were visitors “who did not know when their visit had terminated, though I went about my business again, answering them from greater and greater remoteness.” Instead, it was simply a visiting age — as most of human history has been a visiting age, and every human culture a visiting culture.

Until ours. I doubt if many people reading these words have had a spontaneous visit from a neighbor in the past week — less than a fifth of Americans report visiting regularly with friends and neighbors, and the percentage is declining steadily. The number of close friends that an American claims has dropped steadily for the last fifty years too; three-quarters of us don’t know our next-door neighbors. Even the people who share our houses are becoming strangers: The Wall Street Journal reported recently that “major builders and top architects are walling off space. They’re touting one-person ‘internet alcoves,’ locked-door ‘away rooms,’ and his-and-her offices on opposite ends of the house.” The new floor plans, says the director of research for the National Association of Home Builders, are “good for the dysfunctional family.” Or, as another executive put it, these are the perfect homes for “families that don’t want anything to do with one another.” Compared to these guys, Thoreau with his three-chair cabin was practically Martha Stewart.

Every culture has its pathologies, and ours is self-reliance. From some mix of our frontier past, our Little House on the Prairie heritage, our Thoreauvian desire for solitude, and our amazing wealth we’ve derived a level of independence never seen before on this round earth. We’ve built an economy where we need no one else; with a credit card, you can harvest the world’s bounty from the privacy of your room. And we’ve built a culture much the same — the dream houses those architects build, needless to say, come with a plasma screen in every room. As long as we can go on earning good money in our own tiny niche, we don’t need a helping hand from a soul — save, of course, from the invisible hand that cups us all in its benign grip.

There are a couple of problems with this fine scenario, of course. One is: we’re miserable. Reported levels of happiness and life-satisfaction are locked in long-term one-way declines, almost certainly because of this lack of connection. Does this sound subjective and airy? Find one of the tens of millions of Americans who don’t belong to anything and convince them to join a church, a softball league, a bird-watching group. In the next year their mortality — the risk that they will die in the next year — falls by half.

The other trouble is that our self-reliance is actually a reliance on cheap fossil fuel and the economy it’s built. Take that away — either because we start to run out of oil, or because global warming forces us to stop using it in current quantities — and our vaunted independence will start to lurch like a Hummer with four flat tires. Just think for a moment about that world and then decide if you want to live on an acre all your own in the outermost ring of suburbs.

The idea of self-reliance is so deep in our psyches, however, that even when we attempt to escape from the unhappy and unsustainable cul-de-sac of our society, we’re likely to turn toward yet more “independence.” The “back-to-the-land” movement, for instance, often added the words “by myself.” Think about how proudly a certain kind of person talks about his “off-the-grid” life — he makes his own energy and grows his own food, he can deal with whatever the world throws at him. One such person may be left-wing in politics (à la Scott and Helen Nearing); another may be conservative. But they are united in their lack of need for the larger world. Not even to school their kids — they’ll take care of that as well.

Such folks are admirable, of course — they have a wide variety of skills now missing in most Americans; they’re able to amuse themselves; they work hard. But as an ideal, especially an economic ideal, that radical self-reliance strikes me as being almost as empty as the consumer society from which it dissents. Consider, for instance, the idea of growing all your own food. It’s clearly better than relying on food from thousands of miles away — from our current industrialized food economy, which figures “it’s always summer somewhere” and so orders take-out from that distant field every night of the year. Compared with that, an enormous garden and a root cellar full of all you’ll need for the winter is virtue incarnate. But if you believe in many of the (entirely plausible) horror stories about what’s to come — peak oil, climate change — then the world ends with you standing shotgun in hand above your vegetable patch, protecting your carrots from the poaching urban horde.

Contrast that with another vision, one taking shape in at least a few places around the country: a matrix of small farmers growing food for their local areas. Farmers’ markets are the fastest-growing part of our food economy, with sales showing double-digit growth annually. Partly that’s because people want good food (all kinds of people: immigrants and ethnic Americans tend to be the most avid farmers’ market shoppers). And partly it’s because they want more company. One team of sociologists reported recently that shoppers at farmers’ markets engaged in ten times more conversations per visit than customers in supermarkets. I spent the past winter eating only from my valley; a little of the food I grew myself, but the idea of my experiment was to see what remained of the agricultural infrastructure that had once supported this place. And the payoff was not only a delicious six months, but also a deep network of new friends, a much stronger sense of the cultural geography of my place.

