Thursday, December 31, 2009

Happy New Year

The year-end selling I've been writing so much about lately really kicked in during the last 40 minutes of trading. As I've written previously, I think it is primarily a function of folks just cleaning out their portfolios so they can start the new year fresh. Most of the window dressing is done a few days before the end of the year, and that leaves some sellers who want to go flat. I don't believe we should be reading anything significant into it, especially, with volume so light.

The first few days of the new year can also be rather tricky, as positions are reestablished and new money flows in. We have had some sharp selloffs in early January in the past, but typically, it is a positive time, as everyone tries to start the new year with some quick gains.

Once again, I want to wish everyone the best in the new year.

Wednesday, December 30, 2009

Be Careful, As It Won't Take Much To Trigger A Cascade Of Selling....

Volume was very light today and the action very random, and that is what we should expect. There are a few good trades to be found, but it is very easy to get nicked on some bad ones, as there is little consistency.

The market almost always has one bad day right around the end of the year. I've been stung by them before, and I'm staying very watchful to make sure I don't get stung again. Some small-caps suffered today, but the broad market is still elevated on light volume. A lot of folks at this point just want to protect profits, so it won't take much to trigger a cascade of selling.

Tomorrow should be another very tricky day, and I suspect many folks just won't bother to deal with it. If you are participating, be sure you are ready to move fast....

musings; a recent purchase

the more gs stays down here, the more likely i believe it could really blow out to the upside, as the yield curve is made in heaven as far as it's concerned and the cost of employees has come down. it is amazing that just one analyst, meredith whitney, really controls this one. gs can report anything it wants in this environment, but she has it down to the pennies......hmnnnnn........i bought some april calls to ride this one back up. .....perhaps the most underrated tech story is nvda, upgraded today. graphic chips are a two-man race, amd and nvda, and i don't understand why intc, with all its cash, doesn't just buy the darned nvda - analysts hate it right now......

long gs

Tuesday, December 29, 2009

Time To Hedge?

Today, we had the lightest full-day volume so far this year and the price action was equally uninspired. We ended up with a poor close, but it wasn't anything too severe; mostly, it was just a lack of liquidity. Breadth was close to even and the biggest moves stemmed from some weakness in oil and gold. Most other groups just sat there and did nothing.

In seven of the last eight years, the Nasdaq posted a loss on the last trading day of the year. My theory is that most of the window dressing is done by that time and that sets the stage for those who want to take gains before the end of the year. I think conditions are ripe for such a bout of selling to occur again.

Given how we extended we are on light volume, I don't think it's a bad idea at all to hedge a bit, especially if you are holding some long positions that you don't want to sell this year. The final days of trading are always tricky, because volume is so low and there are a lot of considerations at work other than the fundamental or technical value of a stock. It isn't a time to make big moves, but there can be some good trading opportunities if you are very quick and stay flexible. I'm inclined to look for some short opportunities, especially after the weak finish today, but we'll see how things look as we wind down the year......

Monday, December 28, 2009

Looking Good, But Watch Your Step....

We finally had one minor bout of profit-taking, but before we barely turned red, the buyers jumped in and had us back in positive territory. Volume was extremely light, and breadth was around flat, but overall the action was healthy, with the big-cap technology stocks being the main driving force. Biotechnology and commodities also did well, while semiconductors and regional banks were the laggards.

With just a few days left in the year, it is very difficult to read anything significant into the action. There are lots of crosscurrents with market players making various tax-related moves and trying to add some last minute performance.

There can be some very interesting trading, for example GPRE and GFRE, both of which closed well, but you can't be too overconfident. The end-of-the-year action can be very whippy, and if don't pay attention, gains can slip away quickly.

We still have positive holiday spirit, but that doesn't mean we can't get hit with some selling before the year comes to an end.....

Thursday, December 24, 2009

Merry Christmas

If you wanted a textbook example of positive seasonality and holiday trading, you have a good one this week. Since Monday, it has been steady buying on declining volume, and market players don't seem to have a worry in the world. The only negative has been that no one is very concerned about any negatives.

Obviously, next week we are going to have thin volume once again, but I'd be surprised if we don't have at least one good bout of profit-taking as market players close the books on the year. It is very easy to let your guard down when the atmosphere is so upbeat. We need to keep in mind that a lot of this action has little underlying support, and the pullbacks can be sudden and sharp once some selling kicks in.

I'm not at all negative on the big market picture. We have had some very good trading, but the key to success is making sure you hold on to gains once you have them. I recall a number of times when the end-of-the-year action caught market players by surprise, and I'm going to keep that in mind next week.....

I want to wish everyone a merry Christmas and happy holidays. Here's some jocularity I found regarding "some assembly required:" The user manual starts off, "Our arrangement in content to the user's manual is overall and easily understood. We think it is reliable that it is correct that the information was offered in the manual and try hard to avoid the artificial fault, but the mistake that will unavoidably be found in printing, if causes some careless mistakes, please forgive more!"

Wednesday, December 23, 2009

Will The Bulls Hang Around?

The holiday party has lasted for three days now, and the big question is whether the bulls will hang around again tomorrow. I'm sure some are going to be tempted to lock in gains before they head over the river and through the woods to grandma's house for the holidays.

