Search This Blog

Monday, April 30, 2012

some thoughts... JPM, SLB, AAPL, GOOG and QCOM

JPM - Looking to increase the position near low 42.  If the jobs data begins to improve, JPM will trade between 46-50.  If jobs data does not improve, JPM should trade near 46 because as the housing/mortgage market improve JPM's book value of around 46 continues to be justified.

SLB - Looks interesting here. Now that the fracking negativity is flushed out, and oil prices remain elevated, SLB should be able to maintain the 73 level. Even if SLB maintains its low-end trading multiple range (18 being a low-end trailing PE trading range), SLB will approach 76-77 as the quarter matures.
AAPL - Looking to add here.

GOOG - Looking to add near current level and near 580.

QCOM - I think QCOM is at least a 69-70 stock by the end of the year, but am looking to sell my current position between 66-67 (then re-enter after a consolidation). If QCOM doesn't yet reach 66, and sees between 63 and 62, I will add.

I still believe my current market thesis. If I get an opportunity to add to the above names, I will look to proportionately take out SPY puts for a hedge to the jobs data later this week.  (Although I am getting the feeling the market is front loading potentially negative news, and could rally on decent numbers.)

Saturday, April 28, 2012

Facebook or MySpace?

Guess if I am referring to Facebook or MySpace:

The most widely used and popular social networking site buys a rapidly growing photo sharing property.

Is it Facebook or MySpace?

Its a trick question. The funny and sad reality is that both fit the bill.

In 2007 MySpace was the largest and most popular social networking site, and bought PhotoBucket for a shit load of money.

A few weeks ago, Facebook bought Instagram for more than a shit load of money.

Did Facebook need to spend $1B? Many have stated that Instagram-is-to-mobile as Facebook-was-to-PCs.  In this context, the price tag was a no brainer. But Facebook's growth over the last two years have been directly tied to mobile. If Facebook is loosing in the mobile space, they have themselves to blame. Facebook should understand mobile better than anyone, yet their current mobile offerings suck. Their mobile offerings are slow, clunky and frustrating to use.

AAPL potential trading dynamic

AAPL is in a interesting place. (Been adding to it recently.) Like many other tech stocks, after they reported, AAPL's multiple seriously contracted.

AAPL is currently trading with a trailing multiple of 14.7. Barring the multiple seen in January (12.5), 14.5 was a low end range for AAPL toward the second half of 2011. IMO, the 12.5 multiple was an anomaly as investors were forced to readjust to Apple's new growth trajectory.

Prior to the iPad, and when the iPhone was only on 1 carrier, AAPL typically beat their own estimates by 16-24%. Now that the iPad is gaining wide acceptance and the iPhone is available world wide, Apple has been beating their guidance by +40%. (That's sick, but to the victor goes the spoils.) Realistically, they should see a new range, probably low 20s%/high 30s%.

From a trailing PE perspective, a reasonable assumption can be established to allow AAPL to have a trailing multiple in the mid/high 15s. (If a name like IBM can maintain such a multiple, so should AAPL. The only differences between the two companies is that IBM properly uses financial engineering, where as Apple's growth does not merit heavy engineering. Although they did need a dividend to allow an increased pool of funds to play the stock, via dividend funds.)

With a multiple of mid/high 15, AAPL should be trading between 635-to-655. Heck, even if Apple did nothing for the quarter, then assume Apple beat their own guidance by 24% at the end of the quarter, AAPL would have a trailing PE of 14.5 with a stock price of 637.

Basically AAPL will eventually trade near 630-640 as the quarter matures.

From a technical perspective, AAPL is not overbought and chilling near support SMAs.

Barring an outside shock to the financial system, AAPL should be trading between 600-and-640. As this quarter matures, AAPL should trade between 620-and-new-highs.

Friday, April 27, 2012

Market Thought... seasonality

The slight upward trend in jobless claims comes as no surprise.

The last two years they have trended slightly upward during this part of the year. And each time, the market had the same reaction. The market went slightly down to flat.

As I highlighted before, the real cause for the major corrections were not the slight uptick in jobless claims, it was Europe. If there is no European financial systemic shock, then the market will acknowledge another pattern many are currently overlooking. After the uptick, the jobless claims continued to decline.

Considering corporate earnings, and the higher consumer confidence numbers, the jobless claims should continue to decline after this 'hump'.

The likely hood of a European scare this time around seems less likely. There are obvious concerns regarding Europe, but I think the market is discounting these obvious concerns. (Consider Apple, Google, QCOM, and many other secular growth stories at discounted multiples.)

Although, there is one recent subtlety that I want to point out. The last time the big boys were expecting a major market correction, IBM rallied in their face, and the market did not see the correction at the time all were expecting one. Similar action appears to be happening now.

How can we have a huge correction when IBM is rallying?

But I am sticking to my pervious thesis. If the Employment situation shows improvement from April, the treasury yield will spike. This will cause a nice rally in equities, to remove the current discount. (If the Employment Situation continues to suck, then the markets have a reason to muddle along or decline.)

healthy real estate - BGCP

Seems like BGCP is in a sweet spot with respect to real estate.

"Tenant demand for Manhattan apartments drove the median rent in the first quarter up 7.1 percent from a year earlier to $3,100 a month, the largest annual gain since 2007"

For a company that got into the real estate broker market on the cheap, with some really interesting reach, they are in a nice position to take advantage.