Or consider energy. Since the 1970s, a particular breed of noble ex-hippie has been building “off-the-grid” homes, often relying on solar panels. This has been important work — they’ve figured out many of the techniques and technologies that we desperately need to get free of our climate change predicament. But the most exciting new gadget is a home-scale inverter, one that allows you to send the power your rooftop generates down the line instead of down into the basement. Where the isolated system has a stack of batteries, the grid-tied solar panel uses the whole region’s electric system as its battery: my electric meter spins merrily backward all afternoon because while the sun shines I’m a utility; then at night I draw from somewhere else. It’s a two-way flow, in the same way that the internet allows ideas to bounce in many directions.

You can do the same kind of calculation with almost any commodity. Music doesn’t need to come from Nashville or Hollywood on a small disc, for instance. But you don’t have to produce it all yourself either. More fun to join with the neighbors, to make music together or to listen to the local stars. A hundred years ago, Iowa had 1,300 opera houses. Radio doesn’t need to come from the ClearChannel headquarters in some Texas office park; new low-power FM lets valleys make their own. Even currency can become a joint local project — all it takes is the trust that underwrites any system of money. In hundreds of communities, people are trying to build that trust locally, with money that only works within the region.

Thinking this way won’t be easy. We’re used to independence as the prime virtue — so used to it that three quarters of American Christians believe the phrase “God helps those who help themselves” comes from the Bible, instead of Ben Franklin. “Love your neighbor as yourself” is harder advice, but sweeter and more sage. We don’t need to live on communes (though more and more old people are finding themselves enrolling in “retirement communities” that are gray-haired, upscale versions). But we will, I think, need to figure out how to stop relying on both oil and ourselves, and instead learn the lesson that the other primates and the other human cultures never forgot: we’re built to rely on each other.
Bill McKibben is a scholar-in-residence at Middlebury College and the author of many books, including Enough, Wandering Home, The End of Nature, Hundred Dollar Holiday, and, most recently, Deep Economy: The Wealth of Communities and the Durable Future.


18 April 2007

Still perking?

One reader asks...
Why has everyone moved on from Starbucks? Is growth for the company really over? It seems that it's got a number of strong products - breakfast, sandwiches, etc. - that should really push same store growth and I think it plans to open tens of thousands of stores around the world over the next few years. It would seem they have the pervasive, worldwide reach to continue their impressive growth over the next few years. If you ask me, this might be a stock trading at tremendous value after getting beat down all year.
I agree pretty much with your argument; in fact, and even though the share price is lower, I might have been too hasty when I stopped out at $33 in late-February. However (and you knew there had to be a however!), the company could be hitting the wall of its S-curve. You can view this moot point in the chart below...

[click on charts to enlarge]

Note the potential double top at $40. ("Potential" becomes confirmed with a breach of the 8.3.06 interim low at $28.72.) Note, too, the declining price trend of the past 5 months that causes the crucial simple moving averages to trend lower. And note that the share price is beneath the two moving averages. This negative trend has caused its leadership to falter; its Daily Graphs relative strength ranking is a measly 9. Not good; Wall Street seemingly distributes these shares as rapidly as possible.

Is there a bullish argument? Yes, that the company does not butt its head against the upper limits of its S-curve. And that the chart is, in fact, bullish. To wit...

The viewer can perceive obvious crucial support at ~$29-28/share. Why? The past 18 months could be a high level consolidation ($40 to $28+) following the breakout in early-November 2005. This breakout and subsequent base are seen better by viewing the daily basis chart. (Not shown.) Too, accelerated up trend line #2 lies now at ~$29.25. Thanks to these two items, the stock found support last month (14 March reversal). A second item of bullish note would be an upside breach of the declining 50-day simple moving average; this could occur soon.