The good news for the bulls is that there really isn't any obvious reason to dislike this market. The best bearish argument is that no one seems particularly worried. We are acting like we don't have a care in the world. With holiday cheer in the air, maybe we don't.

So the big question is whether, after three days of very positive action, the good mood can last. When will some profit-taking finally hit? Trying to anticipate weakness in the market has been the single biggest mistake traders have made this year. They are constantly run over and turned into short-squeeze fodder.

While some profit-taking would seem reasonable before a 3½ day break, I'd actually want to see some selling kick in before I hit the exits more aggressively. We continue to hold well above key support levels, and the minor dips are being bought. We have to respect that type of action regardless of how complacent the market might feel. The No. 1 one rule is to always respect the price action and not to fight it.....

Some Stuff I Own And Am Considering Buying, Etc.......

AVAV is a play on alternative energy and grid plays. AVAV is in the thick of this theme. Interestingly, this stock also has a defense kicker as well. The next resistance zone is around $33-34 which I think the stock clears and longer term their battery tech area should provide the power for this name.

An old favorite, AAPL - I'm again fairly aggressively positioned in this name and have increased my exposure in front of the next earnings call and think the stock might trade into the $225-235 area within weeks to months. As written numerous times, I'm sticking by my low to mid $300's target and feel I may even increase that number sometime this year. I see the tablet somewhat different than many do and will have more on that later. In the meantime, the iPhone is a platform, not a product and feel that platform is the most significant in the company's history. That's a short way of saying I think the iPhone is somewhat taken for granted at this time and the stock isn't fully reflecting the upside for this device platform which I feel the tablet may highly leverage. Also, the new Snow Leopard launch has also received little fanfare but the product is a gem and sales are superb. I also feel at some point AAPL may find a way to better monetize their far superior operating system. Lastly, you can now buy a Macbook for under a grand. This power and performance you get in this product at this price point is stunning and I think we see Mac share growth continue to increase powered by their portable lines.

RVBD I think can play some catchup in the coming weeks. This is another name that had a pretty good recovery off of lows but looks to be pretty darn cheap on the fundies at current levels. I've been honing in on more M&A targets lately and this name always finds a way to the top of my lists for tech M&A......

DELL I actually think is an M&A target in waiting. More on this later.

BRCM will probably, as the best chip stock on the planet, has to get back to being mentioned in the same breath as AAPL, GOOG and BIDU. Frankly, given the move in the SOX, the move in BRCM hasn't been that great. BRCM is everywhere they want to be and where they are they dominate. This Dune purchase from them is very good and will aid the dominance in certain areas......

I also continue to like NDAQ, and is one of the cheapest growth names I know. Seems the Fast Money folks are starting to agree as I read they mentioned the name last night. Not much to say here except I think tax loss selling for the last few weeks has kept this down and I think next year will show a lot more value for this name.


Tuesday, December 22, 2009

Market Unfazed By The Dollar's Strength....

Just like yesterday, we saw strength very early in the day, but then we drifted and failed to gain any further traction. The atmosphere was upbeat and we had good breadth again, but volume contracted, which is exactly what you expect during holiday trading.

The difficulty in this environment is that with volume falling so much, it is very hard to anticipate continued momentum. Even if something does appear to be set up well, it is tough to have confidence that buyers are going to show enough interest to keep things moving.

The most interesting thing about the action today was the continued strength in the dollar. That did weigh on gold, but the broader market seems to be indifferent to it. The weak dollar is what helped keep this market rallying all summer, so it's a little surprising that the stronger dollar is not having a more negative impact on the market. The inverse correlation with the dollar was extremely strong at times, but luckily for the bulls, that relationship is not holding now.

With volume sure to slow even more in the next couple days, I'm watching very closely for the very complacent bulls to be surprised by a flurry of profit-taking. So far there are few signs of that happening, but I believe conditions are ripe for the bulls to be caught by surprise. And if they are, many will be happy to just close up shop and call it a year....

Monday, December 21, 2009

Thin Market, But Some Good Trading.....

After the gap up to start the day, the indices didn't do anything, but big-cap technology acted well, and we even had a little momentum in the solar sector. A stronger dollar pressured the precious metals, but it didn't present too much of an obstacle for the bulls.

Volume slowed quite a bit as the day progressed, and there was a lot of drifting, but that is to be expected as the holiday break approaches. Thin volume isn't necessarily bad for trading. Things can move a lot faster, but that can cut either way.

In this sort of environment I tend to focus more on sectors and individual stocks. Traders will almost always find some hot action in thin holiday trading, and those can work very well. You have to keep a close watch on them, but they can work well. Solar energy had some of the best action today, and I'll be looking for some continuation there.

The biggest negative this market faces is complacency. The bulls are content that seasonality will hold us up into the end of the year, and there aren't any big worries right now. If the market does start to slip, a lot of folks will be caught out of position, and that can accelerate the slide. We should keep that in mind as we navigate over the next few days.....

Friday, December 18, 2009

Will Next Week Be Better?

It has been a very random market for two weeks now, and what better way to cap it off than with a wild flurry of index rebalancing and option games? We had huge volume today as some big blocks crossed at the close and the indexers made their required buys and sells. In addition, things like AAPL were pushed to strike prices.