Obviously the above is just one city, and the recent Case-Shiller index continued to suggest a bouncing bottom, but real time chatter suggests there are healthy signs across the country with south Florida doing well, along with Arizona.

FIO - a shame

From a non-GAAP perspective FIO did pretty good. From a GAAP perspective, their performance was (IMO) crappy. (And since FIO ended the quarter with less cash on their balance sheet for the quarter, their non-gaap gain really wasn't a gain.)

At a time when Flash prices declined, crushing Sandisk's margins, FIO's margins only increased by 1% from the last quarter. Seeing how well AAPL was able to increase their margins, I was expecting FIO to do north of 55%. Maybe the high 50s, considering FIO saw gross margins in the 60s in Sept 2011.

The revenue indicated strong demand for their products, but there is an inconsistency here. The macro trend of flash is not jiving with FIO's results. Investors got the answers in the Conference Call.  Management indicated that they passed along the savings to their costumers.

They sold more product for less, which means the lower hardware sales could not be offset by the software.

Whats a real pisser is that management indicated that for every 10% decline in flash price should lead to a 150-200 bases point increase in gross margins.

Basically, FIO is not a company that will ultimately benefit from lower flash prices, as they are passing along the savings. So the basis of their business model, to reap the benefit of lower flash prices, was deteriorated this quarter. (If not completely thrown out the window.)

This quarter showed investors their business model is now shifting, and more dependent on software.

Its a shame. If FIO stuck with their original business model, this quarter should have been a blow out. Most likely they were getting too much pressure from their 'partner' venders to sell at a lower price point because the competition was using the lower price point (no pricing power).  Either way, it will now take longer to get to real (balance sheet expanding) profitability.

I am going to shy away from trading this one until I get better clarity.

Thursday, April 26, 2012

FIO - do or die

FIO reports tonight.  For me its a do or die quarter. The reason being:

1. Demand for their offerings was high (as per the chatter from analysts and similar companies)

2. Flash prices have come down significantly this quarter. (Apple was able to translate this decline to a significant increase in gross margins. I am expecting the same for FIO.)

The macro trends favor a significant beat for FIO tonight. Both aspects of the business were favorable (costs were down and demand was up).

I really like management and the segment of the business, but if there is ever a more beautiful quarter for this company to beat, its this one. If FIO can not translate huge benefit from this quarter, then their business model is not conducive to scale any macro benefits. As which point I will no longer trade the stock.

From my current analysis, FIO should be able to benefit from the favorable macro trends. Hence, I am playing FIO one into earnings, and am expecting margin expansion and profitability.

Wednesday, April 25, 2012

Jeffrey Gundlach on AAPL

Mr Gundlach is a smart guy, expect when it comes to AAPL.

He embodies the superficial view that a lot of the big boys have, which can place an atypically large drag on the stock during times of perceived negativity.

Knowing his record and status on the street, I know his words are listened to, but some of the negative things he says are just so superficial, playing only to price action, and ignoring all fundamentals.

I just caught his interview on CNBC, and will post it when its available. What resonated out to me throughout the interview: a sensationalist permabear.

Glad Simon Hobbs called him out on the income growth thesis in relation to inflation. Income growth or job growth is also key because it mitigates his permabear thesis.

Apple 13.3 Inch MacBook Pro 2.4GHz Intel Core i5 Dual-Core Silver Notebook Computer - MD313LL/A

Market Thought... the mo'mos

The momentum boys will start to get their groove back. All these characters care about is price action and technical set ups (no better case proves it then Apple last week), and the SP500 is about to recapture structural bullishness.

The main concern, just from this chart, was the 14SMA. But today, thanks to the bullishness of earnings overall (not just AAPL), the SP500 started to breach it. After the breach the market started to break through the 38SMA as well.

Structurally, the market looks good again.  And given the momentum of earnings, I do not know how the big boys will allow these contracted multiples (ie IBM, QCOM, AAPL, GOOG, SLB and many more) to remain.

If the technical set up holds, the big boys will err on the side of bullishness.

Obviously the 10yr yield is still causing some concern, and while it is moving up today, it will not see meaningful appreciation until the employment picture improves. If we get good employment data, the slogan will be 'long and strong' :)

The jobless claims have been so-so, trending upward slightly, but not too bad. The really jobs data point that can turn the 10yr sentiment quickly will be the monthly non-farm payroll on May 4th.

Tuesday, April 24, 2012

yup... AAPL

Yup, all that chatter dominated the airwaves and web about price targets of 490-525 was completely WRONG!!!

The 20-30 differential from my trading range is being evaporated as I type.

Shame on all the pundits, tv personalities and BS analysts who extrapolated iPhone demand from ONLY two carriers.

debating aapl

I am debating whether or not to play AAPL's report tonight. (Technically, I have a small common position which I do plan on holding into the report.)

If Apple was not reporting tonight, from a technical perspective I would have entered a few call options to play an oversold bounce.  It is very oversold, and the fundies are more then intact.

Current chatter is referencing of VZ or ATT slowdown in sales. Thats bullshit. VZ and ATT are two carriers of a wide range of international carriers where the iPhone sales are accelerating. (Especially in China, as the iPhone entered a new carrier just before their new year.)

