Thursday, 30 September 2010
Commentary: Investing in gold isn't as easy as it looks
There's a lot of talk right now about how gold is booming, and how gold bugs who have been stashing bullion under their mattresses over the last decade or so have made a killing.
That may be true if you look at the price of the yellow stuff per ounce. The price of an ounce of gold is up about 30% in the last year, or over 400% in the last 10 years. How does that relate to actual returns for investors?
The truth is that gold has steep hidden costs, and that looking at the numbers on paper doesn't tell the whole story. Here are big costs many investors overlook.
The affinity for gold investing and a dislike of the government seem to go hand in hand, from predictions that massive government debt will render the dollar worthless to conspiracy theories that there will be another Executive Order 6102 in which Uncle Sam loots your safe deposit box and seizes your gold.
But the biggest reason for gold investors to get mad at the feds is their tax bracket. The IRS taxes precious metal investments — including gold ETFs like the SPDR Gold Trust (NYSE: GLD - News) and iShares Silver Trust (SLV - News) — as collectibles. That means a long-term capital gains tax of 28% compared with 15% for equities (20% if and when the Bush tax cuts expire next year).
While you may see your gold as a bunker investment, the IRS will treat you the same as if you were hoarding Hummel figurines. And that means a bigger portion of your gold profits go to the tax man.
Just as the math game on gold price appreciation doesn't tell the whole story, the lack of regular payouts is another reason why the long-term profits quoted in gold are incomplete. Many long-term investors can't afford to stash their savings in the back yard for 20 years. Income is a very valuable feature of many investments and gold simply doesn't provide that.
Remember, simply looking at returns in a vacuum can't tell you whether an investment is "good" or "bad." Is it a good idea for a 70-year-old retiree on a fixed income to bet on penny stocks because they could generate huge profits? Even if those trades pay off, 99 out of 100 advisers would say something akin to "You got lucky this time, but don't tempt fate. Quit while you're ahead and don't be so aggressive."
Similarly, the volatile and income-starved gold market is not a place for everyone. Just because past returns for gold have been so stellar, that does not mean that gold is low risk or that investors who need a secure source of regular income will be well-served.
Gold scams take a toll
In a previous article, I detailed gold coin scams in detail. They include false gradings on the quality of the coins, the use of cheaper alloys instead of pure gold and even brazen scams where you don't actually even own the gold that you buy. And that's just on the coins front. Scams abound in pawn shops and "cash for gold" enterprises that refuse to give you a true value for your jewelry or other gold items.
You'd think it would be obvious that precious metals should never be purchased from anyone other than a broker or seller of good repute who provides proper documentations. But many investors fail to do their homework, or worse, can't tell forged documents from real ones.
Gold is ready-made to be a retail sales item, and with that comes all manner of unscrupulous activity. Vigilant investors can protect themselves, but do not underestimate the very real price of being taken to the cleaners by a gold scam if you don't do your homework.
High ownership and storage costs
Maybe through some creative accounting or selective amnesia at tax time you can mitigate the tax burden of gold. But one expense you can't as easily avoid is the high ownership cost of gold. After all, it's not like you mined it yourself — and all those middlemen between the ore and you want to get paid.
The first is that old tightwad Uncle Sam again. Even if you can avoid him going on the capital gains front, he gets you coming into gold via sales tax on most jewelry and coins. And then there are the high transaction costs and commissions that gold can carry. Anyone who has bought jewelry knows significant markups are part of the precious metals trade, and that's the same for investment gold as it is for engagement rings. The bottom line is that some of your initial buy-in goes towards the business of gold and you'll never get it back, not unlike realtor fees or broker fees.
And then there's the additional cost of storing your gold. You have to pay a fee for a safe deposit box, and if you have a lot of gold, that can run you a few hundred bucks a year for a good-sized box. Of course if you're afraid of that Order 6102 scam pulled by FDR you likely have your gold at home in a safe — so that's a one-shot deal. But are you really foolish enough to distrust the government but trust your gold stash to be safe without insurance?
The presumed "safety" of gold is good on paper, but obtaining the actual metal and keeping it safely stored is a costly endeavor.
Yes, gold can lose value
Proponents of gold love to claim that gold has never been worthless like Lehman Bros. or GM. And while this is true on its face, it is actually a half-truth. While gold may never become worthless, it is foolish to think it will never lose value.
Consider that after reaching a record high of $850 per ounce in early 1980, gold plummeted 40% in two months. The average price for gold in 1981 fell to a mere $460 an ounce — and continued nearly unabated until bottoming with an average price of around $280 in 2000. For those folks in their 40s and 50s who bought gold at that 1980 high, it took them 28 years to reclaim the $850 level. That's hardly much of a retirement plan, unless they lived to be 80 or 90 and just cashed out recently.
Gold is an investment, period. And no matter how gold bugs spin the metal as a hedge against inflation and a sure thing that will only go up, gold can lose its value — sometimes in a hurry, as in the early 1980s.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter at twitter.com/JeffReevesIP
But you'd also do well to watch it with an investor's eye, ready to absorb valuable lessons about how to ruin an e-business startup.
The movie is packed with business-related detail, starting with Facebook founder Mark Zuckerberg's complete lack of entrepreneurial instinct. Without a more revenue-oriented cofounder in early-days CFO Eduardo Severin, the whole project would have faltered long before it became the global icon of online interaction that we see today. That phase was followed by angel investors, and then seed funding -- and then came the lawsuits that frame the entire film.
By watching The Social Network, you can learn at least a little about:
* Venture capital financing: Zuckerberg and Severin bump heads and shake hands with noted PayPal billionaire Peter Thiel and others. The scene takes place in 2003, just after Thiel became filthy rich by selling PayPal to eBay (Nasdaq: EBAY - News) and was hungry for new investment opportunities.
* Startup culture: The Facebook team goes through extremes of low funding, big ideas, and constant challenges at a dizzying pace. At one point, Zuckerberg recruits programmers through a drinking game, which is not something you'll see at any large and established corporation.
* Backstabbing and the lawsuits that follow: This is the heart of the movie and the human takeaway: Success will quickly turn your friends against you. Be prepared.
* Viral marketing: From scene one, Zuckerberg displays a stunning understanding of how to create, grow, and then keep an online audience. Make it cool, get your users to involve their friends, and never accept service outages.
* Network security, and the consequences of its absence: If Harvard's network had been properly hardened in 2003, Facebook and its predecessors wouldn't have existed today. A little bit of hacking can collect a lot of information very quickly.
* Why Silicon Valley still attracts technology startups: It's where you go to meet the smart money mentioned earlier.
