Data: http://www.google.com/fusiontables/DataSource?snapid=S290567-PZy

Not even bank crime is immune from the bad economy… (source: http://www.fbi.gov/stats-services/publications)

On August 27, 2008 Bloomberg published a 17 paged obituary of Steve Jobs. A week and a half later Jobs channeled Mark Twain during one of his infamous Keynotes

Last week was super painful for the markets, but there was a shining light. Goog managed to hold some of its gains from the previous week and not retest its lows. This seems to be a good sign for the stock so i figured I would do a bit of charting. here is a long term view of the stock with the Fibonacci retracement lines drawn in. Notice how the stock tells us that these points are important by gaping over the lines or bouncing off of them.

Finally here is the same graph just with an optimized simple moving average cross over. The computer says that the best entry point, assuming no costs is when the 4 day moving average cross above the 47 day, and the best time to sell long is when the 14 day crosses below the 59 day. Over the period this netted 101.5% return on trades compared to 53% change in price that buy and hold would have achieved.

A basic discussion of business positioning inevitably asks the question of what market is a given product or service trying to target. One way to think about this is on a spectrum between low-cost leaders and highly differentiated companies. It is these low cost leaders that have had highly successful earnings reports during our market downturn. Walmart (WMT), Priceline (PCLN), and McDonalds (MCD) to name a few.

Low-cost leaders provide the cheapest option for a given market. Feeling poor? Go buy something off the dollar menu at McDonalds. In part, Walmart is successful at this model because of their size. They can force their costs below their competitors by displacing shrinkage onto the product manufacturers, fighting unionization, and being the all around most hard-core badass realists negotiators. If you want to buy anything from a new lawnmower, outdoor fire pit, groceries, prescriptions, or camping gear Americans KNOW that Walmart is the cheapest place to get it. But still not everyone shops at Walmart… Inefficient market? Public ignorance? Psychological disorder? Maybe a little of both.

In a world where a given company, lets say Target, knows it cannot out price Walmart on most of the things they sell, how can they possibly stay in business? The answer is the product or brand differentiation. Consumers need to believe that when they go shopping there they will be getting something extra that is worth the price. Maybe it is friendlier service, higher quality good, or employee benefits. This basic model creates something of a successful business horizon. This is what makes Target so interesting, they have, more or less, successfully navigated this thin range of being not the ultimate low cost leader but also not offering the most highly differentiated products. Think Walmart vs. Target vs. Crate and Barrel and it goes on from there.

Notice that the graph shifts so that a successful differentiated business requires more differentiation for the same cost.

Anyways this is a long way of saying that people put price tags on intangible things all the time. But when faced with a pinch, a lost job or declining home value, consumer’s willingness to pay for these extras goes down rapidly. Further, our perception of risk goes up dramatically. We think, as I have been often lately, “maybe I wont be able to get this job that pays $X a year”, and change our long-term consumption smoothing. As an investor how can we play on these tendencies? In the macro sense, some people push their money into gold for price stability. At least, I know that even if my retirement doesn’t grow, it certainly will stay liquid and maintain some value. Which is more then can be said for those poor GM workers who sunk their life savings into the stock. Individual savings has gone up as well, this speaks to the risk question.

We can look deeper into this. As mentioned above WMT, PCLN, MCD, BWLD, CMG all had significant beats. Consumers are already moving their purchasing power into the low cost leaders of the industry. No major industry is going to be wholly extinguished, rather the companies that offer substitute products and services and lower costs will thrive, and the highly differentiated ones will fail. The market for these differentiated goods is drying up, companies that rely heavily on brands, Abercrombie and Fitch (ANF), every American car manufacturer, Sirius/XP (SIRI) comes to mind. The obvious play is long on the low cost leaders and short on the highly differentiated companies. I would add to this by saying a quick look at the financial position of a given company will also help illuminate the strength of the company. A highly differentiated company with high levels of debt is fundamentally unsustainable in this economy. If the American standard of living is permanently set back and the average American has lost 20% of their personal value the entire spectrum has been shifted, and companies must adjust. Here is my list of potential low-cost leaders from my own life experience. Obviously do your own DD. GPS, KR, LUV, HMC, MCD, WMT, PCLN, VLO, or ALK.

