GLEANINGS FROM SEARCH BLOG

Like Ruth, I say thanks to those who allow me to glean their fields. "Search Blog" by John Battelle is hosted at www.battellemedia.com. I plan to link his blog in my favorites list. The following are some highlights and comments on his recent postings.

I have written about content being key. John reports that Yahoo is moving into streaming video! The new internet based TV/Movie company!

Google is now offering the 3rd revision to its toolbar. I down-loaded it and especially like the auto map link system. I will email Google maps and directions to my customers. The more important point John makes is that Google is building more and more attractive features into the tool bar. One can be on an IE browser and have easy access to free, advanced, Google features.

FoxFire has been down-loaded 25 million times. Google and Yahoo are working rapidly to strengthen services offered and MSFT has announced coming enhancements to IE for the first time in a while. Will Google and Yahoo co-operate with FoxFire to go head to head with MSFT? I can honestly imagine FoxFire-Google-Yahoo winning that battle. Do you suppose AOL would join the FoxFire side?

Yahoo is working closely with several phone company Yellow page listings. Yellow pages has been and is a very profitable business. Phone companies employ thousands of sales personnel and charge large fees for business listings. Yahoo has made it worthwhile for companies to customize their Yahoo postings. The actual Yellow page book may be obsolete in a five or ten years.

Price of key words up 43.7% yoy! EBAY is growing by leaps and bounds but is paying GOOG and YHOO big bucks for key word listings.

The tail of the long tail. The long distribution tail is a very important concept. The long tail is changing our world and making search engines very profitable. Google and Yahoo continue to report very high growth rates. As a holder of YHOO, GOOG, EBAY, AMZN and NFLX, I very much like the power of the long tail. I hope I can explain it to you.

Traditional businesses must market to the population that occupies the center of the bell curve. For example, the vast majority of all shoe stores cannot afford to stock unusually small sizes or unusually large sizes. The cost per pair to inventory slow selling shoes is many times the cost to inventory fast sellers. This is not a problem for shoe stores because the middle sizes account for the majority of shoes sold. The poor customer with small or big feet or a taste for unusual styles is the loser in the traditional supply system.

Now compare NFLX and BBI. Blockbuster can inventory only so many movies in each store. It can inventory all of the current popular movies but movies stay popular for only a few weeks. Older selections must be moved out before the next group of "popular" titles is stocked. The cost to inventory thousands of movies in each store is prohibitively high but relatively cheap in a central warehouse. Therefore, NFLX can offer thousands of movies on line that BBI cannot offer in its stores. BBI has been forced to cannibalize its store business by offering a similar mail service. BBI tries to make the unlimited service supportive of the store by granting two free in-store rentals with a monthly subscription. BBI does not want to admit it but if you want the most popular hit movie, you will be able to get it quickly only by picking it up at a store. Time will tell but recent numbers show that NFLX continues build market share.

Do you see the long tails of the movie bell curve? At any given time, there might be a few hundred movies that are very popular. These movies may enjoy a high turn rate and account for a significant percentage of the total rentals each month. However, the infrequent rentals of tens of thousands of "un-popular" adds up to a large number of rentals. This gives the online system a huge advantage. It gets paid the same price for low cost older movies. Consumers get the best of both worlds. They can order the most popular if they want but also sneak a peak at an oldie goldie. A good deal for all. (Any business that can cut its costs and give the benefit to the customer is going to grow its number of customers--think Google.)

TV networks have been experiencing longer distribution tails for years; the lengths of the tails are about to grow very long. The Yahoo example is a good one. Yahoo has teamed up with Showtime Networks to stream shows over the web. In days to come, millions of shows will be available over the internet. Many a consumer might occasionally watch a re-run of Howdy Doody, Hop-a-long Cassidy, the 1982 NCAA Basketball Championship game, or thousands of other shows and events. Consumers will be thrilled to have these shows available through a Yahoo or Google search and down-load. Name any popular or un-popular show or sporting event in the past 50 years and there are those who would happily pay a small viewing fee. Consumers with a GOOG or YHOO account could pay with the click of a mouse button.

Consumers actually strongly prefer fixed rate or flat rate subscription plans similar to the NFLX $17.95 per month fee for unlimited movies. Plans that include only the older shows would naturally cost relatively small fees. "Oldie goldies", toon networks, soaps and many other "channels" might be available. A sports fanatic might pay ESPN a few dollars per month to choose from hundreds of classic games available on any given month. ESPN would have zero production costs and would monetize old content. Recent bidding wars have shown the increasing value of content. Buffet seems to like AOL because of content.