Thank you for your question, which has prompted me to re-think my (non-) position; my recent bearishness re Starbucks/SBUX might be an error. We shall know soon.
-- David M Gordon / The Deipnosophist

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Back aboard

With this post, Chad Brand swings back to my side of the investment thesis re Google/GOOG, bullish. Note his 5 points: that Yahoo/YHOO loses to Google/GOOG on seemingly every measure. Chad's final point is especially telling, as Chad now believes Google/GOOG shares are cheap relative to Yahoo/YHOO and relative to itself (Google's own earnings growth).

Does his final thesis sound familiar? It should; I have argued precisely that point since before Google/GOOG's IPO. That there would be bouts of share price under-performance (a loss of share price momentum), as the E would have need to catch up with the P. Chartists term this sideways price action a "base." So while many "investors" buy and sell during Google/GOOG's 18 month (and counting) high level consolidation, you have stood your investment ground. Whatever the immediate price reaction to tomorrow's earnings report, the base remains. (Barring a breach beneath crucial support at $450-430, which appears increasingly unlikely.)

I have shown the subtle clues (most recently, here) that reveal an increasing number of "investors" scramble to climb back aboard this particular investment ride; it is this (their) buying that will give final shape to this base, and when at last the marginal buyer buys, the breakout will occur.

Of course, we welcome them all.
-- David M Gordon / The Deipnosophist


17 April 2007

$2 a pound

The commentary below is by Scott Grannis, Chief Economist at Western Asset Management.
-- David M Gordon / The Deipnosophist
The currency markets today registered a milestone of sorts, as the British £ traded above $2.00 for the first time since 1981. The strength of the pound against the dollar has been remarkable, given that U.K. inflation has exceeded U.S. inflation by 25% in the intervening years and the pound was already plenty strong against the dollar in the early-1980s. By my calculations, as shown in the following chart, the dollar is more undervalued relative to the pound today (i.e., the pound is more overvalued vs. the dollar) than at any time in the past 30+ years. My guess at "parity" (the exchange rate which would make U.K. prices about the same as U.S. prices) is $1.32. So today an American tourist in London finds that on average things there are about 50% more than they are here in the U.S. Our London colleague, Andres, has been experiencing the flip side of that equation, as he discovered that Apple laptops sell here for about 25% less than they do in London. A U.K. tourist anxious to see Hollywood and carry home a shiny new MacBook Pro 17" could pay for an economy ticket with the money he or she saves on the laptop. That's an attractive arbitrage opportunity.

[click on chart to enlarge]

Those of us who have been around for awhile remember when the exact opposite occurred. It was in late 1984/early 1985 that Americans by the droves flew to London for weekend shopping sprees. Back then the dollar was about 50% overvalued relative to the pound -- about as strong then as the pound is strong today.

Currency markets are notorious for their ability to follow a trend for too long, overshooting on the upside and then the downside. It looks to me the current valuation of the British £ pushes the limits of how strong it can get.

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13 April 2007

A Primer for Growth Stock Investing

I have yet to read the book, but I have read the review (below)... Color me impressed. The lessons the book imparts are precisely those I share with you, albeit in my clumsy manner.

So although I have yet to read the book (I just now ordered it!), I will. You should as well. It appears to offer excellent fodder for thought for all the skirt chasers -- er, stock chasers -- eager to buy only those stocks that move higher now. Which method, btw, does not build wealth.

I apologize to Eric Miller for sharing below his complete review. The link to this article and his regular bi-weekly ruminations, however, can be found within the colophon.
-- David M Gordon / The Deipnosophist

Random Gleanings:

Catching A Starbucks

What investors can learn from Michael Moe's book

Wednesday, April 11, 2007

Eric T Miller

One of Wall Street's best stock pickers recently published a book with a catchy title. Michael Moe's book entitled, Finding the Next Starbucks, beckons to a broad audience because so many readily identify with the amazing enterprise. Michael, the co-founder and CEO of ThinkEquity Partners and former director of global growth stock research at Merrill Lynch, offers a useful guide to an enterprising investor. But, it's also a caution to those not well equipped and perhaps unsophisticated in their approach.

His formula suggests scouring companies in the microcap area-- $100 million to $200 million market capitalization--who've got the right attributes and are operating in areas of the economy with strong tailwinds at their back.