I talked about Priceline earlier this week which you can read below. There I talk about some of the reasons they are a hot company. Earnings are out and PCLN hit EPS of 1.29 compared to estimates of 1.05. wow wait really, thats almost a 25% beat! One of the things I think is a strong indication of their business success is the broad international reputation they have. more then half of their gross profit came from places out of the US. You can read more from here. or listen to their conference call at 4:30. They are already up almost 11% after hours

This is just outrageous. I’m sure this is exactly what CA needs, less tax payers, no budget, and less state employees because the system is working so well there. Proposal. Before they can layoff all these people the elected representatives should take a month without pay. Or better yet, fire all their staffers, make them read and write their own damn reports.

“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless.”

Found this quote and a great article on Phil’s Stock World… I just really liked the quote and read his page often

Week of 2/16/08

There is some important economic information coming up this week to keep your eyes on.
First is at 8:30 AM Wednesday the 18th the housing starts and permits data for January is being release by the Census Bureau of the Camber of Commerce. Markets are expecting around 530k and 525k respectively, down from the December numbers.

Second, at 10:30 AM on the 18th the Crude inventories data comes out. Recently an unexpected high inventories caused oil prices to drop to their recent lows in the low 30s. Unfortunately, I think with the oil prices we are at right now, slight increases in prices would help push markets upward. Higher prices indicate higher demand which would help reassure investors there is some life in the economy.

On the 18th there is also some export/import price data being released but I would (and the markets seem to) focus more closely on the January core PPI and PPI which comes out the morning of the 19th. The markets are expecting a .1% and .2% respectively. PPI is the producer price index which is pretty self explanatory. More importantly is tracks inflation or deflationary trends. Core PPI is an attempt to exclude cost of energy and food from the measure. There seems to be some dispute over the validity of this method. Phil of over at Phil’s Stock World (which provides truly great analysis) often jokes about which companies arn’t using energy or food. When oil was really high it excluded the major cost for most producers artificially showing low levels of inflation. On the other hand, the government really likes the core PPI data and tries to isolate inflationary trends from the strong movements of energy which often control the short term measures. With interest rates so low the Fed is going to keep a close eye on these types of numbers to ward off major inflationary movements. Happily, other countries have taken the hint and dropped their interest rates as well while the dollar has been gaining against the British Pound and Euro since the summer.

CPI and core CPI (Consumer price index) come out the morning of the 20th. Markets are expecting .3% and .1% respectively. This is really the benchmark inflation indicator. It measures a basket of goods and services over time, and the results are used to adjust cost of living standards for government programs. Drop in car prices major post new year sales for apparel makers may drive the down even further.

On to Earnings!
After market close on the 17th Jack in the Box (JACK) is reporting earnings. I got a bit of love for this company because of their San Diego roots, and their commercials are pretty funny. Other then that, I dont think they belong on the catagory of other fast food restaurants who had major beats this last week, (BWLD and CMG to name a couple of my favorites). THey have fairly substantial debt but havn’t lost much of their value over the last 6 months and are trading at a fairly low P/E of 11. The market consensus is a $.52 earnings per share.

Same day Walmart (WMT) is releasing their earnings with a consensus of $.99 a share. They had a major beat last quarter and I believe that as consumers feel more and more poor, they shift over to Walmart for their purchases. Not just for the traditional household goods Walmart offers, but consumers are willing to brave the lines for cheap cheap oil changes and drugs. Not to mention ruthless management and a new series of commercials that will almost make me forget how shitty they treat their employees. Another piece of information I will be watching is their international sales. They have had mixed results in Europe, in some countries they have become very successful while in others they havn’t. Perhaps the economic downturn will get people suckling on the nipple of rock bottom prices that is the Walmart empire.

On the 18th we have Baidu (BIDU) with a consensus estimate of $1.34 per share. The pure volatility of the company and the “Chinese Google” effect make this a fun stock to watch.