The chatter also wants to reference QCOM to point to weakness. I do not know what theses blowhards are talking about when they reference QCOM's report. QCOM had a great quarter, and QCOM mentioned insatiable demand. This benefits AAPL.  (These blow-hards are confusing price action with fundamentals. Two very different things. With BS commentary like that, one can understand the level of market inefficiency.)

Everyone today is saying to 'wait' or 'we will enter at 525 or 490'. Well, the market typically does not like what 'everyone' thinks. And frankly those level of declines completely ignore fundamentals.  Those  declines simply accommodate market patterns of a reduction in multiples and technical analysis.

At 520, the market will reward AAPL's +50% growth prospect with a 2011's valuation, where the trailing multiple was below 14. And ex-cash, its trailing multiple would be near 10.

With the expanded base of available funds that can hold aapl (thanks to the dividend), I just do not see such a thing happening. (The trading multiple should be higher.)  But we saw the reactive nature of this market before. Apple ran only after they produced their numbers.. The street is now waiting for the same thing. (Their traditional 'buy high, sell higher' mentality. Fundamentals be damned.)

I don't want to be a hero, but at current levels, I am very tempted to play the report.

(The only reason I am debating at current levels is because I did not think the stock would get below 580 after they reported. There is a 20-30 dollar differential to where I thought AAPL's bottom trading range would be, after this report, and until the iPhone 5 release approaches.)

Monday, April 23, 2012

some thoughts... AAPL and market

1. AAPL - Through out this earnings season we have seen an early trend of 'sell-the-news', which produces a severe multiple contraction. AAPL appears to be front loading this concept before they report.

Current analyst estimates are at $10.00. This is about 17% above Apple's estimates of 8.50. Apple should beat this number. Apple typically beats their own estimates by 24% or so. Given the huge momentum they have, I would not be surprised to see the numbers come in closer to the blogger estimates of around 12.

IMO, at current prices for AAPL, the only way it sees a serious sell off is if it meets or does not beat analysts expectation.  At the 560 price, a lot of negativity is priced into the stock.

Think about what the market is say if AAPL maintains the stock price of 560. If Apple produces analyst expectation, the market will give it a trailing multiple of 14.5. This is the perceived value the stock had PRIOR to its monster 1st quarter run. I do not agree with the market sentiment, but it is consistent with the performance of other large faster growing tech stocks.

2. the market - While weak, there is obvious strength within financial, energy and industrials.  These sectors appear to be supporting the market at the moment.

The support from financials makes sense as there are a slew of key support levels at today's lows. Also, the divergence between book value and stock price is pretty high at the moment.  With now financial shock to the system, current levels should be the banks low end trading range, until normalized earnings become visible.

The support from industrials and energy may make sense because the HSBC China PMI is improving. (We all knew Europe's PMI was going to be crap.)

fyi... timeless portfolio change

I will be making a change in my 'timeless portfolio'. I will switch F with DD.

Not going to capture it now. I will wait for DD to achieve between 50-51. (If the market comes in to the 1340 level, this should happen over the next few weeks. Especially give the weak EU PMI data.)

Even though Ford is disturbingly inexpensive at the current level, I don't know what kind of catalyst will make it trade higher. Despite better car sales and great cash flows, the market simply shuns the autos. (Unless Ford significantly boosts its dividend, which is something I thought they would have done by now.)

Unfortunately I am a hopeless optimist, and do not want the world to end, so I want exposure to an economically sensitive stock. But DD also offers a higher yield, which is nice from a long-term perspective.

Euro must decline

If Europe wants to grow again, the Euro must decline. The Eurozone PMI data continues to be crappy, as expected, but the Euro holds firm.

The above is the Manufacturing PMI against the Euro/Dollar since Oct. But the Composite PMI, which pretty much mimics the EU GDP, holds a similar pattern.

The Euro is simply too expensive here in relation to where the EU economy needs to be. Add the heavy austerity, which no doubt is facilitating a lot of this widely expected slow down in Europe, a systematic decline in the Euro should have been a traditional exercise in economics. (Countries default, their currency declines, which facilitates economic growth.) 

The above chart argues the decline in the Euro should have started happening two months ago. Regardless of what I think, the Euro will have to see a repricing downward sooner-than-later.

Saturday, April 21, 2012

serious thoughts... QCOM and GOOG

Seemingly over night, some stocks went from an expanded-multiples to contracting-multiples.

QCOM - Probably the most obvious example.  Here is a company at the forefront of the-single-greatest-and-steapest growth curve in human history and is currently trading with a trailing PE of 18.7. The day before they reported earnings QCOM was trading with a trailing PE of 25-26. Within two days of reporting, QCOM saw a 25% reduction in multiple, 25%! 

Over the last two years QCOM usually averages a multiple of around 22.  After being at the forefront of the mobile adoption, when the world was about to collapse on itself because of Europe, QCOM's lowest trailing PE was around 18. (chart was from Wolframalpha)

Basically, Mr Market is bracing for a drastic reduction in the adoption of mobile. (Is there anyone in the world that seriously believes mobile adoption is slowing?)

So I ask myself a simple question, does the one company benefiting from mobile adoption and smartphone conversion (regardless of smartphone brand) deserve a valuation similar to when the world was literally going to blow up?

QCOM should be chilling around 66-68, until their margin issue is remedied. (Given the shear force of the macro-trend QCOM is in, 25% reduction in perceived value seems a bit much for a slight hiccup to margins. Especially when that hiccup is caused by increased demand.)