The key to unusual investment success is to identify those companies poised for a long span of strong earnings. Great gains parallel great earnings growth. Simple? Not really, because the key is identifying early the enterprises with the necessary essentials. He insists, as Peter Lynch did years ago, that many investors with the appropriate methods and temperament can prosper, but it is obvious that for most people there are many potential pitfalls.

Being aware of obstacles is an essential part of an investment education and the book offers a number of illustrations and examples that are broadening. The recent controversy regarding Starbucks future growth prospects isn't relevant. That controversy in no way disqualifies using it as an example of a great growth enterprise.

How Rare Is Sustained High Growth?

To find companies that can sustain earnings of 20% to 25% for a long period, you have to concentrate on the small company area because the law of large numbers will impede the giants. The bonanzas recently were investing $1 in Microsoft in 1986 and seeing it hit $347 a share, or in 1990, investing $1 in Cisco and watching it climb to $274. Or how about investing $1 in Home Depot and watching it soar to $1153 or more recently, putting $1 in Yahoo in 1996 and having it scoot to $72.

When Michael Moe was one of the first analysts to identify Starbucks as a winner after it came public in 1992, its capitalization was $220 million. Now, it's $23 billion. And as he explained it, he visited the company almost as an afterthought while on a trip to the Seattle area. Right away, he was turned on by the buzz of the office beginning with the reception area. But he became especially enthused by the energy and vision communicated by the CEO, the now legendary Howard Schultz.

Many company leaders and analysts talk almost casually about 20% earnings growth but as Michael Moe points out, only six of 12,000 companies grew earnings in excess of 20% over the past 10 years. Of the 25 best performing companies, the average market capitalization was between $100 million and $200 million.

The major difficulty is to find them. Only 16% of the smaller companies are covered by Wall Street research. In fact, 85% of brokerage research is concentrated on companies above $1 billion in market size. If identifying promising situations is one challenge, avoiding "Roman Candles" is another because negative returns undermine the hope of compounding overall gains and pose the real risk of permanent loss. Michael Moe correlates superior portfolio results with managing concentrated portfolios. But that puts a premium on astute selection and cutting losses before they become damaging.

His book intends to help investors direct intense focus on the drivers of growth and then to maintain objectivity. One constant is the change in leading industries over time. To help identify future stars, focus should be on companies competing in large addressable markets, possessing substantial potential for expansion. They are industries with tail winds at their back. The search is for open-ended growth, with the hope of being early enough to participate in gains in market share, while enjoying an expansion in P/E multiples.

Small companies frequently have the flexibility and competitive advantage to develop a market niche which can then be exploited. The author sees the biggest opportunities concentrated largely within eight megatrends: the knowledge economy, globalization, the Internet, demographics, convergence, consolidation, brands and outsourcing. These trends are neither new nor unrelated, but remain powerful.

The Megatrends

By their very nature, megatrends are slow to develop and may be invisible early. In 1982, John Naisbitt, in his book, Megatrends, identified a number of trends that have progressed steadily, especially the continued decline of the manufacturing economy, while the information economy has flourished.

Naisbitt observed that the most powerful trends occurred independently and across borders to become later collective trends that accelerate. The eight megatrends that Michael Moe identifies now as drivers of opportunity are to a large degree extensions of past megatrends:

1) The Knowledge Economy supplanting manufacturing as we've moved from a physically-based economy, to one based on knowledge. This requires a continual upgrading of labor as human capital replaces physical capital. In the 1950s, 40% of our labor force was in manufacturing. Now, 10% is. Service employment has grown from 14% to 76% over the same time. Among the results is a widening of the wage gap.
2) Globalization has remained a trend since Christopher Columbus, but has accelerated explained in part by the factors enumerated by Thomas Friedman. Everything is affected for better or worse and China and India will be the two major forces shaping the next 50 years. The two comprise 40% of the world's population, while Asian in aggregate accounts for 60%. Already, China has 100 cities with a population of one million or more, while the U.S. has nine.
3) The Internet: Many thought that the Internet was being over-hyped in the late'90s. But Michael Moe agrees with the later assessment that it actually was under-hyped. He regards this as a megatrend effecting all industries, and believes that it can turn our traditional education system "on its ear" with online education increasing access, lowering cost and improving quality.
4) Demographics: The assertion is that an understanding of demographics opens a predictable window to the future. It requires no leap in imagination to correlate an aging population with a need for health care, more interest in travel, a broader appreciation of premium brands and a demand for financial services. Due to the increases in women in the workforce, home services have risen. It is also widely recognized that the Hispanic population is our fastest growing ethnic group and may comprise 20% of our population by 2020--up from 14% currently.
5) Convergence: Michael Moe is referring to the coming together of two or more distant phenomena such as in a product like the Blackberry. This is a trend especially characteristic of the IT and communications world. For kids, the cell phone is replacing the computer.
6) Consolidation: There remain many classic fragmented businesses and the consolidator can see the advantages of scale. The keen investor has the potential for seeing the whole field and anticipating the opportunities for consolidation before it's obvious to all.
7) Brands: Starbucks is a prime example of a company creating a powerful brand, but there are many other such as Ralph Lauren's Polo, Coach and its products and Google.
8) Outsourcing: Rounding out his list is the megatrend of outsourcing. It's a fighting word to the likes of Lou Dobbs and some politicians, but it's a fact of life for company after company, striving to compete and win or merely survive. For many, it's the only way to produce the highest quality and lowest cost products.

Finding the Companies

In discussing the megatrends, the author lists a number of industries that qualify, but how do you go about finding the individual stocks? He contends that the better investor makes complicated ideas simple, and that the future superstars are likely to have four characteristics: great people, a leading product, huge potential, and predictability.

Evaluating the people correctly in a company is probably 50% of the task of picking a winner. The entrepreneur or leader has to have vision and passion exemplified by such people as Schultz, Bill Gates and Sam Walton. And that inspiring leader has to build a great team. Their concentration is taking a product or service, hopefully, "one of a kind," to new heights. Examples range from an education company such as Apollo, to a discount retailer like Costco.

There should be few limits as to how big they could become and yet you hope to find predictability in recurring revenues in exploiting a trend rather than just milking a fad. If an enterprise has these ingredients, sustained earnings growth and investor recognition should follow.

Valuation Methodologies

Very rarely can you find a company with such promising characteristics at a bargain-basement price. Price is not unimportant, but the real focus should be on spotting companies that can go up five or 10 times. The three primary valuation techniques that Michael Moe advocates are discounted cash flow, the price-to-earnings ratio compared to the future three to five-year growth periods and the price-to-sales ratio. He suggests several matrixes incorporating appropriate metrics depending on size and profit margins. While he's first to admit that a host of factors impact stock prices such as inflation and interest rates, and supply and demand trends, it's earnings that ultimately matter.

As for information sources, since you won't find broad coverage of the small company universe on Wall Street, you have to find ideas by reading extensively and using the Internet as a regular tool. He pegs Google as an invaluable resource and among publications; he gives special attention to Investors Business Daily and the Economist magazine. He also advises paying heed to collective intelligence as a powerful source to tap into.

Hot categories in the next few years will be far ranging but will embrace the exploding use of cell phones. Online advertising remains promising and he describes biotech, which had been "the land of hope and dreams" as now "the land of opportunity". He nominates education as being the health care industry of 30 years ago while acknowledging the continued attraction of health care. He describes education as highly fragmented and inefficient, but with enormous potential for the introduction of technology.

Corporate training and the need for life-long learning are but two major market opportunities. The field of nanotechnology is cutting across wide swaths of industries and, of course, alternative energy will remain a rapidly changing area of development.

But if some of these categories seem too vague and unpredictable, the continued importance and demand for premium brands remains appetizing, especially as the huge consumer markets in Asia mushroom.

This writer wouldn't describe the book as the ultimate "how-to" book on investing--such a book will probably never exist. But in any book on investing or business management, you hope to find one or two ideas or provocative thoughts that reward you for your time. Michael Moe has achieved that and more with his review of what has worked for him by providing a number of specific examples and comparisons. He's also provided a number of pertinent comments and observations of others that support or expand on a number of the points made.

You may not succeed in finding another Starbucks, but you'll be better equipped to try.

Eric Miller
is the former Chief Investment Strategist of Donaldson,
Lufkin, & Jenrette.