Writers on the subject, talk about adding to our culture. I agree but my focus is on the freedom of choice. What a powerful concept. Freedom of choice has always been a powerful concept but choices have always been relatively limited. Peggy Noonan recently wrote a piece on blogging in the Wall Street Journal. She says that "Professional Journalist" are very upset because "un-professional bloggers" are taking away readers. Actually many "professionals" have used "un-professional words" to describe bloggers.

Too bad, the bell curve we are now talking about has very long tails. The number of folks willing to pay a buck for a traditional newspaper will drop relative to the number of people who will find free or low cost blogs that focus on their interest. The parents who have children who play for a local soccer team or who are stars in the local school play will enjoy reading about, hearing about and watching the news about these activities on a local blog.

Boaz was kind to let Ruth glean his fields of the left-over grain. Boaz left extra grain behind for Ruth but in truth it would never have made sense for him or any other land owner to gather every last head of grain. The good news is that the big media cannot begin to cover every story or to produce every good show.

Search technology is just beginning to effect our lives. Google and Yahoo are well in front of many other competitors including MSFT. MSFT is planning an all out assault to gain market share. Competition will be stiff. Over the next few years, billions of consumers will link-up in several ways with the market leaders. Each companies programs have a growing list of "sticky" features built-in. Once a consumer has a mail account, blog or adsense type account with a provider, he is not easily moved. Relationships established this year will pay off for years or decades. Google and Yahoo are growing relationships quickly. Their paths are different but the results are similar.

I understand that extrapolating current growth rates into the distant future would make YHOO and GOOG companies of impossible size. The market caps for these stocks are huge. GOOG has passed EBAY as the biggest internet company. The GOOG market value of $54 Billion is more than twice the General Motors value of $21 Billion!

MSFT is a 279 Billion Dollar company. Is it possible that Google will pass MSFT ten or fifteen years from now? A tall order but I believe it is possible. Can MSFT double in value in 10 years? I believe it can double in less than 10 years? For sake of argument, let us assume that MSFT will double its market value in 10 years and that Google will catch MFST in 10 years (as I recall the MSFT IPO was in 1985). The compounded annual growth needed would be 23%. A very large number for a very large company. If accomplished, the value of one share would be $2,045; a 10 bagger.

Traditional value investors would choke upon reading the above paragraph. They would call my numbers crazy speculation. They are! I happen to believe that GOOG is one in a million. It is already priced as such. Only a wild eyed crazy believer would buy this stock. YHOO is almost as big a speculation.

GREENSPAN'S CONUNDRUM?

Greenspan testified to congress that the extra low bond rates is a conundrum. I can help. The answer is simple.

In mid may, investment bankers bought 30 year bonds yielding 5.6%. The bankers borrowed the money at 1%. They earned a initial spread of 4.6%! A $1,000 bond purchased in May appreciated to $1,236 last week when yields hit the low of 4.2%; not bad! A gain of 23.6% in 9 months plus a nice spread all on borrowed money!

As with any mini-bubble, investors piled on near the end of the 9 month trend. Greenspan raised short rates 6 small steps but a decent spread remained through-out the move. Greenspan can never win in all eyes. In a similar environment in 1994, he was sharply criticized for raising .75% all at once. Never-the-less, by raising rates 6 consecutive months he did remove hyper inflation fears and he slowed an economy that was showing signs of over-heating. His increases, encouraged the bond move that naturally started with the 30 year, included the 10 year and by the last week or so even included the 5 year.

By last week, investment banks knew the market had over-shot just the same as it had at 5.6%. Bankers sold into the move. Economic numbers show that Greenspan's tightening still has not slowed the economy all that much. Industrial production is on a run and the latest unemployment claims are very low at 302,000.

Greenspan stayed on message during his testimony. He did not want to spook the market by saying. "Oops, I am still well be hind the curve and the market has finally figured it out". Early on, he did say that he expects rates to continue to move up toward equilibrium. He said he will know equilibrium when he sees it. Of course, equilibrium is a moving target. Both components, inflation and growth are influenced by many factors. Equilibrium will continue to be reached like a stopped clock, on a pendulum swing to the other side.

Have the markets confirmed the story I just told? Absolutely; it all makes perfectly good sense.

Look at the action the past several days.

