Wednesday, March 19, 2008


The pull back in Google from 7 and a small fraction to 4 and a small fraction has been a significant decline. All the while the business is growing by leaps and bounds with no sigh of let up. Indeed, the mobile business is moving so fast that it is emitting a buzzing sound. Mobile search results just jumped 20%. The new g-phones should make for a much more dramatic and long term jump.

The Google business model is a joy to behold. The key to it is that the cost to provide service is so low that Google can keep on offering more and more great services without charging a fee. This morning I mentioned how Google Transit is growing rapidly. Is it not amazing that a private company can provide the public service of all local transit routes, schedules and fares and post them on map that is available in thousands of locations, free of charge? The benefits of higher utilization, lower pollution, lower costs, and time saved inure to the citizens. This is a great example of Milton Friedman's suggestion that most government services should be provided by the private sector.

We will soon know who won the 19 billion dollar 700mz spectrum auction and by summer G-phones will hit the streets. The first phones may not compare well to the hype but they will boost the use of mobile services. The world will never be the same.


Some months ago, I wrote that Google will ultimately sell at a much higher price but at a lower PE ratio. The problem of projecting the future is that we simply cannot imagine which direction change will take us. My bottom line is that Google is going increase revenues many times over the next 30 years and every time this stock dips it should be accumulated. A small investment for a grand child should grow into a small fortune, in particular if routine additions are made on dips.


The current price of crude oil dictates that technological solutions be found, if we desire to continue or to improve our current life style. The good news is that more time, effort and money is being spent on developing technology than ever before. We live in a wealthy time when the citizens of many nations can afford to pay for research and development. For example, I am starting to wish I had a nickel for every plan there is to dramatically change the production of energy.

One of the technologies that is catching on quickly is hybrid power supplies. When you think about it, a hybrid system is the same strategy as has been employed by utility companies for decades. Power companies have offered night time power to industry and low cost street lighting because "the motor is running anyway". Hybrid technology is not confined to autos. Huge cranes that move cargo at docks are being converted to hybrids. Huge buses and trucks are being converted. The key point is that there is down time between productive work but "the motor is running anyway", so why not connect a generator to that motor to store the down time energy. Then, when it is time to move, let the stored energy supply extra electric motors to give the gas or diesel motor a boost. Like in the load leveling schemes of power companies, the size of the motor can be reduced and fuel can be saved.

There has been yet another discovery of enzymes that cheaply convert cellulose fibers to ethanol. This time, the enzymes were not genetically altered but simply harvested from existing enzymes in the Chesapeake Bay. In less than a year, demonstration plants will be built that will show the commercial value of the latest process.


The tremendous growth in research and the steady decline in the cost of computing and storing data means that the "cloud computing trend" is just getting under way. In 1975 I worked out of the Dean's Office at the Bowman Gray School of Medicine. In those days, we had to be careful about running a few data analysis programs because we could slow the whole system down. There simply was not enough computing power to run all the hospital systems and do research at the same time. We had to schedule our runs in 30 minute intervals. Payroll and other "non-critical" tasks had to be run in "batches" during the wee hours of the morning.

Today, it is growing less and less efficient for a company to manage its own computing system. Off site data centers, run by the likes of IBM, can handle all the work of a big medical center hundreds of times over. This trend will continue and the cost of computing will continue to drop. In the case of Google, program designers totally ignore the cost of computing and data. The Google management understands that the cost per transaction is already so infinitesimal that it has no bearing on the product.


Pundits continue to "look backward" at the housing market. They see the national over hang of houses and fall into the trap of believing that the average house price will fall much in the coming months. The fact remains that if we ignore the rust-belt states of Michigan, Indiana and Ohio and the super boom-bust states of Nevada, Florida and California, the average price of homes is not falling. Using average measures in this situation is like adding Gomer to a professional bowling team. One bad number brings the averages down a long way.

With Fannie and Freddie buying loans again and with Credit Unions making 4.25% variable rate loans, 4.9% 15 year fixed loans and 5.5% fixed rate loans, the housing market will improve in short order. We all know that when BBB- mortgage paper traded at 8 cents on the dollar last week, something had to happen. The price made no sense unless one appreciated the amount of loans held on supper high margin rates. When the margin calls came, the weakest player had to play the part of the canary in the coal mine. Once the FOMC stepped up, the pressure was relieved. It took a long time for the government to grant Freddie and Fannie more buying power. A game was played, an old firm was eaten by vultures but the pressure on the rest of us was relieved.


What does Google have to do with the housing crisis? Not a lot. Google certainly offers a number of services that assist home owners, real estate professionals and financial parties. However, the big decline in the price of Google was only the indirect effect of tight money. Tight in the sense that a massive de-leveraging has been in process. The earnings and earning power of Google continues to grow. We have simply been in a time when of PE contraction. Investors have been unwilling to pay a premium for Google while facing declines in the housing area.


The "helicopter money drop" will begin in a month. Businesses need to build inventories to satisfy the temporary demand. Shays' law will kick-in and the economic surge will move ahead. BUY ALL THE STOCKS YOU CAN IN ANTICIPATION OF THE MOVE! IT IS A GOOD TIME TO ADD TO MANY STOCKS AND SMALL CAP VALUE STOCKS WILL LEAD THE CHARGE BUT BIG CAP GROWTH STOCKS LIKE GOOGLE ARE THE "SAFE" PLAYS.