Google Q1 2007 webcast

Google to Announce First Quarter 2007 Financial Results
MOUNTAIN VIEW, Calif., Apr 10, 2007 (BUSINESS WIRE) -- Google Inc. (NASDAQ:GOOG) today announced that it will hold its quarterly conference call to discuss first quarter 2007 financial results on Thursday, April 19, 2007 at 1:30pm pdt (4:30pm edt).

The live webcast of Google's earnings conference call
will be available via the same link following the conference call.


10 April 2007

Lessons to be a better short term trader

Dorsey Wright always offers excellent insights in each communiqué; this very brief snippet from today's edition is but one example...
The nature of the risk involved in short-term trading is not understood by most people. As a trader, you really are not risking your entire investment on a particular deal as you will be out of the stock as soon as it looks even remotely weak. The real risk lies in the fact that, while a short term trader cuts his losses, he also cuts his profits. To be successful at this sort of thing, you are going to have to pick stocks that are going up and going up now; otherwise, you will spend half your fortune and most of your time chasing your tail. Here are some helpful hints:
1. To be sure of a breakout, buy after the stock has pulled back. This will give you a better risk-reward ratio and a tighter stop loss as well. You need every edge in this endeavor.
2. Sell immediately if the stock turns sour. Sell it if it drops a point or two below support. The idea is not to let it head south like a migrating bird. Violation of the support line is a strong warning.
3. Have in mind a fairly precise short-term target. The vertical count would be very effective. If the stock moves up, move the stop loss up below it until you are finally stopped out.
4. Construct a trend line as soon as possible. If this [trend line] is violated, sell the stock.
5. A stock in an up trend may be purchased as it hits the bottom of the trend line in hopes it will reach the top parallel line. If not, then you have a close stop loss.

To become an expert short-term trader takes a great deal of work, experience, know-how, and money. It is most difficult and most dangerous. The old saying, "you never go broke taking a profit," is only partially true. If you're protecting against losses, as you should be, you should not at the same time be protecting against big gains. Obviously, it is better to let a good stock run. This is very hard to do when you are trading in and out as it is too easy to get shaken out.

© Dorsey Wright & Associates
These 5 "rules" are not as easy as they look...
#1 foils most investors for lack of the ability or intestinal fortitude to purchase pullbacks;
#2 is a purely mechanical exercise, but most investors believe his or her intelligence is greater than that, so they rely on their perceived intuition... to their repeated dismay;
#3, like #1, is difficult: "What, sell strength? But it is going higher in price! Why sell now?!"
#4 also foils most investors. For a primer on the proper construction of trend lines, please see my "Trend Lines Primer" in the sidebar to the left;
I have attempted to teach #5 for nigh a decade, to no success.

Despite my caveats, you can achieve success. Heck, if I could do it, anyone can!
-- David M Gordon / The Deipnosophist


09 April 2007

Speed bump

Today's edition of the Wall Street Journal (via reports that

Google's attempts to diversify -- into radio advertising, online video and social networking -- have flopped, leaving it dependent on its online ad business for nearly all its profits.

Google purchased d'Marc lastyear for more than $100 million. It planned to use the company's technology to automate the purchase of radio ads nationwide. But D'Marc's founders fled the co. Radio industry titans feared Google's technology could usurp their relationships with major advertisers and reduce the profitability of radio ads. So Google has been relegated to selling bad time slots in small mkts.

Or look at GoogleVideo, a service launched with limited content two years ago. It grabbed only a minuscule market share and never made a profit. After it floundered, Google paid $1.65 bln for YouTube -- which, despite being the main Internet video destination, lacked revenue. It also came with substantial legal liabilities in the form of copyright-infringement lawsuits. And the unit will face serious competition later this year from a new online video consortium led by NBC (GE) and Fox (NWS), which are banding together to create what insiders are already dubbing "a YouTube killer."

With the online ad market growing at more than 30%/year, and Google dominating the space, it may be able to pour money into these ventures ad infinitum. But unless some of them begin to pay off, the search giant's shareholders may re-evaluate the massive multiple they award the company.

