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Monday, October 31, 2011

Market Thought... still no power

Going on 3 days with no power, cable and Internet. Three f-n days!! The level of incompetence is frustrating. Maybe because I managed and investigated manufacturing discrepancies with respect to hundreds of millions of dollars worth of a bio pharmaceutical that would go into infants, and excelled at it and trained a team that excelled at it, I understand how to properly investigate an issue, discover a root cause and implement a corrective action. I am left with utter amazement that PSE&G and Time Warner can not fix a specific designated grid within a three day time frame. (Needless to say, I'm writing this on my iPhone, again.)

The catalyst to today's negativity was mechanical. IMO, the Yen announcement gave the false impression of a "risk-off" trade. Then the negativity fed on itself.

This pull back is gonna allow for entries. (When PSE&G and Time Warner get their shit together, I'll be able to detail specific names.)

With respect to the market, there are a bunch of support levels here. If we are in fact continuing the March 2009 rally, the 320 and/or 360 SMAs will act as strong supports, and will not be broken.


Sunday, October 30, 2011

Still no power, but QCOM looks bright

I have not had power since 2pm on Sat. Sucks the big one. I sit here wondering when the fuck will the Smart Grid get deployed to avoid these types of outages. With the current sensor technology out there, and grid capabilities, the Electrical grid is ridiculously obsolete. (This was written on my iPhone. At least Apple knows how to do things right.)

Anyway, I wanted to point out a few key aspects that make QCOM interesting going into the Nov 2nd report.

1. 3G abortion in china is increasing and expected to reach 125M by the end of the year.

http://appleinsider.com/articles/11/09/21/china_to_hit_125m_3g_subscribers_as_buzz_builds_over_apples_iphone_5.html

2. QCOM earns about $14-15 per iPhone 4S.

http://allthingsd.com/20111019/apples-iphone-4s-cracked-open-money-spills-out/?reflink=ATD_yahoo_ticker

The only way Apple could handle such an awesome demand for this phone was to start producing the phone early this quarter, which would mean a benefit to QCOM should be seen this quarter.

QCOM is also very well positioned in the rapidly expanding LTE space. Depending on LTE growth, a higher multiple maybe justified.

Fundamentally, QCOM looks like an interesting play into earnings.

Technically, via the weekly, it looks like it wants a reason to push upward. It's breaching SMAs that were recently resistance.


Friday, October 28, 2011

Market Thought... wow

The EU leaders heard the thunder. They gave the market what it needed, and all those waiting to be disappointed, were caught with there pants down.

The market continued its rally much more than I thought it would. I did not think the market would break its 200SMA today, but looks like the bears (and there are a ton, a ton, of them) crapped their pants. (I took on protection in the AM, but as the market recovered from its intra-day slide down, I covered it for a wash trade.)

The market has re-established its March 2009 trend.

IMO, the last two months of actions should not have taken place below the 360SMA.  The bullshit Standard and Poor's downgrade facilitated the market weakness misconception, and the SP500 is now re-establishing its rally trend. (This weakness allowed for bullshit calls on China and the US economy, exaggerating market weakness.)

Now the market is in a positive feed back loop position. The super negative hedgie boys can not ignore the rise of the 10yr, nor its bullish implications. (The 10yr yield is a statement to US GDP, so a bullish trend on the yield is bullish for the US economy.)

The strength of the banks, industrials and basic materials suggests the market will be trading with a trailing PE range of 14-15.  With a trailing eps of $88 in Q3, I would not be surprised to see the SP500 see 1320.

The market is re-establishing the rally, and we have room to run when looking at a year ending SP500 EPS of $95.  Because of this, I will now be using the SP500/Vix overlay as my guide to measure complacency, and when to short the market.  The VIX has a way to go.  Multiple expansion will happen in quality names like DD, ETN, AXP, AAPL etc.


Wednesday, October 26, 2011

Market Thought... the vix

The fact that the VIX is elevated while the market is rising, imo, is very bullish for the markets.  It means the market is climbing the wall-of-worry.  (We must worry when the VIX is at very depressed levels. That would indicate complacency.)


The VIX still suggests a credit fear, and that is a legitimate fear with out a definitive plan out of Europe.

The only time I worry about the vix:

1. very depressed levels

2. If on particular days the Vix is up while the SP500 is up. (This could either be due to VIX index re-pricing or someone knows something and are protecting themselves. The VIX up/SP500 up only lasts for a day or two until the market reacts.  The most severe I ever observed it, was the week Lehman went under. It was up a few days in a row with the market, scared me so much that I sold all my positions except market shorts. That weekend we got the start of a US driven credit freeze.)

The above indicates everyone is already 'anticipating' a credit freeze. (As I highlighted months before, everyone was play a credit freeze before the actual credit freeze.)  But we already know, we will not get one, hence it is a wall-of-wary the market can climb.

Fear takes time to get washed out.  It took a year to flush out the fear from 2009.

The below was added the originally posted:

As the market re-captures the its 360SMA trend, it may consolidate before running.

In the short-term, the market may see a consolidation here. There is resistance above, and support below current levels. IMO, too difficult to gauge which way at current levels. The SP500 could base at the 360SMA, near 1216.

