Just when you thought that technology had advanced the human conversation as far as it could possibly go, the leaders of the esteemed CNBC network give us their newest innovation.  First called out as the Octobox by Jon Stewart, he brought the new and improved Decabox to our attention this evening.  Having seen this concoction in action, I am at a complete loss as to how this “feature” made it through any semblance of a design review.  Two or three talking heads, coupled with the host, is generally sufficient to guarantee a cacophony bordering on the unintelligible.  The mere suggestion that the addition of heads four or five should have been an offense worthy of dismissal, but 10 heads.  Really?  10?  Really?  I now refer you to Garrity’s Law:

The intellect of individuals in a group decreases exponentially as the number of individuals in the group increases.

This holds true for a meeting of any kind, especially one where television cameras and a national audience are involved.  Yeeessh…

You know, the funny thing about rallies in the market these days, especially the largest one day gain by a country mile, is that it’s hard to know what’s driving the move.  There’s an old saying about the markets, and it relates to dead cats.  I am in no way equipped to make market prognostications given the current turmoil, but it’s hard to look at the advances today and not think that there is something along the lines of a dead cat bounce happening.

The funny thing (depending on your point of view) is that the darn things bounce pretty high when they have had as far a fall as the Dow has seen in the last month.  Recall, we’ve seen 26% decline in the last month alone.  Is now the time to stand up and cheer about the policies working, or a time to sit back and mull over the realities of the market positioning and where things are going?  I’m not sure which it is, but I would really hate for a bunch of people to start congratulating themselves with high-fives and back slaps around the notion that “the plan is working.”  We simply do have enough data at this point to call it.

From Techcrunch: It’s Going To Be A Grinch Christmas: Slowdown Forecast For Online Holiday Sales

There’s been discussion about consumers spending less this winter shopping season, and how the credit crisis is the culprit.  I would like to introduce a thought here, and one that extends a little further down the rabbit hole.  Consider for a moment that demand destruction has in fact occurred.  Consumers are scared and are holding back purchases - everyone understands that concept.  However, the new construct I would like to introduce is the notion that demand destruction will not exceed supply destruction.

What did that mean exactly?  Most retailers, specifically consumer focused retailers, tend to turn profitable around Thanksgiving.  That’s one of the reasons why the day after Thanksgiving is called Black Friday.  This is directly tied to demand coming in the front door (actual or virtual) of the business.  It’s possible that the exogeneous factor of the credit crisis may delay Black Friday, and in fact keep the year in the red.  However, if one also considers the reduced ability to borrow, things get even more challenging for the retailers to turn profitable.

Retailers need to stock up inventory ahead of their selling season.  Inventory is taken on credit terms.  Whether it’s a “net X day” payable, with the ability to return the goods if unsold, or borrowing against the value of the inventory is irrelevant.  Someone, somewhere, needs to borrow funds to make the stuff.  If the ability to borrow is impacted, whether by higher interest rates (pushing down margins and borrowing power), or borrowing is negated all together, the retailer themselves will be harmed because they will have reduced inventories to sell.  With reduced inventories, retailers will be challenged to hit their “black” date.

This puzzle becomes ever more challenging when you consider psychological factors on pricing.  To wit, if retailers fear reduced demand, they may start jumping the gun and offering sales, at reduced prices (and thus reduced margins), to spur demand.  This will have the perverse effect of pushing out even furhter the date at which they would turn black.  An even bleaker picture could envision inventories running out, and credit not being there to keep up with even a reduced demand, at reduced margins.

I can say this - I would not want to be long any retailers for the next two quarters.

From Politico.com:

Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages.

I will, for the most part, stay away from political issues on this blog.  No need to incesnse half my audience, one way or the other.  That said, I find this demonstration of our government at work too difficult to let go.

That’s my emphasis above.  Somehow the bill managed to go from a pamphlet to a novel.  Never mind the fact that the cost of this thing has swelled over 20% from the original ask.  If you have an opinion one way or the other on this thing, I suggest you let your congress  person and/or senator know what you think.  You don’t get to complain if you don’t vote, whether by way of your actual vote in November, or your proverbial vote with a phone call to your representatives.

Suspend your imagination for a moment and imagine that Treasure Secretary Paulson is a one time successful entrepreneur who is coming to a VC looking to raise money for his next venture.  Perhaps that conversation would go something like this:

Paulson: So, I’m here to raise $700 billion dollars for my new venture.  I see a unique opportunity in the marketplace of which I want to take advantage.  I have built out the business plan, and am here to raise some money.

VC: OK.  So what’s the idea?

Paulson: I want to invest in some mortgages.

VC: Interesting.  And how do you plan to make money?

Paulson: Didn’t I cover this already?  I have a business plan.

VC: But we haven’t seen the business plan.

Read the rest of this entry »

It should go without saying that the current financial crisis is going to loom large over the business plans of young and new software companies.  In fact, there is an article out that suggests that the removal of Lehman and Merrill from the buyer pool has reduced the IT budget of the financial services sector by 6%.  Let’s let that marinate for a moment.