A lot of this should interest you if you invest in Valley darlings and online phenoms such as, say, Google (Nasdaq: GOOG - News) or eBay. You'll be better equipped to understand the business environment these companies work in after watching this movie, and the marketing lessons may even make you a better eBay seller and AdWords marketer. In addition, there's always the chance of Facebook going public itself one of these days.
Colored by filters
Mind you, all of these lessons passed through several individual perspectives before they reached the screen. Director Fincher and all-star screenplay scribe Aaron Sorkin (The West Wing, A Few Good Men) surely added their own touches to a book by Ben Mezrich, who never worked for Facebook or attended Harvard. Mezrich's main source and consultant was Severin, who unsurprisingly comes across as a hapless victim in the movie. You want the truth? You can't handle the truth! Or at least, you'll have to accept a version of the truth with any project like this.
Distributor Sony (NYSE: SNE - News) is clearly hoping for a viral hit of Facebookian proportions, since its slate of releases this year has been rather uninspiring. But the marketing has been minimal and not always clear on what the movie is about. None of the trailers convey the courtroom drama feel I got out of the movie, and Sony would have been wise to play up a captivating performance by pop star Justin Timberlake as Napster co-founder and later Facebook investor Sean Parker. In other words, don't buy Sony stock just to capitalize on a runaway hit here -- I don't think that's in the cards.
Some critics compare The Social Network to Citizen Kane with a straight face, and one of my peers at last night's press screening enthused that this was Fincher's finest work yet. Me, I prefer Fight Club, but I'd watch this one again just to reabsorb the business lessons.
Will this movie flop or fly? Discuss in the comments below.
Fool contributor Anders Bylund holds no position in any of the companies discussed here. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. Google is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers recommendation. eBay is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Google. The Motley Fool is investors writing for investors.
Wednesday, 29 September 2010
Those of us who make their living in the mortgage and real estate business are used to business cycles. Although the last few years have been worse than any other period since the Great Depression, we're only experiencing the other side of the curve created by the appropriately titled "irrational exuberance" era.
In retrospect, exuberance is not a strong enough word for the culpable actions of the parties that fueled the bubble until it burst. However, this is not another rant about who to point the finger at or which direction the next knock-out blow is coming from. While the real culprits in every Ponzi scheme (or, "bubble") are the sales people who generate the new suckers ("investors"), it's always a handful of loud Armageddon types who make a name for themselves by getting their clients out in time.
But when it comes to housing -- once referred to not long ago as the engine of the economy -- those making the right call this time will be me and anyone else who tells you just how robust our recovery will be once it starts.
Our company operates in Florida, where home prices doubled in less than a three-year period and just a few years later 50% of homeowners owe more than what their homes are worth. So how can I predict that when the inevitable home sales recovery cycle begins, it won't be a barely perceptible flat curve no one will notice until years later? It's actually quite simple.
Housing, like any sector, is based on supply and demand. There's just too much pent-up demand not to expect a flood of home purchases once people perceive we've reached the bottom as far as home prices are concerned. Unfortunately, no one can be sure when that will occur. We will be sure, however, that a sustained bottom has been reached once the perception -- not the fundamentals -- changes, i.e. when Mr. Case, Mr. Schiller and others like them say so. And just like that, it will be, as they say, "Katie, bar the door ...."
Change will be immediate. More renters will become buyers. Kids grow up and become first-time home buyers every year (but less lately). Baby boomers reaching retirement will buy homes in Florida again or second homes. Sure, they won't all buy in Florida. There are certainly enough boomers to go around. And housing stimulates a lot of other sectors like construction, retail, finance and other services that will help add jobs.
Better employment numbers are key to any recovery, but they will also ease the traditional rate of household movement around the country. This number -- based off of natural migrations due to job opportunities in growth areas or joining other family members who previously relocated -- has dropped to record lows in the last few years. Now add all the move-up buyers who make up a large portion of home sales whose plans have all been on hold due to the declining markets. Move-up buyers are previous first-time home buyers who have grown out of their initial purchase or homeowners looking to upgrade.
This group has been reluctant to buy because they know if they wait they'll get a better deal. Why would anyone ready, willing and able to move up make that move if they thought they could pay another 10% or 5% or even 3% less by holding off a little longer? Their decision to wait is validated by the constant media attention to foreclosures, short sales and doomsday predictions. So they wait. And the pent-up demand keeps building, albeit under the surface.
Last week, we received news of the ultimate guarantee that we Floridians will have another boom in our colorful economic history, long characterized by booms and busts. (You'd think the meltdown the country just endured would result in real reform that will lessen the pendulum swings next time, but that's a story for a different day.) Last week, a University of Florida study indicating population growth of almost 20% by 2020 was released. Last year, the Armageddon folks had a field day with the news that for the first time, more people moved out of Florida than moved in. The news of an increase this year, although small, and the 2020 projections, was greeted with mixed reaction -- some encouragement but little solace to the downtrodden.
But there's one obvious conclusion that bodes well for all sectors of our economy -- all those people will need places to live.
The sheer numbers we're talking about in terms of first-time home buyers, boomers, mover-uppers and general migration will drive up the number of transactions and eventually prices as well. As in every cycle, we'll move from a buyer's market to a seller's market -- it's inevitable.
The government and the powers that be are keeping interest rates low enough for everyone who can qualify to refinance their mortgage -- and we're busy because of it. But I think we're going to be a lot busier when the market turns. And it'll be a flood, not a trickle.
Stan Blacker is president of Mortgage Resource Partners in Clearwater, Florida.
You might have an investment advisor or broker who has established a plan that will put you on the right track to meet your goals. Still, you should be aware of some important factors that could affect your financial plan. For those of you searching for an advisor or broker now, these points are key to understanding how their business works and how they can affect your money.
1. Each time your broker or financial advisor sells you investments from XYZ Co., it may pay him or her a commission for using its products.
Many financial advisors accept extra compensation from companies in exchange for selling their investment products. Sometimes, advisors use products exclusively from one company. The extra compensation can include everything from golf balls to trips to exotic locations. It may also include expense-paid client events and due-diligence meetings. Is this in the best interest of investors? No--and it doesn't matter if the compensation is disclosed.
Some investment companies even pay "shelf-space" fees to advisors, which means advisors and firms accept compensation simply for making the paying firms' products available for their clients' accounts instead of using independent research to determine the best investment products. While disclosure of shelf-space fees is required in a prospectus, that doesn't justify the practice of paying or accepting these fees.
Before buying an investment, ask your broker or advisor if he receives a commission or other benefits for recommending that product.
