The Tycoon Report

Tech Stock Comeback

Monday, July 30, 2007 | Wayne Mulligan

The Internet giants have been slugging it out for some time now ... especially on the advertising front.  Everybody has been trying to catch up to Google (Nasdaq: GOOG) for quite a while, and some of the “web heavyweights” are beginning to make some impressive moves against the Mountain View, California company.

Their most recent slug-fest has been taking place on the “display advertising field” – this is different from where the usual competition occurs, which is on the “pay-per-click advertising field.”

Just in case you’re not familiar, I’m going to give you a quick rundown on the different methods of advertising on the Internet:


Pay-Per-Click (PPC) Advertisement

If you go to Google.com and type in a term like “stock market advice” and then click "Search", you’ll see a series of results appear.  But if you look to the right of those results, you’ll also see a series of advertisements.

The way these advertisements work is that an advertiser, like Tycoon for example, will go to Google and say, “OK, I want my advertisement to appear every time somebody searches for the term “stock market advice.  And I’d be willing to pay 50 cents every time somebody clicks on my advertisement.”

Basically, we’re paying per click – hence the term “pay per click advertising.”


Display Advertisement

While you may not be familiar with the term, you’re certainly familiar with this form of advertisement.

Display ads are the (sometimes) annoying banner ads that appear on most pages you visit – they come in all shapes and sizes and varying degrees of intrusiveness.

Advertisers can pay per click, but most of the time they pay based on the number of times the ad is shown or displayed.


Battlefield

The battlefield lines on the Internet have been drawn around online advertising for some time now.  It’s how Google makes the majority of its profits and how most of the newer web start-ups are getting off the ground.

Google reigns supreme in terms of Pay-per-Click ads – Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) have been desperately trying to play catch-up.  But recently, all of these guys have made moves to venture into the other form of online advertising – display ads.

Google recently attempted to acquire DoubleClick for over $3 billion.

Yahoo! has purchased Right Media for several hundred million dollars.

Microsoft has gone ahead and purchased aQuantive for over $1 billion.

But in this writer’s opinion, they all have it wrong.

Granted, they’re all purchasing established ad networks with a lot of reach, but none of them is doing anything innovative to help both consumers and advertisers.

That is, none of them except AOL (NYSE: TWX).

That’s right, the old AOL – the Internet giant that had fallen from grace - has recently made an extremely savvy acquisition.  The Time Warner company has just purchased Tacoda – a behavioral display advertising company.  That may sound a little confusing, so let me explain.

Behavioral advertising is the process Tacoda uses to display ads to consumers based on previous behaviors similar consumers have exhibited across the web. 

So a user who searches for movie tickets and ends up clicking on an ad for deodorant will have that data tracked in an online database.  The more people who exhibit this sort of behavior, the more likely it is that deodorant ads will start to appear on movie ticketing sites.  Essentially, the software that displays the ads becomes “smarter.”

And after doing this hundreds of millions of times over the course of years, Tacoda has become very, very smart.  And that’s why AOL is buying the company.

AOL has some of the most popular internet properties on the web.  It serves advertisements across all of them.

Now that they’ll be able to serve more relevant ads, they’ll be able to charge premium prices and earn higher revenues.

In my opinion, this was an extremely intelligent acquisition and will definitely put AOL in a decisive lead over Yahoo! and Microsoft. 

Will this help them gain any kind of lead on Google? 

Not likely – well, not in the short term, at least.

But it was a fantastic investment, nonetheless, and I have to give AOL a tremendous amount of praise for cutting this type of deal.  It’s the first time I’ve seen them come out swinging in a long while.

I can’t wait to see what happens next!

Keep an eye on Time Warner – my hope is that they’ll spin the AOL division out in the future – and even if they don’t, Time Warner might end up being a great buying opportunity this year.




Wayne Mulligan
Contributing Editor
The Tycoon Report



Tuesday, July 31

8:30 - Personal Income (for June): Consensus 0.5%, Personal Spending (for June): Consensus 0.1%, Core PCE Inflation (for June): Consensus 0.2%

Big Picture: A strong 0.5% rise in income leaves 6.2% yoy growth and supports strong consumer spending.  Weak June spending growth summed up with a -0.9% drop in retail goods while services should leave an overall gain.  Core PCE prices expected to rise just 0.1% and leave a still lower 1.8% yoy gain.  1%-2% is the Fed's "comfort zone".  The savings rate is expected at -1.0% given the weaker spending than disposable (after-tax) income growth.