GOOG - Regardless of what the talking heads superficially say about Google, fundamentally, the quarter was not bad. Overall Google did well and properly positioned themselves to be ahead of the game when the MMI acquisition is closed. Curiously enough, Google's price action is not specific to Google. Google reported on Thursday night last week and JPM reported Friday morning of last week.  Both stocks had a price discovery which was basically flat to up prior to the market opening that Friday. But once the market opened, there was only one direction, down. JPM also reported solid quarter and acted and is acting, almost the same way as GOOG.

(On April 16th and 17th JPM traded in sympathy with the sector from positive reports from peers, but once the sentiment ended, the trading went back to mimicking GOOG.)

Basically, Google's decline does not seem to be Google specific. It seems to be a part of a general negative sentiment.  That sentiment has caused Google to trade at a reduced trailing PE. For instance, over the last quarter the lowest trailing PE GOOG achieved was 19, at the weekly 50SMA. Currently Google is trading with a trailing PE of 18.0.

Both Google and QCOM highlight the extreme multiple contraction being seen. It speaks to the very fear of the big-boys.

So when I hear there is complacency in this market, I roll my eyes because the above is evidence that there is no such complacency.  The big boys are scared, and since humans are generally wired to follow patterns, like sell in May and go away, we will follow the most obvious patterns. Especially since the low 10yr yield supports the pattern. (As highlighted in my recent market thought post "jobs, not Europe".)

Of course there is always the caveat, if the next Non-Farm Payroll numbers come in better than expected, and highlight the April number as an anomaly, we are going to see the 10yr treasury yield jump. Then we will see a noticeable shift in sentiment, and the above will change.

Thursday, April 19, 2012

Market Thought... Jobs, not Europe

Over the past two years, each major correction the market has had was directly attributed to Europe. The PIGS debt first started to stink up markets between May-Sept 2010.  Shit really hit the fan in August 2011. (The correction was exaggerated by the SP's US debt down grade.) Each major correction showing a 'end-of-world' type spikes in the VIX.

The last major correction lasted for 5 months (assuming a 5 month stall can be called a 'correction'). Within that time period, we saw major reforms take place in Europe, and the active involvement of the ECB. Obviously there is still work to be done across the pond, but to deny progress is to deny the truth.

While bonds have risen in Europe, bonds were also rising in the US. In fact, up until April 9th, global yields were rising together.

The yield on the ten year yield diverged on April 9th because of the poor April 6th job report.  Since then, the yield has not recovered, but we have also seen slightly higher-than-expected jobless claims.

Before the real EU bank runs were taking place, the 10yr was yielding 3%. Yet, with all the EU progress, it is still trading at levels prior to any progress.  Despite a potential breakout in mid March, US jobs numbers destroyed the breakout. (IMO, the above is also evidence that US job creation is now a leading indicator.)

Since the breakdown in the treasury, equity markets have seen a fairly significant multiple contraction. (Thanks to better than expected earnings and heavy sell-the-news declines in equities.)

The semi action would suggest continued weakness in the SP500.  The semis have not acted as a leader since Oct 2011, and the SP500 is in a better technical set up, none-the-less the Semis do suggest weakness.

Until better clarity is seen with US Jobs, the SP500 may trend toward the 1340 level (via the monthly SMA support.)

After the 1340 level, the market gets dicey. There is a lot of empty space to fill.

If the market decides to break the 1340 level, it will most likely reach the slew of SMAs near the 1280 level.  Given current earnings, the trailing eps for the market will be around 97. The SP500 near 1280 will give the market a trailing multiple of 13. A multiple of this magnitude would suggest two catalysts:

1. US slowdown due to weak job numbers.

2. A systemic risk arises again, where ever the rumor mill wants it to arise. (Although many want to use Europe and all its obvious reasons, the above does not suggest it to be the reason. At least not yet anyway.)

The weakness in the treasury seems to be from US jobs data. Given the recent strength from US economic data, I would like to give the April 6th report the benefit of the doubt.  But until there is a pick up in the jobs data, the treasury yield will remain low, which will justify a lower market multiple.

I have been currently playing the weak April 6th jobs data as a blimp, actively hedging but not shy about picking up perceived opportunities (like GOOG, IBM, QCOM etc).

Sandisk's pain, should be, FIO's gain

Sandisk reported some ugly numbers today. Most interesting is that gross margins were down about 7%!  We knew numbers from Sandisk were going to be weak, and the weaker Flash pricing should benefit FIO. But we did not know it was going to be 7% weak.

Combine the lower cost of Flash throughout this quarter, with a relatively bullish backdrop as highlighted by Piper Jaffary earlier this month, FIO should do well.

I am hoping FIO management was able to take advantage. (I really like the management team, but operationally, they need to prove themselves. I am hoping they do this next week!)

thought on VZ and AAPL... reduced risk

Looks like the iPhone sub model continues to work for the carriers.  VZ reported pretty good numbers. So long as the arrangement works for both parties, the loss-of-carrier-subsidy-risk (for AAPL) gets significantly reduced.

Wednesday, April 18, 2012

few thoughts... facebook, qcom

Facebook - The Instagram purchase effectively values Facebook at $75billion. Or at least that is what the largest and controlling shareholder thinks.  No wonder the underwriters were pissed when Zuckerberg made the unilateral decision (then board consent) to purchase Instagram. 