It is interesting to see some of the crazy action today, but it sure didn't do anything to clarify this market. We are still stuck in the middle of a trading range and have no leadership and few themes or trends. We did have the reflexive action to moves in the dollar, but we have been decoupling from that a bit lately.

You can be sure things will be much quieter next week, but that doesn't necessarily mean that we won't have some good trading. The trading atmosphere around holidays is often quite upbeat, and traders have a tendency to create their own action. If we stay attentive, we should be able to find an opportunity.....

long AAPL

Thursday, December 17, 2009

This Market Lacks "Leadership," But What Will It Look Like Without An Endless Supply Of Bank Stock Being Offered?

US equity markets were lower, with the DJIA, S&P, and NASDAQ down 1.27%, 1.25%, and 1.18%, respectively. European markets were lower as the DJ Euro Stoxx 50 ended down 1.2%. Asian equities are likely to open down today as Asian ADRs were lower during the North American trading day. Nikkei futures point to a down open for Japan and the firmer yen should hurt exporters.....

For the last couple weeks I've been complaining that although the indices were holding up well, there just wasn't much energy or leadership. The action wasn't bad, it was just slow and a bit random.

With the bulls acting so lethargic, maybe the bears could generate some better action if they had an opportunity. The bears got their opportunity this morning on weak demand for the C secondary, poor earnings from FDX, worse-than-expected weekly unemployment claims and a strong dollar. There were plenty of negatives for the bears to work with, but they didn't really press too hard either. We did end up closing near the lows of the day, but there wasn't any real panic, other than maybe in some precious-metals stocks.

Breadth was poor, with about 1,600 gainers to 4,200 decliners, and NYSE volume picked up quite a bit due to the very heavy trading in Citigroup shares, but Nasdaq volume was light. The worst action came in the big money-center banks, but there also continues to be pressure on popular names such as AAPL and AMZN that many were looking to as leadership into the end of the year.

With the drop today, the S&P 500 is right in the middle of the trading range we have been in for over a month and near the highs we hit back in October. The chart is still in OK shape, and there isn't any reason to be overly negative. We'd have to break 1085 or so to really do some technical damage.....

After the close, we have some good earnings reports from RIMM and ORCL, so it looks like we aren't in an immediate danger of a technical breakdown. I just hope that we see a little more excitement and energy in one direction or the other. This has been a very boring market lately, and the least Santa could do is give us a couple hot sectors to play with during the holidays......

long AAPL

Wednesday, December 16, 2009

Fed-Inspired Volatility Probably Contributed To Some Profit-Taking....

The FOMC interest-rate decision didn't contain any surprises, but it did give the sellers a little nudge to lock in some gains. The bearish spin on this action is that, when we fail to rally on generally good news, it means it is already priced in and we have nowhere to do but down.

The problem with that argument is that the FOMC news really can't be characterized as particularly good. The fact that the Fed said rates will stay exceptionally low for an extended period of time means it still has plenty of worries about the health of the economy despite some optimistic language. If they really believed the economy was heating up, there would be some hawkish comments.

Overall, it is just a lot of noise and doesn't do anything to change the big picture. We are still churning right around the highs of the year and can't seem to generate any real vigor. On the other hand, the bears are making even less progress, as we hang in the upper range of the recent trading range.

Tomorrow, we should see the pricing of the C secondary offering. That may help the banks find some support. There has been a lot a stock to digest in that sector, and it should be no surprise that the group has underperformed recently.

The dollar was weak early, which helped push up oil and gold. But after the Fed announcement, it bounced back and closed around flat. We need to keep a close watch on the greenback as a potential driver for our next move.....

Overall, the market continues to act in a healthy manner. If there is a negative, it is the fairly high level of complacency and expectations for positive seasonality. But it is impossible to use that sentiment to time a turning point in this market with any precision.

The bulls continue to have the benefit of the doubt. Until we see more negatives emerge, I see little reason to be highly bearish right now.....

Tuesday, December 15, 2009

Man Oh Man This Market Needs A Spark....Big Time (As The Mooninites Would Say)

Selling pressure from the financial sector weighed on the market all day. GE added to the pressure and a poor finish when investors sold into what seemed to be fairly positive guidance.

The market did a pretty good job earlier on of shrugging off the dollar's strength, but eventually gold and some of the other commodities started to pull back. On the other hand, oil held up, but the specter of higher gasoline prices probably put some pressure on retail, which was quite weak.

The most important action right now is in the financial sector. It certainly sounds positive that big banks are weaning themselves from government support by repaying their TARP funds, but the banks need to raise huge amounts of capital to do so, and those secondary offerings are sucking up large amounts of liquidity.

In addition to the poor action in financials, the biggest problem for the market is a lack of leadership. We have some minor action in narrow groups, such as solar energy, home health care or fertilizers, but there were some nasty reversals in small caps. In particular, I saw a lot of China names reverse hard.....

The paucity of upside momentum, coupled with weak action in financials, makes for a poor trading environment. Tomorrow afternoon, we have the FOMC interest-rate announcement, which will further complicate a market that is acting rather randomly.

The overall technical picture still isn't bad. We are in a trading range, and that tends to lead to some healthy chart setups. We just have to wait until this market finds a catalyst and starts to trend again. The Fed announcement tomorrow may be a good candidate......

Monday, December 14, 2009

The Buyers Keep Buying....

