Fact: we continue to spend far more than we take in revenue.
Fact: if this was a private individual, eventually people would stop supplying them with credit.
Fact: Giving warring political factions, unable to make sacrifices that would affect their chances of re-election, but being fully willing to ask others to do such, how much is the US Legislative Branch really committed to cut spending.
Prime Example: Ethanol subsidies-- It takes as much energy input to produce corn ethanol as you get out of it, thus turning corn into fuel merely takes food off the world's table, creating higher commodity prices, while having no effect on the price of oil, and money out of taxpayers' hands ... A bill to remove ethanol subsidies passed the house, but didn't pass in the Senate because of some two faced explantions by both Republican's and Democrats that, "now is not the time to make America less energy independent." Then they turn around and vote against money for real energy research, saying "leave it to the private market to develop that," while the Chinese continue to zooooom ahead in the field. What a joke.
Rex Tillerson, CEO of Exxon Mobil, calls corn ethanol, "moonshine," and I have to agree with him. The same does not apply to Brazalian Sugar Cane ethanol which produces more energy than is used to produce it.
Scenario 1: (worst case) Now let's say John Boehner can't control his Tea Party Children, and somehow the US Defaults. Psychologically, this will be a dagger to the heart of investors and stocks will plunge- 20-35% is certainly possible, maybe more, who knows. The likelyhood of this, granted is low, but at this point not out of the question.
Scenario 2: (best case and most likely) Congress will make the oh so hard choice of delaying the difficult decisions and voting to raise the debt cap to a number that will be reached sometime in 2013. The stock market will rally a couple percent, and smiles will abound on Wall Street, at least for a few moments.
Scenario 3: (US avoids default, but ... (certainly a possibility) ) But wait. Let's put ourselves in the position of China. Your friend, Mr. America, who used to really wealthy, a leader, who you willingly lent money to, suddenly underwent a crisis where he said, "Dude, I might not be able to pay you anything man." At the last second he gets bailed out, and then goes right on spending money faster than you are able to supply it. How much more are you willing to lend him? Especially, when your friend Moody's, who's a supposed expert on who is a good and bad risk, says, "Ahem, I'm not lending Mr. America anymore money. At least not at the 3% interest he's paying."
So, you, China, says, give me 4%, no wait, 5% ... Mr. America, unless he wants to default, because his idiot brain is under the influence of politics, and can't stop spending, but also won't raise taxes, has to accept those terms.
What does that mean for Main Street America? Higher interest rates, on everything. Credit cards, adjustable rate mortgages, etc. Suddenly Main Street's spending drops off completely as they can't rely on others to bail them out, cannot print money; manufacturers produce less, people are laid off, recession (at minimum) As it is right now, interest rates are at all time lows. As interest rates rise, the dividend yields offerred by companies looks less attractive, and stocks dip 10-20% .
The other possibility is the Fed continues to print money (QE3) and we undergo 1970's like inflation along with a recession, whiping out the value of savings accounts.
Additionally, stocks are near multi-year highs. There are some reasons for this, mainly out of the tech sector (Google, Apple, Amazon, and even Microsoft continue to make awesome products that increase the quality of life, which is TRULY what creates wealth and drives the market upwards) but aside of these, and other leading companies, I have to say, the market, without even including the sorry state of the US Government, is slightly overvalued.
Given the risk of being in the market, the potentially huge downside versus what I perceive to be limited updside, I have to state that at minimum you should protect yourself with stop losses, and start raising cash. Stay out of the market for now! It just makes sense.
Addendum: i have received afew emails from people who ask, "Rich, if the scenario that the US doesn't default is most likely, and the market jumos a couple percent, wouldn't we want to be in the market??" Response: No, because the downside outweighs the upside. Small upside, versus big potential downside. If this was a casino, even if you get dealt blackjack, you're still on the sucker end of the table. (in my opinion)
If you have thoughts, feel free to comment below, or email me. Please feel free to donate if I give something of value, +1 the blog when logged into your gooogle account, forward this, or subscribe/follow!
WHY BUY GOOGLE (ticker symbol- GOOG)-- by Rich Birecki
Okay, it has been a long time since I have made a financial pick. last year I purchased Google (GOOG) at 450 for a client's account I am managing, and sold it 597. I will go over the reasons I bought it then and am recommending it now.
The original why: Simply put, my life was becoming Googlefied. Having purchased an Android phone, I found it Vastly superior to the Palm phone that it replaced. To download email in real time on it, I set-up a gmail account which I found to be, infinitelysuperior to yahoo. I likely would not have set-up gmail had I not purchased the smart-phone. To search the internet on my phone, I merely speak into it, it decodes the sound waves, and gives me very reliable results via the Google search engine. My schedule, done by Google. Heck, i am even writing this blog powered by google blogger, with google ads around it, so when you click one after you read this, Google and my company split a few cents.