At the moment I am only in AAPL and QCOM. (Entry level positions waiting for my price points to be achieved, regardless of this market move, as highlighted in previous posts.)  I am waiting to enter SU on this anticipation of consolidation, was tempted today, but held off.  Google also tempted me today, as it declined to 573. (I held off, and if did play it, would have sold by the end of the day.)

Will look to add short-term SPY protection if the SP500 approaches 1260-1270.

a scary chart, for a bear

Today's intra day chart of GS would scare the crap out of me if I were a bear.

One aspect of why the market is allowed to trade at a lower multiple (trailing PE of 14) is the drag the financials have had on the market. Yesterday's Case-Shiller numbers was a wake up call, that housing will no longer be a drag on the market, however it got masked in the crazy market movement.

Today, I find the absolute strength in GS very interesting.  Keep in mind, GS was rallying before 1:30, when the EU/China news sparked a market run.  With the support from the banks, the SP500 may be able to trade with a normal level of 15 or so.

A market multiple of 15, would suggest individual names would see market multiple expansion to more normal levels, from their currently depressed multiples.  Which means there are a ton of inexpensive stocks out there.

Anyone who doesn't like buying after a huge run, look to names like DD or ETN.  They still offer a nice dividend with appreciation capabilities toward the end of the year.

ITRI pushing up

ITRI is pushing itself out of a negative down trend. With its $100M buy back, the intra day move looks like steady buying, which is most likely them.  ITRI looks to be suffering from the low Smart Grid deployment.


Tuesday, October 25, 2011

point out a mistake - QCOM

I need to point out a mistake I made in my QCOM assessment a few weeks ago.

My thesis on QCOM still stands, and should see 57 by years end, but the multiples used in the previous post were wrong.

QCOM currently trades at a trailing PE of around 21.4.  If QCOM reports as expected (0.78), they will have a stock price of 57.5 if the same multiple (21.4) is given to the stock.

At some point toward the end of the year, QCOM will be allowed to trade at such a multiple because its eps is currently accelerating.  (Albeit, if they report better than expected numbers, 57 may be achieved sooner. If they report so-so numbers, it may take longer. If they report crappy numbers, I will have to re-assess the fundamental thesis on the stock.)

Just wanted to point out my mistake.

Market Thought... sanity

Listening to CNBC from 8-11:40, literally, all they talked about was Headlines or 'sources' from the EU.  That drove a lot of the market trading. Then Joe Terranova came on, and said it was an opportunity.  I signed, thinking, finally some sanity enters the talking heads.

There is nothing more frustrating to listen to a journalist give his/her unqualified commentary. Its unnecessary, but this is coming from an individual that hates 'commentary' shows. (I am a boring guy,  just give me the raw data.) But TV is about extremes, whether it be fear or exuberance, people got to keep watching.


The market is seeing a hiccup.  IMO, this is all a part of the bottoming process, and does not change anything we do not already know.

We know the EU is slow to act. We know the EU banks are fucked and need more capital. We know the global economy is slowing. We know the US data is not great. We know there will not be a credit freeze.

The market has factored these things in, and is now letting company performance drive action.  With Q3 earnings coming in, a trailing eps should be around 88. With a multiple of 14, the SP500 target is 1245. So the market is near a reduced multiple valuation.

Regardless of the minute-to-minute distractions, the SP500 will have an EPS of $92-95 for the end of the year. A reduced multiple of 14 gives a SP500 price target of 1288-1330 by year end.

In the mean time, find the stocks trading inefficiently, and wait for the market to catch up to you.


trades... AAPL, GOOG, IBM, QCOM, SU

Below are some trades I am looking to take on. (Because not taking advantage of things I see,  sucks.)

AAPL is now looking to reach 420s quickly. Will look to play the Jan 2012 400 strike call if weakness is seen. (Normally I would have added at already on Friday, and would be riding the position to the 420s before unloading some.)

GOOG looks really interesting here.  Technically, it wants to test 620. Fundamentally, I do not know if it will get there just yet.  By year end, with a strong market, it can see 690 or so.  Normally, I would enter a very small position for the potential technical move. Right now I am looking for short-term market weakness to have GOOG test 584 or so, and will take a light position via the Jan 2012 600 calls.

IBM seems like it wants to hick-up here, but given its consolidated state, I do not think the hick-up will be severe. Conservatively speaking, if IBM re-tests 176, I'm getting in the. If it consolidates near 180, I will enter with a solid consolidation. (It will be via the 175 or 180 Jan 2012 calls.)

QCOM is consolidated and ready for the move to 57, as I previously highlighted.  If TXN's report causes QCOM to hick-up tomorrow, I will look to the 52.5 Jan 2012 calls.

SU is going to, at least 34, but since the technicals suggest 36, it will go to 36 by the end of the year.  WTI crude was near its current trading range in 2010-2011 when SU's upper trading range was 34.  SU has ground to make up. But when it does, the current chart would suggest it can go toward 36. I will look to play SU via the 32 Jan 2012 calls during market weakness.


Monday, October 24, 2011

Market Thought... :)

What ever happened to the aggressive US recession call by ECRI? The market now looks to be calling 'bullshit', too.

The market is re-capturing its bullish structure.  IMO, very bullish.

Although, there are still a few resistance levels to be cleared.

