Thursday, March 27, 2008

Social Security Takes the Stage

Top Line: The market dropped on Thursday but did not even get close to the lows of the last couple of weeks. We continue to expect a countertrend rally that defies the "bad" news. This theory can be challenged by the market if it does manage to drop back down to those lows.

ORCL managed to hold down the techs with a little help from GOOG. Together they dragged the NASDAQ 100 down about 2%. At the same time that was going on the Financials were getting beat up.

What we read about ORCL was that the company should have been able to move those magic mirrors around the smoke enough to handily beat the "number" but it failed to do so, expectations were just met not exceeded. While the revenue number missed and that's the primary headline you read, the failure to beat the number could have been more important in the selloff. Maybe ORCL's purchase of some rival firms didn't go quite as planned.

As for GOOG, they said that "clicks" were not what they seemed and Fleck brought us this commentary in his daily rap today:

"Fewer Clicks to Cluck About
Back to the bottom-up data, probably the most important one from last night is that searches at Google are continuing to slow down. They dropped 7.5% sequentially from December to January, and declined a further 3% from January to February, though February itself saw searches up about 3% year-over-year. But to put that in perspective: As recently as October, searches were up 37% year-over-year. "

GOOG makes its money by companies paying for advertising. If you click on an ad/sponsor, then they pay GOOG. If you don't, they don't. Part of the beauty of GOOG has always been that the revenue would continue to come in due to all the eyes and therefore clicks that were coming to GOOG. Imagine if these clicks went away 100%. Who would want to advertise on GOOG anyway? We're not suggesting this will happen but the reason they make money is due to more and more eyes and ad clicks. If that is not going up, what is going to happen to their revenue and earnings? Yes, those might go down...very good.

The interesting thing from our vantage point is that, yes, GOOG was down on the news, but it wasn't making new lows for the move. That says that the news may be Too late. If GOOG can't make another new low for this down move, then there could be more upside potential.

We wanted to spend just a few moments talking about the level of financial stress the current market is facing and couldn't really figure out a way to do it that made any sense until we saw this article tonight on CNN, where else? Here is the setup:

We have read that John Meriwether, the brainchild behind LTCM back in the 90s, is having trouble again. Ten years ago his fund was thought to be able to bring down the financial system with its highly leveraged portfolio, about 50 to 1. That problem was solved by a bunch of banks, who were owed money from LTCM, decided to take care of the problem. You might be asking how big that problem was and if you are that is why we're here. The number was $4 billion. This LTCM mess was only ten years ago but that $4 billion was a Big deal back then, thought to be able to take down the Entire banking system by itself.

Today, we are experiencing problems with the mortgage market that are up to $200 billion in write downs so far. Does no one think these are big numbers or did inflation from $4 billion to $200 billion happen that fast? Here's where Glenn Beck's article (above) comes into play. We added the LTCM for historical perspective but Mr. Beck has three other numbers of note, $200 billion, $14 trillion and $53 trillion, the asteroid he titles his article.

$4 billion is the LTCM mess
$200 billion is the current write downs from mortgages
$14 trillion is the US economy measured in GDP
$53 trillion is the present value of all of the promises made for Social Security and Medicare

The article is another good one from Mr. Beck, recommended Update readers reading material.

FSI: 74.51 (speculation didn't abate much, probably more upside to come)

2 comments:

Anonymous said...

nice post. thanks.

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