July 2008

So much for Cuil (pronounced 'cool'), a search engine that supposedly was going to give Google a run for the money. The brainchild of three ex-Google employees, Cuil debuted on Monday with a public relations drum roll and $33 million in venture backing. By late afternoon, however, the drum roll had segued into 'Taps,' and it was back to the drawing board. In tests by an initially fawning press, not only did Cuil produce merely hum-drum search results for Barack Obama; after scanning a reported 120 billion Web pages, Cuil reportedly couldn't find evidence that St. Louis, MO, even exists. The Obama search turned up mostly links to the candidate's Web site ' not exactly what you'd be looking for if you wanted lots of interesting information on the guy. We always thought Google was overrated because of its vulnerability to competition from any upstart that cames along with a more powerful algorithm. But if $33 million in start-up capital can't produce a search engine capable of finding St. Louis, then perhaps Google's primacy in its niche is more secure than we'd thought. Cuil certainly looked like the cocky upstart when the day began, and its launch was headlined on the Web Monday morning, including on Google news pages. But the initial reviews were so atrocious that it may not be possible for Cuil to return to the market again under the same name. Then again, who would know if Cuil's promoters were to come along in two months with a re-engineered algorithm and a new name even cuiler than Cuil? Meanwhile, with all the cuil stuff Google packages with its search engine, including 3-D photos taken from outer space of the homes we live in, a competitor may have to give away $100 bills, or free beer, to get users

A few weeks ago, prompted by our astute friend Tom Tankka, and anticipating the imminent climax of crude oil-mania, we suggested staking out bullish positions in the airline stocks. At the time, we expected the carriers' shares to soar above all others if and when oil prices broke. This is in fact what happened: The price of a barrel of crude fell by 25% in the last two weeks, causing most airline stocks to double or more in price. As a result, anyone who had bought out-of-the-money call options a few weeks ago would now be sitting on profits of at least 400%. To take one example, before the shares of American Airlines took off in mid-July from a low of around $4, you could have bought August 5 calls for 50 cents; last week those calls traded as high as $5.60. It seemed a little risky at the time to buy soon-to-expire, out-of-the-money calls in such low-fliers as American, United and Continental, especially since option premiums were in the ionosphere. Although 50 cents may not sound like much to pay, it was about three times what we would have estimated as fair value. To give you an even better idea of how pricey the options were, if a hot stock were to become the subject of takeover rumors, the puts and calls on that stock might spike up to an implied volatility of around 70 or 80. However, in early July, with airline stocks in a relentless downtrend, call options were trading with implied volatilities as high as 200. Astounding! Buy When They're Ultra-Pricey Quite often, when options get that juicy it is less risky to naked-short them than to buy them. But over time, we have learned that when option prices enter the Twilight Zone, there is usually

When the stock market rockets higher on some days and plummets violently on others, we need to remind ourselves that it's not a Jekyll-and-Hyde performance we are witnessing, but pure, unmitigated Mr. Hyde. A monster. The shills on CNBC may wet their pants with glee whenever the broad averages move sharply higher, but is there an investor in America who actually believes the rallies are predicting better days ahead? What they are in fact predicting is that short-covering by some of the gloomiest traders around is in the throes of flaming out yet again, so that the stock market's fiendish, tortured soul might be resurrected one more time. No stock exemplifies the irrational and pathological nature of Wall Street's thinking better than Citigroup. Here is a bank whose capitalization until relatively recently made it one of the two or three biggest companies in the world, and arguably the most sacrosanct member of the Too-Big-to-Fail Club. Citi shares have been deservedly crushed in the last year-and-a-half, falling from an all-time high of $57 to a recent low of $14. More recently, however, the stock rebounded to $22 in the space of just six days -- a 58% gain! Now, we've never put much store in the notion that the market knows all and sees all, and that it has perfect knowledge of all companies at all times. But when you see the shares of a financial blue whale like Citi leap by 58% in a week, you have to laugh when some analyst attributes this embarrassing spectacle to�whatever -- a speech by Paulson, a glimmer of hope for Citi's foreign operations, word of bold success on the trading desk. If a time traveling investor from the Sixties were to emerge on this scene and take notes for a few weeks, where