Good signs for this market:

1. Earnings are doing very well.  The SP500 2011 EPS looks to want to approach 95-96 based on the numbers being witnessed.

2. No hard landing in China. The HSBC PMI figured showed expansion in China, reversing last months contraction.  Since the HSBC data is more mid-size factory focused, the Chinese financing actions on smaller firms looks to be playing a role here. Regardless, the number is good.

The risks to the down side are falling by the waist side, and increasingly the only play becomes up.  With an EPS of 95, the SP500 will be at 1330 for a trailing multiple of 14. (This does not include a potential multiple expansion thesis.  But based on individual stocks, multiple expansion is coming.)

The few things I do concern myself with:

1. The Super Committee. We need resolution.

2. The EU resolution.  Right now, there are certain vulnerabilities that the bond-boys will exploit.  For instance, the EFSF is predicated on AAA status, and when France loses that status, this may provide a hick-up. Also, if EFSF bonds are allowed to trade, any weakness seen can be utilized to justify so sort of end-of-world scenario.  And right now, the bond markets are showing these concerns. (French bond concerns and EFSF bonds)

3. A recession in the EU area.  The latest EU data was not pretty. This maybe used to temper 2012 SP500 earnings expectations.

So long as a potential credit freeze is off the table, the markets will trade based on earnings and macro economic conditions, with the above acting as potential hick-ups along the way.

the chart dump - AAPL, CAT, DD, ETN, DIS, F, GS, GOOG, IBM, UNP

Here are a series of individual stocks that, to me, confirm the bottoming process. These charts coincide with the few stocks I highlighted a little over a week ago.

AAPL - This sucker is a healthy chart, and is going to 450.  It will most likely bounce from current levels, and probably not look back. If AAPL does not agree with me, the bounce off level will be mid/high 380s. (If AAPL reaches this level, I will probably not be able to resist and trade it.)

Most of the stocks highlighted below show a solid base formation. The declines I was looking for as initial entries (assuming entries were not made at the height of negativity) do not seem to want to happen.  They now have a positive bias.


CAT:

DD:

DIS - nice breakout from the its basing.

ETN:

F - Breakout, although it is at a weekly resistance. But the chart is obviously positive regardless, with a complete break from its negative trend.


GOOG - Although its basing, and showed nice strength on Friday, I would still hold off on it until, at least, the lower end of the base range.

GS - I pointed this one out already, but now the SMAs are in its favor.  95 would be an awesome entry with this set up, but I do not know we will see it. This sucker may cruise upward.

IBM - Nice strength on Friday. Looks like the 176 level was the support to watch.

UNP - Saving the best for last, the transport breaks from its 200SMA. Possibly allowing for a long-term trend to eventually be re-established.


I never will understand why traders say "price is truth". A trader's job is to take advantage on market inefficiencies, and this task is in direct contradiction to the "price is truth" mantra. IMO, the above show some really interesting positive bias, which will eventually carry over toward the year end.

Like the overall SP500, many of these stocks are trading at lower-than-usual multiples. The current positive bias or, at the very least continued basing, assumes little multiple expansion.  As US economic and China fears ease, expect multiple expansion to drive these stocks higher too.

Friday, October 21, 2011

Market Thought... technicals

Over the weekend I will be posting a bunch of charts confirming the bottoming process highlighted below.

Optimism is currently hard not to contain. The bottoming confirmations give me a since of bullishness, as we are testing our 320 SMA resistance.

The VIX also shows signs of wanting to collapse.

And the 10yr is very indicative of many stocks showcasing the bottoming of many individual stocks. With its strong move from the bottom, a base formation, that is shifting its overall trend. Its really pretty. :)

This optimism is obviously reflected with a strong up move today, so I am going to temper myself.  Throughout certain weakness, I would have been purchasing AAPL, IBM, QCOM.  If I was aggressive, some GS yesterday.  But with this optimism, I would have sold off on GS, and would be entering some 124 SPY Dec Put protection. (If trading, I would have entered it as certain technical conditions on the intra-day slow stoch, but since the opportunity was missed, I would take it on toward the end of the day.)  This would be just in case a 'sell-the-news' from the EU took place. (But would cover the protection shortly after the initial drop.)

Thursday, October 20, 2011

when to question AAPL

On CNBC this after noon Herb Greenberg pointed out a post by Jeff Mathews about Apple's retail sales, and how it is a prelude to negativity.

I completely disagree with this assumption to negativity. Partly due to the jumpiness of Apple's revenue over the quarters, and the obvious effect of the iPhone 4S launch. (Dan Frommer put graphs to the numbers for all to see.)

The other main reason to not care about physical retail sales is because the store was meant to be so much more than just a retail outlet.  Its your local Apple hub. A knowledge center, and customer service extension.

Every Apple device and every computer screen is a point of sale mechanism for Apple products. So to focus on just the retail store is absurdly lacking in analysis.  Especially, when seeing the type of demand for the iPhone 4S.

Apple has developed a virtuous cycle of a positive feed back loop from their great products, huge ecosystem, to their great customer service.  The loop is so strong, it can withstand many hick-ups.  But the one thing that truly separates Apple's growth drivers (iPhone and iPad) is their hardware. (Although that is over simplifying the combination of friendly user interface, very efficient OS software, huge ecosystem and when combined works effortlessly.)