2. After a broker-dealer sells investments to you, he has no legal obligation to monitor them.
Studies have shown that many investors, even experienced ones, aren't able to distinguish the difference in services available from a broker-dealer (registered representatives) and Registered Investment Adviser (investment advisors).
Both registered reps and investment advisors have a legal responsibility to make sure the investments they sell are appropriate at the time of purchase. For the broker-dealer, the legal obligation applies only at the moment of the transaction. For the investment advisor, however, the responsibility is in place every day the client owns the investment and remains a client of the firm.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (see more here and here) that was passed in July 2010 gives the Securities and Exchange Commission (Toronto: SEC.TO - News) the authority, but does not require it, to impose a fiduciary duty on brokers, which means the advice must be in the best interest of investors. However, a broker is still not required to monitor your investments.
3. A broker sells investments you may not need; they might not fit your investment plan.
Many investors end up with a random collection of investments rather than a strategic allocation of assets. I get countless calls on The Mutual Fund Show from people who tell me they're ready to retire and their advisor wants to sell them a variable annuity. They get no road map or investment plan for getting them to retirement--or through the rest of their retirement. They may get some information on the benefits of the annuity, but they're not getting a full explanation of the potential pitfalls.
Do some research on your own before purchasing an investment product to make sure it fits in your financial plan and will help you reach your goals.
4. Your broker has no particular expertise in investment products.
When I worked at one of the national brokerage houses early in my career, each rep sold everything, including mutual funds, municipal bonds, stocks, commodities, etc. Most brokers did not have a particular expertise, and they weren't concerned with how much they knew about the product they were selling. Their primary concern was meeting a quota. The sales pitch was often more important than the merits of the investment.
When advisors earn any designation, they're required to take continuing education and agree to adhere to a code of ethics. They're like doctors who practice in certain areas of medicine as opposed to a general practitioner. Would you want your family M.D. to operate on your heart?
Check your advisor's credentials and ask him which products he knows best. For example, mutual fund investors can look for one of two designations--Chartered Mutual Fund Counselor (Other OTC: CMFC.PK - News) or Certified Fund Specialist (AMEX: CFS - News)--indicating advisors have taken extra training and education in all areas related to mutual funds.
5. Your broker is allowed to sell only certain securities or products, so that's what he'll recommend.
It makes sense that registered representatives sell only what they're licensed to sell. I wouldn't buy life insurance from anyone who isn't licensed to sell it. What doesn't make sense is when someone licensed only to sell insurance recommends an insurance product such as a variable annuity to someone who wouldn't benefit from it.
Along the same lines, an advisor with XYZ Fund Company, for example, understandably is going to sell only proprietary products. It wouldn't be in XYZ's best interests if its advisors were selling investments from competitors. I understand that. But that doesn't mean it's in their clients' best interests.
If your broker is not familiar with a product you're interested in, ask for a referral for someone who knows the product inside and out and how it could affect your financial plan. Every investor wants the choice of the best, most appropriate investments that will help them achieve their financial goals.
Most advisers continue to doubt rally, which is a good sign
There continues to be a strong wall of worry for the market to climb.
Consider the average recommended domestic equity exposure among a subset of the shortest-term stock market timers monitored by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). This average currently stands at 22.1%, which means that the average short-term market timer is recommending that his clients allocate more than three-quarters of their equity portfolios to cash.
This 22.1% equity allocation is surprisingly low, given the stock market's strength in recent weeks, and suggests that there is widespread skepticism towards the rally. And that's good news, on the contrarian grounds that the majority is usually wrong about the market's direction.
Early last May, for example, was the last time before now that the Dow Jones Industrial Average was trading above the 10,800 level. And yet the HSNSI then was more than double where it is today -- 51.8%.
So one way of characterizing the net effect of the stock market's gyrations since early May is that it has wrung a lot of bullish sentiment out of the market.
This reminds me of an analogy that some contrarians are fond of using: A bull market can be thought of as a bucking bronco in a rodeo, trying its darnedest to throw everyone off its back on the way to the other side of the ring. Clearly, this bull market is doing a pretty good job of doing exactly that.
To be sure, there is no guarantee that this market will continue higher, just because it has thrown a lot of over eager bulls off its back. Sentiment is not the only factor that influences the market's direction, needless to say.
And even if contrarian analysis turns out to be right in its current analysis, its bullishness is strictly short term. My statistical analysis of the HSNSI shows it to have maximum forecasting power over periods of between just one and three months. It tells you nothing about where the market will be in, say, a year's time.
But, with these qualifications firmly in mind, it is definitely good news that there is a strong wall of worry out there.
Everybody knows the last decade on Wall Street was a poor one for investors.
Turns out it was even worse than we thought.
A remarkable new study from TrimTabs Investment Research shows that regular investors needlessly lost billions more than they should have on the stock market. Why? It's the old story: They invested more money in their equity mutual funds during the booms ... and then sold them during the panics.
So even though Wall Street overall ended the decade pretty much level (when you include dividends), average investors lost a bundle. TrimTabs puts the losses at $39 billion. It calculates that mutual fund investors bought into the Standard & Poor's 500-stock index at an average of 1,434. That's close to its record high of 1,565. If investors had invested at random times instead, their average purchase price would have been 1,171.
"It cost them about 20% to buy high and sell low," says TrimTabs' Vincent Deluard.
So even though the stock market today is around its 10-year average, TrimTabs reckons most of those who invested during the decade are actually sitting on hefty losses.
What does this dismal news mean for you, the investor, now?
Oddly enough, it means almost exactly the opposite of what Wall Street is going to tell you it means. The Wall Street crowd will say, as usual: "See, you can't time the market! Just like we told you! So just give us all your money, and just go with the flow."
That this line happens to serve the economic interests of Wall Street is, of course, a pure coincidence. Yet the TrimTabs numbers show, instead, that over the past decade it was actually quite easy to time the market. All you had to do was buy when the public was selling, and sell when the public was buying.
Naturally, going against the crowd is easier said than done. That's why the best professional investors like to say that successful investing is "simple, but it isn't easy."
Human beings are hard-wired to run with the herd. For millions of years, when the herd stampeded, the smartest move wasn't the hang around and wait to see why. It was to run.
And that's how they act on the stock market as well. But when it comes to investing, it's a bad idea. Your feelings are a bad guide. And there is no safety in numbers.
I am frequently surprised at how many people still give in to their instincts in these matters. During the housing boom, anything I wrote questioning house prices automatically drew scathing reactions. Today anything I write that is positive about buying a home draws a similar response. (I'll confess this alone makes me feel bullish.)