It was a quiet but positive day for the market once again. We started off with a classic Monday morning "gap and fade" open, but the buyers stepped up and kept bids under the market the rest of the day.

The action under the surface was actually better than indicated by the senior indices. Breadth was over 2 to 1 positive, and all major sectors were in positive territory at the end of the day. We had a little early weakness in financials and retail early, but buyers snapped up the laggards as the day progressed.

The big-cap technology names with the exception of AMZN performed well, and that helped the Nasdaq to outperform. The dollar weakened slightly, and that helped boost oil, gold and commodities. The XON acquisition didn't hurt matters either.

If there was a negative today, it was probably the lack of any worry or concern. Market players seem to be feeling quite confident that the market will hold up through the end of the year, and there are few indications that they are locking in profits and taking the rest of the month off. Maybe that will occur closer to the holidays, but for now, market players are quite content to hold positions.

It's a holiday atmosphere, and we might as well enjoy it while we can. I'm sure the ride will get a little bumpier before we end the year, but for now it's all good.....

Friday, December 11, 2009

Dullsville Again; No Catalysts

I'm going to try to avoid repeating myself, but there are only a limited a number of ways to convey how slow and dull the action has been this week. It has been an absolute snoozefest. By far, it has been the slowest week of the year.

That doesn't mean it is bad action. The major indices did manage to put some points on the board, but there sure wasn't much energy behind it. We had a lot of random action, with odd groups such as airlines and utilities leading at times, and, unsurprisingly, volume was quite light today and has been all week.

The biggest negative this week was that the U.S. dollar strengthened, and that put pressure on energy, commodities and gold. I was looking for that to trigger a rotation into some other groups, particularly technology, but it certainly has not been a smooth transition. Retailers, alumina and steel seemed to benefit the most this week, which is another odd mix. The strength in the dollar was overlooked to a great degree today, and, hopefully, that is an indication that we will be less sensitive to it going forward.

The big-cap tech names, AMZN, AAPL, PCLN, GOOG, etc., were a mixed bag this week. The group struggled today in a stronger market while they led yesterday. If we are going to have a run into the end of the year, I'm looking at these names to lead. These are the stocks that underperforming money managers are most likely to chase in an effort for some relative outperformance.

We are going to need something to take a leadership role if we are going to see a healthy Santa Claus rally. Airlines and utilities aren't going to do it....

The good news is that this slow action has helped to create some interesting charts. All we need now is a little spark to get them moving.....

long AAPL

AAPL's Weak Again Today; Repeating Why I Think That's Happening....

The big weakness in AAPL stock last week (and possibly the weakness today and part of this week) was a result of a major levered ETF unwind which was forced due to a dynamic change in margin requirements for those instruments. That unwind could still be happening in part through the end of this week (today) though I think the bulk was done by the end of last week. In turn, that unwind also served as the catalyst to push AAPL below a key MA (the 50 day) -- thus fueling more weakness. In short, let's call this a liquidity trade that has created a technical trade....

Further, we have seen no firm "good" news out of China. The market was expecting an instant smash. That hasn't happened so far, but the fact you have a couple million iPhones already in China floating around tells me when the features and price for "legit" iPhones finally connect, that market is going to be huge. And by the time we start seeing big sales numbers posted out of China, I'm not sure you'll be able to buy AAPL south of $235....

I've long seen the iPhone as a platform (not a product) and that platform will have a commanding, possibly leading market share presence for the whole cell phone category before this is all said and done. I see nothing currently to think my expectations for a further 50% or so rise in the stock price needs to be changed....

long AAPL

Thursday, December 10, 2009

Talk About Dullsville....

I'm running out of ways to describe how lifeless this market has been. Yes, the indices did post some okay gains, but volume was anemic and there isn't any leadership or momentum to be found outside a few big-cap technology names.

Even though the Nasdaq finished with a decent gain, breadth was quite negative, with about 1,040 gainers to 1,640 decliners. That tells us that money is flowing to a few big-cap names like AMZN, PCLN, RIMM and GOOG. Obviously, small caps are underperforming when breadth is that poor.

I'd really like to offer some better insight, but this market it is in no man's land, and until we see greater emotion and/or a break out of this trading range, it is just a coin flip. What is particularly difficult about this current trading range is that there is so little going on with individual stocks. There is a very limited amount of action and the few things I do see working tend to fizzle out quickly.

As I have been saying, this action isn't bad, it is just dreary and slow and not offering us many good opportunities. The indices are set up well for a move higher if they can generate better energy, but if the bulls don't get more active soon, then the bears may gain some confidence. Frankly, I'd just like to see a little more excitement, whether to the upside or downside, I don't really care. Any movement is better than what we have now.....

Wednesday, December 9, 2009

Banks, TARP and Inflation......

There is a good part and a bad part to what commercial banks have done with a combination of bailout money, recapitalization and zero-cost money.

The bad part is they have not extended credit to those who may be demanding it. By any measure of bank lending, there's a Roach Motel here: The money goes in but doesn't come out. Small wonder we are not creating jobs.....

However, the impairment of bank credit has prevented an outbreak of inflation stemming from the Federal Reserve's monetary creation. This is why year-over-year M2 growth is declining and velocity is just over crisis levels. If banks decide en masse to start lending -- and do they ever do anything in a non-herding manner? -- watch for inflation to pop higher.