IMO, the main link that lets everything work together effortlessly is their "A" series chips. It allows for the fluid activity of the device (iPhone and iPad) and extended battery life.  With out these chips, Apple's margins will slim as the device becomes a commodity (in relation to the mimicking competition), and Apple would become dependent on their ecosystem for sustained business, not growth. 

I would begin to question Apple when I no longer see a differentiation from their A6 or A7 or A8 and so on.  But Apple is far from a stupid company.  They know the importance of this differentiation, and how it allows for revolutionary type of software services not seen in other devices. During the recent CC, we learned Apple has about 1000 employees working on these chips. (And history has shown they are not shy about buying relatively small, under the radar, companies that have a potential edge in the space.)

When I see Apple lose their processing strength, I will begin to seriously question the stock.  Until then, all the other negatives are just cancelled out by record setting sales, and continued proof that Apple will out innovate their competitors.

Market Thought... detached emotions

Ever since I graduated from high school I have tried to put myself in a position to grow intellectually or emotionally.  After years of growth in Corporate America, I am expanding my intellectual and emotional base by starting a business.  The twists and turns are interesting, and have already learned a lot.  This drive is probably why I relate to trading so well. Conditions always change, assessments are never stagnate. If you do not adjust, you lose. period.

Each 'Market Thought' post attempts to assess the current situation as it stands, but a few recent posts transcend that purpose in order to form a basis.

The first is the 'market evaluation' post.  This post forms a worst-case scenario, as to what to expect if a US recession, China hard landing or EU inspired credit freeze takes place.

From the worst-case scenario, a more realistic assessment needs to take place. This is where the 'one-eyed man' post fits in.  The post gives a worst-case scenario a very very low probability of playing out.

By eliminating the worst-case we have to assess current and realistic future conditions to properly evaluate market expectations.  Here is where the 'tired, hungry and wounded' post fits in.  It gives a conservative below average market multiple due to stagnate US economic data, and slower global macro data.

Since Oct 16th a few outlier data points, imo confirm a stagnant story:

1. Earnings.  Qualitatively, earnings have been fairly robust, and guidance has been decent. Obviously, nothing to merit crazy momentum to the upside, but nothing that merits a collapse either.  Its blah.

2. Various Chinese action and data continue to point to soft landing.

3. Shipping and transports are now projected to be relatively flat. From an estimated 12% in Sept to near 2%, and 2.8% for this year's peak season. (This is from multiple ports, and confirmed from the CSX earnings report.)

4. German GDP for 2012 has been revised down to 1%, from 1.8%.


Detaching the negative emotions, the above observations continue to tell a weak economic story, that merits the market to continue to trade with a reduced multiple.  So I would continue to expect the SP500 to trade near a 13.5-to14 trailing multiple, and stand by the SP500 target of 1290-1300 by year end.

In 2012, given the current earnings story, continued global GDP growth and negativity, it is very reasonable to expect the SP500 to produce a $100eps. (Which is 10% lower then recent estimates.)  If a conservative 12-14 multiple range is placed on the SP500, next year we should be expecting a 1200-1400 trading range. (A flat year is not extravagant expectation.)

Right now, the market is just buying time, consolidating and continuing the bottoming process.  If the market decides to sell-the-news on the EU plan, I do not see the market breaking down below 1170-1180. (This assumes the EU leaders will produce something that squashes an EU credit freeze thesis. Despite the uneven chatter, their actions around banks suggest they will produce a solid plan.)

Wednesday, October 19, 2011

QCOM weakness

QCOM is taking a bit of a hit today. Maybe due to the aftermath of Apple's report.  If this weakness is from AAPL, then the market is being inefficient, as the opposite is true.

Apple eased up on iPhone 4 production, it ramped up 4S production to be ready for the very high demand. So, QCOM will see good impact from the iPhone 4S build prior to official launch (as their chips are in every single 4S).

As I indicated previously with QCOM, I would have been chipping away at my position on the way up. (A detailed description was provided.)  The position I would have chipped away near 53-54, I would be re-entering near 52.


Tuesday, October 18, 2011

the freak occurance

AAPL takes a hit due to its analyst estimate miss. Looking back Apple's 3rd quarter guidance, the company guided for $5.50 versus 7.05. But we know their guidance always underestimates expectations, even as they crush their guidance.

Anyone thinking, because of this analyst estimate miss, the company is no longer the company that it was, is very wrong. (And I am sure plenty of people are feeling this way, which is providing opportunity.)

The street has never seen a situation like Apple. Usually, the stock trades a head of exponential earnings growth, and the stock valuation gets very extended. This has not happened with AAPL. Apple's valuation has been consolidating on the way up.

With the lack of understanding, and its size, comes my expected market multiple of the stock.

There is a reason I started with Apple's last quarter's guidance in this post.  Apple's 4rth quarter guidance is $9.30, above the 8.98 estimate. (I guess an investor can view it as a give and take.)

If a trailing PE (minus cash) of 13 is allowed, AAPL stock should be at 446, today.  (A multiple of 13 for Apple businesses factors in a slower growth rate, obviously.)  So I am comfortable expecting AAPL to see 450 by the end of the year.

