Google pushes 600mm server farm out to 2010, Tuesday Tea also cancelled

Google continues to clamp down on spending.

A 600 million dollar Tulsa, OK server farm planned for early 2009 has been pushed back to some time in 2010.

Brin still thinks you're all a bunch of spoiled brats, Googlers. Valleywag had this item a couple of days ago. Tuesday Tea is suspended, meal hours are shortened, dinner is not to be served "to go". The horror.

They're focused on very small things (controlling perks) and that almost always means the big things are getting much harder. Expedia today on their conference call said cost per click is declining. That's what I'm worried about -- rate cuts in the advertising business. There's simply no way real estate, mortgages, financial products and automobiles can be getting slammed like this without some kind of notable impact on ad rates and keyword pricing. Amorphous as it is, keywords are an asset like anything else and they're going to be worth less in a slower economy. I think Google knows it, too, and they're trying to cut fat as quickly as possible as the top line moderates.

Government suggesting Goldman not pay bonuses this year

http://oversight.house.gov/documents/20081028142433.pdf

 

Big move

After massive interventions at all levels of the financial infrastructure, the market displayed its oversold power and had a gigantic rally, the 2^nd best on record. Many of the articles cited an impending Fed interest rate cut as the primary driver.

I don't think the Fed should cut until they absolutely have to and I don't think they absolutely have to. I don't think it's affecting lending anyway. It's a token. The market is really expecting it – fed funds have a ½ a point cut factored in and investors would be very surprised if they didn't – and I don't think the Fed can jeopardize the market's tenuous hold here. They probably will cut… but they shouldn't. They and the Treasury have completely flooded the system with liquidity through other means.

I think yesterday's rally had most of the earmarks of a bear market rally. They may carry further. The VIX remains stubbornly high. I think the market moves lower over time but for the time being the low price/earnings ratios make stocks appear attractive. Prices look great. The problem, I think, is that earnings estimates are complete fiction, based on economic forecasts that have no validity in the current environment. I see modest upside to the market here – maybe 6% to about 9700 in the DJI. Downside target remains under 7500, which is now a 17% move if it happens.

 

 

Here come the cavalry

Today, the Federal Reserve will become active in the commercial paper market in an effort to provide liquidity and bolster confidence.

Also, the TARP bank investments are coming out today. Each company will announce them on an individual basis so as not to create a list of haves and have nots. It's probably a bad choice to let banks reveal the information themselves. It doesn't help anyone -- it makes conditions murky. We need clarity, not obfuscation.

I wonder if the companies that receive assistance will not wind up being a hit list of companies in critical condition -- that these programs may in fact have the opposite of their intended effect.

As we know, the problem here is one of confidence. We have seen plenty of companies assure us of their balance sheet strength and credit worthiness one day and go belly up the next. If the market decides these companies that receive direct government assistance have solvency risk, the bailout programs could run into serious jeopardy.

The treasury investment program has been chosen as the primary rescue mechanism. The Fed has never been so far out of bounds mucking about in capital markets. If the companies that receive assistance do not hold today, we could spiral lower.

Crazy talk

The SOX opened this morning at 202, which is slightly below the 2002 low.

Normally I think historical references like that are stupid and mean nothing. You can't compare time periods as if they have relevance. Times change. But the semiconductors are an interesting case study for this environment.

In 2002, we were on the backside of the dot com bubble. I was managing a book for a hedge fund that had ballooned from 100 mil to a billion over a year – the hedge fund, not my book. My book was 200mm. Anyway. The semiconductor business was absolutely horrendous. Every quarter, companies would guide lower. Broadcom was trading at 9, down from 200. Corning, who is now the largest producer of flat panel glass in the world, was at a dollar and people were worried they'd go bankrupt. Amazon was a single digit stock. It was freakin' bleak, my friends. Capital spending kept dropping, bank financing was virtually non-existent. The IPO market was utterly dead. So I'm looking at the chart and wondering if the future prospects for semiconductors are really worse now than they were in 2002 coming off 2001. And I have a lot of trouble getting to that.

The consumer may wind up unalterably shell shocked from the sheer asset devastation occurring in everything he or she owns. And my guess is there isn't going to be much of a bounce. I still think at the bottom no one wants to buy them. No one wants to look at them. That's how it was in tech then. That's how it's going to have to be in fertilizers, steels, oils and banks. People will not run to buy these stocks every day and jam them up 10% because recovery is imminent. It's just not what happens. CNBC will not have its highest ratings in history. No one will care anymore.

I really like the valuations in semiconductors. But I don't see a bottom in the broad market yet. It's a tough spot.