1. If short rates are still too low, then the dollar should be weak. The dollar is falling again.
2. If short rates are too low, then gold should be rising. Gold turned a few days ago.
3. If short rates are too low, long rates should be moving up. Long-rates turned a few days ago.
4. If short rates are too low, interest sensitive stocks should be down. Even in the face of a Circuit City bid, retailers have pulled back. Banks are down. Utilities (take out the natural gas plays) are down.
5. If short rates are too low, economically sensitive stocks should be up. Take a look at energy, natural resources and even small caps for the past few days.
6. If short rates are too low, the yield curve should be steep. After flattening for months, the curve has steepened.
7. If short rates are expected to rise, stocks should struggle. Stocks have had a real nice three week run but took it on the chin today.

I will probably buy a gold stock or two later this morning. No one should chase every little swing but testing the old highs without breaking out would be a decent trade.

Haloscan commenting and trackback have been added to this blog.

RESIDENTIAL REAL ESTATE

Mike Taylor of taylortree.com, "My Old Merrill Pal" and I had a good discussion about residential real estate rentals the other day. My wife and I have earned our living by renting our families homes, condos and commercial properties for the past 19 years. I generally discourage folks from entering the business unless they are ready to pay attention to the market and to work very hard. I discourage folks from investing in rental property unless they have substantial reserves, 25% or more of total property values in liquid investments. Real estate is typically purchased on margin. The old saw about the stock market is to never meet a margin call. Sometimes in real estate, one must meet a "margin" call to realize long-term capital gains.

"My Old Merrill Pal" who has extensive experience as an investment broker, investment advisor and CPA, made the following comments:

"I have experienced a little rental real estate investment in my own family and
commercial is far easier and more costly to enter than residential. What is enticing about residential is that it does not appear to cost
much to enter, but boy you can pay a lot along the way.

In a pro forma for any real estate investment today, you should consider, at
the least, these three things.

1) Operating expenses are never as low as you would think. I rented a single family house to
someone and in the lease was the requirement for the tenant to maintain the yard. The tenant did not maintain the yard and I paid a company to do the job. The margins were too thin to cover. There were other unforeseen expenses.

2) Rents do not always increase. I had to lower the rent to get a better tenant.

3) Put in your calculation rising interest rates, taxes and other costs. If you get a bank to fix
your rate, you can forget about rising interest cost but other costs will surprise.

My father-in-law, who suffered serious losses in the Texas 80's real estate
debacle ( actually a melt-down) told me one axiom I will always
remember.

You make your money in real estate when you sign the contract to
buy.

Never purchase with assumed growth rates in values to make your money.
Jack made much of his gains when he signed good purchase contracts."

"Old Pal" nailed the problems and the correct way to make money in real estate. Investors need to include "unknown" costs and they need to shop for the best price at the best time. Most investors need to build liquid investments first. After all stocks are cheaper than bonds and bonds are cheaper than real estate.

With the dollar at low levels, US property is cheap relative to foreign property. Resort properties are very hot. Big money is being made by those who buy and "flip" quickly. I know of beach condos that sold for $320,000 14 months ago and for $510,000 recently. Should the dollar continue to fall, a speculative blow off will occur in real estate. During the 1980's similar cycle, home building peaked in the mid 80's but foreign buyers continued to push up prices for another two to two and a half years.

KISS--BUY STOCKS!

I started to make the title BUY SSS. I had second thoughts when I realized someone out there might mistake the title as a recommendation to buy Sovereign Self Storage. Actually SSS was to stand for Success of Social Security reform. Bush has shown that he will make the compromises necessary to pass a reform plan. Yesterday, he said he would even consider an increase in the payroll tax for those who are paying $90,000 or more per year. With this kind of backing from the President, it will only take a few democratic votes to pass reform. Deals will have to be made but success is a matter of time. When the market gets a small whiff of the smell of success, market momentum will take over.

Right now, social security funds are invested in low rate treasury bonds. After reform, a portion of these funds will be re-invested in stocks. For 4 years, Americans have been adverse to buying stocks. Six years ago, Americans were willing to buy stocks yielding 2.5% while bonds were paying 7%. Yes, some folks have purchased stocks after the bursting of the bubble but the net purchases have been zero or less. This situation has caused bonds to be over-priced and stocks to be under-priced. Markets always correct, revert to the mean or what ever you want to call it. The bottom line is that stocks must appreciate, bonds must depreciate or we have to have a recession in the months ahead. Our economy is strong, leaving the probability that stocks will appreciate and bonds will depreciate.