Google also has a huge moat around their castle. This is a term coined by Warren Buffet, meaning that a business would be hard to overtake/ attack/ because they have a competitive advantage that is hard overcome. This may be owning a top notch brand name like Coca-Cola, really high barriers to entry, whether they be government protected monopolies that still take place in some countries, or huge amounts of capital needed to get into the business, (think offshore oil drilling.) Facebook's moat is the social network's the ubiquity of use. How are you going to get facebook users to your competing site when all their friends are on facebook?
Google's moat is the name brand recognition of its search engine, the general goodwill it has, and it's technology. You really aren't going to get much better search results than Google, especially as they continue to refine their algorithims as all good companies do. Yes, Bing is pretty good, and gaining some market share, but Google will remain at the top of the heap.
Simply put, pending a valuation inspection, I like to own stock in companies whose products I use and like. Google has a tremendous amount of goodwill with me.
WHY BUY GOOGLE NOW?
1. It is cheap. It has dropped down to only slightly above the level I originally purchased it for my client. Google's earnings have been very good, and expanding, so I never thought that I would be able to purchase it for the same price almost a year later. They are trading at 18x current earnings.
2. their search engine keeps getting better. Results are better, with less spam than before, and more indexed pages. Way more than Bing, and with better results. (Though Bing is getting better as I said as well)
3. depressed earnings. Google could show Wall Street much higher earnings, except they invest sooo much into Reasearch and Development. Current CEO, and Google founder, actually upped R + D last quarter by a good margin. Many CEO's look for short term fixes, and become momentary heroes on Wall Street by increasing the next few quarters earnings, at the expense of slashing the innovative parts of companies that fuel their long term growth, but then the company atrophies and starts dying a slow death.
Google will continue to innovate and lead.
4. Of course when a company gets to be this size, many ambitious employees leave for start-ups, often of their own, but Google gave out extra bonuses last year to keep their talent. It is pretty obvious that Google has Talent there. Furthermore, Google encourages employees to take one day a week to work on anything they like that are not part of their current project. This is where Google translate and Gmail have come from.
5. Even if we have inflation, which is likely based on the infusion of money the Fed has injected into our economy as an artificial way to prop up financial markets rather than allowing real growth and innovation to lead the way, the real price of google ad sales will not change too much based on inflation. Ad link sales are very elastic and scale-able.
6. Google is already has driver-less cars going between San Fran and LA. Just the other day, the Nevada legislature passed a bill to begin allowing testing of such driver-less cars. That is the future baby, that is innovation, and with a software brand name that I associate with Google, I would certainly be interested. "Car, gym, now!"
7. Google wallet. Taking on the banks and credit card companies by turning your phone into a wallet where you swipe your phone and it charges your credit card. Who likes to look through their wallet every time they pay. This is in the testing phase but has massive potential.
8. Android Operating system for Smart Phones. Yes, it dominates the smart phone market, having more market share than the Iphone. Of course, Apple actually makes the bulk of the money in the smart phone field, way more money than Google who has more market share, who essentially gives away the Android operating system for free. But now Google can monetize the system not only via Google search, (as they do with me via my gmail account I had to set-up), coupon deals based on your location. but also Google wallet described above ...
9. CASH- Additionally, Google has $114 a share in cash. As of June 27, 2011, Google trades at about $475 and 18 x earnings. if Google were to distribute every $ they have in the bank to shareholders, you would be buying this innovative company for something like 14 x earnings. Ummm ... that's not expensive for an old stalwart company experiencing little growth ...
The Case Against Buying
point #1: the market is in the doldrums, economic upheaval is on the horizon--
Rich's answer: Yes, the market is going down at the moment, and that makes for buying opportunities like this one. Buy low sell high. Google might go down to 400 with the rest of the market, but in a few years it will likely be like $650 +
point #2: Google is being investigated by the FTC and the European Union for monopolistic practices.
Rich's Answer: Yes they are. Some small British company that did comparison shopping complained that Google was intentionally pummeling them in search results because they are a competitor. #1-- good luck proving that Google intentionally targeted you. #2-- Google has so much to lose by not offering good search results. If users don't get what they want, they can always move over to Bing or whatever fledgling search engine appears. Google is not going to punish a "competitor" intentionally and lose their core business!
These Fears are what drives down the stock, making the stock even cheaper and more of a buy!
point #3: Larry Ellison, and Oracle, who bought Sun Microsystems primarily for their crown jewel of Java Software are suing Google for billions of $$.
Rich's Answer: yes, Oracle is claiming that Google is violating their patent in incorporating Java software in building the architecture of the Android phone system. Google claims they licensed open source code from Java, Oracle claims otherwise. According to research I have read, Oracle is a favorite to win the law suit (but not a sure thing)
The bottom line: I think that Google stock is a SCREAMING buy right now. I am tempted to put most of my remaining cash into it! I just believe in the company, think the price is right, and believe in two years, I'll have a 50% + return on my investment.
Thoughts, something i overlooked, i want to know!
Note: You make your own financial decisions. This is just my opinion. While Rich might be a Certified Genius, (his certificate is in the shop being framed) you cannot hold him liable if his predictions turn out to be incorrect.