Analyzing More Ad Market Data Points

Ross Levinsohn of Fox Interactive says that Fox is seeing no signs of an advertising slowdown (per Mediapost), a tidbit suggesting that Yahoo!'s problems may be, well, just Yahoo! problems.  Meanwhile, Lowe's preannounced modestly disappointing results and blamed them on the housing market, as did homebuilder Lennar.  Washington Mutual recently said that the inverted yield curve and rising interest rates have dampened mortgage origination (no surprise), and consumer home equity withdrawals are apparently down year over year.  And the American car companies continue to suck wind.

Put it all together, and Levinsohn's observation does not necessarily support the view that Yahoo!'s recent news is a Yahoo! problem instead of a market problem.  Fox is presumably less dependent on advertising from financial services companies than Yahoo is (specifically, mortgage companies), and, with a younger demographic, it is also presumably less dependent on ad spending tied to the housing market.

Will Yahoo!'s weakness continue?  Is it a market problem that will soon affect other companies, including Google?  Is it the first sign of a slowdown that will spread to other industries?  Still too early to tell.  I continue to think, however, that the Yahoo! news and other data points above are consistent with the start of a general market slowdown, one that will likely gather momemtum if housing prices continue to fall.  The recent drop in rates may help housing prices stabilize (or even rise modestly) in the next few months, but the downward trend will probably resume eventually.

Put differently, I still think the Yahoo! news is a canary in a coalmine--one that the market has, so far, largely ignored.

Comments

[Victor]

What predictions can you make based on this poor little canary Henry? Do you think there'll be a miss in Google this quarter?

Re: the housing market. I think the threat to the market is quite overblown. Both Australia and England came through with ephemeral periods of flattening (rather than precipitous dips, followed by a collapse in consumer spending), with spending and prices now picking up in both places.

Beware of those that cry wolf and of false canaries.

[Victor]

One other point, I read in the Economist that a few percentage points of yield in long term treasury notes (accounting for the current inversion) comes from China's voracious appetite for T-bills and doesn't necessarily suggest the bond market signalling a recession.

[Henry Blodget]

I would be surprised if Google missed. If this is the start of a general slowdown, which I think it is, my guess is it will take time.

I think it is too early to conclude that the UK and Australian housing markets have "come through" their weakness blips, although it is certainly possible that the U.S. will have a temporary recovery here. House prices are still extremely high relative to rents and incomes, and this situation will eventually correct itself.

[Victor]

Measuring house prices against rents is a really bad way to gauge whether prices are too high. Houses are not stocks and price/rent is not P/E. You have to factor in the *cost* of purchasing, which is dependent on interest rates which have been very low over the last 5 years. Even now they are historically quite low. External factors such as competition from China, and China buying our Treasuries play an important role in the low yield of long treasuries.
Having said that rates have increased significantly in the last year and a half, and no doubt some people will be squeezed, but it's not yet time to start running for the hills Henry; if for not other reason, because we like reading your blog! :)

[ZF]

While there may be a macro component here, it must also be news that Yahoo seems to be so fragile in the face of even just the first hint of economic weakness.

[Henry Blodget]

Agree with ZF... Market-related or not, it is troubling that Yahoo is one of the first companies to have taken the hit.

The problem with looking at housing affordability as a measure of value is that interest rates (and, thereby, affordability) have a nasty habit of changing. If interest rates drop back to 4% and stay there, housing will be fine for a while. If they bounce around between 4%-5%, however, I think you'll continue to see a slow bleed. Also, to continue this digression, I do think that housing prices vs. rents is the appropriate analogy for a housingt P/E (or at least owner-equivalent rent). High P/Es on both stocks and houses are justified when interest rates are low (at least modestly high P/Es). The trouble is that, historically, anyway, interest rates haven't stayed low for long. And what matters is not what a house is theoretically worth today--it's what it will be worth tomorrow. Agreed no one should run for the hills, but in part because there's nowhere to run to.

