Weekend Reading

Hedge funds under performed the S&P last month. This is not a terrible thing as hedge funds hedge and, like our middle Google plays, playing both sides, while safer, doesn’t always yield the best month-to-month returns. I’m sure that is small comfort for investors in GS’s $10Bn Global Alpha fund, which dropped 10% last month… The fund was hurt more by currency movements than the commodity crash but, when this letter goes out next week, look for many high flying funds to experience outflows from nervous investors. The last time GS had a monthly loss this large was October 1998, when the S&P dropped 10% in a month, not the same thing at all! The fund told investors it does not intend to change it’s strategy, which returned 33% last year: “Our overall view on U.S. Treasuries was and continues to be negative given poor long-term value and a less favorable macroeconomic outlook.” So the smartest fund guys on the planet disagree with me – I’ve had worse! As the WSJ notes about the letter, they also say: “We continue to maintain the highest confidence in our models and positions, despite our performance in August.” This is what I mean about commodity funds (and currencies are commodities too), they are not going to capitulate in a single month, even when that month is a disaster but a 10% drop in oil for August, followed by a 5% (so far) drop in September may have hedgies heading for the exits before they wipe out last year’s profits. Think about the amount of gold, for example, held by the GLD ETF and others as investors picked up 8M shares a day, double the usual volume, as gold went from $575 in April, to $730 in July. Buying was more muted but still strong as gold picked up again in June, from $542 to $676 again in July. Last week’s drop caught everyone by surprise except this guy, and I think the ETF investors, just like many hedge funds have not yet begun to freak out – a break below $550 should do that! =====================================
I hate to be cynical but, looking at Google, one could say this is the World’s best example of “window dressing.” After a huge early sell-off, the stock took off just after the March expiration. After a sell-off in May, the stock suddenly caught fire again after the June expiration – finishing Q2 $30 over Q1. Now, as Q3 drives to a close, we see Google still a bit below the Q2 close may be projected to “dress up” to $450 but with earnings out on October 19th, pretty much anything can happen. ===================================== Speaking of being cynical, as much as you want to admire the determination of New Yorkers to get the new “Freedom Tower” built, I do question the wisdom of having State and City government centers locate there. Giuliani’s former “command center” was at 7 World Trade Center and, though not directly hit, the building was too unsafe to enter and was ultimately demolished as well. Putting vital government centers in the center of a two-time target may be a big New York FU to your enemies but, strategically, it’s not necessarily the smartest move.
===================================== Let’s buy some health care insurers as they have brilliantly combined good PR with good business by allowing regulatory changes that allow parents to keep paying for their kid’s health insurance until they are 30. This article says about 30% of the gap group, between college and 30 are uninsured and I know when I got out of college my loss of health care was a big issue. With fewer employers making payments these days, piggybacking kids on parental policies gives insurance companies a huge boost in revenue on the segment of the population that is least likely to require expensive medical care! ===================================== I think it is a week or two too early to make a big buy on EBAY but it’s killing me to wait. The short-term chart looks weak but they are very long-term oversold and could explode any time. Looking at this month’s action though, one could conclude they were being held up, not down, buy a buyer at the $28 level. Is Ebay worth 40 times earnings? Apparently it depends on the time of year as the stock often does well into the holidays, and then sheds half the run-up or more in the spring. The only Q3 that this stock went down was 2000, and everyone went down that quarter. I’ll tell you what’s wrong with Ebay – runaway SG&A expenses. They’ve been tracking up on a 1:1 basis with sales for years and now take up close to $2Bn a year. I thought I was buying a Database company, why are we running retail looking numbers? The cost of revenue also does not get much bang for the buck but has also started running up a bit. Compare that to a well-run retail operation like TGT and you will see what I mean. On a 10% increase in revenues since 2004, Target’s cost of revenue rose 1:1 but SG&A went up less than 4%, dropping an extra $1Bn to the bottom line. I can’t think of a single way to say this without coming across as sexist but Meg needs to stop mothering her employees and start firing a few people! I applaud the price increase, heck I just picked the stock as a buy recently, but I am certain there are many CEOs who could knock a half a Billion off the nearly $3Bn in sales and operating expenses. Raising revenues is nice but not when it’s a trade-off to increasing efficiency. It takes 11,600 Ebay employees to make $5.2Bn in sales while 5,700 Googlinians rack up $8.2Bn in sales. AMZN moves $9Bn in actual (not virtual) product with just 12,000 employees. That means that for each dollar in revenue an Ebay employee oversees as clicks move through their computes, an Amazon employee generates $1.60 while they order the item, stock the item, package the item, ship and bill for the item… Ebay starts out with a bang, with a Gross Margin of 81% vs 59% for mighty Google but, when all is said and done, the Operating Margin comes in at just 26%, far behind Google’s 34%. Someone, anyone, help these guys out! I’ll do it myself if I have to! Again, I love this company; they earned their monopoly by being the best but boy could they be doing better… ===================================== Speaking of companies that should be doing better: YHOO is down 13% for the year, well ahead of EBAY but 15% behind MSFT (and the whole S&P) and 50% behind GOOG. Unlike EBAY, I have no issues picking up the Jan $32.50s for $1.30 or perhaps the far safer buy of the Jan ’08 $25s for $7.80 and selling the Jan $32.50s against it for $1.35 to wipe out half the premium (but I would wait for a test of $32 to sell calls). This is a nice play if Google holds $400 as we can hope for somewhat of a rubber-band effect to close the gap. A lot of the monthly fluctuation we get between Yahoo and Google comes from the oft-quoted Hitwise statistics which, although interesting, are subject to statistical anomalies that are blown out of proportion by the press. Yahoo was off to the races early in the week but was halted (as Google took off) by this statistic. Volume down from 22.73% to 22.58% is hardly significant (and still ahead of the prior two months) even if the measurement was absolute. Nor is Google’s .3% rise a nail in anyone’s coffin… On a longer-range perspective, since Google’s IPO in ’04, Google is up 300% while Yahoo is at the exact same price. Despite the competition, YHOO has grown its revenues close to 100% while profits are more than doubled for the period. The financials don’t look too sexy because the Yahoo boys have been quietly making $1.5Bn in investments since last year. All the more reason to buy Yahoo on a Nasdaq rally.