Implications: Personal income measures income from all sources.  The largest component of total income is wages and salaries, a figure which can be estimated using payrolls and earnings data from the employment report.  Beyond that, there are many other categories of income, including rental income, government subsidy payments, interest income, and dividend income.  Personal income is a decent indicator of future consumer demand, but it is not perfect.  Recessions usually occur when consumers stop spending, which then drives down income growth.  Looking solely at income growth, one may therefore miss the turning point when consumers stop spending.  The income report also includes a section covering personal consumption expenditures, also known as PCE.  PCE is comprised of three categories: durables, nondurables, and services.  The retail sales report will provide a good read on durable and nondurable consumption, while service purchases tend to grow at a fairly steady pace, making this a relatively predictable report, and ranking it well below retail sales in terms of market importance.

8:30 - Employment Cost Index (for Q2): Consensus 1.0%

Big Picture: Steady 3.5% annual growth is the largest since Q1 2005.  Wages are also expected to rise 0.9% as benefits rebound to 1.1% after the mere 0.1% Q1 gain.  Leaves annual wage gains (3.6% yoy) larger than the annual rise in benefits (3.3%), as benefit costs are decelerating (compare to 5% yoy in mid 2005).

Implications: The Employment Cost Index (ECI) is designed to measure the change in the cost of labor.  Since the employment cost index was mentioned by Fed Chairman Greenspan in July 1996, it has risen into the upper echelon of economic reports in the eyes of the bond market.  Its lagging nature still leaves it as a less timely indicator of employment cost trends than the monthly hourly earnings data in the employment report.  But the ECI does add something to this picture: an adjustment for shifting employment between industries, and a look at benefit costs.  These additions are interesting, but typically do not alter the view of the employment cost picture which was left by hourly earnings.  ECI will be much less closely watched during periods when wage inflation is not a serious market concern.

9:45 - Chicago PMI (for July): Consensus 59.0

Big Picture: While March and May brought 2 year highs, a modest decline in new orders and production should still leave levels in a strong 62-65 range.  Employment to show a fourth month above 50 (despite manufacturing payroll declines).  Prices paid may edge higher, but the lack of manufacturing pricing power leaves very little inflation threat.

Implications: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The New York and Philadelphia Fed's surveys are the first each month followed by the Chicago purchasing managers' report on the last day of each month.  A few, such as the Atlanta and Richmond Fed surveys, are released after the ISM and are of little value.  The purchasing managers' reports are measured like the national ISM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector.  For the New York, Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.  These surveys can be of some help in forecasting the national ISM.

10:00 - Construction Spending (for June): Consensus 0.3%

Big Picture: This report will mark a small decline after four months of gains and the large 0.9% May rise.  Very different factors are driving the three components.  Residential spending is expected at -0.7%, just below the 4-month average.  Commercial spending is flat after a long string of gains -- and that's the biggest risk.  Total public spending is expected to be under 1%.

Implications: The construction spending report is broken down between residential, non-residential, and public expenditures on new construction.  The monthly changes are both volatile and subject to huge revisions, so this report rarely has any market impact.  Only trends extending over three months or more can be viewed as significant.

10:00 - Consumer Confidence (for July): Consensus 105.0

Big Picture: A large gain here is consistent with preliminary consumer sentiment index data, a tight labor market, and stronger economic growth.  Leaves index just 2% below the 6 year high of February.  Rising expectations is showing a larger lift than the present situation.

Implications: The Conference Board conducts a monthly survey of 5,000 households to ascertain the level of consumer confidence.  The report can occasionally be helpful in predicting sudden shifts in consumption patterns, though most small changes in the index are just noise.  Only index changes of at least five points should be considered significant.  The index consists of two subindexes -- consumers' appraisal of current conditions and their expectations for the future.  Expectations make up 60% of the total index, with current conditions accounting for the other 40%.  The expectations index is typically seen as having better leading indicator qualities than the current conditions index.


Wednesday, August 1

10:00 - ISM Index (for July): Consensus 55.5

Big Picture: A small 0.5 pt gain is expected after June's 14-month high, while manufacturing has rebounded from contractionary levels at the turn of the year.  Both new orders and production are expected to hold near June levels -- they compose 55% of index, and employment is expected to rise from 51.1 (despite payroll declines) as deliveries return to a 50 level.  Inventories are expected to hold below 50 for a full year.  Prices paid are expected to hold near 70, but the lack of manufacturing pricing power leaves no effect on inflation.

Implications: The ISM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders.  Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.  The total index is calculated based on a weighted average of the following five sub-indexes, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).  The ISM is one of the first comprehensive economic releases of the month, typically preceding the employment report.  Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases.

17:00 - Auto Sales (for July): Consensus 5.5M, Truck Sales (for July): Consensus 7.0M

Big Picture: A moderate 4% rise marks the weakest pace since October 2005, weaker than the 12.4 mln YTD average, which stands below the 12.8 mln average in 2006.  Domestic auto sales are expected to rise 3% to 5.4 mln.  Light trucks to rise 6% to 6.9 mln.  Import market share rose to 24% in June from a 22% average in 2006 and 20% in 2005.  Light truck sales continue to be the majority purchase.

