The Stalwart

How to Watch Tonight's 'State Of The Union'

Nassim Taleb says that he likes to watch CNBC with the sound off, so that the talking heads, minus the talk, look as absurd as the nonsense they spout.  Those expecting something meaningful out of tonight's SOTU will probably be disappointed, so perhaps you should watch the speech the way Karen Kohn Bradley does (Baltimore Sun):

"I check [the speech] out with the sound off," says Bradley, a visiting professor of dance at the University of Maryland, College Park, who specializes in body-language analysis. "That way I can read the nonverbal meaning all the way through.

"The whole world's a dance," she says. "We're all dancing, all the time. We always reveal."

Sounds good, though I'll have to see if there's anything good on cable before I commit.

More:  Perhaps we'll hear, "The era of big oil is over".

Google Earnings

I never thought I'd see this headline from TheStreet.com--"Google Misses by a Mile"

1.56 (actual) vs. 1.74 (forecast)

More:  Something interesting, that I noticed, is that revenues from Google's own properties are growing faster than revenues from the sites that run their advertising (like this one).  This has got to be a positive for margins, since they don't have to share that revenue, but it's somewhat surprising.  One thing that I've thought may happen is that people eventually find what they're looking for, and over time, need to search less.  Eventually they get settled into some sights that they like and go to.  This hasn't happened yet.  I still find it strange that with the proliferation of adsense-driven business models, this slice of the pie isn't growing as fast.

More!: Down 78 Points right now!

Update: The Google bulls will undoubtedly point to the tax-rate, which came in at 41%, greater than the anticipated 30%.  This obviously made a big difference, but what does it mean?:

Our effective tax rate for the fourth quarter increased to 41.8% this quarter, and to 31.6% for the year, above our previously announced expectation of approximately 30% for the        year. Primarily because the proportion of total expenses allocated to our international operations was greater than we anticipated, more of our profits were taxed at a higher         domestic tax rate; this resulted in a greater effective tax rate compared to our expectations. We expect our effective tax rate for 2006 to be approximately 30%.

So domestic profits were a greater share of the pie than expected because foreign expenditure was higher than expected, which is a positive way of saying that foreign profits were lower than expected.  Is this just another way of saying that foreign revenues aren't sizzling as much as they'd hoped, or is this true investment spending that will fall as a percent of revenues next quarter?  We'll see.

Update 2:  What is it saying that at 6:09, Jim Cramer still hasn't mentioned Google, but is instead talking about his love of US manufacturing companies--about as different from Google as you could get?

Brain Training Videogame in Japan

Last year was, in a certain sense, a good one for the entertainment industries, as many pundits and studies came out arguing that--surprise!--watching TV could be good for you, since the storylines were complex, and video games could improve not only one's hand-eye coordination, but also your problem-solving skills.  Some of this may be true, but one also has to weigh the costs of watching TV and playing video games, against the increase in skills.  If your increased hand-eye coordinating is only used to play more videogames, then it doesn't mean a whole lot.  Of course, video games are fun, and we generally endorse them for that reason.

In Japan, the idea that video games can be good for you is being taken to surprising new levels.  In fact, the number #1, top-selling title for the handheld Nintendo DS is a game called Brain Training a game designed to do exactly as the title says (Cabel Sasser):

Brain Training is, basically, an application — one you just happen to play on a handheld videogame system. In this case, the system is Nintendo's DS — a quirky, two-screen-with-touchscreen handheld system that's technically creakier than Sony's PSP, but which has lived up to its intended purpose of generating innovative new styles of games for a new generation of gamers.

And what does Brain Training do? Well, you hold your Nintendo DS like a book (with left and right screens), and you basically use the touchscreen to undergo a wide variety of simple, cleanly-designed, interesting exercises intended to make you smarter. Or, at least, keep your brain sharp and fresh and delicious. At the end of your "fun", the game eventually calculates and reports your "mental age" — often with painful/comedic effect — and tracks your progress over the weeks and months of self-education. And that's about it.

It may sound painfully simple, but it's been unstoppable. From Dec 26th to January 1st, Brain Training 2 sold 414,556 copies. In one week. It has consistently been the number one videogame since its release, and — this is important to remember — it's not even a videogame. Has it driven hardware sales? In the same period, the Nintendo DS moved 390,181 units. That's more units sold than every other hardware system that week — combined. (Yes, that's two dramatic ItalicsFacts!)