Kinross Gold (KGC) is reporting on the 18th as well. It is approaching a technical resistance at $20. I read one article that was noting the rise in gold prices hasn’t corresponded to a rise in stock for gold companies. Couple that with decreased transportation costs over the last 3 months and this may turn out to be a good mid term play. The consensus is to see $.12 a share. If there is a beat, expect the stock to break above 20 aiming for 25.

Priceline (PCLN) is reporting the 18th. I love this stock, maybe irrationally, but my user experience combined with the jsut basic economic model it supports is great. Allow people to say exactly what they are willing to pay for a hotel or flight and see if that is profitable for the company. Gives power to the consumer on the internet which maybe the only place this can really happen. Their website is significantly better then their competitors and they offer a dramatically better product. If you have never tried it and want to have a nice getaway to LA, enter downtown LA 5 star hotel and start at $70 bucks a night. I would be very surprised if you didn’t get a hotel for that price, and could always enter $80 the next time around. I have done this on a few occasions and it makes for a great getaway for the weekend at a pretty affordable price. The overall pressure of the economic downturn is a flight to low price goods. Priceline is the low-cost leader in this market and actually offers service that is as good as you can get without having a travel agent. Furthermore, its down 50% from its highs last june. Seeking alpha posted saying priceline is likely to beat estimates. EXPE is reporting the following day, the contrast should be informative.

Whole Foods (WFM) is reporting. Generally overpriced image oriented sales havn’t been so successful. The problem with Whole Foods, is the die hard organic/local/green consumers find better places to buy their produce, and the others go back to shopping at the normal Vons or Kroger, who are starting to offer enough “hippie” products to make them feel better about themselves. On the other hand WFM is down trading around $10 from $50, so they have taken quite the hit already. Look for $.15 per share.

These are the ones I’m going to be watching. Can’t forget the ever important stimulus that will be coming through. Most of the major economic data and earnings are coming on Wednesday. If the stimulus isn’t signed before then don’t expect much action out of the markets. Otherwise, its difficult for me to imagine how nearly a trillion dollars stimulus money being pumped into the economy will cause the market to breakdown. The major concern are the specifics of the bank rescue plan, but it sounds like the administration is headed in the right direction by pumping money into the hands of consumers who will be foreclosed on. Stop the foreclosures, home prices increase, consumers arn’t pumping money into a losing investment and their spending/confidence will go up. As for this stress test, i really believe this is what the market needs. the problem has been that the extent of the bad assets is still unknown. Even if this is bad news for some banks, the overall confidence we will have in where the market is at should increase by ‘cutting the fat’ so to speak. Honestly, someone has to be thrown under the bus.

According to the great wisdom of the masses as understood by Wikipedia, a industry is said to be a natural monopoly “if one firm can produce a desired output at a lower social cost than two or more firms”. The most obvious situation arises in the case of utilities. If there is little possibility for differentiation in the product and traditional understanding of economies of scale apply, then the company who scales the quickest can offer the cheaper prices driving consumer costs below the production costs of the other companies.

There has been some discussion of whether the online search industry follows this pattern and the jury is probably still out on this question. The permutations of search mean that niche markets can exist such as the twitter-yahoo news search. It seems unclear how Google could do this cheaper simply because of its size (it may have better engineers or ideas but the size doesn’t drive down costs of new search development).

I would propose that online security for payments has many characteristics of a natural monopoly.

First, this industry operates on the back end of most websites. This means that the average user knows almost nothing about the various providers other then their logos.

Second, keeping up with hackers and ensuring the safety of data requires a significant amount of R&D. Currently, this industry is Verisign (VRSN, 3.87 B market cap), Entrust (ENTU, 97.07 M market cap), and Symantec Corp. (SYMC, 12.91 B market cap). Symantec is the creator of Norton anti-virus stuff too so the market cap comparison isn’t exactly great. Anyhow, to give you an idea how standardized Verisign has become, even PayPal has their logo promising security. Their earnings are this afternoon so we can get a little more information. Just some ideas I had during constitutional law today.

Happy Hunting all