October 14, 2018
I thank Dave for this week’s elegant and timely thematic nudge. I have known Dave for 50 years, and though we reside on opposite coasts, when we do connect, he can always be counted upon to bring his singular brilliance (induced by a tinge of madness) into our conversations. He doesn’t move around as quickly as he did when he was 12, but his eyes and mind are as sharp as ever.
I hadn’t spoken to Dave in a couple of months, but we managed to catch up mid-week, just when a stock market rout that you may have noticed was setting in. Recently, Dave has transferred some of his formidable analytical skills from Rotisserie League Baseball to the stock market, and, as the subject – inevitably -- turned to Google, he mentioned that he thought it was a dreadful name for a search engine. I didn’t immediately catch on – replying with the obvious: that math nerds Serge and Larry selected the name on the basis of its numeric equivalent: 10100: or the number 1 followed by 100 zeros. The idea, of course, being that having gone to the trouble of being the first to have indexed the entire internet, their engine would generate a great deal of content for any given generic search criteria. As further evidence of pointy-headedness in Mountain View, I pointed out that at the time of its IPO the company issued a number of shares that when divided by a million, equaled the 2.718 – a close approximation to the eternal mathematical constant e – the only number in the world that is its own logarithm.
But Dave challenged. First off, he said, they didn’t even spell the term 10100 correctly; it’s actually googol. His main argument, though, was that if you insert a space between the 2“o’s” in the middle of the its name, you arrive at the term “go ogle”: an apt description of how a big portion of the Company’s ubiquitous service is used by the masses. I never thought of this, but had they? Dave is sure they had. Of course, I had to check this out on my own, and I can report back as follows: if you type the words “go ogle” into the google search engine, you come up with zero, goose eggs; for math geeks that’s 0100.
Again, all of this is timely, given the outright rout of the tech sector, which has not spared Team Serge/Larry. So I begin the market commentary portion of this week’s installment by offering my readers a chance to “go ogle” the recent performance of the Mountain View Colossus stock prices action (WARNING: GRAPHIC CONTENT):
Let’s all agree on one thing, shall we? If this truly gruesome plunge in the Company’s price fortunes extends itself, it is a sign that the market as a whole is in a mess of trouble. It’s market cap plunged by >$100B in the stretch of a handful of sessions -- before recovering a bit on Friday. At its lows the preceding day, overall valuation had plummeted to a beggarly ~$750B. Pretty much everyone, directly or indirectly, felt the pinch.
So I hold forth that if the attendant head and shoulders configuration reaches the depths of the left shoulder, the market as a whole is indeed in deep sushi.
But that’s just my point: I don’t think that the selloff is sustainable, and in fact am hard pressed to understand why it transpired in the first place. Lord knows there are arguments to be made that: a) the correction was overdue; and b) it stands, perhaps, over an intermediate time horizon, to do a world of good for the health and well-being of the markets in general.
I’ll have more about this further down the page, but first back to Google. It will report earnings on 10/25, at which time it is expected to announce >$27B in Revenues, nearly $9B in profits, at growth rates of 22.7% and 6.5% respectively. 37 out of 42 of the wise sages who officially cover the stock for their brokerages rated it as a BUY -- before last week’s puke and the other 5 have it no worse than a HOLD. The consensus one-year target price clocks in at 1384 – a nearly 20% premium over current valuations. For a company ranked Number 4 on a worldwide basis in terms of valuation, that’s not too shabby (did I really just write “not too shabby? Please tell me I didn’t).
But to my way of thinking, the mad love of analysts for Google simply demonstrates always-impeccable sell-side wisdom. No, I mean it this time; seriously. Because it’s time once and for all for us opposable thumb bearing-bipeds to acknowledge that Google is perhaps the most powerful, undivided force in the world; maybe the most awe-inspiring one this side of Genghis Kahn’s Golden Horde. At this point, without Google, our lives as we know it would change dramatically. Consider, if you will, what would happen if The Great Capitol Allocator in the Sky took his enormous eraser out, and disappeared all 100 zeros (not to mention the 10). Traffic lights would immediately stop working. Air Traffic Control Screens would go dark. Our Army, Navy, Marines and even the Coast Guard would be rendered sitting ducks. Hospitals would not have the ability to monitor patient status; your pharmacy could not fill your prescription. The Electric Power Grid would not function. Scientific Research would all but shut down. Much of the world’s most important information would simply disappear. The NFL would probably have to cancel the season, and I personally would be driven to despair by my inability to source old episodes of the Yogi Bear cartoon series (or anything else I might want to stream on a private device).
I’d go so far as to suggest that if we all woke up one morning and every communication device showed nothing but an announcement that Google had taken over completely, that America was now the United States of Google, there’d not be much we could do about it but accept it, carry on and try to smile.