It’s one thing to have a cyclical contraction in spending.  It’s another thing entirely to compound that problem with demand destruction.  Worse still, the demand destruction is not due to a symptomatic pricing issue, but rather the abject removal of key buyers from the market.

Even more complicating is the difficulties in financing businesses operations.  I’m not talking about raising venture money, but good old commercial credit.  Many companies use debt for expansion, and many times that expansion includes computer systems.  Companies are now having their hands forced to not just pay lip service to lowering their CapEx associated with IT, and moving it to OpEx.  They have no CapEx dollars left.  They need (must) find a way to fund software and services.  Enter SaaS business models, and the Cloud more broadly.  I would expect a knee jerk and rapid migration of buyers in the market to seek out SaaS solutions for line of business applications, and a reduction in spending on CapEx associated with IT.

Here’s the sad irony of the current financial debacle.  IT is what got us here.  IT has been wielded as an offensive asset for many of these firms.  The calculations required to price and model out many of the derivative products they were buying in insane.  I almost took a job at Merrill working on their Fixed Income Derivatives desk back in 1995.  Scary.  Here’s what’s more scary: my Fixed Income homework from my FNC235 class (*there’s a nod to all Wharton peeps who ever had Prof. Basak) is what got me the job.  The MD actually said “hire this guy.  I can’t make heads or tails of his homework and he got them all right.”

People worry about Google being the current incarnation of Skynet, but I would look more to the systems which have been handed the ability to make trades for humans based on human created models which very few people understand, much less can maintain in such manner as to adapt to what are being called 10 sigma events.

I was in NYC when 9/11 happened.  I remember a quote that still hangs with me: that we suffered a failure of imagination in our ability to stop the terrorist attacks.  There’s a similar sentiment to be had here.  The failure of imagination in the building of these models has led to many models essentially acting (reacting?) the same way, causing herd like behavior in a flight to or from assets.  The combination of programmed trading, naked shorts and no uptick rule has led to some serious unintended consequences.

From the Buffett special on CNBC tonight, in reference to whether or not hedge funds can justify their fees:

But in Wall Street you have this progression from the innovators to the imitators to the swarming incompetents. And what happens is that the results achieved by the innovators enable the product to be sold by a lot of people simply because the record of a few people was good. So the idea that billions–well, trillions of dollars can be managed to get above average results while charging fees that are way higher than normal just defies the–just defies the logic. So, in aggregate, people are going to be disappointed with the results you get from hedge funds.”

Innovators –> Imitators –> Swarming Incompetents.  I love that.  The same could be said about the Web2.0 trend, but I’m not here to talk about that.  Not now anyway.

I’ve been spending time time thinking about all the flap regarding the surprising decline in Google paid clicks.  (full disclosure - I am long GOOG in the mid 300s)  What struck me about the discussion around GOOG has been how the sagging economy is going to impact the company and it’s fortunes in a meaningful and negative way.  We’re off close to 250 points (35%) in a matter of weeks.

In order for this kind of analysis to make any sense, I would first want to understand how, in a broad sense, the categories of words that are the highest earners, in an absolute dollar sense, are impacted by this coming recession.  The discussion of whether or not we are in a recession (we are not) and whether or not we are headed into one (could be a self fulfilling prophecy) will be left for another time.  For now, what I want to talk about are mortgages.

Yes, mortgages.  I started by playing around with a simple idea - what is going on with the cost of the “mortgage” keyword, and what is going on with the traffic?  I haven’t figured out how to find the trend line for the cost of a keyword, but I can tell you that the average CPC for positions 1-3 is $5.73 - $8.60, for a max of 28,625 projected clicks.  You can get positions 4-6 for considerably cheaper: $0.55 - $0.83 worth a max of 1,894 projected clicks.  To be clear, that’s a difference of daily ad spend of $244,890 and $1,580.  I wish I knew what it cost to get in positions 1-3 in late December.

Now, things get a little bit more interesting when you use the Google Trends tool, which allows you to see how search terms have performed over a given period of time.  I started with the “mortgage” keyword because I knew it to be one of the more expensive, and one of the more clicked on from a paid ad perspective.  Take a look at that chart on the right.  Looks like searches have actually gone up over the last few months.  Now, one could argue that these are all desperate people looking to get out of a bad loan.  Possible.  One could further argue that there is no one willing to lend to these people.  Also possible.  Regardless of that truth, someone still paying for those clicks.  

If you look at the chart at the left, you can see that the cities that have well documented troubles with subprime are well represented here.  So the question remains, is GOOG’s business in trouble, or will there be some subset of words that actually drive more income for the company?  We all know that when financial troubles set in, people go looking for the get rich quick schemes and other magic pills.  Think of all the Ebay Power Seller guides that will get sold to people following the Dave Ramsey model of getting out of debt (note: I listen to Dave every day, and his advice is pretty solid, but he does like people to sell their stuff).

I wish I had access to a little more data to further explore this concept.  I throw this post out there in the hopes that someone smarter than myself, or with access to more information, takes a deeper look at this idea.  Bottom line, I am actually holding out on buying more GOOG because I don’t think we have bottomed.  If it touches 400, I am in, and backing up the truck.