Lower Interest Rates and Inflation in the US: Is the connection overblown?

Posted on March 1, 2008 by BMWFan

The air-waves are full of talk about recession, inflation and stagflation. Longer term interest rates are increasing while the Fed continues to cut the Fed Funds Rate, to bring short term rates down.

A number of observers are questioning whether the Fed’s decision to focus on growth rather than inflation is the right one. Conventional thinking suggests that lower Fed Funds Rate will increase inflation since it spurs economic activity and growth. However, there is not much written on the mechanics of inflation, and the amount of control the Fed has to manage inflation.

In the current context, I would like to view inflation along the following three dimensions:
• Commodity Costs: The cost of the basic natural resources
• Labor Costs: The cost of wages paid to workers
• Infrastructure Costs: The cost of using existing (or building new) factories, hospitals, or computer networks

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Can Wall Street value brand loyalty?

Posted on February 28, 2008 by BMWFan

The tech-ticker on Yahoo! Finance h ad

an interesting article about Apple zealots posting extremely critical messages in response to an article by Barron’s Eric Savitz which highlighted negative comments by Toni Sacconaghi, a Berstien Research analyst.

It got me thinking about why companies have such loyal fanboys?

Two Silicon Valley companies come to mind, Apple and Google.

The stock for both these firms has been hammered by recession fears.

Though the sell-off after the big run-up of last year was expected, the size of the fall has taken many by surprise. Having spent time working both in the valley and Wall Street, I often wonder whether Wall Street put sufficient value to the value of the brand which each company represents.


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AAPL’s presentation dispels all doubts; will GOOG follow suit?

Posted on February 27, 2008 by BMWFan

Apple’s COO Tim Cook made a presentation at the Goldman Sachs Technology Investment Symposium earlier today.

The call was very bullish and tore to shred all the doubts that had been raised by different analysts about Apple’s business prospects. MacDailyNews has live notes about the call.


Some highlights:

• iPhone sales target of 10 million affirmed
• Mac has huge headroom and has immense mind-share.

Apple passed Dell as the largest provider of portable computers to higher education.
• iPod revenues grew 17% year over

year. 40% of all iPods sold to consumers who did not own one.
• iPhone contracts may not be exclusive in other countries; a lot of carriers are interested in the phone since it is driving data-plan usage with web-

usage orders of magnitude higher than other smart phones.

The stock is reacting positively and is up about 4% from its 4:00PM close of $122.96.
AAPL also announced a special event on M

arch 6 to discuss the plans for the long awaited SDK for the iPhone.

The announcement emphasized ‘Some exciting enterprise feature’; ; perhaps referring to the long awaited integration with

the Exchange server and the catalyst for the corporate adoption of the iPhone.

Google, the other Silicon Valley darling under cloud, will also be presenting at the Morgan Stanley Technology Conference in Dana Point, CA. The session is scheduled for 9:30 a.m. Pacific Time on Monday, March 3, 2008.

If the response to AAPL’ s conference call i

s any indication, it would be prudent to anyone short Google to cover!

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Blodget Watch: Trend Reversal on Google bullish?

Posted on February 27, 2008 by BMWFan

Google’s stock has been hammered over the past two weeks and Henry Blodget blog posts have been in

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the thick of the action. Last October when Google was on a bull run, Blodget had come out with a post about Google going to $2000. He had followed up with another post on November 27, where he did felt that a price target of $1000 was very plausible. However, his tone has become increasingly negative over the past two weeks.

Blodget identified a revenue miss warning in Google’s 10K on February 19, and quoted an entire paragraph to illustrate that Google talking revenue expectati

ons down.

As it turned out only one sentence in that paragraph was new and he subsequently clarified that.

He followed it up with a post on February 22 about Google’s exposure to the recession based on an insider (who turned out to be a digital-ad industry insider). He was very suspicious of Google’s tweak to the AdWords algorithm in his posts on February 24 and 25. But he beat his own prolific output on February 26th.

February 26th was an eventful day.

The day started early (5:40AM) for Henry with a grumpy post about Google’s participation in the trans-Pacific cable. But he really hit the panic button with his post reporting the lower Comscore estimate of paid clicks at 7:16AM. He followed it up with a post at 10:58AM dismissive of analysts’ efforts to defend Google’s stock.

However a strange thing happened as the day wore on.

Google’s stock made a V shaped bottom at around $450. Blodget’s next post at 12:22PM highlighted the bullish call from RBC’ s Jordan Rohan.