Now all the investors with out IPO shares have a basis for valuation.

QCOM - Like other tech companies, after earnings are reported, all of the sudden we see QCOM trading at a lower range PE level.

Despite the recent quarter's run up, many tech companies are now trading at interesting levels with respect to a trailing multiple perspective.  Below 64, QCOM looks really really interesting.

Generally speaking, barring a European catastrophe, from a multiple perspective, the tech stocks that sold-off, are setting up for another run.

I hope Europe has their shit together to prevent a meltdown, like allowing the Euro to systematically decline to facilitate growth for these peripheral economies. At least there is always a wall-of-worry to climb. 

Tuesday, April 17, 2012


In traditional IBM fashion, the quarter was fine.  If we really want to get specific, it was just a slow-and-steady quarter, and in typical IBM fashion, it 'sells-the-news'.

I played it before earnings, and now that it is selling off, I am looking to play it again. IBM is currently going through price-discovery, but as of today's close, here are some technical support areas:

1. The 200 level is a solid support level via a horizontal support, and the 50SMA.
2. The weekly chart with the 20SMA, and a previous high (prior to the 2012 run), near 195.

I am looking to take a position in IBM near 201. (Barring no financial systemic shock, IBM should maintain support at the 201-202 level.)

Monday, April 16, 2012

Apple trading dynamic

Apple is currently at levels I thought it would be in if they produced a blah quarter or wall street focused on just 1 or 2 metrics. (Like weak margins.)

If independent analysts have projected eps to be near $12 eps, yes 12. That is roughly a 40% beat from Apple's own estimates. If Apple does 12, they will have a trailing multiple of 15 when the stock is at 610.

If wall street analysts are correct, and Apple produces 9.89 eps, the stock will have a trailing multiple of 15 at a stock price of 580.

Apple should produce numbers in between the two, but independent analysts have been far more accurate projecting earnings.

Where can Apple trade?

Technically, AAPL is currently at support.

Historically, after a run up, AAPL has a tendency of chilling to its 10SMA, then continues to trend higher.  Given its run, the consolidation would not surprise me.

Some chartist would point to the trend line as a potential support area. But, in my most humblest of opinions, the only way Apple sees the upper trend line is if they do not meet analyst expectations or there is a real financial systemic shock.

Market Thought... falling sky?

Apple is down 5 days, and there is talk about collapse. We have the same situation taking place between other tech stocks as well.

Google out performed on the 12th because of pre-earnings strength, but then got sucked in with the rest of the sentiment.

There is an interesting set up taking place:

1. Google, at 609, is currently trading with a trailing multiple of 18.4. That is a low-end of its potential trading range. (Historically it has seen a trailing multiple of 16 during times of financial systemic collapse.)

2. If factoring relatively decent earnings for AAPL, assuming a traditional 24% earnings beat, AAPL will be trading with a trailing multiple of 15 at current levels (price of 586).

So will these stock, who many like to wrongly categorize as "high-flyers" collapse?

If there is no systemic issue that materializes, then they will not collapse, and right now is a buying opportunity.

The above names, along with others with similar growth characteristics, usually lead the market down and up.  They will see a bottoming before the SP500 does, and continue their march upward before the market does.

With that said, there is concern that the market will breach its current level of support.

If the SP500 breaks the 62SMA, it will most likely see 1340. (The 1340 level is also a monthly support level.) Obviously, many stocks will go down with the overall market.

I effectively added to my Google position, and maintaining a small Apple position I took on the other day. I also took on market protection.

Apple is a bit trickier because they will report next week. If the bloggers (or independent analysts) are right, Apple numbers are going to blow passed expectations. (Then today is a good buying opportunity.) But if the street decides to focus of 1 or 2 data points (like they did with Google), they will follow market sentiment. (More on Apple in a separate, more detailed, post.)

Saturday, April 14, 2012

Facebook - Bing swap

Gary Kaminsky basically became a tool for the Facebook IPO by mentioning an "anonymous" report regarding Facebook's efforts within search. Its speculation that Microsoft will hand over Bing for more shares of Facebook.

If Gary Kaminsky is in the business of promoting speculation, I hope Gary can promote my blog on CNBC. That would be cool. Gary, want to give me a mention on CNBC too?

Everyone is free to speculate, so I decided to entertain this speculation to see the potential effects on Facebook.

I did an analysis on Facebook, and their potential growth, as per their filings about two months ago. With Facebook just starting to touch on mobile, there is no question to its continued near-term growth prospects. (And knowing how analytical Zuckerberg can be, I am sure he will be managing Wall Street's expectations very well. Probably Apple like.)

Below are the exact figures:

As of December 2011, Facebook had an operating profit of $548M.  Obviously its nice growth with nice margins.

Bing is estimated to have an operational loss of $2-2.5B. That's crudely $500-625M dollars a quarter in loses.  A swap would effectively wipe out Facebook's current profit profile.

We can argue and speculate the potential is big if Facebook has a real search engine, but lets be realistic for a second.

1. Google is a fierce competitor that is obviously not standing still.

2. Social search does not encompass all of search.

3. The rise of the answer engine is just as much of a competitor to the Facebook/Bing search as it is to Google's search. (The app ecosystem is a threat to this as well.)

4. Facebook has probably the worst reputation of all large web companies handling personal data. (If there was an uproar over 'Google Search Your World', there will be a challenge to Facebook's efforts too.)

