Oh, Google (GOOG)

It is funny, I was looking at some of the top performing mutual funds for 2007 and reviewing their top holdings - most were chock full of Google (GOOG) and Apple (AAPL) in their top 5 holdings. And judging by their year to date performance in 2008, I assume they made no adjustments since Jan 1, 2008 since many of these funds are down nearly 20% for the year, on the backs of these 2 names along with a few others. Lack of adaptation - which in my book is deadly.

While I've held both these names, Google has never been more than a 1-1.5% stake and Apple was actually the name I liked better; however when the technical stock action breaks down I act relatively heartless (don't get attached to any stock), and began reducing exposure. I am a big believer in a very uneven playing field on Wall Street - those with connections get information first no matter what the SEC assures us... and this is reflected in the stocks with deteriorating price action. So once a stock breaks key technical levels, I try to cut back exposure - no questions asked because it means someone, somewhere has information I don't. Period. Does it work 100% of the time? No. Nothing does. But it works a vast majority of the time, and on the Street that is a huge advantage.

I've been watching these 2 names very closely, as without them I just don't see any great rallies in the stock market that are meaningful ... and on each Kool Aid rally these stocks barely do anything. Which makes me not want to add to them, even at these "value" levels.

Specific to Google (GOOG) I wrote back in August [August 30: Google (GOOG) Can't Get any Traction - is this Why?] I was worried about the potential for this stock to finally suffer in a US recession - people called it recession proof at the time, but I found it hard to believe that anything reliant on advertising is recession proof.

financial advertisers account for more than a third of all web advertising, and as the plunging share prices of investment banks clearly demonstrate, the mortgage crisis is affecting a lot more than the mortgage sector.

And online revenue doesn't have to collapse the way it did in 2000 for online companies to get hurt and Internet stocks to get crushed. It just has to experience a normal advertising recession.

Very interesting points and they have some serious merit in my book. You don't notice all the ads because at some point you just begin ignoring them as white noise but based on how many refinance offers I get in the mail each week, plus all this advertising on the web that is EVERYWHERE for getting a mortgage or refinancing.... this has to be pulled back.

Now today's news is not about financial advertisers pulling back but simply a dramatic drop in click thrus. Personally I am immune to internet advertising - I click on no ads at all; it is all white noise to me. But I guess many of you do click and that keeps the advertising world happy. But as Americans get poorer, they are going to be forced to consume less, which means less pull into clicking on those ads for those "must have" shoes, Coach (COH) bag, that new book, that new this, that new that. People have to pay for things like food and gas after all.

This is yet another of countless examples of why the stock market is so difficult. You can be intellectually correct, but if the herd on Wall Street ignores reality you can be out of money by the time your thesis proves correct. So let's say someone thought Google would slow down due to recession in August - and shorted the stock; well after the big rally in teflon tech stocks (the "4 horsemen") through Dec 31, 2007... they'd be much more poor, and unable to get much of the benefit of the crash Google has been going through since. Even though they were right intellectually. So not only do you need to be correct in THEORY, you need to time it correctly. Very difficult. This is why it is not easy being a short - you need to fight Kool Aid. Another parallel is the current issue with inflation - the Street is laughing it off and going with the Kool Aid thought that by 2nd half 2008 it will be fine and Fed cuts fix everything. When in fact it is going to be corrosive to a CONSUMER LED economy. But people don't get that now, nor will they believe it. So they trust in 2008 estimates for all these consumer based companies. And they will be proven wrong later in the year. But between now and then, just like with Google and a host of other examples, we are subject to Kool Aid love and rallies... inflation will "take care of itself" and the "consumer will be roaring by 2nd half 2008".

I still own Google (GOOG) but it is a minor position, around 0.5% of the portfolio. I was actually debating mentally whether to cut it cold turkey based on its action the past few days (no rally when the rest of the market was bouncing on bond insurerer Kool Aid), but at this point the stock is now at long term support levels $440-$450, so I'll just sit on what is left. I really don't have any urge to add more here even at this "great discount". I did mentioned a Google miss as one of my 13 Outlier Predictions for 2008, which already proved true [Jan 31: Google (GOOG) Misses], and today's news reinforces this theme - proving once again I need to listen to myself more, even though the sirens of the Kool Aid bunch constantly whisper sweet nothings about how great everything is...

Google is finally hit by an earnings miss by Q3 2008. It won't be a major miss, but enough to rock psychology. Advertising slowdown, led by US recession... err not a recession but a "slowdown" (its a political year folks), finally hits Google, despite secular growth. Google will be seen as human and a company that is not immune to the business cycle, driving the stock down.

Long Google in fund; no personal position