A Hidden Pivot target for Comex Silver that went out to subscribers Tuesday night appears to have worked nicely for at least one trader. Here he is, come a-gloating yesterday in the chat room: 'Rick, you son of a b____. You just made me $8K I was short, covered at 17.34 and went long at the same time. Now I'm gonna tighten up stops, since I took 1/2 off the table already.' Mind you, this trader's day job, allegedly, is sheep farming. So much for the notion that trading is not for everybody. It isn't, we should warn you, and neither should you infer from this guy's success that we hit bullseyes all the time. Even so, it will always be a pleasure to hear from subscribers who have been kissed by lady luck, even if just a peck on the cheek. And here is the forecast, exactly as it appeared in the Touts section of Wednesday's subscriber page: 'The downtrend steam-rollered some minor Hidden Pivot supports and prior lows yesterday, announcing that it probably has bigger things in mind. If so, look for more selling to push the futures down to at least 17.315, a Hidden Pivot that can be bottom-fished aggressively with a stop-loss as tight as you please.' And so it went, even if only by dint of good luck. When the dust settled, the futures had plummeted sharply to within a single tick of the predicted 17.315 low. And now for the chart: (Click on chart to enlarge) Would that the forecast for Comex Gold had been sufficiently gloomy! Gold futures were tracking the same bearish pattern, more or less, but we neglected to extrapolate a worst-case target as we'd done in Silver. Platinum was also featured in Wednesday's touts, and although it looked for a

Yesterday's 135-point rally in the Dow owes a debt of thanks to Hurricane Dolly, which has tacked north of oil rigs in the Gulf, reducing the threat to U.S. energy supplies. Crude oil quotes were down more than $6 at one point as result, helping to propel the broad averages moderately higher. 'Moderately' is the right word here, or perhaps 'disappointing,' considering the drubbing crude was getting. Perhaps it will work in the bulls' favor, allowing stocks to build a sustainable head of steam that won't blow out on a few back-to-back 300-point riots. Airline shares were among the biggest gainers and continue to benefit from perceptions that lower oil prices will cure much of what ails the economy. It certainly couldn't hurt, although we'd put debt forgiveness by foreign lenders at the top of our wish list. Prices at the pump have dropped to 4.06 from a recent record of 4.11, and although a nickel-a-gallon decline is hardly reason to celebrate, it's arguably the trend that matters and for which we can be thankful. Tuesday's 'bad' news centered on estimates that a Fannie/Freddie bailout could ultimately cost taxpayers $25 billion or more. The financial stocks seemed to take this number in stride, possibly because it's not much more than the banks have been writing off each quarter anyway. The 'or more' part of the estimate seems likely to come into play, given the size of the GSEs' shaky portfolios. For now, though, the bailout is being spun by Paulson et al. as a non-bailout ' a 'back-up plan,' if you will, should Fannie and Freddie be unable to save themselves. That they appear to be doing so, if only momentarily, owes more to the predictable ebb and flow of mass hysteria than to anything the mortgage Leviathans are doing

China has sunk a reported $42 billion into the Olympics, setting a new standard for such global extravaganzas, but it looks like the planners may have skimped public relations. How else to explain the attention that Beijing's air quality has been getting in the press lately? The Wall Street Journal carried a feature yesterday about a triathlete who has been trying out a new type of anti-pollution mask secretly developed by the U.S Olympic Committee. Although Chinese officials are downplaying the need for such accessories, they are unlikely to prohibit them, and it will be up to the individual athletes to decide whether or not to wear them. Urban Chinese have been wearing surgical-style masks for years themselves, since air pollution in smog havens like Beijing and Shanghai is hard on everyone's lungs, not just those of marathon runners. The U.S.-developed mask is designed to be worn before and after actual competition, but the British reportedly have one that is intended for use by athletes when they are actually competing. Some U.S. athletes have even been 'commuting,' training in Beijing for a while, then returning to the U.S. for a literal breath of fresh air. But it remains to be seem whether Beijing will be able to scrub pollution from the air between now and the start of the Summer Olympic games in a little less than three weeks. Automobile use is already being regulated via odd/even-numbered license plates, and the city has ordered many factories to cease operating between now and the end of the games. Three days into this crash program to curtail the activities of polluters, air quality reportedly has improved noticeably. Will it be enough to keep the athletes from coughing and wheezing their way through the competition? We shall see. The 1984 Summer Olympics in

