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The author has been handling his own investment portfolio for over 30 years, consistently beating the S&P. The past few years Mike has become more conservative, switching to commodities and basic materials. The guiding principles come from David Stockman: "My investment model is ABCD:... More
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  • Why Google Is Doomed To Follow Apple Down

    Google has had a spectacular run, increasing ten times in the past 9 years since the IPO in 2004. Just as a root-bound plant eventually reaches the limits of how much it can grow, it seems that Google has bumped up against its own wall. It seems that all of the big gains are behind us so maybe it's time to take some of the money off the table and be happy for this run. Here's why I think that Google will soon get hit just as Apple lost 40% of its value over the past 6 months.

    1. It has $50 billion in cash, but it's dead money.

    Over the past few years Google has made some big acquisitions such as Youtube and Motorola Mobility. However more recently it's pace of acquisitions has slowed even though its bankroll has grown. It seems that the executives have run out of ideas for what to do next, or maybe they are aware of the problem of appearing to monopolize a sector.

    That $50 billion in cash represents about $151 per share of value, no small part of the stock price. But if the money just sits there doing nothing then it is useless to shareholders. It's almost as though they are waiting for inflation to slowly erode it or for cash-strapped governments in Europe and the US to tax it away.

    2. Its problems with regulators are far from over.

    Google has been treated very kindly by US regulators, almost as though they have free rein to do anything. But Google has far fewer friends in Europe. There, courts and regulators have continually investigated and fined Google and it is getting worse. See this, and this and this.

    If Google continues to get beaten up and reprimanded in Europe, then even US regulators might feel the need to have at least some token regulatory attention. Such actions cannot be expected to help share price.

    3. The value of its patent holdings is falling steadily.

    As Bill Gates pointed out years ago "Intellectual property has the shelf life of a banana." So Google's patent holdings only have a limited time over which they have value. Imagine owning a patent on a manufacturing process that halves the cost of making really good buggy whips. And these days technology is going at an ever-increasing speed, making patent holdings fall in value more quickly than in years past.

    A related problem for Google is that courts have begun to reduce or invalidate over-reaching patents. While Google might very well have a patent on being the only one allowed to use electrons, good luck being able to ever enforce that.

    4. It got booted from China and there are very few places left where they could find any organic growth.

    To their credit, Google partially stuck to their slogan of "do no evil" and refused to go along with China on their demands for censorship and spying on the citizenry. However in making a big enemy like the Chinese government they might have started a hidden war that they are neither prepared nor equipped to win.

    China has been known to heavily favor their home-grown companies and they're not above dirty tricks. It has been alleged that the Chinese government-backed hackers did denial of service attacks, stealing trade secrets and other sabotage on Google's servers in their efforts to help their native Baidu succeed.

    5. Their price/sales ratio is terrible.

    At 5.4 Google's price/sales ratio is very ugly. They desperately need to increase sales but how? Organic growth has slowed down greatly over the past year. They could acquire a business with good sales, but it is getting harder to find businesses that mesh with Google's current services.

    Google needs to keep Yahoo alive in order to deflect criticism of monopolistic practices (see bullet 2, above). Yahoo is their only real competition and since Google already has about 80% of the pay-per-click market they can't generate growth in this mature market without endangering Yahoo.

    6. Their P/E of 24 is pricey.

    The average for the S&P 500 is around 19 even at currently lofty levels for those stocks.

    7. The recent privacy scandal with the NSA is bound to create laws that spill over onto Google.

    It's hard to ignore the recent uproar in the US over privacy and the spying done by the NSA on US citizens. This is just now starting to result in calls for more regulation, so far only vaguely defined. The next logical questions that people ask will be how much personal data Google and other large corporations collect, as well as how they sell or use the data. We can expect to see further legislation to protect privacy rights from corporations. Since we are in the very early stages of this trend, the costs to Google are unknown and risky. Again, the unwanted attention and legislation cannot help the share price.

    Summary

    Google is a great company and has grown mightily this past decade. But they're showing signs of maturity and flattening out, which usually precedes the fall. Better to take a little money off the table and be happy with the gains, rather than being greedy and lose half.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jun 24 10:35 AM | Link | Comment!
  • Economics As Ecology

    The economy can be thought of as one type of ecosystem. There are many different participants, each with their own goals and their own ways of reacting. They all share information in one way or another. Sometimes small groups of entities will cooperate for their mutual benefit (corporations or hives). The gestalt of all participants behaves in ways that wouldn't be obvious from knowing the behavior of individual elements.

    Chaotic Systems

    Scientists are aware that changes to an ecosystem can have unpredictable and damaging consequences far beyond the area that was changed. Wiping out a predator might seem like a good idea at the time but then the prey population can explode leading to starvation and disease. Small changes can lead to large effects and "unintended consequences". People have gradually learned to be careful with the natural environment in order to protect all of the participants. However politicians have not learned to show similar restraint with regard to their destruction of the economy.

    State Planning

    The great Supreme Court justice Louis Brandeis said "The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding." History is full of well-meaning social experiments that went horribly awry. Maybe the biggest and most destructive such failure would be communism in China and Russia. Historians estimate that Mao's Cultural Revolution killed around 60 million Chinese. The famines caused by Stalin similarly killed millions of Russians, Ukrainians and others.

    Prohibition

    Even the US is not immune to the destruction wrought by well-meaning social experiments. We have endured Prohibition as well as the ill-informed semi-socialism started by Hoover and amplified by FDR. Even now we have the huge financial bailouts and Obamacare that threaten to take over huge portions of our economy, purportedly to cure some past evil. And the experimenters, playing with OMP (other people's money), are so out of touch with the suffering of the little people that they actually think that they're helping. These experiments wouldn't be as destructive if the experimenters would admit when something doesn't work and so abandon it. Instead, any admission of error is politically impossible, and we end up stuck with the same failed policies for generations.

    Some common-sense principles that should be extended from ecological science to economic science.

    - Any major change to the economy (taxes, regulation) should be studied carefully by independent scientists using case studies and computer modeling. In general, only governments and government-backed entities are likely to be large enough to disrupt the economic-ecology. For this reason most of the initial focus should be on the largest and most disruptive entities. Later, it would make sense to focus on those who have explicit or implicit government backing such as FNMA, FMAC and the too-big-to-fail banks.

    - Crack down on the major polluters. In the economic ecosystem everyone depends upon information. The most egregious polluters can damage millions and stunt growth of others. For example, a government agency who gives out rosy yet bogus information one month then quietly retracts the number next month should be reined in. Perhaps we need a government agency who can police other government agencies and penalize them with staff cuts when they damage the economy through intention or negligence.

    - Any changes should be small, slow and incremental.

    A Path Forward

    As we have learned more about nonlinear systems and complex dynamics, we have turned our attention to the natural world and the study of ecology. It is completely natural that we should use some of the same methods in our study of economics since the latter is similarly complex and fragile. Let us be careful about making large changes to the natural economic landscape risking much needless suffering or the extinction of many small businesses.

    Naturally there will be old, established institutions (governmental and associated members of the parasitic class) who will fight against even the smallest incursion into their ability to control or change the economy. Just as in the 60's when environmental laws made it harder for the large polluters, so too will entrenched interests fight against modest and common sense reforms. To quote Cicero: follow the money.

    If the modest ideas presented above come to pass, it would probably be best to avoid the TBTF banks. Therefore I would sell or lighten up on XLF, Goldman Sachs (NYSE:GS) and Citi (NYSE:C).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: C, GS, XLF, economy
    Oct 22 6:54 PM | Link | Comment!
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