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Tuesday, July 27, 2004
Good evening friends,
Market Recap
Triple digit gains on the Dow today was a welcomed rally for most people in the market. This is because the majority of the crowd is long on their stocks. If you were short today, it was one of those days you do not like to see. Professional short sellers are not worried about this rally, stocks and markets do not go straight down. They will have what is known as “relief rallies” and today was one of them. This rally did not have overwhelming volume, and many of the stocks we are short are up on very weak volume. This indicates to me that the rally is not for real and will run out of gas soon. The market had been over sold so this rally was due.
The NASDAQ gained +30 points and the S&P gained +10 points with all three indices closed near their highs for the day. The VIX stands tonight just over 16, still nowhere near market panic. With a reading this low, there is not much chance of a market putting in a bottom yet. This tells me that there is still further downside to go after this brief rally. Shorting is still the favored position to be in at this time. If you cannot short, cash is always king.
Is Google a Goof?
Has Google made a mistake with a decimal point in pricing their IPO? I could see it priced between $10.80 and $13.50 a share, but it looks like it will price at between $108.00 to $135.00 a share. Someone check the calendar, I think this might be a flashback to 1999 in the middle of an internet bubble.
Google is the hottest IPO since KKD, but I think they may be setting themselves up to be the biggest flop of the year. By pricing shares in this range, Google may alienate just about every investor out there, and the P/E ratio will be astronomical. By setting the price so high, how much further will it go up? And will any institutions that do not have IPO shares already want to touch it? The float on Google will be very low, only 24 million shares. This will cause wild movements in the stock at first. Will there be any shares available to short? Google may be setting itself up to possibly make for a pretty decent short. However, I would not short the stock right out of the gate.
Google is planning a type of Dutch auction for at least a portion of the shares. Dutch auctions work by placing a bid and a number of shares you are willing to buy at that price. If someone bids higher and on more shares, they will get their allotment before you. If there are shares left over as they hand them out, you could get a partial or full fill. You could also get a full fill at a price much higher than what everyone else is bidding. It is the strangest way to invest I have ever encountered, and one of the riskiest as well. This is one stock I will be staying away from until the dust settles.
Re-Thinking the Google Effect
I am re-thinking the whole Google effect at this point. The timing of the IPO really could not be coming at a worse time. The markets have been in a slump and even great earnings are getting hammered. That's not the ideal environment to be putting new shares out on the market. With the price range that they are shooting for, I am not sure how many retail investors will pay up for the shares. For the most part, small investors do not buy stocks valued over $100.00 a share so I am wondering who the target investor is. Even institutions and mutual funds may not be interested from a valuation basis.
I see three possible outcomes from the Google effect. If the IPO goes off without a hitch and the stock is on fire, it could ignite a rally in the internet and technology sector. This is the least likely of possibilities in my opinion. Or, the stock could be a flop on IPO day and immediately trade down, taking the entire sector down hard with it. Or if we get lucky, the Google IPO will be a bit of a flop and the analysts will identify other players in the sector as a much better buy. The thought being, “why pay over $100 for Google when Yahoo is only $28, MSN (Microsoft) is only $28, and the real bargains like MAMA are around $6?” All of these are much cheaper on a valuation basis with lower PE's than Google. One way or another, this IPO will have a dramatic effect on the sector.
By the way, the two founders of Google purchased their shares for 35 cents. I am guessing they will sell a portion at the first opportunity. These guys are instant billionaires on paper when this IPO comes to market. Kind of makes you wonder how they can get these shares so cheap. I think these two guys are a little greedy with the pricing, and of course the investment bankers who are pushing the deal stand to make millions as well. I do not know who mind would buy this stock at this price, but even if it does by miracle trade up even more than the IPO price, rest assure that it will not stay there long. History shows that most IPO's are trading lower than their IPO price one year later. Knowing this, it is certainly not a stock for the longer term investor. So, who will buy the stock? Maybe day traders at first as a low float momentum play, but when they stop supporting this high price, it should fall from the sky in a hurry. Hey, what is their symbol anyway? I think GOOF would be most appropriate.
OTC BB Watch List
- AOGI
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