At the depths of the stock market lows, early last year, I pointed out that even rock-solid blue chips were being sold off cheaply: My email box filled up with people telling me I was an idiot, that Kellogg (then $38, now $51) (NYSE: K - News) or Procter & Gamble (then $47, now $61) (NYSE: PG - News) or Kraft Foods (then $22, now $31) (NYSE: KFT - News) were doomed along with everything else.
But as the TrimTabs research reveals, our feelings are terrible guides in these matters. Even during a flat decade, people could make money just by going against the herd. They didn't need to know anything else. They didn't need quantitative models, astrophysics Ph.D.s from M.I.T., inside information or privileged access. All that money spent on equity research? All you had to do was look at the latest numbers from the Investment Company Institute, showing whether the public was putting money into their stock-market funds or taking it out. And then do the opposite.
Last week I was in London, visiting one of the best investors I have ever known. Peter handles money on behalf of a small number of rich clients.
He shuns publicity (and requests that I don't mention his last name). He's been managing money for 40 years. Ten years ago he told me to sell the Nasdaq and buy gold.
Over dinner, as he reflected on a long career, he told me that as he has gotten older he has learned that good investing is even simpler than he used to think. He has abandoned most of the sophisticated tricks he tried to use as a young man. He sticks to value, and he runs against the herd.
Right now? He likes some blue-chip stocks, as they are reasonably cheap and no one else seems to be interested in them. He's avoiding fashionable emerging markets. And he's been quietly building a position in Japan. Why? "Everybody hates it," he says. "Twenty-year bear market. It's cheap. And your typical fund manager would rather suck a lemon than invest in Japan."
Most people's reaction to this is probably to shrug and forget about it. Japan is so over, after all. Why would you want to invest in Japan? Nobody wants Japan.
The forecasts were outlined by GIC group chief investment officer Ng Kok Song, speaking at a conference on private wealth management on Wednesday. GIC sees more rewarding emerging market opportunities in private asset classes including real estate and private equities, he said.
Publicly listed equities, however, are 'likely to remain GIC's main implementation vehicle for our emerging markets' strategy', he said at the conference organised by the CFA Institute and held at the Raffles City Convention Centre.
According to Bloomberg, Mr Ng said on the sidelines of the event that GIC aims to lift the proportion of investments in public equities and private assets in emerging markets from about 12 to 13 per cent at the end of March this year to the 'high teens' over time. As at March 31, GIC's exposure to emerging market public equities was 10 per cent or one-fifth of its global public equity holdings.
GIC's economists expect Asia to contribute 50 per cent of global growth this year, even though its share of global economic output is 34 per cent, said Mr Ng. China's contribution to global growth will be 26 per cent, he said, and India's, 10 per cent. 'Without doubt, we are witnessing a shift in economic influence of seismic proportions,' he said.
GIC's strategy to focus more on emerging markets strategy was announced earlier this week when the fund released its annual report which showed the 20-year nominal annual rate of return in US dollar terms jumped from 5.7 per cent to 7.1 per cent for the 12 months to March 31.
Friday, 24 September 2010
No, it isn't, says Glenn Tongue, a general partner at Tilson Mutual Funds. It's just that, if you're buying on price, you have to have a different time frame than traders who are gauging "momentum" or "sentiment" and other factors that drive the market's movements over the short term. Specifically, you have to be willing to wait years for stocks to gravitate toward their fair value.
This fair value, by the way, can be above or below the current market price. "Buy and hold," in other words, works the same way when you're betting overpriced stocks will drop: You may be right, but you may also be waiting a while.
In the late 1990s, stocks were extremely expensive on a number of measures, including the price-earnings ratio. These high prices suggested that the market would perform poorly over the next decade, and indeed it did. But predicting the enormous up and down moves in the interim was a different business altogether.
Right now, Tongue says, the market as a whole may not be attractively priced, but many individual stocks are ideal for buy-and-hold investors. Tongue cites Microsoft (MSFT), BP (BP) and Johnson & Johnson (JNJ) as examples.
Thursday, 23 September 2010
Gold, gold, gold.
Everyone covets it for one reason or another, millions are out buying it and even more people are talking about it.
Surging interest in the yellow metal is pushing it to new record prices. When prices reach these levels, the result is a bit of navel-gazing in the markets. Why is gold rising like it has been? And, perhaps more importantly, can it continue, or are we gearing up for a spectacular selloff?
A few of the fundamental reasons gold prices are going up and away include:
• International buying. Central banks around the world have been loading up on gold. The International Monetary Fund (IMF) recently sold $403 million to Bangladesh, while China, France and other nations have stocked up.
• Sheer momentum. Gold is expected to gain for the 10th consecutive year as loose monetary policies have flooded the markets with cash.
• Safety. Discussion of quantitative easing from the Fed coupled with lingering concerns about the eurozone still have investors turning to gold for its value as a safe haven.
• Jewelry. It's festival season in India, the world's largest gold consumer. This period in the country drives demand for gold jewelry. Look out, though -- higher gold prices this year could scare some buyers off.
• ETFs. Some observers also believe that the greater interest in gold and silver markets is a direct result of ETFs. The World Gold Council said gold demand grew 414% in the second quarter, and this is largely attributable to ETF demand.
If you're among the investors looking to get a little gold exposure, consider ETFs. Why would you own a gold ETF instead of actual gold? Simply put, it's more convenient.
Owning a gold-focused ETF is a good way to get physical exposure to the metal without the hassle of taking physical possession -- finding storage, paying for storage and so on. Each share of a physically backed gold ETF is just that -- it's backed by 1/10th of a bar of gold.
This gold is stored in secure vaults in London and Switzerland, and the holdings within are audited and inspected on a regular basis. Some investors aren't comfortable with this, and as stated above, if you're not, then gold ETFs may not be the right choice for you.
You have three options to invest in physically backed gold ETFs:
The differences between the three come down to both where the gold is held and the expense ratio of each of the funds. After recently slashing its costs, IAU is the cheapest, with a 0.25% expense ratio. GLD and SGOL have a 0.40% and 0.39% expense ratio, respectively. SGOL stores its gold in Swiss vaults, while GLD and IAU have their gold stored in London.
The catch with physical gold ETFs is that long-term capital gains are taxed as collectibles -- a whopping 28%.
If physically backed gold ETFs aren't your style, there are also equity funds that hold miners' stock.
The catch with gold miner funds is that they don't track the spot price of gold, so you shouldn't expect them to replicate the metal's performance. Their benefits may outweigh that fact in the current climate.