5. Facebook's mobile offering sucks. Its slow, clumsy and at times inconsistent with the web version. If they are serious about search, they have to get their shit together on the user experience front.

6. Monetizing search is difficult. (Look at Ask, Bing, Yahoo, and the many other smaller engines.)

Basically, Facebook/Bing speculation, for me at least, adds more questions and concerns regarding free cash-flow and valuation of the company. Albeit, speculation on search also adds a lot of potential, but as an investor, there are real concerns here.

For me it was a turn off, but eventually even Facebook has to shift with the industry. Obviously this is where the sector is moving, and Google's efforts are proof to it.

IMO, a low-risk/high-margin strategy for Facebook is to open the platform to as many players as possible and collect a reasonable fee. (Commoditizing the efforts by the search players, leaving Facebook the real beneficiary.) But seeing how Facebook already has difficulty working with large companies (i.e. Apple and Google when the two were looking to access the Facebook platform), seems like Facebook wants to go the high-risk route.

MMI becoming less of a margin issue

Over the past few months I highlighted why the MMI+GOOG merger would force Google to improve its margins.  On this front, Google is not disappointing.  Over the past few quarters, Google has expanded its overall margins by 4-5 basis points. Basically, half way to completely mitigate any margin hit from the MMI merger. (And that is assuming they do no cost controls at MMI. Which is a very conservative assumption given how proactive management is acting, and the given trend of the industry. A trait many pundits are choosing to ignore.)

Since the Sept 2011 quarter, Google has raised their margins by 6.24%.  At the moment it is in-line with Apple's margins.  Obviously there is still more cost cutting to do, and on the MMI side there is a lot of low hanging fruit that they can easily streamline and cut, as highlighted in the link above.

Basically, I am arguing that the MMI+GOOG merger is no longer an issue with respect to margins. Once they merge, given the current margin trend at Google alone, margins will approach 31%. Effectively wiping out the margin concern.

Instead pundits with a large soap box, like Cramer-Lee-Faber, just point to a superficial bashing of a conference call due to its "broadway" style.  Based on the above data, I would argue analysts did not praise Google enough! And I wish during the morning crowing about Google, one of these Ivy League grads would have been nice enough to mention actual data, instead of their "feelings" and the 1 metric everyone knew was going to be bad. (I expect more from CNBC, especially given their soap box.)

Anyway, this is the nature of the street. People do not see things until they want to see things.

Yesterday, investors did not want to see the mitigated risk of the MMI acquisition, and they do not want to acknowledge a proactive trend within management.

1. Search is changing. Management is changing Google to reflect this BEFORE the industry forces them to change. Search is becoming more of an answer engine. Google defines this change with the term 'semantic' search. This morphing has been in the works for a better part of a year.

2. Social. The social effect is probably going to effect 10-20% of overall searches, but Google does not want to be left out of that 20%! So they are going to compete BEFORE Facebook or FourSquare forces their hand to compete. (People may not like it, and at the moment a true argument can be made about personal data protection, but this will be a market and Google is simply not going to cede it to another player.

3. Mobile. This can and will effectively combine the two shifts in search. Obviously Google is knee deep in mobile. They have a bunch of inefficiencies to work out (to better compete with iOS), but the feedback I am getting from Google Play, and over-the-air syncing is actually pretty good.  And with lower priced tablets coming online with Android 4.0, Google is still in a very good position to be #2 in the mobile space. (I have a hard time seeing anyone really competing with Apple and Google in mobile. Other players are simply too reactive in relation to these two proactive management teams.)

IMO, the data speaks for itself. Pundits are choosing to ignore tangible proactive trends to better compete. Instead they would rather spew out superficial analysis and speculative threats to a business (which ALWAYS exist).

Friday, April 13, 2012

no more mo'mo boys for AAPL?

Looks like the momentum players have left Apple. At least for now. Amazingly enough, the current oversold position is the most it has been in the last 3 months.

Seems like an interesting area (around 600) to enter an initial position, assuming anyone wants to position themselves in Apple prior to earnings. (Although any sane chartist would tell you that the SMA trend is busted, and you should not.)

I do not know if Apple will hiccup this quarter. (I think their margins will take a hit because the new iPad cost will be capture during this recent quarter. How wall street decides to act is another story. Google produced good numbers, but got knocked at the open.)

There have been reports that the institutional investors have been exiting the stock as it passed 600. So theoretically, there is fuel if Apple produces a blow out.

If there is a run up into earnings (meaning the momentum players began re-entering right before earnings), and a minor hiccup (i.e. margin hit or just meeting analyst expectations), we may see similar action as Google is seeing. In this case, I am looking for AAPL to test its 10SMA on the weekly. By next week, the 10SMA should translate to a stock price near 580.

With dividend funds now available to support the stock, Apple should be trading with a trailing multiple around 15-16. (This lower multiple is simply because of its size. As per its growth rate, the multiple should be much higher.)

Current blogger (or independent analyst) estimates are expecting a +30% beat from Apple's own estimates. Analysts estimates are currently 16% above company estimates. Apple should beat analyst estimates, but if the street decides to focus on 1 metric (as they are with Google), then it can still take a hit.

Thoughts on the Euro

Over the past few months I have been following the PMI-to-Euro correlation, and the surprising (sarcasm:) correlation suggests a declining Euro helps the PMI.