Policymakers act as if their wisdom has prevented inflation when it in fact has been an impaired banking system.....

Some Gains, But Not Many Big Breakouts

We finished the day with some decent gains in the major indices, but under the surface it was another chaotic day. Once again, we moved in lockstep with gold, which has an almost perfect inverse correlation to the dollar.

Breadth was just about flat on the Nasdaq but the heavily weighted big-cap names, particularly AAPL and RIMM, outperformed and kept the indices solidly green. AMZN was the laggard in the group on concerns that Apple may present some competition for the Kindle book reader early next year. Apple reversed very dramatically, exploded higher and helped to carry the market along with it.

We also had quite a bit of intraday volatility with four fairly sharp reversals during the day, which is a function of the high level of uncertainty out there. The bulls are still optimistic about some positive seasonality into the end of the year, but the bears have had a strong dollar and some frothy sentiment in their corner. The bottom line is that we are in a rather murky place.....

We have been in a trading range and chopping around randomly for a while now with no one being able to gain a clear advantage. There is very little leadership, and the few pockets of positive momentum are steadily drying up. Many market players are looking for the big-cap technology names to attract money mangers looking to beef up their relative performance, and that is what kept AAPL running once it turned.

This is a market with a lot of conflicting themes, including the dollar, performance anxiety, seasonality and various fundamental arguments. Unfortunately, the price action isn't giving us a lot of clarity. That is ultimately the final arbiter, but we haven't gone anywhere for about three weeks now, and today's action didn't do anything to change that....

long AAPL

Hang On To Your Wallet, Because First They Came For The Bankers.....

While the British decision to impose a 50% surtax on bankers' bonuses above GBP 25,000 may seem like an "over there" story, it can turn into an "over here" story in a hurry. The tax will be imposed at the employer, not the employee level, and while there may be a few tricks available for banks to try and hide it, they all depend too much on the U.K. government.

They cannot threaten to move offshore; what, you're going to transfer the whole industry to the Channel Islands or Gibraltar? Shut up and pay is the path of least resistance.

We are entering an era of nickel-and-dime taxes; apparently, they will start with the unpopular ones. They always do, but as Pastor Niemoller lamented, by the time they come for you, there won't be anyone left to help.....

The tax dodge game is going to be part of the investing landscape and a wasteful distraction for several years. Chicago rules indeed.

Tuesday, December 8, 2009

Self-Defeating Business Policy....

How bad were Bush and his team that these radicals were allowed to hijack this government and no one's willing to stand up to them? The answer is they were pretty bad and in a lot of ways.

It used to be said politics in America was played between the 40-yard lines. What has changed is while the population remains between the 40s, the political classes are in the respective red zones, no pun intended. The dynamics of the long primary seasons, gerrymandered districts and too-expensive campaigns have pushed the political classes to where their interests and those of the citizenry do not align.

Moves such as the EPA's declaration on carbon dioxide and the rush to pass some ill-considered health care legislation smack of a government preying upon rather than serving its citizens. This is not a formula for long-term growth or prosperity.

Bill Clinton, for all of his faults, recognized he had to move back to the middle; this was his famous "triangulation" policy. But Clinton was only a true believer in Clinton; the present crowd seems to be filled with true believers, just as the Bush crowd had its people with an agenda.

What is amazing about all of this is the Constitution as designed and amended tried to force everything into the middle. This will tell you something about how hard the political class has had to work to achieve these consecutive administrations out of touch with the people and from two different directions....

Kind Of A Messy Rotation

It was a messy and unpleasant day of trading. Although the point losses in the major indices weren't too severe, we had broad weakness on slightly higher volume. No major sector was in the green, and the weak-dollar plays -- gold, oil, steel, coal, shipping -- were hit particularly hard.

The stronger dollar was the primary problem today, but what made it difficult was that the rotation into new sectors wasn't very vigorous. Some of the big-cap tech names -- GOOG, AAPL, AMZN, etc. -- benefited some, but at the end of the day, the gains there were limited.

If the stronger dollar and the rotation persist, then the likelihood is that we have seen the highs of the year unless the rotation into new names really takes hold and a few of the big-cap technology names really catch on fire. The big problem is that it is awfully tough to trust in a sustained rally of the dollar. The issues that have weighed on the dollar for so long are still out there and will pop up again. There is probably a bit of squeeze in the dollar right now, but it is obviously the key driving force in this market and must be watched very carefully.

The good news is that out of chaos, we usually see some better opportunities. We just need to stay attentive and wait for a little more clarity....

long AAPL

Jonathan Swift, EPA Administrator

While Gulliver's Travels is regarded as a children's story today, it was written as a political satire. What would Swift have made of yesterday's ruling by the EPA that carbon dioxide poses a threat to human health (duh; that's why we exhale it)?

Let's bring America's tort lawyers into the act next. Anyone who exhales is endangering their neighbors. Any lawnmower is a threat to human health. All volcanoes, forest fires and other natural carbon dioxide sources are tortfeasors. All countries who allow the wind to blow carbon dioxide across our borders are committing a hostile act.

While I do not take the extreme position that all climate control legislation is about asserting ever-greater political control and extracting taxes from the gullible, (Gullible's Travails?) I certainly can see how the EPA's actions will do nothing to discourage the fringe. Taken to the extreme, this is a tax on breathing.....