In the final title, I chose to include the word KISS. KISS is the short hand for Keep It Simple Stupid. This philosophy was developed by William Ockham. William was a 14th century Franciscan Monk. He found that the simple answer is usually the best answer. He summed up his philosophy with the words, "What can be done with fewer assumptions is done in vain with more."

Investors have the bad habit of trying too hard. They try to understand every detail of the market. Countless hours are spent studying complex topics such as the relative value of currencies. I frequently read articles by "experts" who make investment recommendations based on their perceived knowledge about relative currency values. More likely than not the rational is upside down and backwards. I suggest investors would do well to keep their investment philosophy and execution simple.

When stocks pay a higher earnings yield than the government pays on bonds, buy stocks. When the government pays more, buy bonds. In 2005, the average big stock will pay about 6%. The historical average is much higher than 6% but right now that is all you can get. Ten year government bonds currently pay 4.1%. The historical average is higher but right now all you can get is 4.1%. What little logic that I have says that 6% beats 4.1%.

KISS--BUY STOCKS!

SLING A SHOW

The following paragraph was cut from the Slingmedia.com web site.

The SlingboxTM Personal Broadcaster

The SlingboxTM Personal Broadcaster by Sling Media, Inc. is a breakthrough consumer electronics device that transforms today's television viewing experience. The SlingboxTM enables consumers to watch their TV programming from wherever they are by turning virtually any laptop or Internet-connected device into a personal TV. The SlingboxTM redirects, or "placeshifts," the TV signal from any cable box, satellite receiver, or personal video recorder to a viewers location and device of choice - whether in another room in the home or anywhere in the world with a high-speed Internet connection.

I keep writing about time and place shifting of TV shows because our world is about to change. Those that embrace the changes will enjoy the transformation and can even make some money in the process.

Texas Instruments (TXN) at a development conference today talked about teaming up with SlingMedia. The new box uses TXN DLP technology as well as Audio-Video technology supported by MSFT. I expect adoption rates to be relatively rapid as many folks already own devices such as computers, lap-top computers, phones, and video games that are connected to the internet.

Many big businesses are involved in making video portable. Motorola has been an aggressive player and has announced exciting new products. Nokia is also taking a leadership role. MSFT and TXN are two of the "old" companies that have been re-making themselves with sophisticated technology that is needed to make the paradigm possible.

Yahoo (YHOO) allows one to send directions from a YHOO map to a cell phone at the click of a button. I could have used this today. My daughter was looking for a UPS store and I found one quickly on a computer map but had to try to tell her directions. Many a business and a consumer will save a lot of time and expense when precise maps are part of cell phones.

Portable TV will be mostly a consumer product. It is coming soon to a phone near you. Watch what you want, when and where you want to watch!

OIL AND GAS PRICES NEAR PEAK!

Japan's economy is dependent on the price of oil. The high price of oil is giving Japan a bad case of gas. The Japan GDP is down the third month in a row--another recession.

Today, Greenspan was grilled because half of all US Bonds are now owned by foreigners. Greenspan basically said, so what! There is no reason for the treasury to sell bonds to anyone but the highest bidder.

Again, folks get worked up about "problems" that are really solutions. Japan's purchase of our bonds helps the US keep our interest rates low. Japan's recession is a sign that OPEC has to pump oil. OPEC does not win by putting killing the Japanese economy. Greenspan spoke about a world wide bond market conundrum. Japan is not the only economy in the world that has slowed.

Businesses are still more focused on cutting cost than on expanding. Free trade is the culprit here. A business does not want to expand only to hear that a competitor is expanding at low cost in a third world country.

The above is not a change of my position on energy. There is still no doubt that it will take time to increase production and to enhance conservation of energy. Prices have been above $40 for maybe a year or so now. T Boone Pickens (my nickname T-Bond is a metaphor) expects oil to hit $60 per barrel before it hits $40. I would not bet against him.

Today, which sectors continued the run up in prices, energy, oil services, gas and related industry. The trend is your friend. My oil servicing holdings continue to do well and are up around 18% so far this year.

Never-the-less, it is good in a sad way to see that a major oil importer like Japan is suffering at today's prices. The rise in oil prices is affecting the world economy. COP announced a new deal with Venezuela last week and other supplies are coming on line. Conservation measures are being pursued around the globe. Oil prices are high but record numbers of drills are drilling and pumps are pumping.

Oil prices are high but not enough to kill the world wide expansion. Oil and Gas prices will peak this year. Stock prices will be substantially higher by 2006 when new supplies begin to take oil prices down.