With a stock price of 396, its trailing PE, backing out the cash is 11.2.


As highlighted in a previous post, I would have maintained a light position going into earnings. (This would mean 2 Jan 410 call options.)  From this decline I would add in the AM, to the Jan 400 call options (also repositioning my current position), near the 10SMA.   Leaving me with 4 Jan 400 Call options.

The negativity alone should keep pressure on AAPL near 390-400 until the market players realize next quarter's guidance exceeded the street's estimates ($8.98).

If we see the market acting crazy, I would not be surprised to see the 90 SMA. (If this was achieved I would reposition the call options to either the 380 or 390 strike, but too soon to tell.)

fyi... GS

GS made the push I was anticipating with its bottoming out process.  My original entry in GS would have been near 92. (see here)

Considering the technicals, I would look to take profits, as it attempts to break out.

Ideally I would sell in stages, but knowing the type of gains I would be staring at, I would capture it with this push upward, and wait to trade it again.

lol, oh Cramer

I am listening to Cramer speak right now on CNBC, and I think it epitomized the tug-of-war the bigboys currently face.

No one wants to own banks, and Cramer open the show with the premise. Then David Faber breaks down the numbers, and things don't look as bad. (The greater hit was due primarily from mark-to-market pricing.)  Once Cramer heard it, he instinctively state, "its cheap here". (Melissa Lee calls him out on his flipping, and he sticks to the "don't own thesis".)

The above is from the start-to-the 4:20min mark.


This is how bottoms are formed.

Monday, October 17, 2011

IBM follow up

IBM's report was pretty much in-line, so analysts and media folk are going to do what they do best and cherry-pick a reason to justify the decline.  But that is no surprise, the pre-earnings evaluation said it all.

I still stand by the multiple-expansion thesis, and thanks to this sell-off, opportunity presents itself.

First lets establish the rising multiple thesis. The 2010 EU credit freeze threat pushed IBM to a trailing PE of around 11.  The current credit freeze threat, which was far more severe than the 2010 threat, pushed IBM's trailing multiple to high 12 and mostly 13.  During extreme market conditions, the trailing multiple has seen a higher low.  Throughout 2011, normal market conditions allowed IBM to trade with a trailing multiple at 14, and pushing toward 15 at times.

With a credit freeze off the table, and IBM's 5yr plan still very much intact, a low end multiple of 14 is very reasonable.  A trailing PE of 14 (using GAAP eps), would give a target price of 177-178.

Now, lets corroborated this with the technicals.

In the daily chart, there is support near the 20 SMA support and horizontal support near 175-177.  Also the weekly chart shows solid SMA support near low-mid 170s.


IMO, the risk for IBM to decline, establishing a trailing PE below 14 is low. Hence I view it as a solid entry point, and would enter.  

Here is how I would play IBM (bur right now can't):  Since I would be completely out of IBM, I would enter an initial position tomorrow, near the 20 SMA if possible.  If the negativity of the quarter is exaggerated by any market weakness, allowing it to break the trailing 14 PE, I would enter a second position at 175.  

(I am familiar with the type of negativity IBM can encounter because I have been trading it for a long time, so I would also be prepared ride the above position to 172 and enter another position near 172.  Any position entered near 172 I would unload toward 175-178.)

The Google threat

Over the weekend, there has been chatter (article, article 2) from the technophiles regarding the threat to Google's main search business.

The articles, mostly superficial and obvious, do not highlight the complexities of natural language internet search, but they are thought provoking.

The one thing that the chatter currently lacks is Watson.

If Watson and Siri were to 'get-it-on', OMG, we will have a true (spoken) natural language answer engine that speaks back.  We might be a year away from this because there are things to be worked out.  For instance, Watson was predicated on a created database, not the internet. And Siri is currently in Beta, albeit in a very good state, but still needs to be tweaked.

Research is not stagnate, and I am sure significant progress has been made that the average person is not yet entitled to.  IMO, this is significant enough to merit caution on Google's multiple. (Even when backing out Google's cash, it is still pricer than Apple.)

Keep in mind, I do not think Google is stupid either. They know this, and have been transitioning their search to be more of an answer engine. This is also another reason why they purchased Motorola.  The only way to make money from an answer engine, especially one that speaks the answer back to you in a mobile format, is to sell the hardware, software or be involved in the answer. Google will look more and more like Apple over the next few years.

Depending how quickly the 'answer engine' transition takes place, and if Google is lacking in their transition, is how severe Google's multiple will contract.  The worst case scenario could be the Microsoft Effect. Where MSFT lost device market share of 95% to some 40% in a span of 3-4years, and despite its growing EPS base, its trailing multiple is near 10.

Sunday, October 16, 2011

Market Thought... tired, hungry and wounded

"Give me your tired, your poor, your huddled masses yearning to breathe free..." -Emma Lazarus

I wish our political leadership (and aspiring leadership) were intelligent enough to remember this statement.  The idea of America is not buried in some past debate against State vs Federal level authority, it is the quote above. 

The beauty of a democracy is that voices will be heard, if there is courage to speak.  A lot of disenfranchised people have found their voice.  They are tired, hungry and wounded. They are now the most dangerous animals in the jungle. 