There was a follow-up post confirming the reversal at 2:02PM which talked about the bargain Google was at 32x Future Cash Flow.

So do have we hit a near-term bottom on Google? The candle-stick today had the hammer formation on huge volume, which often signals a reversal.

A lot of instituti ons have also lightened up

on Google over the past few months and they may be looking to come in again.

And Blodget has also reversed….

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To Mr. Blodget: Revenue is more important than margins

Posted on February 22, 2008 by BMWFan

Henry Blodget is out with another post claiming that industry insiders are telling him

that Google is extremely vulnerable to an economic slowdown. The main thesis of the article is summarized below:

A consumer who had $100 to spend before the recession and now has $50 to spend will either:
1. Click on fewer links (resulting in less Google revenue) OR
2. Click on the same number of links but spend less (resulting in a lower advertiser ROI).

There is no doubt that slower consumer spending will lower the amount of money spent.

This may translate to lower ROI per click.

However, just because there is a lower ROI per click during a slowdown, does not mean that the return is no longer attractive to the advertiser. What the advertiser is looking for is relative effectiveness of different media.

During a slowdown, internet advertising will outshine traditional media and emerge even stronger.

Immediate Gratification: Generate Revenue Quickly

If a business is struggling for revenues, its focus will be to cut spending on items which do not generate immediate revenue.

Businesses will have to compete for a greater share of a stagnant pie and will adjust their plans accordingly. Strategic projects which will not return an immediate benefit

will suffer.

When it comes to advertisement, the focus will be to generate the greatest immediate bang for the buck. This is very internet advertising outshines other media.

A consumer searching for a particular item on the internet is much more likely to buy soon. So even if the ROI per click may go down, the need for that return (even if it is smaller) will be a lot more. Businesses will sacrifice margins to generate revenue; without revenue there is no business.


The cut-backs in advertising will be on strategic and brand-building campaigns which are oriented towards traditional media.

Consumer Behavior: Where is the best deal?

Another aspect to keep in mind is consumer behavior.

When times are tough, people

are more likely to shop for deals. And the internet beats traditional shopping and media hands-down when it comes to shopping for deals.

I expect the market-share of internet retailers to increase during a recession, since consumers will be price-conscious and will

be looking for the best bang for the buck.
Both these trends bode well for internet advertising.

It is clear that on a relative basis, online advertising will emerge the clear winner during a slow-down. Further advertisers are much more likely to sacrifice margins rather than lose sales to a competitor.

Of course if the slow-down is deep and extends for a long time, the entire consumer economy will be in trouble. However, Google is likely to emerge in a much better shape than others.

Trading Analysis

Google’s stock has been trading in the range I specified in my previous article.

The support around $500 has held and the resistance around $514 is yet to be broken. Using out of the money calls to trade these moves is turning out to be a very profitable strategy.

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Much Ado About Nothing: The Warning That Wasn’t

Posted on February 20, 2008 by BMWFan

Google’s stock was down almost 4% today (Feb 19) on below average volume.

The fall is being attributed to a post by the infamous Henry Blodget on his blog claiming that Google’ s 10K filing

s are talking down future revenue. Blodget’s post was picked up by a number of other blogs and soon made it to the headlines page of Yahoo!

Finance and other news sources.

Analysts tend to comb through Google’s 10K since Google does not officially provides estimates or guidance.

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a long drawn out proxy battle is going up everyday.

This gives Google a window to strenghten its market leading position.

Retracement Analysis: Google’s stock hit a recent low of 488.52 on Feb 5.

It bounced back to reach a high of 541.04 on Feb 14.

The stock has been retracing since then, closing remarkably close to the Fibonacci retracement levels. On Feb 15 the stock closed at 529.64, very close to the 23.60% retracement point of 528.65. On the next trading day, Feb 19, it closed at 508.95, just above the 61.8% retracement point of 508.58. The next retracement level (76.40%) is at 500.92 which should provide some support; the near term upside retracement levels are at $514.78 (50%) & $520.98 (61.80%) which might provide some resistance.

Trading Strategy: There is a lot of cash waiting on the sidelines to be deployed and HP’s stellar results are going to provide a short term lift to the technology sector. I feel it is time to start taking long positions in Google.

Out of the money calls for the March 2008 expiry look promising; the 540, 550 and 560 strikes are worth considering.

The expiry date for March options is March 20, which is a full five weeks from last week’s expiration. This has resulted in longer time to expiry for the March options, and consequently lower time decay (theta) in the short term.

These options will not lose a lot of time-value in the next one week but will capture most of the upside.

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