To which I say two items in response:
1) What "massive multiple"? On trailing (actual reported) earnings of ~$10/share, the PE is a large-ish 47.5, but that number figures in no more growth of future earnings. And do you truly believe Google/GOOG will always and only earn $10/share? Perhaps you believe, as do I, that, on the basis of its PEG, the shares in fact are cheap.

2) That the shares have traded sideways for 18 months now in a massive long term base (circumscribed by resistance at ~$500 and support at $330) that itself allows all this fretting and worrying. ("Why no more advances in the share price?")

[click on chart to enlarge]

Note first the 18 months base since the massive upside breakaway gap in October 2005 and the second such gap in October 2006. Then note that the shares have traded in the upper end of its presumed base whose new low end would be ~$430. (A support level I have suggested repeatedly would stem declines, and which has done precisely that.)

Stated as a metaphor, this long and lengthy base is nothing other than a speed bump. An investor could view all trading between the two data points ($330 and $500) as noise; the signal would occur upon a breach in either direction. I have no notion when the upside breach will occur -- perhaps late next week after its 1st quarter earnings release, perhaps in 6 months to continue its track record of major breakouts during October -- but the past 18 months are a base, and the share price will break out above it.

Yes, the eighteen months of base building corral the share price momentum, but also help diminish its once-high(er) PE. This is precisely how growth stocks trade, especially the great ones. Of which class Google/GOOG shows it belongs.

And thus [it belongs] in our portfolios, despite the increasingly cacophonous fretting, worrying, and naysaying. (Also a common occurrence for growth stocks.) I have recommended Google/GOOG for so long and so often (since well before its IPO) that I could splash a banner over this page, "The Original Google Bull." (But I will not.)

Patience is more than a virtue, it also is its own reward. Hang tough, hold on; heady days will return soon enough. In time my (our) portfolio value(s) will receive its (their) just rewards.

-- David M Gordon / The Deipnosophist


05 April 2007

Music for the weekend, but offered on Thursday

Music does not get much better than this, Beth Orton's most recent CD...

I find nary a false lyric written, chord hit, or note sung on this entire CD. In truth, I would like to claim this entire CD qualifies as perfect - from music to musicianship to the marvelous cover art, but allow for individual sensibilities. So how about superb, extraordinary, exceedingly excellent?

Which makes it extraordinarily difficult to select one song to share from the CD's total of 19 that, above all others, speaks volumes. Good lord, from Conceived (the first single) to Rectify to Shopping Trolley to Heart of Soul to the title song, the gorgeous Comfort of Strangers. Hmm, perhaps Pieces of Sky

These memories are just pieces of sky
Pieces of something much bigger than I
To anyone else just endless blue
I see time framed, an image of you
These memories hold me like the moon
Holds the sea like the sky holds the sun
The sea holds my tears and carries me
When my heart is too heavy for one

When it’s over, it’s over
I best get busy living
Been a long time gone

A dress made of air and webs and dew
The way dreams evaporate as they come true
To anyone else just endless blue
An invisible kite string connects me to you
I knew that it’s selfish to think you’d come here
There’s so many people that must need you near
There’s so many people that need to know
That you’re still with them even when you go
That you’re still with them even when they don’t know

When it’s over, it’s over
I best get busy living
You’ll be a long time gone

And how do you know how much you’ll be missed
Does it add up to some names on a list
Do you know we’re just pieces of sky
Pieces of time that keep drifting by

(AMG review here.)

You decide which songs you like, if not all. Purchase Beth's CD... and enjoy!
-- David M Gordon / The Deipnosophist


04 April 2007

A negative divergence?

First, please accept my apology for my absence. I am back now, however. While away, readers wrote...

"I noticed in your most recent post you mentioned that your decision on stocks are not just based on charts but also fundamentals, et al. However, I think I recall you telling me that fundamentals were unimportant to you. A negative divergence, perhaps?"

It sometimes frustrates me that no matter how loudly and publicly I caterwaul this point, I still am not understood.

Yes, I once believed the fundamentals to be unimportant, but for at least 1 decade now, I consider them of paramount importance. Which means, in practice, that I monitor a list of opportunities screened initially on the basis of corporate fundamentals and opportunity, and then await the appropriate buy signal. I do not chase stock patterns based on what happens now, and only then look at the company. This is one reason my watch list rarely changes. There are not that many good companies with excellent management available at a given moment.