Both hold the stocks of mining companies. Gold mining corporations held in these funds tend to perform better when the price of gold is elevated, which was demonstrated during the second-quarter earnings season when many of the major players in gold mining reported soaring profits.
However you choose to get your gold exposure, be alert to any signs of a selloff, and have an exit strategy at the ready to avoid getting burned on the downside.
Commentary: Gordon Gekko's return is worth the wait
"I'll make you a deal," Michael Douglas's Gordon Gekko says to a rival who is equal parts Lloyd Blankfein and Jamie Dimon. "You quit telling lies about me and I'll quit telling the truth about you."
And with that, "Wall Street: Money Never Sleeps," which opens Friday, rolls into full gear. The follow up to "Wall Street," the 1987 movie that cemented Gekko as Hollywood's symbol of Wall Street excess and greed, is a fun romp. It's also director Oliver Stone's best movie in years.
I'll spare you the cinematic critique and stick to the issues. Suffice it to say this isn't "Citizen Kane."
Wall Street the sequel is preposterous in that it tries to stick closely to the events that shaped the financial crisis. Truth is stranger than fiction and the movie both suffers and gets its poignancy from the facts.
(Note: The movie is produced by Fox which is owned by News Corp., which also owns MarketWatch.)
Telling the truth is a central theme in the movie and in an industry where veracity is always in question. The volume of lies is a matter of perspective. Some financial pros who viewed the film see it as populist outrage. To them, the movie is a lie. Others will see the one-dimensional self-interest that pervades the movie's characters as validation of their suspicions.
Suffice it to say that those of us who work on or follow Wall Street for a living, will scoff at some scenes. A Wall Street chief executive, no matter how rattled, isn't going to throw a painting worth millions across a room, and none would have the guts to commit suicide when their firm goes belly-up. Not too many Fordham grads break into fluent Mandarin when dealing with Chinese investors.
The movie is full of these sort of reality-stretching spectacles. It's the kind of stuff bankers may say undermine the film's accuracy. But they're Stone's equivalent of car chases designed too keep the audience's interest.
Despite its embellishments and its too frequent shots of the Manhattan skyline, "Money Never Sleeps" finds Stone at his story-telling best. The movie begins with Gekko exiting prison. He's broke and no one comes to pick him up. The story then shifts to Jake Moore (Shia LaBeouf) a young trader who is dating Gekko's daughter.
Gekko writes a book and begins warning the financial industry about its practices. Moore's firm pays him an early bonus as it is about to go under -- it's at once a fictional Lehman Brothers and Bear Stearns.
Moore goes to see Gekko speak and is wowed. He seeks a relationship with this legend without telling Gekko's daughter. A deal is made. Gekko will help Moore avenge his company's failure -- blamed on a rival bank -- and Moore will help Gekko get back into his daughter's life.
It's a brilliant conceit that's been concocted by screenwriters Allan Loeb and Stephen Schiff. Like the first film, the push and pull of what's important in life -- money, family, trust -- are evoked. And like the first film, today's pressing issue of government intervention and the "moral hazard" that comes with it are probed.
Douglas's Gekko is at the center of all this and at even more than two hours we don't get enough of him. Gekko, we find, isn't really interested in rebuilding his relationship with his daughter -- something Winnie Gekko sees coming: "he'll hurt us," she says, before she's sucked in through Jake. You can guess what he is interested in.
Despite its look-ins on New York Federal Reserve meetings and use of CNBC footage, "Money Never Sleeps" isn't an accurate depiction of the financial crisis or its players. It's a cartoon. Exaggeration is Stone's device. His fans love it. Others find it irritating.
Josh Brolin, who plays that rival CEO, is so devilish one half expects him to jab poor Jake with a pitchfork. Winnie Gekko's dream of cold fusion energy is so naive and dreamy she seems to have just walked off a Disney lot after playing a princess.
And the ending? A little too neat, too happy, redemption that comes too easy. Again, this is Hollywood. If you're interested in realism, "Inside Job" the documentary directed by Charles Ferguson, opens Oct. 8. I'll be writing about that next week.
But for all of its flaws, "Money Never Sleeps" delivers when it comes to asking the question "Is Greed Good?" which also happens to be the title of Gekko's book. The answer, in fiction as in real life, isn't yes or no. It's nuanced. It's also beside the point. As Gekko says in one of his more hammy lines "It was never about the money, it's about the game."
Games, like movies are for fun. And this one delivers.
Balance-sheet drags remain deterrent to economic rebound.
THE GREAT RECESSION IS OVER, and it's news because, except for the stock market, it's far from obvious.
The National Bureau of Economic Research Monday declared the recession that began in December 2007 ended in June 2009, making it the longest since the Great Depression. It also was the deepest, slashing gross domestic product by over 4%, nearly twice as much as the 1981-82 contraction, which had held the distinction of being the worst since the 1930s.
As the seasons change with the arrival of the autumnal equinox in the Northern Hemisphere, it's useful to think of economic cycles in the same way. The end of a recession may be likened to the winter solstice, the shortest day of the year; after that, the days get longer, but that's not apparent during the short, cold days of January.
As with the seasons, the springtime of recovery is nowhere in sight at recessions' end. But in past cycles, 30 months after the peak of economic activity (analogous to the summer solstice), the recovery was in bloom. We're still in the February of this recovery; past the low point but the sun remains low in the sky, occasionally shining but bringing little warmth.
This cycle is different because it was the result of a plunge in wealth, which is ongoing. According to the Federal Reserve's latest flow of funds data, households' wealth contracted by $1.5 trillion in the second quarter owing to the stock market's decline. More importantly, Americans' wealth remains nearly $10 trillion, or 15%, below the yearly peak reached in 2006.
A number of commentators have noted in the second quarter's data an increase in households' real estate assets, to $18.8 trillion from $18.7 trillion in the preceding quarter. Notwithstanding their skepticism, the rise is possible given the federal government's tax credit to qualifying home buyers that expired during the second quarter, which goosed prices and sales volumes temporarily.
Not noticed was the sharp upward revision in the Fed's tally of residential real estate values in the latest flow of funds report. The level of housing assets increased by some $4 trillion, retroactively back through 2009. That statistical revisionism no doubt is as gratifying to homeowners as the news that the recession ended last year is to the ranks of the unemployed.
Another revelation is that much of the reduction of Americans' liabilities—a bigger factor in the improvement in their balance sheets than growth in their assets—has been the rising tide of defaults. WSJ.com's Real Time Economics blog put numbers to that observation () made here previously.