The general movement is with a declining Euro (in relation to the dollar), the Euro zone PMI increased. As the Euro appreciated, the PMI declined. Econ 101 at its finest. (In Feb there was a bit of a fake-out suggesting the Euro Zone might be able to grow even with a Euro/dollar near 1.31, but that was squashed in March.)

The flaw, or lack of information, in the above data point is that the Euro is only in relation to the US dollar. So it is not a complete picture.

A decline in the Euro will have some level of effect on earnings for US based companies from their European business, but that effect should be mitigated by a generally stronger EU economy and active hedging. If the Euro/Dollar repricing happens in a gradual process over a two year period, active hedging should be able to mitigate this risk. If the repricing takes place in an overnight process, someone will take a hit if they are not prepared. But that hit should only be in relation to the Euro, not in relation to other currencies.

A bigger concern I would have with any potential repricing is the effect on the Swiss Franc. The Euro/Franc relation needs to stay at a certain level to not effect certain bond prices. (These bonds are important and can destabilize the EU again.) The SNB has already been saying it will not allow the conversion to surpass 1.20.  But I am sure the SNB will be involved with any overnight repricing efforts.

Generally, I am not too concerned about a gradual depreciation of the currency, so long as markets can adjust to it. (And I am hoping this is what happens.) If there is an overnight pricing, there will be some shock to earnings from the EU zone. But that shock should get mitigated relatively quickly with an improving economy.

As far as the general effect of a stronger dollar to corporate earnings, the dollar (in relation to a basket of currencies) saw some major up/down swings over the last two years, yet corporate profits have still grown quite nicely.

dichotomy in IT

Infosys reported horrible guidance. This is should cause IBM to take a hit today. Could be an interesting set up for a short-term trade. (Buy IBM on today's weakness then sell into the run-up before earnings.)

For the record, IBM should produce decent earnings as they are taking share from competitors. (I do not know if they will see the same level of appreciation after they report this quarter because its run up so much.)

Oracle and Accenture produced good quarters, which set the tone for the IT/tech sector's recent run. Infosys seems like a company specific issue, just like Oracle was laster quarter.

update: SAP just chimed in regarding their company specific poor sales execution.

Thursday, April 12, 2012

GOOG - pretty good

The numbers were pretty good. Google showed more cost control, and earnings leverage out side of Cost-per-click (CPC).

As expected, CNBC and the chatter is pretty much just focused on CPC, which is a shame because there are other leverages to earning that are pretty much being ignored. (Coincidentally management is hitting on this point right now. I wrote it before they were talking about it :)

From the better than expected numbers, Google has a new, higher, price range.

Because I think it was a decent-to-good quarter, GOOG should trade near 690. (This assumes a trailing multiple of 21, which is no multiple change from the last two quarters.)  As this new quarter (starting in April) matures, Google should approach the low/mid 700s.

When factoring today's quarter, Google's current trailing multiple is 19.7 (using a stock price of 651 and a non-gaap eps of 32.98). Its got room to run from here.

Obviously, my current stock prices will have to be divided by two, once the stock-split is completed.

FIO acting well

FIO is acting well. Apparently it got an upgrade from Piper Jaffray from channel checks.  The move is also facilitated by a very oversold condition.

Its got a ways to go before its long-term head-and-shoulder break out (at 34), but when it does, it should see 40. (Assuming the fundies remain intact, and as of right now, they appear to be.)

quick thought... oil, industrials and materials

The market is seeing a nice broad base move, but the laggers are seeing the most appreciation.  I am thinking Alcoa scared a lot of the macro-economic bears that have caused the drag on oil, industrials and materials.

The charts of the laggers are still crappy, but they are definitely outperforming today.  Could be a bottoming process forming.

Wednesday, April 11, 2012

interesting info... connecting the dots

I found the below pieces of information interesting:

1. Good video explaining some mitigated down side risks:

2. A repost of Jim Rogers indicating no hard landing in China.

3. Alcoa corroborating Chinese strength via their earnings report. (Not to mention the strength in Aerospace.)

I am having a hard time believing the market having allowed depressed levels of the oils, materials (ex-coal/nat gas) and industrials. The market was ridiculously wrong with Alcoa, and I think they were and are wrong with the rest. (We will see if the market was right over the next two weeks.)

Tuesday, April 10, 2012

fyi... goog

Just an FYI on GOOG.

I still believe in my earlier posted thesis on Google.  The thesis is basically predicated on two assumption:

1. The market stays relatively healthy.

2. Google produces decent earnings.

The SP500 has declined 4% from its high. At the moment we are in a normal pull back. Can Europe blow up tomorrow, for any of the many logical/illogical reasons? Sure. Its just as likely that Oliva Wilde knocks on my front door asking if she could borrow some milk for her coffee, while she is in a tight tank-top and min-shorts.  Its unlikely, but yeah, it could happen!

I just think earnings will, for the most part, hold firm, and the market should maintain a historically lower multiple of 14-15. (Which the SP500 is currently in the low 14s.)

Specifically related to Google, the main concern last quarter was the cost-per-click (CPC). This took a hit in the fourth quarter because Google got even more efficient at delivering ads and the transition from PC-to-mobile that is currently taking place.