Now calm down; as a trained risk manager, my models say the probability of such an outcome is extremely low, but they also indicate that the Company’s reach and influence can only grow from here. Don’t mistake their silence on blockchain to be a sign of indifference; I suspect they’re working hard on the concept and will eventually own it (perhaps allowing a few No Cal crony enterprises to accompany them on the ride). They are publicly known to be the leaders in Quantum Computing – a concept just on the horizon, not much talked about, but which will inexorably increase the power and speed of computer processing by millions of orders of magnitude. Artificial Intelligence? The Internet of Things? They have gargantuan edges in all of the above. I’m not sure they’ve cornered the future cannabis investment market yet, but I wouldn’t sell them short on that score either.
My point here is that if the pricing action in the markets, as evidenced by names like Google, is really, as has been posited, a sea-change that ushers in an era where the Company’s run is over, that it will start to trade like Johnny John, selling baby powder-like products that are essential but uninspiring, then it probably is time to sell everything in your portfolio and abandon any hope of investment returns anywhere. But the concept of course is ridiculous, and because Google’s run ain’t over, and if so, the name, and the market as a whole, are cheap right here – Friday’s reversal notwithstanding.
So whatever caused the Gallant 500 to rudely and unexpectedly shed nearly 700 basis points – over a rolling 6-day period that began a week ago Thursday and ended (though it could resume) this past Thursday, the normalization of tech leader valuations to public utility levels hypothesis is the ones that ring the hollowest to me. Facebook cannot seem to get through a day without soiling itself, and I’m always skeptical of Netflix, because I think pulling content rabbits out of hats into perpetuity is a tall order. Apple may have overpriced its latest yak devices and could also feel the Chinese tariff pinch. But if we’re talking about Amazon, Microsoft and… …Google, I’m pretty convinced that they have higher elevations to climb ere they are brought down to terra firma. If so, the market as a whole should recover, and quickly.
But what of the other catalysts that across the carnage have been on everyone’s lips? What about, for instance, macro-y stuff? Well, it is indeed worth noting that the start of the above-referenced 6-day puke transpired at a point contemporaneous to an incremental divestiture of our longer-term notes. This took me by surprise, but that will happen from time-to-time. However, I would hasten to point out that the teeth of the horrifying selloff were biting hardest mid-week this week, during a time when our longer dated paper was actually rallying. Meanwhile, the CPI/PPI Reports, contrary to the endless squawking of Chicken Little Inflation hens, came in exactly where they’ve been every month for longer than I remember: 0.1% core, 0.2% overall, 2.7% year-over-year, yada yada yada. In addition, GDP estimates continue to rise with the Atlanta Fed now projecting out a spiffy 4.2% for Q3.
So I really can’t find an economic justification for the big scary correction, and this concerns me. After all, eventually we do, at some point, need to connect the dots between the market and the economy, don’t we? I suspect it was a technically driven culling of the herd (perhaps orchestrated by those evil quant models). And, given that we can expect high-vol conditions to persist, there is every chance that the Chauncey Bear of a selloff could extend itself. But I will stick to my guns here and state my belief that particularly for certain names, and perhaps for the market in general, favorable entry points are available in abundance. If they continue to go down, my conviction in this regard is likely to increase.
But it’s going to be a rocky ride. While, as indicated above, there’s no reason at the moment to conclude that the recent action is not a healthy correction, it wasn’t and won’t be healthy for everyone in terms of outcomes. Its timing can be viewed as sub-optimal in light of a few unpleasant realities: most of the volatility inducing catalysts (earnings, GDP, etc.) are in front, rather than behind us, and the election psychodrama is likely to increase over the next couple of weeks. Beyond this, I should mention that based upon the numbers I see, 10/10 and 10/11 were the worst P/L sequences (though not, blessedly, to the 100th power) for fund platforms since that VIX debacle in February. 2018 is shaping up to be the worst hedge fund performance year of the decade and there’s only 10 weeks left. Some groups are the walking dead; others are clinging to life. Their continued presence in the markets only adds to the hazard level, and, no matter how sure-footed we are, their death throes present a threat to all of us.
If you’re hanging in there, and, like me, believe that this bad patch will pass sooner rather than later, I’d offer the following advice. There’s no need to try to catch a bottom here. If the market continues to bleed, be patient; buy on the way up. Google’s not going towards 1,400 without providing investors multiple opportunities to jump on board for the ride. If you need to cut risk to preserve capital, as always, I’d also try to protect core themes – even if you must do so at smaller sizes. Shorts are in configuration to be squeezed like grapes and are unlikely to help you if a problematic tape persists. Option hedges are ridiculously expensive at the moment, and never a particularly good bargain even when they’re cheap.
But if you wanted to discuss buying those 10% OTM puts, you should’ve called me three weeks ago.
So if you’ve got to cut risk, I say embrace change and sell some longs. After all, to mash up platitudes, nothing lasts forever, and sometimes our main task is to live to fight another day. If you can, channel Google here, which isn’t even Google anymore, but rather is something called Alphabet. The plan for global hegemony presumably marches on. Affiliating with them is no longer a suggestion to “go ogle”, but now evokes images of speculations (“bets”) that outperform Expected Return (“Alpha”). I’ll have to ask Dave if this passes the Dave Test, but one way or another, for now it’s the best I can offer.
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