I received the following email from a friend who, after asking me for some advice, bought her first stock and caught the bug:

so i ended up buying $1000 of CAT and $1000 of payless. so far so good!! i'm at 2044 right now... (that's after the 14 bucks it cost me to buy it!) soooo... i think i want to buy 2 whole shares of google. what do you thinK????

I thought I'd share my response as someone else out there may benefit from it:

I have mixed feelings about GOOG. First of all, considering your portfolio as a whole, buying 2 shares of Google would really skew your risk exposure. Google is much more volatile than the stocks you own -- if you buy 2 shares you are putting almost 50% of your portfolio into a stock which could lose 10% or more in a day. The stock is especially risky, however, because they announce earnings in 2 days!!! When earnings are involved, a tech stock can make much more significant swings-- in either direction. If GOOG beats estimates, you could go up 20% in one day. If they miss badly, you could find the stock crashing (especially because Google doesn't warn before announcing). That being said, I personally believe Google's got at least one more record-breaking quarter in it, and this might be it. Despite the huge drop in capital from purchasing YouTube, and the subsequent lawsuits that have swarmed the company, the fact that Google just announced a $3.1B acquisition suggests that they probably aren't hurting for cash. Additionally, Google has been moving into new, more experimental businesses. For example, Google Checkout (which I think is bound to give PayPal a run for its money), which Google is expending resources to promote (they are not charging fees for the service until 2008). There have also been talks about expanding into television advertising... in general these new business segments have a good number of skeptics and I think they make investors worry that growth in the core business is slowing down.

These are fair arguments. On the other hand, when the media starts speculating on the reasons a really hot stock will go down (I saw several articles last week about why GOOG is too big and why YHOO may be a better buy), it usually means it is going to go up.

If I were you and:
1) I'm willing to bet that Google had a really good first quarter, I would buy 1 share.
2) I like the company but I'm not sure if it had a good quarter, I would wait until after the earnings announcement and buy 1 share (especially if the earnings are good).
3) I'm willing to bet that Google had a really good first quarter, and I'm willing to potentially lose $350 at the risk of gaining $350 (and more in the coming weeks), I would buy 2 shares.

Technically speaking, the stock recently moved above its 50-day moving average and the 25-day moving average is crossing over the 50-day as people buy into earnings season. This is a positive sign, but rendered practically irrelevant due to earnings.

Anyway, I would be curious to hear why you selected Google. Remember, your own research is going to lead you to the best ideas...when you ask me about a stock, I'm just going to give you my interpretation of the information everyone has. True insight can only come from you! I recommend looking for at least one stock or mutual fund that is in a less-volatile industry than retail or tech, or at least one that is countercyclical. Also, look for at least one small-cap stock that you find interest in that you think has a really good idea. It shouldn't be something that you hear about everyday on CNBC...

2007 Trends

Okay, so the new year is coming up, which means another 250 days of potential profits in the stock markets.

One thing that I have always advocated is watching trends. When you watch and understand general trends -- e.g., demographics, technology, political -- you are in a much better position for determining which sectors you should be in and even which stocks. Understand trends, figure out which stocks are best poised to benefit from those trends, and then wait for the fundamentals and technical indicators to line up. When they do, these stocks don't just break out, they can go on to become Ciscos, Home Depots, and Googles.

That being said, there was a segment on CNBC today about the biggest trends to watch for 2007. I think they are on to something:

1. Chindia
The combination of China and India represents the frontier of the new world economy. China's rapid growth over the last decade has already caught everyone's attention and irreversibly impacted global money flows. But where is it going next? Manufacturing outsourcing in China and services outsourcing in India are only the beginning. Chindia has a population of well more than 2 billion people, many of which are well-educated and extremely hard-working. These cultural factors combined with low wages have given China and India their economic edge. Now, as the countries are becoming wealthier and more sophisticated financially and technologically, these trends will continue to accelerate. Educational and structural improvements will be made in these countries and they will probably overtake the US in many ways.

One of the most important ways that Chindia will overtake the US is as a consumer market. Chindia's combined population is about 2.4B people, which is eight times that of the US. Translation: plus one point for companies who are in these markets.

2. Masstige
This is interesting -- people are achieving retail 'prestige' not by flaunting brand names, but rather value. Apparently these days women prefer to brag about getting a good deal than paying a lot for something. I cannot verify this trend from personal experience, but it makes sense to me. Keep an eye on Target (TGT).

3. Green
Energy prices were a big deal in 2006, and considering the fact that we aren't making any more oil, it will continue to be a big deal. I think that the term "sustainable energy" is finally gaining traction, and there is just too much technology and too many examples of companies making the effort to ignore this trend any longer. Starbucks, WalMart have good footprints to start making a difference. Tipping point.


