Google and Citi, A Tale of Two Economies

Google posted a 31% jump in profits for the first quarter, dispelling the rumors that had been circulating about the slow-down in the economy affecting the company's ability to continue to grow at a torrid pace. If you happened to check the stock after hours yesterday, you may have thought for a moment that you had stepped through a portal in time and traveled back to 1999. It's rare to see a $75 surge in a stock's price these days, although on a percentage basis a 17% move isn't that hard to believe. What is interesting is how mispriced the options on Google were relative to the jump in the stock price. The options market is generally good at jacking up the implied volatility in the options to anticipate a stock's move on earnings news. But given that Google reported the day before options expiration, getting the pricing right was particularly difficult this time. If you were a betting fool and felt like taking some serious one-day risk, you could've purchase the april at-the-money straddle for roughly $30 yesterday and printed cash today. It's rare to see a stock blow through eight strikes on an expiration friday. In any event, there are some fairly significant profits and losses out there today, which should make for interesting trading.

Citigroup, on the other hand, lost $5 billion in the first quarter on a massive $15 billion in write-downs. Revenues, although down by 50%, did not decline as much as analysts expected, which got the market very excited. Why does this also remind me of 1999? Because back then internet companies with negative margins would claim "we're losing money on every product we sell, but we'll make it up on volume." And the stocks would rally. Once again, the chorus of "the worst is behind us" continues. I still don't believe it given how the overhang in the credit market persists and Citi remains an owner of $2 trillion in assets, but it's tough to fight a market that loves to rally on such dismal news.