In this column late last year ("Middle Class Money Angst Visible in Dry Fed Data," Dec. 11), I contended the contraction in household debt in the third quarter of 2009 "wasn't just because of Jane and John Q. Public's pledge to get their financial houses in order after having tapped their houses as automatic teller machines. Their debt also was extinguished in the rising tide of mortgage defaults and home foreclosures, not exactly a wealth-enhancing trend."
Three months later, this trend was still apparent in the fourth-quarter report. At the time ("Middle Class Money Angst Still Apparent in Data," March 12), the second part of the headline explained: "Fed's Flow of Funds numbers again show average Americans' net worth gaining more by mortgage defaults than asset appreciation."
And three months ago, the same phenomenon continued ("No Champagne Wishes or Caviar Dreams," June 10) So-called strategic defaults—where homeowners determined it wasn't worth continuing to pay a mortgage worth more than the property—helped push foreclosures to a record at the time.
No respite is in sight, however. With foreclosures surging, spirits of homebuilders remain at rock bottom. The National Association of Home Builders/Wells Fargo reported Monday its confidence index remained at a cyclical nadir of 13. Index readings under 50 indicate conditions are poor. RealtyTrac reported last week that evictions under foreclosure were at a record in August.
Foreclosures may slow, albeit for non-economic reasons. GMAC Mortgage, a unit of recently rebranded Ally Bank (the one heavily advertised in commercials saying even kids know it's not fair to screw you, the customer) Monday said it halted foreclosures in 23 states for procedural reasons.
That doesn't change the doleful reality that, according to Institutional Risk Analytics, "we are less than one-quarter through the total corpus of bad loans and foreclosed properties in the U.S." Citing a presentation by Laurie Goodman of Amherst Securities, one-third of U.S. households have negative equity—owing more than the asset is worth—in their homes, which means one-fifth of them is vulnerable to foreclosure. So massive is the backlog of foreclosures that it takes 18-24 months from a borrower being in default and until they are evicted, according to Goodman.
IRA's Chris Whalen contends loan-to-value ratios in excess of 100% are less problematic that the loss of jobs by one or more of the breadwinners of the household. Whether it's the inability or unwillingness to pay that's more important, defaults and foreclosures have become so numerous that there's a backlog.
Regardless of the declaration of the end of the recession issued from some ivory tower, saying it won't make it so.
Wednesday, 22 September 2010
Maybe we need a new definition of "recession."
It will come as no relief to the 15 million Americans who are unemployed, but a committee of august economists has finally declared that the recession is officially over. In fact, it ended more than a year ago. No, you didn't miss the celebration. There was none.
For all the drama of the last few years, the final act of the Great Recession was remarkably anticlimactic. A group of economists from the National Bureau of Economic Research, a private, nonprofit group, has finally decided that the recession ended in June 2009. That's the point at which economic activity stopped falling and began rising. Economists call this a "trough," since it's the low point at which the economy bottomed out. It took 15 months to know this for sure because the number-crunchers like to have a year's worth of data to analyze--and there's no hurry to make a determination that has little effect on the real economy.
Ordinarily, it might boost consumer spirits to have official confirmation that we're on the way back to prosperity. Yet even economists seem mystified by a "recovery" characterized by sky-high unemployment, falling incomes, record poverty, and an endless housing bust. In its recession-ending announcement, the NBER noted that hitting the trough in June 2009 wasn't exactly like making it to happy hour on Friday afternoon. It was more like the unidentifiable moment when you stop getting more drunk and start getting less drunk. "The committee did not conclude that economic conditions since that month have been favorable," the NBER explained, "or that the economy has returned to operating at normal capacity?. The trough marks the end of the declining phase and the start of the rising phase of the business cycle."
The problem now is that the rising phase has nearly stopped rising. After a year's worth of decent growth fueled by government stimulus spending, Federal Reserve maneuvers, and a rebounding stock market, the recovery has clearly stalled. Companies have stopped laying people off in droves, but are barely hiring. State and local governments, once robust employers, have been slashing their own payrolls as their budgets fall. The housing bust seems headed for a fifth miserable year, with sales tumbling following the end of government incentives and prices likely to follow downward. The stock market, in response to all the gloom, has sagged since April.
The NBER's pronouncement means that if the economy slips back into recession, it will officially be two back-to-back recessions, not a single prolonged one. To most people, the distinction makes little difference. Yet by dating the end of the recession, the NBER provides a better way of comparing today's economy with earlier periods--and guessing what might happen next.
Jobs usually take a while to return once a recession has officially ended, and this time obviously is no different. The surprising thing is that in one way, the job market today is bouncing back faster than it did after prior recessions. The total level of employment bottomed out in December 2009, according to the NBER--just six months after the recession ended. After the recession that ended in November 2001, it took 21 months for employment to drift down to its low point and turn upward again. That might signal that we're doing better now than during the "jobless recovery" that followed the 2001 recession.
The reason it doesn't feel that way is that the 2007-2009 recession was longer and deeper than prior downturns--and we now know how much longer and deeper. With an end date to the Great Recession, we know that it lasted 18 months. The average length of a recession since World War II has been 11 months, and the longest, before the one we just endured, was 16 months. Forecasting firm IHS Global Insight points out that the latest recession was also the most severe since World War II, with GDP falling 4.1 percent from its peak before the recession to the low point in 2009. We still haven't regained all that lost ground.
That makes the current "recovery" worse than the lowest moments of earlier recession. The current unemployment rate is 9.6 percent--a tenth of a point higher than in June 2009, when we hit that trough. When the 2001 recession ended, unemployment was just 5.5 percent. When the 1991 recession ended, unemployment was 6.8 percent. Compared with today, those troughs seem like mountaintops.
The question now is whether the economy will continue its slow improvement or sink back into another bout of recession, like it did in the early 1980s. Back then, a short recession gave way to a mirage recovery, followed by a longer recession. Overall, the economy was in recession for 22 months out of 35 between January 1980 and November 1982.
IHS pegs the risk of a double-dip recession this time at about 25 percent. Others think the odds are higher and a few argue that we're already in the second dip. What economists agree on is that it will feel like a recession for a long time, no matter what the statistics say. When the unemployed begin to find work, home values stabilize, consumers start spending, and the government stops stimulating, that will signal an end to the nation's psychological recession. Maybe then, we'll celebrate.
This past week David Rosenberg posted an article, Here Are 13 Signs We're Actually In a Depression Right Now. I disagree. He is analyzing from a "glass half empty" perspective, without noticing that there is decent growth in much of the data he examines. Let's take a look at his items one by one.
1) Wages and Salaries are still down 3.7% from the prior peak.