In addition to these, there are a few other trends that cannot be ignored. Consumer-generated content and product R&D is one of the greatest overarching trends of our time. It is one of the central themes to Web 2.0 and the lifeblood of YouTube, Facebook, etc. Aside from that, increased consumer feedback gives consumers much more control over what they buy, which not only means that demand can be increased but also that it can be estimated more accurately allowing companies to avoid excess inventories.

Look for innovative companies that consider these trends... the outcome will be good for them.

Morning News

Google buys YouTube.
YouTuble is costing the internet giant $1.65B in stock, a rather hefty price tag, if you ask me, for a company with no revenue. In the midst of other high-profile web acquisitions, such as that of MySpace and potentially that of Facebook, this raises the interesting question of how much is a customer worth? I will compile a list of customer acquisition costs for some companies (GOOG, NWS, SIRI, XMSR, etc) and perhaps put it up here.

Googtube faces many potential lawsuits due to copywrite infringement, as YouTube users are constantly posting clips from movies or TV shows. Google has deep pockets, making it a reasonable target for publishers to continue the IP fight that has been waging since before Napster. This is a very complicated situation that is just starting to be resolved by innovative companies such as Apple... I can't wait to see what Google's plan is.

Ford to buy out workers.
This company's got issues. Luckily they have a good amount of cash too, because they are offering 8 different buyout plans and career counseling to all 75,000 of its US hourly workers. This to help cut 30,000 or so workers along with the 14,000 salaried workers that can expect the boot. Meanwhile Toyota, which recently breezed past Ford, introduces a new Corolla to go after GM's number one spot.
-Bloomberg, AP

Go Blue.
I'm not talking about the Dodgers, it is too late for them. But a study by pro-democrat Blue Investment Management released a study yesterday suggesting that companies that primarily donate to Democratic campaigns do better than both the S&P and the companies that primarily donate to the red cause (I don't mean communism -- companies investing in China are certainly outperforming). Examples of "blue" companies: AAPL, GOOG, COST.

Sorry Goldman, Sachs.
-MarketWatch.com

30% of Americans believe that the recent decline in oil prices was engineered by the government to secure a Republican votes.
This unfortunately does not astound me. Only 35% attribute the price changes to supply and demand.
-Washington Post

I'll have a Vista Latte

Today on Kudlow and Company, Noah Blackstein had some things to say about how Microsoft is spending all of its excess cash:

"I think I'm going to go into my office tomorrow morning and read that Microsoft announced that they are opening up a specialty coffee store to compete with Starbucks."

I think that this was funny and an excellent way to illustrate his point, which was that Microsoft ought to partner with companies such as Google instead of face them head-to-head, and instead use the cash to focus on their core business.

Just that that was amusing, especially amidst all the talk about the HP and Apple scandals.

Getting a Grasp

I haven't been following it everyday, but from what I've seen in the markets recently has confused me a little. Several elements are moving: oil prices have fallen dramatically as the summer nears its close; bonds have rallied like they have bulls chasing them, the 10yr yield falling 20 basis points in just a few days; gold prices apparently rising on overseas demand; the nazz making a stunning recovery and the DJIA at an all-time high of 11,700.

Sounds like good news to everyone, as long as you are on the long side of whatever you are trading. I know that I have done well, especially with AAPL which I continue to like. Speaking of which, I am becoming more and more attracted to companies whose products I can sense the demand for. AAPL is such a company with clearly palpable demand. I am still kicking myself for not buying it when I started college and everyone wanted iPods. Heck, I have been a Mac user all of my life -- I should have known that the other die-hard fanatics like me would keep the company in business until Jobs had the breakthrough we were waiting for. Well, it happened, but rather than dwell on the five or six digits I missed out on, I jumped on the next opportunity: a skeptical street crunching iPod demand figures but neglecting to enter an Apple store or a college campus. By the way, the highly touted "halo effect" is real.

In a similar manner, I have also fallen in love with TGT. I now have a friend working for them and she provides the internal confirmation for what I've been seeing at the mall: a continuing refinement of the brand, the execution of a unique expansion plan which includes leveraging the brand and the [tar-JAY] joke to enter higher-end markets as well as new store openings. There was an article in Financial Times (Monday's issue, I believe) about urban resistance to WalMart and preference for Target.

With the holiday season approaching, now might also be the time to look at clothing retailers. If you bought AEOS after reading my October 24th post, congratulations, you are up 110%. Almost half of that increase has taken place in the last two months, which means it is time for scrutiny. I would not buy this stock here, on the common-sense grounds that it is overextended and liable to fall back quickly in the event of any bad news. I am concerned that, barring Martin+Osa which I know little about, demand has not been extraordinary for this store. This is my gut feeling based on the number of people I see in the stores... it could be a big mistake, but I am not clinging to this company.

