Market Thought... re-cap

Just wanted to re-cap my market thesis given today's nice move. The thesis has not changed from the previous Market Thought post, China Syndrome.

Although no actual plan came out of Europe, the actions to shore up the banks are speaking louder than words. First we had the two Greek bank merges with a Qatar capital infusion. Then Dexia organized break-up. Now, days later, another organized break-up of a smaller Greek bank Proton.

We have clear evidence the EU is not going to let a credit freeze to take place.

Going forward, the market concerns are the US recession dictated solely on one research company's (ECRI) leading indicators and a slow down in China.

As highlighted in the previous market thought post:

1. Leading indicators include consumer expectations, money supply, stock market, steel production, industrial product sales, newly started construction, non-financial service indicators, etc.  These factors can be corrupted if there are unusual shocks or discontinuations of patterns from external forces.  A Fed induced twist or China specifically stops buying copper or steal for a few weeks because they want to slow down their construction to ease up on elevated prices seem like unusual shocks to me.

2. The China-drastic-slow-down is predicated on:

- Bubble real-estate prices
- Over capacity in housing and factories
- bad local bank debts
- bad accounting (Was anyone really surprised by this? We knew this since 2002!)

There is no question all these things are bad, but China has +$3 TRILLION in reserves and an extremely under leveraged consumer.

Given the US and China's macro-economic data has not been bad enough to justify drastic earnings reductions, the market should continue to rally toward the 320 SMA.

 The market should hang around the 1200 level until the above concerns are mitigated. Obviously, if these concerns are realized the markets will decline. (see worst case market evaluation)

QCOM

QCOM may possible be one of the easiest trades in the next three months, despite its relative weakness on Friday.

Now that we know QCOM will be in every single iPhone 4S produced, including all new carriers and the fact that the initial response has been pretty good, QCOM will break out from its negative weekly chart.

The SMA's reflect the resistance near mid 52.

QCOM reports Nov 2nd. They are projected to earn $0.78 for the quarter, and with a strong iPhone 4S future guidance is more than likely to remain intact, regardless of the 'end-of-world' or 'China Syndrome' crowd. (If the media starts to use 'China Syndrome' to describe the slow down in China, you know it came from me :)

Even though QCOM has a PE of 20, that is historically low for the company, especially given its growth over the next few quarters to a year out. But this is not a multiple expansion story. When factoring in the Nov 2nd quarter, QCOM will have a trailing PE of 19 with its stock price at 66.

That potentially allows QCOM to run 16 points from current levels. But the easy part comes from playing QCOM from current levels to 57, its first test of major resistance.

There is always a probability that this takes longer to execute, but QCOM has accelerated earnings going into the end of the year. So there is a very strong likely hood that QCOM will see at least 57 by the end of the year.

I currently can not trade because I am getting my fund in order, but QCOM was one of the missed opportunities I wrote about.

Here is exactly how I would trade QCOM. At 46-47 level, I would have a total of 12 Jan 47.5 call options. At 50, the position would be reduced to 6. On Friday's weakness 2 options would have been added, leaving me with a total of 8. If QCOM continues to decline, more options would be purchased. At 53-54, I would maintain 6 call options, repositioned to the Jan 50 calls, and letting them run to 57.

IBM evaluation

IBM's action has been nothing short of impressive. As the market collapsed IBM has seen a higher low, with 168 acting as some very strong support.

The support is best showcased within the weekly SMA chart.

The most obvious conundrum now being faced is that IBM is approaching its all-time high, with a crazy market that acts as its biggest risk to the down side.

But there are some realistic dynamics to think about concerning IBM at these levels:

1. They report earnings on 10/17. Usually IBM runs into earnings, and then 'sells-the-news'.

2. The momentum-boys are more inclined to attack a stock after an all-time high in this type of crazy market. (see AAPL)

3. Google bought a lot of patents from IBM this quarter, that very well maybe valued in the billions (especially since the patents were primarily related to search).

4. With some revenue growth being seen, IBM's multiple is expanding. This is well deserved, and if history is any guide, IBM should be trading with a trailing PE of around 16-17. (Before the 2008 financial crisis, and with stagnant revenue growth, 16-17 was their multiple. With revenue growth, it is only fair to assume IBM deserves the same multiple, if not higher.)

The multiple has been expanding slow and steady, and I strongly believe it will reach 16-17 over the next few quarters. (Maybe even 2-3 quarters out.) But at current levels, I would be hesitant entering a heavy position. Even if I was able to trade normally, I would have entered a position near 168, but would have sold off in the 180s.

With a market that stops acting crazy, IBM maybe in a position to see a new leg up that will establish a higher trailing multiple range. However, I have more uncertainty as to how IBM will trade after they report because of the above.

If IBM reports solid revenue growth (or the Google purchases skews the result that could cause the stock to pop) the multiple expansion should accelerate.

If IBM sees inline results, and the market keeps acting crappy, IBM will most likely sell off, allowing for an entry. If this causes IBM to trade relatively weaker, the strong low 170 support level maybe seen.

Occupy Wall Street

I am reading this article on the potential US bank exposure to the EU banking crisis, and I can not help but to agree with the theme of the protests from #occupywallstreet.

See, this article highlights the fancy, twisted lingo and obscure numbers bankers use to show how there is actually less risk than what is stated. If bankers were more transparent from the get-go, the tongue twisting would not be necessary.

Bankers do routine business in a a maze of confusion. The #OccupyWallStreet crowd is saying the same thing the equity markets are saying (as reflected in the massively discounted stock prices), stop the bullshit.