 

I don't like posting this chart at all

Converging lines at around 7400 in the DJ average. I wish it said something more encouraging... but it doesn't.

Micron and Sandisk

Look. The memory business blows. It's terrible. Everyone in it is struggling to stay alive. There's a lot of focus on the demand picture because of the impending depression.

Historically, you buy these stocks on giant capacity reductions. We're seeing them in unprecedented droves. We also saw expansion to the upside on unprecedented levels so there's probably more coming down the road. At some point, these stocks will start to respond to it -- the ones that will survive, that is.

Sandisk trades at a 2 billion dollar market capitalization here. They pull down 500mm a year in royalties alone.

Samsung is likely to slash their capex forecast by 50% soon. When that happens, I kind of think the memory producers will rally. That's what used to happen before everything was going to zero, anyway.

Semicaps see significant memory cutbacks

Lam Research last night reported a precipitous decline in business, guiding next quarter down 30-35% on revenues. Memory still represented 72% of the current quarter's 440 mil of revenues in the face of unprofitable economics in the DRAM and NAND markets. Their prior official forecast was for up memory in Q4. Mattson, a smaller semicap with a big memory book, forecast a 40-60% decline in business for next quarter.

Samsung is widely expected to take a hatchet to memory capex at some point in the not too distant future. Analysts seem to be gearing up to make the "this is as bad as it gets" call when Samsung, the number one buyer of semiconductor equipment, slashes their forecast. Sandisk and Micron also cut their capex budgets by as much as 65%. No question, the downward velocity of the cuts is going to peak... but that doesn't mean there's an upturn on the horizon.

In an uncertain environment, investors will want to see some indication that things can get better. The stocks are historically cheap. They are still extremely memory dependent. The foundries are also suffering from lower order rates and their capex for next year is likely to moderate. My guess is there's no hurry to buy these. It's good to see reality come to play into the forecasts.

The problem with Apple (AAPL)

Spectacular quarter relative to expectations that we all knew were too low. They threw out numbers when they guided last quarter that were far below what most analysts considered feasible. They claimed they had new innovative products that would create 300 bps of gross margin downside. Then they never shipped that product -- or it never existed in the first place -- it's unclear what happened exactly and Apple is terribly secretive about new products so who knows if we'll ever find out what it was.

For next quarter they threw out another terrible number relative to consensus. I have to tell you, the Apple data has weakened significantly over the last month (but its not unique to them). I've heard statistics like September foot traffic in the stores is down 15%. NPD data indicated iPods shrank 3% y/y in September even with a total refresh of the line. Macbooks, which accelerated to 30% y/y growth in July and August saw their y/y growth rate halved to 15%. The blowup in the credit market is clearly the culprit behind the slowdown. The company said this is a tough economy to game and they want to be conservative... and that's why their guidance is weak. I totally hear that and I think it's prudent.

I'm looking at the stock up 8 and wondering why they're not getting believed. It didn't blink last night before shooting up 10. The Apple cult is undeniably the strongest in the stock and consumer electronics market. There is an undying faith in their ability to innovate and deliver easy to use products that take the technology out of the picture and let the user access their content without having to be a programming geek. And that's great.

Apple products remain overpriced relative to other offerings. Apple stock price, while cheaper than it once was, is still at a premium to its peers (if you can call its competition peers). Apple, while always cautious when they guide, may actually be telling the truth this time. Their business (along with everyone else's) has lost a lot of momentum. iPod may be in a dangerous slide. iPhone is a great product but there's no next act for it near-term -- 3G is as far up the curve as they go for now. Admittedly, the stock has been pounded to its 2007 lows in the face of much success.

This is a market of broken faith. Kool aid drinkers die in this environment. I'm struck by the lack of pause from investors. They're great, don't get me wrong. And they're notoriously conservative about their outlook. However, the world has changed. I think they could have been even more conservative than they were in light of the September data. I don't like the stock here at all.

The valuation trade

I'm finding it really hard not to buy tech. I look at EMC, for example. They report 20 cents, better than expectations. They guide next quarter to 30 cents with the street at 24 cents. This company is trading at an extremely low multiple. I don't know who is selling it here at 10.20. It doesn't make sense to me.

I'm starting to see stocks find levels off bad news. Broadcom lowered guidance and is up a dollar and change. I was short this stock 3 months ago at 29 and if anything numbers have gone up since. The market multiple contraction seems very extreme in tech.

Admittedly, the data just stinks right now. Retail has fallen off a cliff and theres a lot of enterprise caution out there -- with good reason. I find myself buying, though. I'm still short stocks... just not tech.

I wonder if I'm just falling for the valuation trap.