Most importantly, though, Brain Training is doing what Nintendo said they would do but nobody really believed them on: opened gaming up to a whole new generation of players. Seeing grandmothers on the train holding their Nintendo DS like a book sends an instant signal — "brain training in progress".

The game's designer is a top brain researcher:

Dr. Kawashima, the creator of Brain Training, is leading authority in Japan on brain medicine. His research shows that:

- The brain becomes weaker every year, just as the body becomes weaker every year
- Effective training is a way to regain body strength
- The brain can also be trained, and can be rejuvenated
- The brain doesn't need difficult training: even easy work is effective, like reading a book out loud, simple calculations, etc.

Hooking humans up to some presumably expensive and freakish brain-scanning equipment, Dr. Kawashima did some interesting tests. When a brain is simply "thinking", presumably about chocolate chips and where cat hair goes, it generates this much activity. When a very difficult expression is being worked out. looks something like this. Not a lot going on, really.

On the other hand, when very simple calculations are performed quickly, the brain lights up like a drunk at a drunk convention. It also shows lots of activity when sentences are simply read aloud.

The great part is, for Nintendo, that now parents will buy kids a Nintendo DS, just to get them to play Brain Training.  Meanwhile, our youth are still playing Halo and Grand Theft Auto, giving the nattering class, who says"Our children are falling behind in everything", just one more thing to grouse about.

More: It's actually coming to the US!  Still I doubt that it will be as much of a hit; though it does have Sudoku in this version, so who knows.

Flu Vaccine

Want to order some flu vaccine, for next year?  It may already be too late.

They went on sale at 12:00 PM EST today, from the website, www.vaccineshoppe.com which at the moment is completely inaccessible.  Now you know what it's like being a teenager, dialing Ticketmaster to ducats the Arcade Fire show, only, their life actually depends on it.

A Google Preview

Well, today's the big day.  Hope you got your chips & salsa, chicken wings and beer.  It's Google earnings day.  The entire market may take its cue from Google, despite the fact that Google's earnings only reflect one company.  Actually, that's not true at all.  Google's earnings affect thousands of other companies, whose entire business model depends on turning Adsense into gold, though at the moment none of these are public.   Yes, Google's always been counted as a savior.  During the recession, they were the only company hiring in Silicon Valley, and the only one buying Segways from Dean Kamen.  Now they're going into China, risking their reputation, just to help the US reverse its trade deficit.  Wow, what selflessness.  (Update: And let's not forget mutual fund manager Bill Miller, whose Legg Mason Value Trust continued its S&P beating ways, only because of Google)

The market's turned nervous on Google lately, but if I had to make a prediction, I'd bet they come in pretty good.  It's hard to imagine that ad prices/clicks weren't through-the-roof in q4, though "through the roof" is already expected.

Here's Jeff Matthews with a preview:

Depending on the analyst talking, Wall Street expects a minimum of 22% sequential growth (more than most growth companies experience year-over-year) and as much as 30% sequential growth (way more than most growth companies experience year-over-year). “Pro-forma” earnings should be at least $1.75 a share—and probably closer to $2.00 to satisfy the hoards.

I have no idea what the numbers will look like when Google reports after the close, but we have some clues that add up to strong numbers—particularly the fast growth in eBay marketing costs (eBay is Google’s largest user) and the continued ramp-up in online marketing spend described on many conference calls in the last two weeks.

Indeed, if the Alexa.com numbers are to be believed, Google usage has continued to grow substantially—significantly outpacing Yahoo!

You can see this yourself: go to Alexa.com’s “Traffic Rankings” page, type in “google.com” and then type “yahoo.com” into the “Compare Sites” function. You will see the Google blue line crossing the Yahoo red line—at least for internet users utilizing the Alexa.com toolbar.

Whatever the outcome tonight, I doubt there is much of a short-term “play” in Google stock, because short-term option volatility has soared to absurd levels and will almost certainly collapse the minute the press release hits the tape.

I’d be willing only to bet that Google put buyers and Google call owners see little profit, unless Google management misses huge or beats very large.

We'll be back on it after the bell, if there's anything worth talking about.