Hours worked per week, after hitting a low in October '09, is now actually at its highest since January 09. Here's the chart. Number of temp workers has also been moving up steadily over the past year.
When employers start pushing their employees to work overtime and start using more temp workers, it's almost always a precursor to higher full-time employment, which is a precursor to higher wages. We are already starting to see the results of this: The jobs opening index surged last month. Here is the data at the BLS. Job openings went up by three million. Meanwhile, initial jobless claims fell to 451,000 last week, lower than people expected.
2) Real GDP is down 1.3% from the peak.
This doesn't seem like a Depression. In the Depression that started in 1930 GDP was down:
The GDP has now experienced growth for the past four quarters. Growth does not equal a Depression.
3) Industrial production is still down 7.2% from the peak
True. But it's also 7% up from the lows in 2009.
4) Employment is still down 5.5% off of its peak.
See #1 above. All of the leading indicators on employment suggest that we are going to see full-time hiring. Additionally, its not uncommon for a recovery to be jobless at first; in fact, its the norm. Click this link from Google Trends and you can see the phrase "jobless recovery" appears for years in news reports after every single recession.
5) Retail sales are still down 4.5% from peak.
Am I the only one that is looking at this from a glass half-full approach? We're about 8% higher off the lows. Here's the data. Sure, we're at 10% unemployment and retail sales are down. But the recovery has been fast and furious since the lows in 2009.
6) Manufacturing orders are still down 22.1% from the peak
7) Manufacturing shipments are still down 12.5% from the peak
8 ) Exports are still down 9.2% from the peak
ISM Manufacturing is at 53. Any number over 50 signifies growth. We've had numbers above 50 for 14 months in a row. So while we are certainly off the highs, it does seem that 14 months of growth doesn't qualify as a massive Depression.
9 ) Housing starts are still down 63.5% from the peak
10) New home sales are still down 68.9% from the peak
11) Existing home sales are still down 41.2% from the peak
12) Non-residential construction is still down 35.7% from the peak
I agree that these are bad numbers. Months of inventory (the amount of time it would take to sell all of the existing homes for sale) is at 12.5 months, an all-time high. The expiration of the tax credits on housing caused a plunge in sales, showing that government policy, while a temporary salve, ultimately doesn't do anything.
What needs to happen is for the banks to start lending again. Here is the money supply data. While at an all-time high now, its growth has slowed since the recession began. Lending needs to begin again. However, encouraging news is that housing prices are up 4.4% in the last quarter. If housing prices are truly stabilizing, which it appears they are, banks will not be afraid to lend against them. Then the virtuous cycle will begin. Again, was this bump in housing prices due to the tax credits? We'll find out this quarter.
Admittedly, the Homebuyers Tax Credit caused a spike up in the housing data that was probably irrational. But the expiration of the credit is also causing a spike down that is irrational. We won't know the true state of housing until later this quarter or the next.
13) Corporate profits are still down 20% from the peak
Now this is clearly a glass half-full analysis. You have to see the actual chart:
Are we down off the peak? Or have we spiked off the lows and on our way to recovery? You decide. Meanwhile, with corporate profits spiking, corporate cash in the bank is at an all-time high of about $2 trillion. And companies are confident enough to spend that cash:
A) 162 companies in the S&P 500 have increased their dividends this year versus just two decreasing.
B) $150 billion in share buybacks have been announced this year versus $20 billion at this point last year
All of this bodes well for the market.
I want to add some notes about the market. Right now, the market is baking in a double-dip recession. With interest rates near 0% the market should be experiencing a level of P/E expansion. Instead, versus interest rates, we are the lowest P/E levels ever with the market trading at barely 12 times next year's probable earnings (even if I discount the estimates) versus the historical average of 15. Whats the best way to play this? I like some of:
Warren Buffett's holdings: JNJ XOM
George Soros's holdings: MON AAPL YHOO
John Paulson's holdings: BAC C
James Altucher is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.
The S&P eclipsing 1130 for the first time since late June would seem to confirm the long-awaited technical breakout for the index, and could pull many reluctant investors off the sidelines. "Many automatic buy and sell orders are set around market milestones such as these, and investors watch those levels closely for clues about which way the market may go next," the AP reports.
But the wise move now is to sell this recent rally, says Robert Prechter, president of Elliott Wave International.
"I think we're getting ready for another leg on the downside," Prechter says, citing evidence of what he says are extreme levels of optimism, including:
- -- The most-recent AAII poll shows bearish sentiment at 24%, less than at the Dow's peak in October 2007.
- Mutual fund cash positions being at record lows, which Prechter says should be taken at "face value" rather than the result of massive redemptions from equity mutual funds.
- The TRIN Index (a breadth indicator) at one of its lowest levels in recent years, indicating extreme buying pressure of stocks at 52-week highs, i.e. investors chasing momentum/performance.
In addition, Prechter notes volume has been punk during the rally in recent weeks a sign, to him, that buyers lack conviction.
The veteran market-watcher says the current environment is similar to the 1930-31 period. "The market can make its high while optimism makes a peak despite the fact you're going stair-step lower," he says. "What we had in May with the ‘flash crash' was the first wave down."
Prechter predicts these periods of downturns sandwiched around 4-5 months of recovery "where people think we've hit the bottom" is likely to "go one for quite a long time" until a true bottom is reached well below the March 2009 lows, much less today's levels.
Tuesday, 21 September 2010
Amit Singhal of Google argues the competition is one click away. Charles Rule, an attorney whose firm represents corporations suing Google, counters that the company commands a share of search advertising in excess of 70%—the threshold for monopoly under the Sherman Act.
By Amit Singhal
Last week, "Googling something" took on a whole new meaning. Instead of typing your question into the search box and hitting Enter, our newest invention—Google Instant—shows constantly evolving results based on the individual letters you type.
Instant is just the latest in a long line of search improvements. Five years ago, search results were just "ten blue links"—simple web pages with some text. Today search engines provide answers in the form of images, books, news, music, maps and even "real time" results from sites such as Twitter.
The reason for all these improvements is simple: It's what you want. When you type in "weather" (or just "w" in the case of Google Instant), you want the weather forecast right away—not a collection of links about meteorology. Type in "flights to San Francisco," and you most likely want flight options and prices, not more links asking you to enter the same query again.
We know these things with a fair degree of certainty. We hire lots of great computer scientists, psychologists, and linguists, who all contribute to the quality of our results. We carefully analyze how people use Google, and what they want. And what they want is quite obvious: the most useful, relevant results, as quickly as possible.
Sounds pretty simple. But as Google has become a bigger part of people's lives, a handful of critics and competitors have raised questions about the "fairness" of our search engine—why do some websites get higher rankings than others?