And while many, including the Tea Partiers, distance themselves away from the Occupy Wall Street crowd, the message is the same.  Everyone wants the same thing: a far more efficient government, with clarity in leadership, looking out for the little guy.

If our political leadership had any sense of self preservation for their elected positions (and given their general sense of egotistical selfishness, I think they do), they would take note, ease the divisive tone, compromise and actually find an equilibrium to give America a plan. (We need to see a lot more bipartisan actions like Foreign Investment Act.)

A plan, will allow corporations to focus their spending and unleash their cash hoard facilitating growth.  In the meantime the US economy is stagnant.  Adding the threat of an EU inspired credit freeze, leaves everyone taking a far more negative tone.

At the moment, the markets have completely (imo, correctly) removed the threat of an EU inspired credit freeze.  Even with out a crisis plan, the EU has a $1Trillion dollars with the funds available from the amended EFSF ($600B) and IMF funds ($390B). IMO, that is enough, but there is talk of having some 2Tillion euros, to effectively remove all uncertainty of a credit freeze.

With out a threat to a credit freeze, the SP500 has absolutely no basis to trade with a trailing multiple of 11-12.  This is historically very low trading range reserved for extreme scenarios.  Q3 esp estimates for the SP500 is $24.64. So far reports have been very good, except for materials and industrials. This estimate should hold firm, potentially giving the SP500 with a trailing eps of $89.  A 12-14 multiple range with an eps of 89 is 1067-to-1245. 

Usually the high end market multiple should be 15-17, but the EU austerity measures and stagnant US economy (with no plan in place) is no place for optimistic multiples. IMO, a 14 multiple is reasonable for steady global GDP growth.

As this quarter funnels through, end of year SP500 eps should be around $92, if not slightly higher.  That will lead the market to trade toward 1290 with a multiple of 14.  This move will be facilitated by other uncertainties easing. The uncertainties include:

1. the Super Committee gives America something reasonable
2. negative US economic sentiment lessens
3. China's soft landing

With these uncertainties removed, the market may even be able to trade at a multiple of 15.

From a technical perspective, the SP500 is at its high-end trading range, but many stocks and sectors are forming bottoms.  They have gone straight up in a weeks time, and based on the above market fundie assessment, stocks should consolidate, allowing for entries before the year end rally toward 1290-1300.

Saturday, October 15, 2011

AAPL valuation

Now that AAPL is pushing past 420, and about to release their numbers on Tuesday, I have been thinking about how to perceive Apple's stock to obtain a realistic expected valuation.

My points of consideration:

1. Already the largest investor base. (Everyone owns it.)
2. Product growth trends
3. Revenue and earnings growth rates
4. Potential product growth drivers
5. The market has never seen a situation like AAPL

Earlier this year the majority of the hedgie big-boys developed a "too big" mantra on AAPL. Despite consistently proving other wise, some heavy hitting big-boys question its growth prospect. However, AAPL is in a situation where the average investor and technophiles have not given up on it.  The dichotomy has allowed AAPL to trade at very low multiples, then rally when it proves itself. (As the big boys catch up to the bloggers and technophiles.)

Its product cycles are still in their growth phase, and eps is still accelerating. (As for future products, just combine a giant iPad, iTunes library and Siri and you have the future living room.)

When Steve Jobs resigned, the stock pushed toward mid 350 briefly, then rallied.  Then, while everyone was disenchanted by the iPhone 4S release, the stock again pushed toward 350.  The mid 350 level, factoring out the previous quarter's cash, gave AAPL a trailing multiple of 11.

This multiple was given to AAPL while the SP500 was in a state of absolute free fall negativity.  The intra-day low end of the SP500 was near 1075, giving the SP500 a multiple of 11-12.

The SP500 and AAPL have since bounced.  The market is now trading in a more reasonable 12-13 multiple range.  AAPL is now trading with a multiple (backing out the cash) of mid 13.

My point here is that AAPL may have gotten so big, over owned and lack of cash utilization, that the street will only give it a market multiple when backing out its cash, regardless of growth rates.

So when the SP500 trades with a multiple of 14, so will AAPL.

At the moment, this is not a bad thing.  If we factor in 'about to be released' quarter's results, and the SP500 is trading with a 13 multiple, that means AAPL will trade at 450 soon after they report.

The 450 target assumes analyst estimates are achieved, which AAPL usually blows past, and $10B in cash is put onto the balance sheet.

This is just another reason I would not sell AAPL going into earnings. And if by some freaky development the street decides to sell the stock after it reports earnings, I would be an aggressive buyer.

Friday, October 14, 2011

Market Thought... more technicals

I would look to take on SPY put protection via the 123 Dec puts.  I would most likely take on the put protection on Monday, 15 min or so after the open or if the SP500 sees 1230 (or the 320SMA).

But realistically, if I was actually looking at the sizable gains of a would be AAPL, QCOM positions, along with the trading via the 'opportunity loss' trades, I would be taking on a light protection now, and add on Monday as indicated above.  Then wait for the position (DIS, DD, ETN, SLB, SU, POT, IBM etc) I would want to get into (as highlighted in the post below).

Thursday, October 13, 2011

trading thoughts... AAPL, QCOM, IBM, GOOG, DD, DIS, ETN

(Below are trades I would actually do, but can't, so I am venting them below.)