If Google sees a moderating CPC, the stock should be okay. If it produces a relatively weak CPC the stock could fall to the low-end range I provide in the linked post above. If Google sees a higher CPC, then I think investors have a reason to give Google a multiple expansion. An expanding CPC would suggest the transition (or new equilibrium between the two form of devices) from PC-to-mobile is taking place far quicker than most are projecting.

Market Thought... this is a pull back

Pull backs happen with real fear. This is it. I think Europe is the main culprit here. Italy's 5% equity decline does not inspire confidence, obviously.

I covered my SPY protection, and am waiting for positions.

Monday, April 9, 2012

few thoughts... the market, DD, DIS, IBM

Before I go into the names below, just wanted to highlight two quick thoughts regarding the market:

1. A distinction between the current pull down vs the previous ones since December is that an argument can be made that some internals are breaking technically.  But this could just be a stalling process.

2. Jim Rogers declares China's property bubble over. No hard landing. Maybe this is the reason materials and oils saw some strength in the AM. (China GDP is announced on Thursday. If these numbers confirm the statement, we should see a shift in sentiment with respect to industrials, materials and oils.)

DD - Looks really interesting here, sitting on its 50SMA and oversold, especially if interested in its higher yield.
 If market weakness persists, it may see 50, guided by the weekly.

I am looking to enter a position near 50, via the 20SMA.  They report on the 19th, and if they produce what is expected, DD should be a $55 in 3 months. (see forward PE link under 'links')

DIS - Looking for the bounce off the 50SMA, but  on a multiple perspective, I am also expecting DIS to be around 44 before they report earnings on May 8th.

IBM - This is one of the stocks indicating internal weakness. It usually rallies into earnings (then sells off after the report) but the last three days it got caught by John Chamber's comments about weak government spending and a downgrade.  I am looking to enter IBM near 200, even if it before they report on the 17th. (Would love to be able to get it in around 195, but I think it will find solid support near 200.)

Saturday, April 7, 2012

Market Thought... gonna be ugly

The non-farms jobs number, put simply, was crap. There really is no spin on this data set, that I can see, to even be remotely positive. The only pseudo positive statement I can make is that it maybe a 'one-off'.  (Most surprising is the sizable divergence from the ADP number.)

The temporary employment number went from an accelerating figure, reaching a high of 54.9 last month, which should have translated to solid employment numbers this month, did nothing of the sort. And to top it off, the temp number was -7.5 this month. (Just ugly.)

The number I really cringed at was the Average Weekly Earnings. Over the last few months there was growth, albeit, the rate of growth has moderated. This month we saw a decline. Last month it was at 807.96, and this month it was $806.96.

The futures were not kind when the report was announced. Monday will most likely be an ugly day.  I believe the futures indicated a SP500 decline of 16. If that is the case, the SP500 would be breaking technically from its recent supports.

From the daily chart, the supports included the 5SMA, 14SMA and 32SMA. The implied open would suggest a breach of the 32SMA.

The weekly chart had the SP500 riding the 5SMA, but that will be breached this week.

The next, most obvious, support for the SP500 is the 32SMA. IMO, if we bounce off of that level, the market is bouncing due to earnings expectations or assuming the Fed is back on with QE3. But given the bad number, I think the market will find support near the 68SMA on the daily, and the 1360 area, as indicated via a horizontal support on the weekly.

With the above being said, I still think earnings will remain intact. But I am expecting the negative chatter to increase. Since there is an already high skepticism on the US recovery, we should start to see the bears really come out pushing this report. (I don't know if ECRI still has a recession call on the US, but if we keep seeing crappy numbers like today, ECRI's projection will only gain traction.)

Wednesday, April 4, 2012

JPM... support below 45

Banks should hover around book value. Which is arguably a few percentage points near current levels (for JPM and GS, more so for the less banks). Barring a financial shock, the thesis should hold firm. Even though Spain bonds were a perceived issue today, the EU has over a trillion dollars as a firewall and well capitalized banks (thanks to the LTRO) to prevent a financial shock.

Tonight JPM got another reason why it will not stray too far from the mid 40s. JPM will focus its buyback below $45.  So we have comfort in knowing JPM is giving support to the stock.

Generally, I think JPM will trade within a tight range around here, around mid 40s-to-50. (And I felt that way prior to the buyback comments.) Looking to add, if weakness push JPM to the 10SMA on the weekly.

Market Thought... pull down

Seems like the market wants to test the 32SMA or near 1390 on the SP500.

My biggest fear in the current environment is that the jobs numbers derail. If that happens, my bullish thesis, and the thesis of jobs as a leading indicator, puts to question my market assumption. (This is why I always have on put protection prior to each jobs data.)

As of today, after the ADP report, the bullish thesis is still intact.

But yesterday we began to see a short-term sentiment shift starting with the Fed minutes. The fed minutes were economically bullish. Today we are seeing follow through most likely due to the Spanish auction this morning. (This is allowing for US banks to consolidate.)

Interesting observation: A bit of a fake out this morning, as the markets were declining, cyclical names were firming up, providing support to the market. After the non-manufacturing ISM numbers were released everything collapsed again. I just thought the action was interesting.

quick thought... FIO

Sandisk indicated weak numbers today, primarily due to weak flash pricing.  This is good news for companies that buy flash, like FIO, as their margins should see expansion if the price was depressed throughout the quarter.

FIO is pretty oversold, and I am waiting to make an additional entry. (I just think the SP500 has another 10 points down, and FIO may get pulled down with the sentiment.)