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A BEAR MARKET IN INTEGRITY

This week, Barron’s published a bearish cover story about Google (GOOG), which was a fairly innocuous piece. It highlighted Google as a company similar to most others in that they had formidable seasoned competition such as Microsoft and Yahoo, and a difficult road ahead. Such a competitive environment can be considered “business as usual” for all companies, including Google. The next day, the Wall Street Journal published an article highlighting the fact that about 19% of Google’s quarterly earnings came from interest income on cash which was mostly raised in their most recent secondary stock offering. A sharp gumshoe could have found this out by reading their SEC filings; but the lack of clarity in the quarterly reporting press releases and TV coverage typifies the mood and low level of integrity that now exists on Wall Street and within many corporate managements. Their strategy is to just tell the public what they must be told with no regard for clarity and color – just release the minimum allowed by the law and always promote the positive while remaining silent on the negative. (Sound familiar?) If that strategy paints a deceptive picture of growth and prosperity, so be it. Such is the best strategy for promoting the stock price while corporate insiders sell out to performance-chasing institutions that are playing with their customers' money. (See Google Insider Selling.)

This is the prevailing culture on Wall Street which is designed to deceive the public and promote high stock market valuations for as long as possible. The strategy is obvious when examining the extremely bullish opinions of Wall Street analysts with regard to speculative Google. Forty (40) analysts cover Google, and 29 rate it a “strong buy,” or “buy.” Only one (1) analyst rates it a “sell” and no (zero) analysts rate Google a “strong sell.” The preponderance of analyst opinion is actually more positive this month than it was last. The mean price target of this stock is $476 per share which would give Google a market capitalization of about $140 billion, equal to the market cap of IBM and significantly greater than the next two largest internet companies and competitors – Yahoo and EBay, combined. In spite of this obvious disconnect between valuation and business realities, only one analyst - AmTech Research - has the integrity to make the obvious fundamental recommendation of “sell.” When this game ends, and it most certainly will end, it will end badly. And while according to the technical charts, there are few if any, indications that the game will end soon, it would be foolhardy to believe that a sudden event could not find many momentum players, technicians, and other speculators off guard and on the wrong side of a trade that crashes.

What is difficult to grasp (still), is that we are less than six years removed from the days of Henry Blodget, and Jack Grubman. Their egregious actions regarding conflicting interests between investment bankers, corporate managements, clients, and the public were punished; but this did nothing to reverse the integrity bear market on Wall Street. While the specifics of their actions have been adjusted (the minimum to comply with the law), the spirit of their actions remains exactly where it was in the late 1990’s. In fact, these cases may have actually made the situation worse by defining clearer boundaries to what is within the law and what is not.

Even though it appeared that the public had a sense of outrage following WorldCom, Enron, Late Trading, and many fraudulent technology companies, this outrage appears to have been quickly lost in the apparent bull market. Even new regulations pertaining to options expensing have been side-stepped in spirit. The Wall Street Journal reports that several of the most prominent technology companies -- including Intel, Dell, Google, and Cisco Systems -- are currently reporting two sets of earnings, with and without options. Stock analysts' forecasts generally ignore options costs.

Call it a Bull Market. But there’s a bear market in integrity.

Today’s Market

All of the major indices were up strongly today, with the Nasdaq achieving an up day on significantly higher volume than yesterday. For the short term, the bulls get the benefit of the doubt. A notable participant was Google, which was up over 7% today. Below is a one-year daily line chart, showing how the 200-day moving average provided support. In addition it was at that level, about $340/share, where Google reached its head-and-shoulders measurement target, before bouncing. The blue arrows point to $400 a share that was support on three occasions within the last quarter, and is now potential resistance.

Another key technical level will be at the $376 level where a “buy” signal would be generated from a point-and-figure perspective. Unless that happens, the effective pattern is the tall descending triple bottom breakdown which suggests a price target of $316 a share. Today’s action was painful even for the (theoretical) bears who may have hedged a short in Google with an equal dollar amount in EBay. But over the last few weeks, such a theoretical position is still in the black, even after today’s 7% rally in Google. Today’s Google action came on over two times an average day’s. It closed on its daily high, and this suggests that there is likely to be more upside to come in the short term. And one would think that after CNBC finishes with their daily coverage of curling, Google will get a Cramer upgrade too. And who am I to fight the tape or those who influence it?

But that said, when the game ends it is likely to end fast and severe to those who are applying market logic to their “investment” decisions. And I am entirely ready to appear stupid and foolish until this comes to pass. But it is important to maintain discipline in spite of what is going on in the financial markets, because even though there is a bear market in integrity, it is important to not lose money because the crowd disagrees. Better yet, there are opportunities to make money, and this must be managed with a logical and business-like approach. Intelligent money management is extremely important in these markets.

The action in gold and precious metals was quite positive today, as indicated by the XAU and HUI, up 2.3 and 2.4% respectively.

There is important action going on in the bond market as bonds are nearing a key technical level. Let’s look at a long-term weekly chart of the 10-year note price, and the 14-week RSI momentum indicator. There is a descending triangle, and the 10-year note price is right at the important support level of 107.5. For what its worth (a warning so far), there is a divergence of weekly momentum showing higher lows, each time the support line is approached. I’m thinking that to the extent that it can be controlled, the bond market will be saved one more time. This will improve upon the public perception that a housing bubble is about to burst.

However that the statistics relating to housing starts showed a multi-decade high, something is afoot and that something may be a rush for one more roll in the hay before the housing market dries up. But if this story is wrong and the support line in bond prices is broken, that would hurt the housing market and stock market (eventually). But as you may already know, I’m no genius. The Fed and the Chinese and other Asian loaners of money can also read a chart and they also know the implications of a slowing and injured US consumer. They plan to injure the US consumer, but the only question is whether they are ready to do it at this time. If the continuation of the US consumer debt game will benefit them now, we’ll get a bounce in bond prices.

If not, we will see the horizontal blue line broken. In terms of a trade, the risk to reward ratio probably favors bond bulls in the short term.

Have a great evening.

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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