Roach on the Handover Fallacy

Excellent piece from Morgan Stanley's Stephen Roach:

The capex handover is at the top of everyone’s list these days.  That’s especially the case with respect to the US economy.  There is a presumption that consumer fatigue is about to give way to support from the business sector. Awash in record cash flow and profitability, the wherewithal of Corporate America to spend on new plant, software, and equipment has never been greater.  And so, there is hope that the baton of economic leadership is likely to be passed from consumption to capex -- a seamless transition that could well lead to another upside surprise for US economic growth. Recently reported data on new orders for capital equipment -- with the core gauge of bookings for nondefense capital goods excluding aircraft up 3.5% m-o-m in December 2005 -- seem especially encouraging in that regard.

There is, however, a potentially serious flaw in this argument -- reverse causality. The macro models that work best in explaining business fixed investment treat the sector as a “derived demand,” with the need for capacity expansion judged against forecasts of future pressures on operating rates.  Those expectations are very much dependent on the likely path of end-market demand, or expected consumption growth.  To the extent that businesses fear consumer consolidation, capital-spending plans should remain cautious. That, in fact, was precisely the point made at our recent MacroVision conference -- that capex would be driven mainly by the product replacement cycle, as well as by some special needs in the energy and infrastructure areas.  By contrast, due largely to their inherent cyclicality, the backward-looking profitability and cash-flow models have not worked nearly as well in explaining prospective trends in business fixed investment.

We too have thought that the idea that corporate spending would magically pick up where the consumer was leaving off sounded more like wishful thinking than sound analysis.  Good to know we're not the only ones.

Beautiful Bubbles

Daniel Gross has an interesting piece up at Wired called 'In Praise of Bubbles", arguing that bubbles, though often ending painfully, almost always spur some type of innovations and economic progress:

Financial bubbles get a bum rap. People focus on the sob stories (think of the grandmothers who invested in Pets.com) and the tales of financial chicanery (think WorldCom). But bubbles - those sudden, excessive, and seemingly irrational investment stampedes - aren't all bad. Sure, they tend to follow a painful cycle of boom, bust, hand-wringing, and abject humiliation. But there's often another step at the end: innovation. Over the past 150 years, many bursting bubbles have paved the way for economic and cultural progress.

First of all, he's mainly talking about technological bubbles.  I don't think the Florida Real Estate Bubble, or the Tulip Bubble did much to improve the long-term health of their respective economies.  If anything, they probably hindered advance for some time, by souring people towards investment.  Other bubbles also have the consequence of inducing unfortunate regulation.

That being said, it's clear that the economy's ups and downs are not mere unfortunate side effects, as many make them to be, but crucial to the very nature of the economy as a dynamic system.  Consider anything else--with our great habitable climate here on earth, we get ravaging storms that would be unheard of on the moon.  A living being must face sickness many times.  An open internet has security and virus threats as part of its nature.  The idea of eliminating cycles, or even bubbles, would demonstrate as much hubris as trying to tame the weather.

Speaking of hubris, bubbles, and trying to tame them, Eddy Elfenbein found an old letter to the editor of the NY Times from a young Objectivist named Alan Greenspan (1957):

To the Editor:

Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Mr. Hicks suspiciously wonders "about a person who sustains such a mood through the writing of 1,168 pages and some fourteen years of work." This reader wonders about a person who finds unrelenting justice personally disturbing.

Alan Greenspan, NY

Sic transit, oh wise one.

Doctors Vs. Quick Clinics

We've voiced our enthusiasm for quick in-and-out, retail-format clinics such as Minuteclinic before.  Here's Medpundit, a doctor, voicing his concerns:

My local grocery store is opening a QuickClinic. For $39 they'll take care of colds, flu, minor injuries, pink eye, and the like. They'll also take out your sutures and clean your ears. They'll screen for diabetes, anemia, and cholesterol, among other things. And they'll give you your immunizations, too, but their brochure doesn't say how much those cost.

I know my office can't compete with $39 visits. I'd go bankrupt. But then, I'm not just a walk-in clinic. I'm expected to do a lot more than just "treat and street," and rightly so. I know quite a few doctors who are more than a little upset about the competition. There's no sense fighting it, though. They exist because there's a perceived demand for them. They're also a natural outgrowth of the influenza vaccine clinics that have been held these past several years in drug stores and grocery stores throughout the country.