By the way, what's is Air Force One's carbon footprint for traveling to Copenhagen and then hopping over to Oslo to collect that hard-earned Nobel Peace Prize? I somehow think it is greater than mine for today, tomorrow and quite possibly the rest of my life......

Monday, December 7, 2009

Will A Theme Emerge?

The good news is that volume was light and breadth positive. The bad news is that the action was so slow, it was hard to stay awake. The dollar held steady, and that helped pressure gold, oil and commodities. We also had some notable weakness in big-cap technology names, like AAPL and AMZN, and weakness in financials. Small-cap stocks exhibited a little relative strength, which was a positive sign, but the trading was so slow and random, it's tough to give it that much weight.

The big technical picture still looks OK. The major indices are all in trading ranges, and there hasn't been much, if any, technical damage done. The QQQ is probably the most worrisome right now, due to the big-cap technology weakness, but it is still holding recent support levels. The IWM is going to look very bad if it breaks back down under its 50-day simple moving average, but so far it is holding near the November highs.

The market is at a juncture where we have to be on the lookout for new themes and trends, especially if the dollar stays strong. The action today reflected the uncertainty that usually emerges when sector rotations are about to start. It is muddled and directionless trading with little edge. We should have some better clues in the next few days of what may emerge from this lifeless action, but in the meanwhile we have to be patient......

long AAPL - and buying more tomorrow

Why AAPL Stock Is Sinking (I Think); And Why I'm Buying Some More Very Soon

At this very moment so many hedge funds are positioned wrong -- short dollar/long commodities -- that they have to take the market down with their reversal of these positions.

Even though I do not believe that the dollar will stay strong, the ferocity and strength of Friday's employment report will cause the hedge funds who thought rates would stay low -- the guys who keep buying Treasuries at these auctions -- cannot take a chance this late in the year to see their profits drop.

So, if you were in that mind-set, here is what you have to do:

1. Sell your banks, as rates are going up, and these banks make money from paying you nothing and investing in shorter securities, carry trade, and that goes away without a concomitant increase in loan demand.

2. Sell your commodity stocks aggressively, because they are hedges against a weak dollar. That goes away.

3. Sell your oils for the same reason as above.

4. Declare the gold trade over, and gold goes from a long to a short, especially because it has been bid up by the gold companies that took off their hedges.

Now this switch will cause a host of confusion for people at home like me who think, "Isn't this what we wanted?"

The home-people are right; they just aren't right for this moment, and their confusion will cause even more selling.

So, let the hedge funds unwind their trades. Let them lock in their gains. Look for opportunities in tech (not associated with rates), health care (the president's agenda is stalling) and transports, which need stronger growth to maintain trajectories....

But recognize that a market that totally relies on artificially lower rates and stimulus is NOT a good, long-term sustainable market, but one that relies on improving earnings, better credit ratios, a slow series of tightening, IS! Of course, anyone who bought when the market is up is now freaking out, and there's nothing worse than a market that opens higher and reverses. One of the keys here is AAPL, and it is being hammered as a source of funds by the frantic hedge funds.

With AAPL at about 190 as of this writing, I am going to make my stand by buying April 200 calls at about 14, hopefully. This way, I am betting that when the smoke clears, the funds will come right back to these, and I will be in at better prices because of all of their desperate thrashing to get their gains locked in.....

long AAPL

Friday, December 4, 2009

A Whole Bunch Of Crosscurrents In The Market Sea

It has been a very interesting day for the market with a number of complicated crosscurrents. Most action is being caused by the strong employment news this morning; some will dispute whether this report really is as positive as it sounds, but certainly the headlines sound pretty good.

The bulls obviously argue that this report is great for the market, as it shows the economy really is recovering. The problem is that if it really is good news, then it is going to cause the dollar to rally, and a weak dollar has been a major positive for this market since the bottom way back in March.

For months the market has had a very strong inverse correlation to the dollar, which means it has also been positively correlated with gold. All we have needed for the market to rally lately was a little softness in the greenback. Today, for the first time since April, the UDN is set to close below its 50-day simple moving average.

It is possible that the dollar will weaken again, but if today marks a change in trend, there is going to be some major selling pressure created as traders exit all the weak-dollar plays that have done so well for so long. That is going to be the key to the market. Maybe we'll see some rotation into sectors less sensitive to the dollar, but it is going to be a bumpy ride.

The other interesting crosscurrent today was the secondary offering of BAC. It turned out that the shares issued are considered to be common shares rather than preferred, which means that all the index funds have to buy BAC shares and reduce other holdings in the indices. That is causing higher-than-average volume today and some artificial movement that will likely be reversed rather quickly. Financials are still in a precarious position even though many seem to think BAC's repayment of TARP funds is a positive for the sector.

Overall the action today was a victory for the bears, but the problem with the bears is that they have been totally inept when it comes to producing follow-through. Maybe if the dollar stays strong they will have better success, but they still have work to do. AAPL continues its sickening sell-off....I'm buying more next week....

long AAPL

Thursday, December 3, 2009

Nerves Ahead Of The News? Does Someone Know Something The Rest Of Us Doesn't?