URBN, is another retailer that I think deserves some attention. The orange color means that I am undecided on where it is going. It is #67 on Fortune's fastest growing companies list, but the feat is mediated by the fact that they were #39 last year. Nonetheless, that should probably put it at a substantial PEG premium to AEOS which didn't even make the top 100. I used to love this company and I owned the stock going into the 2004 holiday season. Recently I was impressed with the palpable demand amongst their primary 20somethings targets, and further encouraged by the fact that the appeal was spilling over into the highly profitable high school crowd, resulting from the sibling effect. However, that demand seems to be dwindling according to my fashionable friends, and I have definitely noticed a decrease in foot traffic and an increase in sales in the Westwood Store. These friends that I mention, who are formerly URBN frequenters, are now dismissing the trendy apparel as fadish. I do not believe, however, that this justifies why the stock is down 50% or so since its November 2005 high. I am planning on looking into this situation more carefully to determine if URBN is a bargain right now or if it is finally reasonably priced.

About this strategy. There is a classic book called One Up on Wall Street by the incredible Peter Lynch. In it, he discusses the benefits of buying what you know, and being sensitive to the trends going on around you, right in your neighborhood. It is an excellent strategy for novice investors to find opportunities, and it is something that even professional fundie-crunchers and technicians need to remember to do.

I have been busy developing a new business model for my company, not to mention looking for a new job. Nonetheless, I have fallen behind the already pathetic one-post-a-month mark, so I will make a little more effort to post more frequently. Au revoir.

Today's Buzzwords

Geopolitical Issues
Clearly, we have had some very significant 'geopolitical' events occur recently:

1. North Korean Missiles
2. Lack of progress with Iran
3. Israeli and Lebanon
4. Bombings in India

and these events are purportedly impacting the global markets today. The emerging market strategist for Bear Sterns was just on CNBC and he said that if you think such events are going to continue, it might be time to sell positions in emerging markets. On the other hand, the respective markets in the countries involved in these events were not dramatically affected by them: the Bombay SENSEX is up 1.9% since the Tuesday bombings, and the Tel Aviv 25 index is down 4.2% today, which is not bad considering its volatility. In the meantime, the US markets are getting rocked. The real reason GP events are affecting us:

Oil
Unrest in the middle east scares the hell out of US investors because of the oil issue. The numbers prove it: new highs today for crude oil! $76.50/bbl!!! At this point, I don't think traders will have any trouble driving the prices up to $80/bbl. As a result, transports are down some 2.7% and the broader market is taking quite a hit... I believe the Dow is down about 175 points right now. Investors are getting scared, and so many are initiating a new strategy:

Flight to Quality
This has been the word lately, since most analysts are weary about the upcoming earnings season and the geopolitical events and whatnot. The movement is evident by the dramatic relative decline of technology and/or small cap stocks in recent weeks. Today, however, judging by volume, the degree of "quality" that investors appear to be flying to has increased to beyond that of large-cap blue chips -- investors are going to fixed-income and cash investments, which makes sense. There was an article in the Financial Times yesterday about central bank warnings about low risk-discounts on risky assets. I agree with the assertion that risky stocks are overvalued these days. Risk-free and government-issue rates have been increasing rapidly for some time, yet a correction in the markets did not take place until May.

If we see disappointing earnings, I think that these other factors will convene to cause another significant correction in the market. Thus, this is one of those rare instances that I am BEARISH.

I am all in cash, but still earning 5%.

Wow

Put your rallycap on.
Congratulations if you picked the bottom: after several weeks of losses, and an 8.5% correction to the DJIA since May 10, the market posted its biggest two-day gain since April 2003. Today alone the dow climbed 198 points, putting it back above 11,000 and into positive territory for 2006. So, why?

I don't know. Economic data has been mixed: Business inventories for April were down, and capacity utilization undercut analyst estimates. Treasury bond yields are inverted on the 2-5 year horizon, and other recent signs of weakness in the market and economy have raised postulations about the end of rate-hiking. On the other hand, financial firms such as Bear Stearns and Goldman Sachs posted strong earnings, Core CPI for May was higher than expected at 0.3% (hence a lot of talk at the Fed about inflation), and initial claims were revised down.

Whether or not this is a buying opportunity, therefore, is unclear. I think an 8.5% correction in 30 days is a bit extreme, so today's rally is healthy. At the same time, 310 points in two days is a pretty drastic move as well. I tried to find some specific stocks to buy on Monday if I like the action tomorrow... you know, companies I like with an MACD crossover south of the centerline. But, this isn't one of those situations that I want to be 100% long. In fact, I think the only thing that we can count on in this market is the volatility. Since the market corrected downward, and is now moving upward, I am expecting a bit of a penant pattern and decreasing volatility as this thing gets some footing. Therefore, a good strategy would be to sell option spreads. :-)

Anyway, the market is certainly interesting enough to bring me back into it. I'm ready again, Skeedaddy...