It should be interesting to see how they pan out, though. They're still more expensive than most people's co-pays. And I'm not entirely convinced that the volume of uninsured patients (or HSA plans, for that matter) is high enough to sustain a practice based solely on cash payment. I know one doctor who tried it here, and ended up closing his practice after a year. (He had other personal issues, though, so he might not be a good example.) Then, too, these aren't standard practices. They're subsidized by the retailers who think of them as a means to bring customers to their store (and pharmacy). They're like an interactive advertisement.

First of all, given the spiraling cost of care, it'd be great if retail stores started subsidizing this stuff to get people in the door, though I don't think that's what's going on.  As for the $39 fee being more expensive than most people's co-pay, that may be true, but given the hassle and headache of going through insurance (when people even have it), a few dollars more seems like a good idea.

If these new kind of clinics do start making a dent in doctors' receipts, I see no other scenario, than for the AMA to start lobbying hard against them, saying they pose various risks to patient's health.  Doctors enjoy unusual barriers to entry to keep their fees high, and this undermines that in many of the most common cases.

Is Cisco Back up to Old Tricks?

Now that Cisco has made it clear that their strategy is to target the consumer market, both explicitly, and implicitly (with a $6.9 billion buyout of Scientific-Atlanta), the question naturally turns to, who will Cisco buyout next?  After all, this is Cisco we're talking about, the kind of acquisitions, a company whose only core competency, arguably, is integrating other companies into it.  If the networking market ever disappears, they could certainly start a consulting firm advising other companies in this area

Yesterday, Marguerite Reardon, from CNET, speculating that Tivo may be the next target:

The question now is, who's next? Will Cisco take a hard look at troubled but well-known TiVo, the maker of digital video recorders? What about Nintendo, maker of video game consoles? Or what about Sling Media, a start-up with technology that lets people watch cable television on their laptops or mobile devices with a broadband connection?

Though Cisco executives certainly won't say who they're looking to buy, there are some hints as to which consumer electronics companies they're considering for partnerships.

According to a source familiar with Cisco and TiVo, there's a "potential for an interesting partnership" to emerge between the two companies. TiVo, the source said, has held discussions with many potential partners.

There's no indication that Cisco is looking to buy TiVo, and details regarding a potential partnership are scant. But Cisco's recent acquisitions do suggest how serious the company is about becoming a major presence in the living room, and TiVo carries weight as a well-known consumer DVR brand. At the same time, Cisco could help TiVo regain the distribution clout it lost when satellite TV provider DirecTV said it was walking away from a longtime partnership with TiVo.

Representatives from both Cisco and TiVo said they would not comment on rumors.

It's difficult to see, from our perspective, how any value is created in melding Linksys, and Scientific-Atlanta and Tivo, than if these three remained standalone brands.  Unlike in their networking glory days, when they could buy up a small upstart, simply for a piece of a technology (like some revolutionary optical switch), and then scale it up to sell it as part of their package, these kind of consumer electronics products can't easily be scaled up.  Furthermore, having the Cisco backing does relatively little for these companies with well established brands.  Most importantly, consumer electronics is hot hot hot right now.  Slingmedia, mentioned in the article, just closed a round for $46 million in venture capital funding.  Why should we assume that by entering a hot market, that everybody knows is hot, that is very well capitalized, Cisco can find a way to break out?  We agree, with this author however, that knowing this company, they will certainly try.

Stock Market Giffen Goods

In the most recent Economist there was an article about how trading in the US markets is becoming increasingly passive, i.e. indexed, with the number of stock pickers declining. Since Giffen Goods, or those whose demand increases with their price, have always intrigued us, it occured to us just today that Index investing actually turns stocks into something similar to Giffen good.

This is because when you an index, you buy portions of each listed company in proportion to its market value, better known as price. Thus the higher priced the company, the more you buy. If a company's price rises further, and you index more money, you then you allocate even more of your money to this company. So while technically you don't buy a higher number of the company's shares if the price rises, you allocate more of your spending toward it.

We understand that this doesn't fit perfectly into the realm of Giffen Goods since quantity demanded should technically increase with price, but it seems pretty close. As new money comes into an index fund, it will allocate more and more to the stocks which have become more expensive nominally.

Momentum investing could also be see as falling prey to a Giffen Good. The higher a price goes, the more you buy... there are probably many more examples, please feel free to add any as a comment.