If the CEOs of financial institutions want higher stock prices, they would be wise to consider a far more transparent philosophy.

Just an obvious and simple thought, one that my be to simple for complex CEOs to grasp.

Market Thought... china syndrome

The market landed 0.03 points away from 1165. (Beautiful call, along with GS acting well, and soon it will be time to take on the Euro short again. In normal conditions I would have been buying GS yesterday, and doubling down on Friday. But whatever, bitching is for the weak. New day, new opportunity. I just have to wait for a few weeks.)  The 1165 call came from the 28sma of the monthly chart.

What was interesting today, was that the 10yr started to break from its negative trend.

This begins to add support to a bottoming out for the equity markets.

If the EU takes strong action, the market will move to the 1200 area. (I have highlighted before, the market removes the EU uncertainty at that level.)

At 1200, the market also prices in a decent slow down. (The market evaluation I highlighted was for a very drastic recession, which there is no evidence of at the moment. Recent rail carloads were pretty strong.)

So as the market sits around 1200, the concern become "leading indicator" US recession, and/or the China Syndrome.  Ever since the guy from ECRI stopped the media blitz, there has been little worth-while chatter about  a US recession. (SocGen came out with an estimate, but SocGen's analysis is bullshit and based on one graph with a very weak correlation.)


As for these 'leading indicators', consumer expectations, money supply, stock market, steel production, industrial product sales, newly started construction, non-financial service indicators, etc, just to name a few, can be corrupted if there are unusual shocks or discontinuations of patterns from external forces. Like a Fed induced twist or China specifically stops buying copper or steal for a few weeks because they want to slow down their construction to ease up on elevated prices.

The China-drastic-slow-down chatter has gotten louder, even though their economic numbers don't point to it.  All the bearish chatter on China is predicated on:

1. Bubble real-estate prices
2. Over capacity in housing and factories
3. bad local bank debts
4. bad accounting (Was anyone really surprised by this? We knew this since 2002!)

There is no question all these things are bad, but are they enough to bring GDP growth rate to 0%, as some estimates are floating around?  I do not know.  All I know is the command economy has

1. +$3 TRILLION in reserves
2. An extremely under leveraged consumer

The combination is potent. The Chinese government can easily cover enough bad loans that does not hurt their system (although their inefficient system needs desperate changing), and the Chinese consumer will not be hurt by any cooling of property prices.  The government can also infuse a lot of those reserves for stimulus, and further accelerate a domestic consumer-driven economy.

Basically, the China Syndrome is predicated on 'what ifs' that is dependent on the Chinese government to do nothing.

Where we go from the 1200 level will be dependent on the big boys ease up on their "leading economic indicator" and China Syndrome concerns. (I still hold the belief, if the SP500 can close above the 320SMA on the daily chart, we will see a tone of big boys respect the action, and negative views will fall to the waist side.)


Just an ending note, despite my feeling of frustration, I am very proud of myself.  Although I have no positions, and would feel better if the market simply went down, I am still very objective and calling it like I see it.  Unfortunately for me, the data suggest bullish activity.  I am proud of the fact my highlighted trades and market assessments are still pretty kick ass :P

opportunity loss

The ultra conservative approach I took on the in the AM of 10/03 has been truly frustrating to endure. (And its only been 3 days :)

When I first took on the approach, the SP500 was around 1130.  As the SP500 started collapsing, hitting 1075, I felt pretty good. But I was also very much annoyed.  While I took on some trades, I can count about 7 I did not take on (more considering the double downs I did not take), and I most definitely did not hold positions to levels I normally would have.

While technically I did not see a real loss, I bared witness to a lot of opportunity loss.  And this feeling is far more frustrating than I thought it would be. Truly.

See, my general strategy is to pin point entry points. Because of the detailed fundamental and technical assessments I do, these initial entry points have low probability risks to the down side.  Obviously, conditions change when the fundamentals change. (For instance, Operation Twist caused the dollar spike, commodities to exaggerate their declines and forced the hedgies to liquidate their positions. Hence, SU and POT were all out sells.)

But, I know there is always a probability of a position to go lower.  This is why I hold enough cash to re-position or double down at the lower point.  Somethings the doubling down process can take a day, a few days, a few weeks or a month or two.  I do not fear holding a position for a loss. (For instance, the weakness in AAPL from April - June.  Over the years I have desensitized my emotions to short-term losses because I know my homework is the very best.)

Unfortunately, at the moment, I am in the position to which I can not afford to hold a losing trade longer than a month. And since I know the effects of a losing option trade on my portfolio, I am more on edge then normal.  I simply could not take on this risk at the moment. Even though I desperately wanted to.

Its only been three days, but they were very very frustrating days.

AAPL

Just a quick technical assessment.

With the weakness of this market, the stock has shown its low end, and potential high end.

The low 350s is the ultimate support, it also represents the action when Jobs resigned as CEO. Fundamentally, it will trade at single digit multiples (excluding cash) below the 365 area. (In any other time, current levels are a screaming buy.)

For anyone who doubt the company will be the same, those doubters are wrong.  The doubters have always doubted.  Also, any muted response from the iPhone 4S launch is bullshit.  Its an entirely new phone, that looks the same as the old one.  The increased carrier uptake, and transition from 3GS to the 4 and 4S, will allow AAPL to see continued sales growth. (It will most defiantly allow the company to see growth greater than single digit multiples.)

For the time being I think AAPL could be in a 360 to 400, potential trading range.