It's important to remember that we built Google to delight our users—not necessarily website owners. Given that not every website can be at the top of the results, or even appear on the first page of our results, it's not surprising that some less relevant, lower-quality websites will be unhappy with their rankings. Some might say that an alphabetical listing or a perfectly randomized list would be most "fair"—but that would clearly be pretty useless for users.
People often ask how we rank our "own" content, like maps, news or images. In the case of images or news, it's not actually Google's content, but rather snippets and links to content offered by publishers. We're merely grouping particular types of content together to make things easier for users.
In other cases, we might show you a Google Map when you search for an address. But our users expect that, and we make a point of including competing map services in our search results (go ahead, search for "maps" in Google). And sometimes users just want quick answers. If you type "100 US dollars in British pounds," for example, you probably want to know that it's "£63.9p"—not just see links to currency conversion websites.
Google's search algorithm is actually one of the world's worst kept secrets. PageRank, one of our allegedly "secret ingredients," is a formula that can be found in its entirety everywhere from academic journals to Wikipedia. We provide more information about our ranking signals than any other search engine. We operate a webmaster forum, provide tips and YouTube videos, and offer diagnostic tools that help websites identify problems.
Making our systems 100% transparent would not help users, but it would help the bad guys and spammers who try game the system. When you type "Nigeria" you probably want to learn about the country. You probably don't want to see a bunch of sites from folks offering to send you money … if you would only give them your bank account number!
We may be the world's most popular search engine, but at the end of the day our competition is literally just one click away. If we messed with results in a way that didn't serve our users' interests, they would and should simply go elsewhere—not just to other search engines like Bing, but to specialized sites like Amazon, eBay or Zillow. People are increasingly experiencing the Web through social networks like Facebook. And mobile and tablet apps are a newer alternative for accessing information. Search engines aren't the "gatekeepers" that critics claim. For example, according to the research firm Compete, Google is responsible for only 19% of traffic to WSJ.com.
Investment and innovation are considered strong indicators of a competitive marketplace. Last week's launch of Google Instant was a big bet for us—both in terms of the complexity of the computer science and the huge demands it puts on our systems. Competition for eyeballs on the Web helps drive that risk-taking and innovation because consumers really do have the freedom to vote with their clicks and choose another search engine or website. In an industry focused on tough questions, that's clearly the right answer.
Mr. Singhal is a Google fellow who has worked in the field of search for over 15 years, first as an academic researcher and now as an engineer.
'Trust Us' Isn't An Answer
By Charles Rule
'What goes around, comes around." That pretty much sums up the predicament in which Google currently finds itself. If you listen carefully to Google's complaint that antitrust regulators have no business poking around in its business, you'll hear the echoes—if not wholesale appropriation—of the arguments once propounded by Microsoft.
In case you might have missed it, a decade ago Microsoft was a pioneer of sorts in establishing the relationship of antitrust to high-tech. Its Windows operating system was labeled a monopoly, and the company was accused of employing a litany of "bad acts" to prevent rivals like Novell, Netscape and Sun's Java from threatening Window's dominance. I should know. I represented Microsoft then and still represent the company today.
Microsoft countered that, far from being a monopoly, it was under intense competitive pressure and that the allegations of bad acts were actually the self-interested complaints of rivals unable to keep pace with Microsoft's innovations. Taking up the cause of the victims, state and federal antitrust regulators (and counterparts around the world) challenged Microsoft, and after an epic battle, they won.
Google now finds itself in those same antitrust cross-hairs, accused of being today's monopoly gatekeeper to the Internet. There are a growing number of complaints in the U.S. and Europe that Google has used its search monopoly to exclude actual and potential rivals, big and small. How exactly? Rigging clicks by lowering competitors' rankings in Google searches is one way. Another is locking up critical content, like video and books, so that rival search engines are frustrated in trying to provide their users with access to that content. The result has been Google's overwhelming dominance.
Ironically, many of the most ardent defenders of Google are the same individuals—such as Eric Schmidt, Google's CEO who was an executive at Sun and later Novell—who devoted so much time, money and effort to pushing the frontiers of the law and government regulation against Microsoft a decade ago.
Much like Microsoft's arguments about a general software market, Google likes to claim its business is only a drop in the bucket that is the general advertising market. But after lengthy investigations, the Justice Department and Federal Trade Commission have concluded that search advertising is unique and constitutes a separate market. In the U.S., Google commands a share of search advertising well in excess of 70%—the consensus threshold for monopoly under the Sherman Act. Google's share in most places around the world is even higher.
Like Microsoft, Google claims "competition is just a click away." But for an advertiser hoping to reach consumers when they type in a query about the products the advertiser sells, Google is where the queries are and more than 70% of all ad-supported queries flow through Google's search engine. Yahoo once provided a choice, and Bing is still hanging on. But there's reason to believe that Google's strategy has been to deprive any rival—big or small—of the queries and advertisers necessary to create real alternatives for users.
Again like Microsoft, Google claims its antitrust problems are the result of a cabal of disgruntled competitors. And it is true that Microsoft's rivals such as Mr. Schmidt's Sun and Novell provided much of the evidence, and at least some of the impetus, against Microsoft. But in monopolization cases, which are about exclusion of rivals from the marketplace, it is almost always the excluded victims who blow the whistle on monopolists.
Unlike Microsoft, however, Google so far has offered little more than cursory justifications for its actions. Microsoft at least believed what it was doing reflected its innovation, which, though perhaps rough on rivals, benefited consumers.
Google smugly brushes aside allegations against it, expressing indignation that anyone would deign to question such a hip, warm and fuzzy company. Google's defense seems to be: Trust us, whatever we do will be good for the rest of you. And, we're way smarter than you, so you'd never be able to comprehend what we're doing anyway.
Whether Google likes it or not, the Microsoft case resolved antitrust's role in high-tech. And the last 10 years have shown that reasonable antitrust rules can be applied to prevent exclusionary conduct by dominant tech firms without destroying market forces. Complaints by leading Googlers, who were once strong proponents of those rules, that the same rules should not apply to Google are disingenuous at best.
The application of antitrust must be consistent. Failing to apply antitrust rules evenhandedly—particularly to politically well-connected monopolists like Google—would neither be just nor promote the cause of free-market capitalism.
Mr. Rule, head of the Justice Department's Antitrust Division in the Reagan administration, is an attorney with Cadwalader, Wickersham & Taft LLP. His firm represents Microsoft and is counsel of record for two companies currently engaged in antitrust litigation against Google—myTriggers and TradeComet.