[Victor]

Interest rates not staying low for long doesn't explain the extraordinarily low long term yield on 10 years notes. Why are interest rates so low and is this a trend? It's strongly related to the huge injection of labour supply into the world economy, including workers from China and India. This injection still has a long way to go (there are still 200 million people living in rural China on subsistance wages who could be brought into the world economy) and will not be stopped unless something catastrophic (like a huge terrorist attack) gives the protectionists enough political clout to curtail the benefits the world is gaining from globally free trade.

I think it's highly unlikely that we'll see long-term rates jump dramatically (i.e., above 6%) any time in the next decade. Given that belief, I think it's unlikely that anything terrible will happen to housing in the US, although I do agree a slow bleed could be possible

[ZF]

I don't know how much this is a specifically California issue, but P/E measures of housing prices versus rents really ought to subtract property taxes from rents (because the landlord only gets to keep the net rent, after he or she has paid the property taxes). The result (validly) makes current house price P/E measures look a great deal more ominous.

[C. Fischer]

Henry,

Would you really be surprised if they missed? Look at the following data-

Revenue History/Projections:

yahoo christmas quarter: 13% or 170MM GAIN (expected 12%)
yahoo q1: 5% or 70MM gain
yahoo last quarter: revenue flat
yahoo this quarter: preannounced FLAT

(goog numbers are with TAC)
goog christmas quarter: 23% or 341MM GAIN (expecting 23%, stock still got crushed)
goog q1: 17% or 334MM GAIN (stock went thru the roof, only expecting 9%)
goog last quarter: 9% or 202MM GAIN
goog this quarter: expecting 9% or 220 MM gain (law of large numbers kicking in? 9% now is a lot more than 9% was)

Market Share according to comscore:
yahoo nov: 29.5
yahoo mar: 28.0
yahoo jun: 28.5
yahoo aug: 28.7 (note the moderate share increase, in contrast to declines for the past year, yet they still preannounced flat revenue. to me, this signals pricing weakness.)

google nov: 39.8
google mar: 42.7
google jun: 44.7
google aug: 44.1 (note the dramatic increases to a slight sequential decline)

total searches:
nov: 5.15 billion
mar: 6.4 billion searches
jun: 6.4 billion searches
aug: 6.5 billion searches (also flatlining)

What do you think? Where do you think google is going to pull another 220 Million in business versus Q2 from? (or 140 million with TAC excluded)

With the above numbers and the seasonality of the business, I can EASILY see google missing.

[C. Fischer]

Oh, one more piece of anecdotal evidence - the google people have been REALLY quiet in the last 3 months..

[todd sawicki]

Working in an online ad supported web 2.0 content play here are my thoughts on yahoo and online ad spending. Audience is the leading indicator of revenue assuming rev per audience member is constant with US audience the most valuable in an ad supported scenario. For mature businesses like yahoo's US business the revenue pinch could be painful. And yahoo's will be worse because they rely much more on display ad revenue vs. google and others. So businesses with growing traffic like FIM/MySpace and likely growing rev per US user will likely be able to offset any declines in spending as long as audience growth continues to outpace any declines in rev per user due to ad spending declines.

[Victor]

Yahoo telegraphs terrible fourth quarter:
http://www.thestreet.com/_yahoo/newsanalysis/technet/10311513.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

[vfsv]

Why is nobody talking about Yahoo's announcement of mandatory time off during the holidays for all employees? Doesn't this suggest they see the announced problems as only the tip of the iceberg?

To find out "What's Reallly Happening," visit www.viewfromsiliconvalley.com

[Sufiy]

Google will be down due to click fraud exposure: the story slowly is coming to the surface:

http://yahoo.businessweek.com/magazine/content/06_40/b4003001.htm

[sufiy]

Google TA

http://sufiy.blogspot.com/

[sufiy]

Interesting TA development intraday and GOOG vs YHOO: usually YHOO is leading GOOG - its problems is not only company related ones:

http://sufiy.blogspot.com/

Regards,

[Jim Larrison]

Comparing Yahoo! announcement to a canary in a coalmine is more like a sick canary in a coalmine. Yahoo! is hurting in growing with the ad market and their bird is sick. Maybe their announcement is a sign of a trend, but realize it might just be that they are less able to deal with a little toxic air while the market adjusts.