Market Thought... Final Countdown

Its the F-i-nal C-ou-nt Down!

Earlier in the year, the tea leaves were projecting the markets would enter a new trading multiple, pushing to the high-end of the historic 15-17 trailing price-to-earnings (SP500) range.

The markets are pushing that high-end range to the limit. The SP500 for the June quarter and September estimates were taken down (for the reported earnings), and with the revision, the trailing multiple is near 18.

In September, the Fed's meeting minutes were pretty dovish. Surprising given the job data. But if taken at their word, no "easing" until the 6.5% Unemployment Rate target achieved, the markets should enjoy about 9 months of 'higher' multiples.

Markets rarely wait for news. Most of the time they anticipate, and the anticipation is usually a few months ahead.

After the Fed's green light in April, the markets started to push forward with trailing multiples touching near 18. 

When factoring the projected Q4 SP500 eps, the markets are currently pushing near 18 the estimated earnings. (The below graph highlights a year-end target of 1719 with eps of 98.28, allowing for a multiple of 17.5.)

The markets are already near the high-end.

From a trading pattern perspective, the SP500 is at a level that merits caution.  The first half of 2014 may stall due to the actual shift in tone from the Fed. (Can't ignore the data forever.)

In the above SP500 model, March has a trailing multiple of 17, while the rest were given a 16 due to the the easing. (Being conservative for now.)

The big $$$$ question is 'when'.  When will the markets care?  Based on the previous and projected drop of the Unemployment rate, probably some time in late Q1 - early Q2 2014. 

clock work $amzn

Revnues acceleration

Cash generation

Gross Margins

GM incorporating fulfillment and tech spending at a low.

$aapl technicals

Looks interesting here. Pretty over bought, and at a heavy resistance point.

A view of the fundies and subtleties of the price action suggest a new trading range (leaving behind the discounted trailing multiple).

Apple usually runs up prior to events, and this is no different. But knowing what is to come in their Q1, it may break out sooner then anticipated.

Looking to add near 500, and any oversold condition via the daily chart.

$goog - everyone is a bull

Everyone is now a bull. Most are recycling the same thesis: Paid Clicks are growing fast, off-setting the decline in CPC. 

Below is a historic look at Paid Clicks and CPC.

Paid Clicks look to have decent growth, but nothing near the level of 2012. CPC are still in the same decline since 2011. 

In my most humblist of opinions, there is no awesome re-acceleration in Paid Clicks that merit a multiple expanding price action. Keeping in mind, these are the wildy referenced metric that added over $35 Billion in value.  At most, the gradual increase in Paid Clicks merits justifying the already elevated multiple existent prior to Friday.  And despite the gradual rise in Paid Clicks, there was still a gradual increase in declining CPC.

During the 2012 acceleration of Paid Clicks, GOOG saw a 100 point move, but the move took about a month, and prior to July 2012, the street gave a rats ass about +30% Paid Click growth. (I remember very vividly because I was actively criticizing the street for the lack of appreciation.) In fact the street was trading GOOG at a recession-level discounted multiple despite the growth. 

(The chart does not reflect Friday's expansion.)

So, now that the street wants to use 'Paid Clicks' as the justification for multiple expansion, I call bullshit.  The growth is not as fast as 2012, and the market capitalization is too large to justify a trailing PE of 28-30.

Looking at the above, Fridays move was a bit perplexing. Along with the lack of analysts questioning the move. Adding to the confusion was the low tax rate. Over the past year, Google's tax rate has been jumpy. So much so, I keep wondering why analysts dont question it.  Q3 tax rate was the 2nd lowest in three years. (Q1 saw an awesomely low 8% rate. wtf.)

After plotting the tax rates, the quality of earnings for Q1 and Q3 really stick out. To add to my discomfort, while Q2 had a historically normal tax rate, Google met earnings expectation through a one time addtion from Discontinued Operations.

There are serious questions of earnings quality for each quarter in 2013.

Google is by far the king of online ads. I love their services, and use most of them. They will definitly benefit as more and more of the content business goes online. But I hate it when Eric Schmidt talks because he says stupid, blatantly factually incorrect things. I hate it when Google's management acts hypocritical. I hate the way the company has morphed into a competitor to so many sectors instead of a partner. 

As a company I think they deserve a premium multiple. But the only time a +$200billion Market Capitalization company has held a near 30 trailing mutiple is during times of euphoria.

$ibm - the golden crow

A long-term thesis trading IBM was that the stock would eventually see trailing multiple equivalent to the market due to the company's consistent performance and investor friendly financial engineering. The Q3 report is servicing me up some crow.

The Q2 report started to merit caution to the multiple expanding thesis, as well as the breaking of the 100sma on the weekly, needed a solid Q3 report to regain confidence in the above thesis.  Unfortunately Q3 was not the catalyst as the relative weakness in emerging markets (aka "growth" markets) did not boost revenue enough.

Some other bear thoughts included:

1. Poor earnings quality from a lower tax rate of 17%.  (Google's tax rate is actually lower than 17% this quarter. Their rate went from 23% to 15%, and earnings are considered 'great'. Stock is up over 8%.)

2. Lack of revenue growth. (There really is no sugar coating this one. Although much of the weakness came from hardware sales, and earnings were made up for in services.)

The last time revenue declined was in 2010.  IBM's trailing multiple was allowed to contract to 11.7-to-12.5. 

IBM has been maintaining their EPS expectations. If IBM does see a similar trailing multiple, the stock price can see a price range of 168 - 180.

Technically, the stock seems to be nearing oversold support territory. After breaking the 100sma, the stock is now 10% below the sma. (Also a bunch of horizontal support throughout this area.

The monthly trend indicates three oversold conditions over the last 10 years. IBM just entered the third.

$goog - higher market cap, higher multiple

After Hours GOOG surpassed $300b in market cap, and will have a trailing GAAP PE of mid 27 (with a price of 958).

Law of large numbers need not apply.

MOT continues to be a drag, although margins rose a slight bit.  

Why isn't any respected analyst highlighting the 14.7% tax rate this quarter is beyond my comprehension. But that would fuck with the apparent "blowout" quarter. 

$ibm decline in perspective

In after hours, IBM is approaching 175. This allows for a GAAP Trailing multiple of 12.2.

Management also maintained their 2015 $20 eps. Thereby placing a forward multiple of 8.75. (Stock price of 175/20.)

The report just doesn't look as bad as these numbers are suggesting.