The bears finally managed to put some points on the board as we sold off hard in the last hour of trading. Fed member Bullard come out with a comment that just because unemployment was high, that wouldn't preclude the Fed from hiking interest rates. That certainly wasn't very helpful, but the major issue today was the inability of banks to rally after the news of BAC's desire to pay back TARP funds.

There also was nervousness over tomorrow's jobs report and growing concerns over weak retail sales, as a number of major retailers, like COST and TGT posted seemingly lackluster numbers.

If we get this BAC deal priced over $15 and the jobs numbers aren't too bad, then the dip-buyers may show up again, but they weren't interested in stepping in front of that news in the final. Market players were looking for a sigh of relief on the repayment of TARP funds, and it turns out that it isn't all that simple, because BAC still needs to raise the funds, and demand for its shares wasn't as great as was initially hoped.

Technically, the breach of 1100 by the S&P 500 is a negative development, but volume fell and breadth wasn't that bad at around 2 to 1 negative. We still have some major technical support at 1090 or so, but the biggest complaint about this market lately has been its narrowness, and if we lose key groups like banks, energy and retail, it is going to be very tough. We need some leadership other than just AMZN.

We'll see what the jobs report brings in the morning.....

Wednesday, December 2, 2009

Most Likely Why AAPL's Been Trading So Terribly While The Market Goes Up And AAPL Sells Everything In Sight....

AAPL's recent late - day (and all day) selling probably has to do with the levered ETF's and the new margin rules that hit yesterday. Given these margin rules many people will be selling the QLD and QID, as well as many other ETF's tied to the QQQQs. In most, if not all, of these, AAPL is the largest position. Those running these ETFs have to balance their books, and there are adjustments accordingly. AAPL being the largest position should therefore experience the most adjustments...

This really shouldn't occur for too many more days and is probably mostly done already. AAPL's Christmas results will likely be stunning, so I'm looking to add to my positions.

long AAPL

Bulls Are Still Loosely In Charge....

If one looks at the indices, it appears that it was a fairly quiet day, but beneath the surface we had a very unusual mix of action. On the bearish side of the ledger, we saw weakness in some big-cap technology names, such as GOOG and AAPL (more on AAPL in the next post) but strength in AMZN helped offset that. Financials were weak again, particularly GS and some of the money-center banks.

On the bullish side, we had good breadth, with about 3,650 gainers to 2,070 decliners, but the most notable action was some very strong momentum in China-related names and fertilizer stocks. Also, precious metals stayed very strong, even though the dollar strengthened today. The stronger dollar did weigh on oil a bit, but, for the most part, the market shrugged off the greenback rally.

Volume was about average, and the indices didn't move that much, so the positive bullish technical patterns are still in place. This narrow but very strong action in China, fertilizer and a few areas is the sort of speculative excess that feels like topping action, but it is the sort of thing that can persist longer than you would think possible.

There are a few other warning signs, such as the volume patterns and the high levels of bullish sentiment, which we need to watch. But the market still hasn't done anything wrong. The bulls remain in charge, and I don't see any reason to doubt them yet.......

long AAPL

Tuesday, December 1, 2009

The Pattern Holds True....

Certain patterns have played out in this market since March. One of the most notable has been the strength in the first week or so of each month from August through November. Today is only the first day of December, but the pattern is repeating so far.

It was an extremely strong day with about 3 to 1 positive breadth and all major sectors in the green. Banks were weak, but the XLF managed a flat finish. Once again, weakness in the dollar was one of the primary driving forces. That helped push gold to new highs and perked up oil. Oil has been showing some relative weakness lately and still has work to do in order to improve the technical picture there.

China stocks were the place for some wild momentum today, and many of them looked downright frothy. Momentum has been narrowing lately, so there is increased focus on a smaller group of stocks, which is why there were some exceptionally strong little pockets of action.

It is very easy to come up with fundamental reasons to distrust this market, but it is just plain foolish to fight this type of strength. The pragmatic traders out there are holding their noses and buying, and that is why it feels like there is an undercurrent of dislike for a market that keeps racking up big gains. It's a peculiar market environment because there is so little celebration, although many are obviously doing quite well as they ride the strength.

There are a few troubling considerations under the surface, such as the narrowness of the market until today, but if history is our guide, then we should be looking for more strength in the early part of the month. If nothing else, the bulls still deserve the benefit of the doubt....

Monday, November 30, 2009

A Narrow Market

News that the Dubai World debt exposure might only be $26 billion rather than the $60 billion originally reported helped to wake up the market this afternoon. We already have a propensity for strong finishes, so a little well-timed positive news didn't hurt. Financials were the primary beneficiary of the news, and that helped the tone as well.

Even with the positive action in the final hour of trading, it was still a pretty quiet and uneventful day. The best action, other than the late run in financials, was in small-cap China stocks and some lower-priced biotechs. Overall volume was light, but breadth did turn positive late in the day.

Technically we aren't bouncing back with much vigor, but the bears still can't manage to gain any traction. It is a narrower market, and market players seem to be a bit more cautious, but we aren't cracking, and there isn't any aggressive selling.

Tomorrow is Dec. 1, and so far this year, the first day or two of a new month have had a positive bias. However, that doesn't always work. Last year on Dec. 1, the DJIA lost 680 points. This market looks much healthier than it did last year, but it is not quite as energetic as it was this summer......