We did a double take on the following headline atop Friday's edition of the Wall Street Journal: 'Mortgage Giant Freddie Mac Considers Major Stock Sale'. This plan gets our vote for the dumbest idea we've ever heard from Wall Street. A cruel joke on shareholders, perhaps? After all, the stock has already fallen 75% -- and now the same geniuses who have practically run Freddie into the ground are proposing to further dilute shareholder equity down to the vanishing point. We wonder what the erstwhile mortgage behemoth could possibly hope to achieve via this 'hyperinflationary' tactic.  The issuance of new stock totaling as much as $10 billion supposedly is being considered, but how much could it help? After all, Fannie's troubled portfolio is nominally valued in the trillions of dollars, and raising a pitiable $10 billion from shareholders would be like piling up a few more sandbags after a mighty river has inundated its levees and put half the U.S. under water. (Click on image to enlarge) The idea is so miserably stupid, in fact, that even Congress is balking at it, fearing taxpayers will be on the hook for yet more billions when Freddie fails anyway. Freddie's ostensible goal is to save itself rather than be regulated to death following a government bailout. But the firm would never even have floated this idea unless the Fed and the Treasury Department were on board. That means it is probably just a red herring intended to distract us from the fact that there are no palatable options for saving the GSEs. So why did the Wall Street Journal play this non-story story so prominently, stretching the headline across three columns above the fold? Our guess is that it was a slow news day, and the Journal's editors couldn't come up with another

Finally, some good news for those who have always wanted to live in the Bay Area but couldn't afford it: the median price of a home has fallen below the half-million-dollar mark. With prices back to levels not seen since 2004, will Northern California now be inundated with Okies and Rust Belters looking to start anew in the vineyards of Sonoma? The median price of a home there fell nearly 27% since last June, to $389,500. The real estate crash has been nearly as dramatic in Napa, where a 23.7% fall has brought the figure down to $444,000. Even in San Francisco, where prices have held up relatively well, an 11.9% drop since last June equates to a current $726,750. The table below, from DataQuick, tells the whole story: Reported DataQuick: 'The price barometer fell an unprecedented 27 percent from its record level a year ago as more sellers settled for less, lenders unloaded more aggressively-priced foreclosures and more sales activity shifted to less- expensive areas, mainly inland. Credit remained tightest for potential high-end buyers on the coast, where sales were generally anemic and prices showed signs of increased erosion, the real estate information service reported.' The bad news is that migrants to California are going to be disappointed, if not to say distraught, when they see what $726k buys in San Francisco ' assuming they can qualify. That seemingly formidable sum is not going to put one on Telegraph Hill or even on Lake Street, although it might buy a fixer-upper on the 'bad' side of Potrero Hill. As for an $846,000 digs in Marin, you could get an in-law cottage in Sausalito for that kind of money, but you'd have to drive quite a ways north before it would get you into a family-size house on a well-trafficked

Bears looking for the culprit that has been keeping this deadest-of-dead-duck stock markets aloft should look in the mirror. Although there are indeed a hundred great reasons for the Dow Industrials to be trading at half their current levels, the implied adjustment is unlikely to happen as long as everyone is betting aggressively on it. And 'everyone' clearly is betting on a collapse right now, to judge from the hysterical power of yesterday's rally, an almost daily occurrence any more. Some traders in the Rick's Picks chat room were itching to get short at every possible opportunity, which in this case meant at the Hidden Pivot targets of minor rallies during the day. The idea was to risk a few ticks on each trade, recouping any losses and then some when the stock market finally collapsed. It never did, though. Shares paused briefly at each of our targets, only to quickly recover and head still higher to the next. You could have made money shorting with this method if you were nimble, but in retrospect, being long the whole way up was a much less challenging way to go. Don't Impede Lunatics With an hour or so left in the session and the Dow up about 200 points, we posted the following warning in the chat room: 'It's really not worth trying to get in front of this lunatic frenzy, since it is being driven by bears who are trying to do [exactly] that. If I'm reading [things] correctly, shorts will be stranded at the high of the day on the final bar. The [stock market] is saying� "Hey, sailor, if you want to short me, you're going to have to do it on the final bell and spend a sleepless night. I'll lay odds on this one." No one