"A speaker at a seminar I attended made the claim that technical indicators have been developed that have fit historical data. However, he claimed that their predictive value (patterns, RSI, MACD, Stochastics, etc.) was weak or non-existent. I spent some time on a GOOG search looking for any studies that might support or reject this notion but found very little. Are you acquainted with any good studies that conclude with a correlation between technical and pattern analysis and future price movement?"

Your first sentence connotes curve-fitting, although not its denotation. To the extent that technical analysis is curve fitting, I agree. ("A head & shoulders pattern is a head & shoulders pattern 100% of the time -- but predictive 30 or 40% of the time. At best.") I believe most investors rely on the quiver of arrows that is technical analysis but rarely hit the bulls-eye, mostly because they misappropriate the tools, apply them incorrectly, or fail to apply them in context, the continuum. (See discussion re JNJ below.)

Despite the fact that I agree conceptually, I disagree with the entire argument. Each investor must base his or her decisions (buy and sale) on some form of analysis; technical analysis is as good as any, because, at its simplest level, it studies the supply and demand for the stock. And it is our investment in the stock that manifests our interest as an investor. To forsake this tool is akin to a cardiologist who forsakes an EKG because it too is mere squiggles on paper, all sound and fury signifying nothing. I would prefer a different doctor, thank you very much.

Several readers have written, both here and privately, re Johnson & Johnson/JNJ. They fret about the "ugly" chart pattern seen in the chart below...

[click on each chart to enlarge]

Well, yes, it appears a possible "double top" is in place, that the share price is below the two crucial simple moving averages (50 day and 200 day), and that... well, the chart just looks ugly. So it is understandable that it confuses some investors. When placed within context, however, it's ugliness quickly transmutes to beauty (read: opportunity)...

Opportunity does not get much better than this moment for Johnson & Johnson/JNJ. First, and most important, I assume investors have done their own due diligence with re to the company, and they seek only the optimal moment to purchase, which is the province of technical analysis. In the chart above, I revert to simple peak & trough analysis. (Or charting, pure and simple -- a subset of technical analysis. Just as arithmetic is a subset of mathematics.)

Having discerned Johnson & Johnson (the company) belongs in our (your, my) portfolios, the next item to decide is when to buy JNJ, the shares. Now, this moment, seems especially optimal, if not auspicious, as I imply in the paragraph above. The recent decline to ~$60 from ~$70 (only ~15%!) found support at the 13 year up trend line (delineated in the chart above) and turned higher only yesterday.

Although the shares have yet to leap several hurdles (oops, there is that damned technical analysis again!), that the stock has turned higher precisely where and when it should is an excellent beginning. Why? Because buying the stock on long term support (and a 13 year up trend line is fine support -- oops, more technical analysis!) provides the opportunity to purchase at a discount a market leader (and Johnson & Johnson, as I state often, is my poster child for the ideal growth stock) and at its stop loss. Oh sure, the stock could decline to ~$57-56 and still remain fine, so I am okay with purchasing at ~$60, with a stop loss of ~5%, at which level a different chart picture builds. I would sell (stop out for the small loss) and move aside to get a clearer picture on what that pattern and setup proves to be.

The possible upside? Note the flat trend line at $70 -- as the two lines converge, a powerful ascending triangle nears completion. Once breached, an intermediate term target of ~$100 seems probable...

As always, determine your objectives, the tools to get you there from here (it is insufficient to say, "I invest to make money" - there is more to the process of investing that that!), and have patience during the minor oscillations that will occur in your time frame, no matter how long that might be.

And, finally, a bit of news. I have been asked many, many times over the years to manage money. And so, at last, it has come to pass; I now manage clients' portfolios as an investments manager. I use all the tools - scoffing at none - that help achieve investing success. And, unlike other investment managers, I tailor your portfolio around your objectives, not making my particular and peculiar preferences fit your objectives and risk tolerances. (No curve fitting here!) This venture is all about investing, not short term trading.

If this investment management opportunity interests you, please contact me.
-- David M Gordon / The Deipnosophist


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