Implications: Auto and Truck Sales measure the monthly sales of all domestically produced vehicles.  They are considered an important indicator of consumer demand, accounting for roughly 25% of total retail sales.  Demand for big ticket items such as autos and trucks tends to be interest rate sensitive, making the motor vehicle sector a leading indicator of business cycles.  Each auto maker reports sales individually.  The reports are typically released over the course of the first three business days of the month.  Using the individual reports, a total annual sales pace can be calculated after applying Commerce Department seasonal factors.  It is this annual sales pace that the market refers to when discussing auto and truck sales for the month.


Thursday, August 2

8:30 - Initial Claims (for 7/28): Consensus NA

Big Picture: Initial claims are at their lowest level since the sub-300Ks in early May, and the 4-week average fell to 309K -- a seven-week low.  4-week average in continued claims rose to 2.556 mln -- reaching the year and a half high of early March.  The labor market remains very tight, as shown by the 4.5% unemployment rate, low labor participation rate and small layoffs.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

10:00 - Factory Orders (for June): Consensus 1.3%

Big Picture: Volatile factory orders peaked in September, but are rebounding.  The struggling auto and housing sectors added to the softening in business capital investment as orders and production are back on the rise.  Some of the fall-off was due to the drawing down of unwanted inventories as the correction seems largely over.  The underlying fundamentals of flush corporate balance sheets and high capacity use helps support capital investment and factory production.

Implications: Factory orders consist of the earlier announced durable goods report plus non-durable goods orders.  The report is very predictable with nondurables the only new component.  Nondurables consist of such items as food and tobacco products which grow at a fairly consistent monthly rate, so that market forecasts for this report are far more accurate than for the durable orders report.  In addition to seeing nondurables for the first time, the market also watches for revisions to the durable orders data, which can be significant.  At present, durable goods orders sum to about 54% of total orders.


Friday, August 3

8:30 - Nonfarm Payrolls (for July): Consensus 135K, Unemployment Rate (for July): Consensus 4.5%, Hourly Earnings (for July): Consensus 0.3%, Average Workweek (for July): Consensus 33.9

Big Picture:

  * Nonfarm Payrolls:  150K estimate near the 3mo (148K) and 6mo (145K) averages.
  * Manufacturing declines expected to stretch out beyond a year in July.
  * Construction expected to edge lower -- the 3rd decline in four months.
  * Private service producing jobs expected to provide the entire 150K gain.
  * Health, leisure and hospitality to lead the gains.  Temporary help hasn't shown a rise in 2007.
  * The government is expected to add a relatively small 20K.

  * Unemployment Rate:  expected to rise to 4.6% -- highest since last seen in January.
  * March reached a 4.4% low -- lowest during the expansion. 
  * 5% rate generally considered to be inflation neutral full employment (i.e. NAIRU).  

  * Hourly Earnings:  A 0.3% gain expected to leave unchanged 3.9% yoy growth.
  * Reached a six-year high of 4.3% yoy in December.

  * Average Workweek:  A dip back to the 33.8 hours of April and May.
  * Showed some moderate swing over the last half year February's 33.7 to 33.9 hours. 
  * An indicator for real time labor need (prior to hiring/layoffs).

Implications: The employment report is actually two separate reports which are the results of two separate surveys.  The household survey is a survey of roughly 60,000 households.  This survey produces the unemployment rate.  The establishment survey is a survey of 375,000 businesses.  This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few.  Both surveys cover the payroll period which includes the 12th of each month.  The reports both measure employment levels, just from different angles.  Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month.  The household survey is used only for the unemployment measure -- the market focusses primarily on the more comprehensive establishment survey.  Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.

10:00 - ISM Services (for July): Consensus 59.5

Big Picture: The non-mfg index has broken away from its more respected mfg ISM sibling given the vast sectoral differences and economic forces driving the two pieces of the economy.  The index isn't compiled from its components but dependent on a single question -- is business activity stronger, weaker or the same as a month ago?  Therefore the index can swing wide of the movement in the components.  The non-mfg ISM readings are a bit suspect given their extremely broad inclusion (entire economy ex manufacturing).  The non-mfg index seasonally adjusts only new orders and employment as the inclusion of all sectors outside of manufacturing leaves plenty of bounce given vast sectoral differences.  A level above 50 marks positive growth in non-manufacturing business
activity.  The index has rebounded from a four-year low in March to a one-year high in June.

Implications: The non-manufacturing ISM report is a national survey of purchasing managers which covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders.  Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.  The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing.  However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates.  The seasonal adjustment of the index didn't begin until January 2001, with only 3 of the 9 components seasonally adjusted as of April 2001.  The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "B-" rating compared to the "A-" rating of the well-respected manufacturing ISM index.


Source:  www.Briefing.com