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Posted 2/6/2006
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Google has peaked, but the rally may go on
The disappointment over Google didnt hurt its competitors, which means the market may have a little more room to run.
By Bill Fleckenstein
Google's search for the upside failed last Wednesday, on the back of disappointing results the night before. That spelled disappointment, and shockingly so, for the many folks who believed they were backing a surefire winner.
To reprise my comments from my Jan. 9 column, "I don't know exactly what will make the stock go down. But I believe that lots of people who think they've done very well owning Google (GOOG, news, msgs) will wind up with losses, rather than gains (even if Google continues higher in the short run), just as happened to so many with temporary 'home runs' during the 1995-2000 stock bubble."
Google feels sting of over-$pending
As it turns out, what made Google tank was not just the increased tax rate (as so many dead fish insisted), but also that operating income, as a percentage of revenue, dropped from 33.5% to 29.7% sequentially. This indicates, as I suggested in my Jan. 20 daily column, that Google was, in fact, hurt by excess spending. Ergo, in the absence of an even wilder ramp in revenues, expenses hurt its bottom line.
Related news and commentary on MSN Money
Because I didn't feel strongly enough about the potential for Google to disappoint folks, I was unwilling to put up any money behind the idea. However, I could easily see the case that the top is in for Google as a stock and that it's in the early stages of a decline. I plan to approach it with that viewpoint, though I'm not sure when -- or if -- I will take any action.
On Wednesday, stock-market bulls shrugged off Google's stumble as company-specific -- though I feel very confident in stating categorically that had the news been good, it would have been deemed good for the whole galaxy.
And, I think there might be some information in that. If the bulls were able to contain Google's damage to just Google and not even hammer the other Internet stocks (which last Wednesday they really did not), then that may argue for a little more life in the rally. That, of course, runs contrary to my prior thought that a Google stumble might take the whole tape lower.
Some further thoughts that suggest to me the possibility of a rally: We are entering the corporate no-news period. In addition, disappointing macroeconomic data points, which ought to be negative for the tape and the economy, will be contorted into glad tidings by the bulls -- i.e., negative news will be spun as market-friendly, due to its impact on the Federal Reserve.
A run-amok money supply?
Speaking of which, it's a bit scary to think about what the environment might be like, from the standpoint of monetary growth, once the Fed actually stops tightening. Even when the Fed was supposedly tightening, the money supply was ratcheting up.
Of course, that's mostly because this Fed does not know how to tighten. It only knows how to change the cost of money. If the Fed sets the cost of money too low (albeit higher than before), it needs to print money in order to keep the interest rate it picked suppressed at the level it picked, which is sort of what is occurring.
This Fed is never going to act responsibly. Ultimately, it will be the foreigners selling our dollars and our bonds, or our own bond investors selling our bonds, that will finally get the Fed to stop printing money. (We haven't arrived at that moment just yet, though we will.)
Notes on Fed newbie from Carl Pellegrini
As for my thoughts on our newly crowned Fed Chairman Ben Bernanke, let me just share the like-minded comments of economist Carl Pellegrini, whose services I have taken for a long time:
Ben Bernanke
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"Ben is the origin of the deflation focus of several years back. His concern was not correct -- either in the perceived force of the causes, or the result realized in the marketplace. All we hear from Ben is a discussion of excess global-savings flows being responsible for the U.S. experiencing lower-than-expected long-term interest rates. (Yet,) M3 (a measure of the money supply) is up $497 billion in the last 26 weeks. Can the Fed fool most of the people most of the time? Yes. Can the new kid on the block play in the rough-and-tough street game when all he has done before is watch from the window of his academic house? We will see!"
My guess? Bernanke is in over his head. He'll be knocked to the ground by market "bullies," and they will take his lunch money. Easy Al left him in a maze of no escape.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein did not own or control shares of companies mentioned in this column.
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