AAPL - The only new info since my last post on AAPL (explaining the potential for the 420 level to be achieved) is the market's reaction to GOOG's report.  AAPL will most likely see  420 before it reports. (I would not add to my AAPL because of Google's report, but I now would not sell my light position at 420. I would let it ride into earnings, and sell into potential strength from their earnings.)

QCOM - I stand by my recent assessment of QCOM. I would not alter the trading highlighted in that post.

IBM - My opinion has not changed.

GOOG - Anyone playing this one into earnings, congrats!! Even if I had the ability to trade, I would not have been so bold this go around. The Motorola and IBM patent acquisitions, and potential Oracle settlement gave me doubts the headline number would be off. I thought GOOG would take a sizable charge this quarter for one of these things, but I did not see these costs in their report.  Regardless, it was a nice report and the stock is acting accordingly.  At 600, GOOG is approaching a very hard resistance.

Also, given the macro-environment, I do not know if the market will allow for a high degree of multiple expansion right now.  If GOOG can trade with a trailing PE of 19, it can trade in the low 600 area. Basically basing at its resistance.  If the market allows for multiple expansion, then it can break out.  This scenario is not something that appeals to me at the moment, so I would not trade GOOG on the hopes of multiple expansion.  (I would rather play GOOG if it sees 560-570 level, then play the breakout going later on in this quarter.  As the end of the year comes closer, then I expect Google to break out.)

DD - This stock usually trades with a trailing PE of 14. Its currently near 12. If recession is taken off the table, and factoring next quarters results, DD can easily test the 200SMA or 48. I would  enter a position near 42, and another at 40.  (I would play the common as there is a nice dividend that can be a cushion at current levels.)

DIS - Looks to have formed a nice bottom, and is basing. I would start entering 5 Jan 2012 32 strike calls at 32, and add to the position at 31. Would look to sell in stages from 34 and then at 37.




ETN - Looks to be forming a bottom. I would play the common (for the dividend cushion), starting an initial entry near mid 39, and add a second near 38. I would look to sell around 44-45.

(After entering these positions, I would be more inclined to maintain a light SPY put protection.)

Market Thought... technicals

Just wanted to follow up with some more details around the market technical levels.

The SP500 is near its 5SMA, pending on negativity, there could be a move to the 1180 level.

FYI... as per my previous post my only positions right now would be AAPL, QCOM and GS. Because of the relative strength in AAPL and QCOM, I would be covering my protection here.  I would also be looking to add to GS with this weakness. (I would already have a light position here, and add one option here, then another at 92.)  We already know banking reports will be weak, and the current reaction is from a "V" shape move from the lows.  (I find myself getting more bullish on financials the more I here them being bashed. Also, the activity highlighted on CNBC by Beazer Homes is going to make me dig into housing stocks, and see what the sector is saying.)

Wednesday, October 12, 2011

Market Thought... the herd

Even though I am well aware that market action tells traders how to behave, I still find myself amazed when I witness it.

The type of bullshit that is allowed to circulate and gain credit is just truly amazing.  But that just goes to show the lagging and reactive nature of the market players mostly because a lot do not rely on solid fundamentals. They rely of 'what if' scenarios and false indicators, not questioning the meaning behind the numbers.  In any other time I would be thanking their predictable craziness, but this go around I sat out of it.  I am just glad I have this blog to time stamp my thoughts through out this craziness.

So, as they run like chickens without heads, we try to use our heads.  At this stage of the game, I would have light positions in AAPL, QCOM and GS (as highlighted in previous posts).  Through out this mess I would have maintained my BGCP, ITRI and AXPW.ob positions. And depending on the cash I would have accumulated I would determine if I needed to unload the second position of BGCP. But given the opportunity loss I calculate, I would be holding the entire BGCP position until it hits 7.75, then sell half.)

I would take on light 122 Jan 2012 SPY protection here.  This SPY position would be used for any very-short-term protection, as the action suggests short-pull backs, until Nov 3rd.

Many stocks and sectors are forming a bottom here. It started with the semis (as I pointed out during the heart of negativity), and the rest of the market is now following.

I would be waiting for initial entry points on SU, POT, ETN, IBM (after they report), DIS, GOOG (after they report) and SLB. All of which, like the market, saw "V" shape moves from the bottom.

The market seems like its clear sailing until the Nov 3rd EU plan is announced, but once the plan is announced the rating agencies will most likely start downgrading EU countries and Greece default goes in effect, which would provide some hick ups. The hick ups will not matter as much because US and EU bank capital can withstand it. (After Nov 3rd, there will be a green light to short the Euro again.)

In the mean time, if the SP500 see a 90eps (about $8 below estimates) for 2011, the potential range is 1080-1260, given a 12-14 multiple.  If SP500 sees a 100esp (about $10below estimates) for 2012, the potential range is 1200-1400.  So the market may form a base around the 1200 level, until economic data gives us better clarity.  (My lower eps is due to the hits the materials and banks should take due to lower commodity prices and banking pressures.)

While its tough skating against the herd ;),  it always feels good to be a few steps ahead.

SocGen's 2 cents

SocGen's opinion on EU banks is literally worth 2 cents, probably along with the equity value of their bank.

