Sunday, May 13, 2007

Supply and Demand

I just read an article in Seeking Alpha by a guy who will never manage any of my cash.

Google: Believe It or Not, The Stock Looks Cheap

He says -
I have been warming up to shares of Google (GOOG) more and more as of late because the stock has been dead money while the company's impressive growth continues. The result of that dichotomy has been a share price that is getting more reasonable on a valuation basis. On Thursday, I began initiating Google positions in some of my accounts that had sizable cash reserves

This guy's thesis is that the market is oversold and one has to be careful where one puts one's money in an oversold market. So he is going to park his client's money in GOOG to protect it. That's not moronic - that's almost criminal.

Here is a chart of GOOG

Now keep in mind that I am not the sharpest tool in the shed - but if the company's impressive growth continues why hasn't the impressive growth in its share price continued as well? In fact, how can a company with such a amazing future predicted growth have shares that are decreasing in value?

There can only be one answer to that question. There are too many shares for sale at ever lower prices.

That is such an important concept that I will repeat it - there are TOO MANY SHARES available FOR SALE at EVER LOWER PRICES. Sorry but I had to shout those words so the hard of learning would get the message too.

The stock market is a world of supply and demand. When there buyers (demand) price goes up until it hits a level where someone is willing to sell. If the demand continues then the price will continue to rise. When there are sellers (supply) price goes down until someone is willing to buy and price will continue to drop as long as no buyers are willing to take the offer.

What stimulates buying (demand)? The perception that the stock will be going up in price. What stimulates selling (supply)? The perception that the stock will be going down in price. Note that I said "perception" - there is no reality more powerful than the "perception" of a move in a stock's price and the perception for GOOG just doesn't exist.

So if that's the case what is the case for GOOG to go up? Oh that's right I remember now - it's done nothing for so long it has to do something - someday.


Tom said...

Points are well taken
During this period of "basing" all the sellers will eventually have sold, then some trigger comes along that generates interest/Then the stock will rise. The company needs to keep the stock price up to continue their buying spree/
I don't own any stock/but use some option techniques to generate some cash.

Dogwood said...

You can't say a stock is basing if the price keeps going down. That's called a decline.

Characterizing a steady decline as "basing" is a rationalization one would expect to hear from someone trying to justify holding onto a losing position.


Excellent and well thought out trading methods.