Playing the equities in the EU banks right now is a game of Russian Roulette.  Each bank will need to get re-capitalized, and they will. But which one will be the bank that looses their equity in the process?  Dexia was supposedly the strongest of the EU banks, and look how that turned out.

The EU banks is a high risk/high reward game, with a ton of uncertainty.  The better high reward lower risk play is the US banks.  The US banks declined in sympathy to the EU banks.  Once the EU banks are re-capitalized, the US banks become relatively safe again.

The only risk to the US banks are the forced selling of assets from the EU banks (that was seen last Friday in the CMBS market) that could depress asset values while the selling takes place. With all the capital the US banks have, this threat is meaningless with respect to their operations and will act as a short-term hickup to earnings potential, via write-downs. (But with real-estate chillen at bottom levels, the missed priced assets from forced selling, actually have real value this go around.)

As I highlighted a week ago with the GS call, banks are in a bottoming process now.

Tuesday, October 11, 2011

AAPL trading dynamic

I have been consistently highlighting AAPL's trading dynamic, with the low end being Steve Job's resignation and the 90SMA (which also corresponds to a very low multiple valuation).  Now it is testing the 400 range.

Given its underlining strength, low multiple base and the fact that I now I can discount ECRI's recession call, AAPL looks to want to test the 420 area.

I should note how I would normally been playing AAPL, as this is one of the opportunities lost.  Near 370 to 350 I would have been purchasing 370 Jan call options.  Purchasing Two option in the 360s and two in the 350s. As AAPL rallied off the 350, I would have unloaded the one purchased in the 350s. Maintaining the two purchased at 360, and any other position I had maintained going into its decline (although the options would have been re-posititioned to a 370 strike). On Friday's weakness, at 370, I would have added one position, leaving me with a total of 3 options (and what I maintained).  With yesterday's move, I would have sold off the 2 options, and today I would have sold off the remaining third option.  Leaving me with a minimal position I held onto into its decline. (I would reposition the options again, to a 390 strike here.)  I would be holding on to this position until the 420 level, and wait for a re-entery into AAPL.

(In hind-sight, this action took place within a 3-4 day period, but earlier this year, AAPL's weak trading took place over a multi-month period. My trades are not time dependent, they are price dependent. Hence my inability to take on these trades at the moment.)

Basically, going heavy near 360, and being light at 400.  But since there is now a greater possibility of pushing higher, I would maintain a light position, but not an added position. (I would add a 390 Jan call option to the position if 390 is seen from the potential 400 level resistance.) 

Monday, October 10, 2011

Market Thought... one-eyed man

In the land of the blind, the one-eyed man is king.

I know I already wrote my Market Thought post for the day, but quite frankly, the very aggressive ECRI recession call has been bothering me since I saw it on CNBC. (Simply does not jive with data, especially the Baltic Dry Index.) Since then, I have been looking at leading indicators, and trying to assess them individually to confirm my original thesis that 'special circumstances', like the Fed twist or specific (but controlled) easing from China or something was skewing the results.

I was combing the chatter today, and came across this blog post that posted the ECRI Weekly Index, which saw the index pointing to recession.  The below chart is from the article.

My interest in this chart is from 2009 onward.  The index had a sizable move in 2009 representing the start of the March 2009 market rally.

What I found most interesting was the decline in the ECRI index in the middle of 2010.  During this time, the market saw a full blown correction, hitting the 360SMA support.  A period of time, the big-boys were really scared, and when took place I did not understand why so many of the big boys were scared.  This was the data point I did not have access too, but regardless, my thesis that the rally would continue was correct, and the market rallied hard after testing the SMA. Looking at the above chart, now I understand why they were ALL scared.

So, a few weeks ago a similar ECRI index set up was achieved, except the market is completely broken down technically.  And I am willing to wager, the reason ECRI is so aggressive with their call this go around is very much to do with the breach of the March 2009 rally via the 360SMA. (The stock market is viewed as a leading indicator.  A broken market suggests a broken economy.)

Here is where I am finally able to call BULLSHIT on the fear of recession, and side with Buffett.

In 2010, the market correction was predicated on issues with the EU, issues that were fixed with band-aids allowing the markets to rally.  However, now, the EU issues could no longer be contained due to the bank runs.  The potential EU induced credit freeze alone is enough of a shock to the equities markets, but the SP500 has about a 100 point decline because of the US debt downgrade.  The down grade came right before we started seeing signs of EU bank runs, which eventually caused the markets to completely breakdown technically.

The markets would not be broken down technically, if Standard and Poor's did not downgrade the US.  This downgrade holds absolutely ZERO economic effect.  It only effects the momentum whore traders that actually give a rats ass about these technical levels. (And entities forced to sell due to their by-laws.)  The massive volatility we are seeing would have been seen on the 360SMA, not below it, ultimately maintaining the trend.

Basically, I think ECRI's conviction is very wrong with their recession call.

I know the above sounds really bullish for the equity markets, and I think it is. However, once the EU bailout plan is announced, the rating agencies will downgrade a few EU countries. France is most likely a target, and maybe even Germany.  Potentially capping upside, until this is washed out. But worst case scenario market action, IMO, can be removed.