Wednesday, November 25, 2009

Obviously One Should Never Read Too Much Into Holiday Trading

We had some traditional holiday trading today with some good, but thin, action in a variety of momentum groups like small-cap China, fertilizers and big-cap technology, but it was the weak dollar that really drove the action. The dollar fell sharply, and that drove gold to new highs and propelled oil and commodities.

It is exactly the sort of action you expect to see around the holidays. There is an upbeat mood, and although volume was very light, market players were happy to chase a number of stocks higher.

The important thing to remember about a day like this is that it isn't very significant. Many of the moves will likely be reversed fairly soon, but it makes for good trading. The technical patterns in the major indices are still quite positive, and there aren't any major technical roadblocks in the near term. We have all the same macroeconomic concerns we have had for a long while, and the market still doesn't care.

I don't like how tied the market action is to movement in the dollar. It is really becoming quite extreme, and when we finally get a bounce in the dollar, stocks are likely to suffer a quick spike down. It is impossible to time when that might occur, so the best we can do is to be very aware of the correlation to the dollar and monitor it carefully.

This has been a particularly tough year for many, and it is very easy to feel like you are caught in a downward spiral. The best thing you can do is try to stay focused on the positive and give thanks for the good things you have, even it's just cranberry sauce in a can.....

Tuesday, November 24, 2009

A Dull Distribution Day...

It was an extremely dull day of trading. Since we were in the red and volume ticked up about 2% over yesterday's low levels, it qualifies as a "distribution day," a simple way some traders use to measure if bigger money is buying or selling. We have had quite a few distribution days in this market during its rallies, and they haven't mattered much, but when volume picks up on down days it doesn't inspire much confidence.

The problem the market had today was that the overanxious buying in the first half-hour of trading on Monday messed up the bullish setup that had developed last week when we churned for a few days and built a bit of a base. We used up at lot of our seasonal goodwill in that big gap up on Monday and now are struggling to gain further traction.

Tomorrow we will have very thin trading again, but it does have a history of being a positive day. We'll see if the traders can get some themes going, but they looked weary today and I'm not sure they are going to put forth the effort.....

I'm a bit taken back by Jim Cramer's (of; he writes that he can live with a trading tax, although not officially in favor of one....) view of a trader's tax. I think he is dead wrong on this. Such a tax will do nothing to create jobs and will destroy the industry of active trading. I'm not trying to be sensationalistic, but this tax could destroy the livelihood of many people. I plan on fighting this loudly and aggressively, and I hope many will join me....

CIEN Is A Buy Right Now

It's time to get aggressive on CIEN. This deal, where they will become an optical giant, was a great one for the company and will be very accretive for next year. Yes, they had to pay more than I would have liked. Yes, they had to issue a high-priced convertible to Nortel, which I also didn't like.

But Ciena was doing outstandingly well in a difficult environment where the major telco companies cut back. They can't afford to do so again in 2010, and my thinking is that Ciena now becomes a one-stop shop for optical needs.

Ciena will now be in the sweet spot to deliver equipment for high-def mobile and fast mobile Internet. The idea that somehow this deal is a setback for Ciena is ridiculous given the growth of the mobile internet.

It is always difficult to say, "This market is dead wrong about Ciena." The swift judgment determined that Gary Smith, the president and CEO of Ciena, simply goofed here, paid too much and hurt the company.

I think that judgment is wrong. This stock becomes the cheapest now of all the Mobile Internet Tsunami plays. It should be bought aggressively.....

long CIEN

Monday, November 23, 2009

It's Kinda Complicated; I Guess.....

It was quite a confusing day of action. Sentiment went from red hot at the open to moribund as the day progressed. Almost everything ended up well off intraday highs other than a few big-cap names like AAPL and AMZN. The weak dollar was the primary catalyst for the opening strength, but as it strengthened throughout the day, oil, gold and other commodity stocks pulled back sharply from their opening levels.

Overall, it was still a very positive day with plenty of green on the screens, but it was troubling how we lost momentum after the housing numbers and didn't really see the buyers give it another good go.

Technically, the S&P500, Russell 2000 and Nasdaq-100 all were turned back at or near significant overhead levels. The DJIA had a little better relative strength, but it was turned back as well.

It certainly wasn't a negative day, but the inability to gain any traction after the very hot open is of concern. The bulls used up a lot of energy, and it is going to be tougher to deliver that sort of action again, especially as volume slows down and folks figure that they might as well lock in the day's gains and go enjoy the holiday.

I think traders will be actively looking for some pockets of momentum in the next couple days, so there should be some interesting action to trade, but the screwy behavior today has complicated things a bit. We still have positives to work with, but the setup isn't as good as it was......

long AAPL

Friday, November 20, 2009

Follow The Hot Money?

The bad news this week was that we had a four-day streak of poor action. We held about even on Tuesday, but then sold off the rest of the week. The good news is that it is exactly the sort of consolidation we need. We were a bit overbought as the major indices attempted to make new highs and now, after backing and filling for a few days, there is a pretty good foundation for another run at the highs.

The selling this week wasn't particularly vigorous. We didn't hit any major air pockets and the dip buyers showed up late every day to do their thing. It was just some mild selling from some profit taking and movement of shares into stronger hands.

Much of the action continues to be highly correlated to any movement in the dollar, which is making for some very reactionary trading, but we uncoupled a few times for brief periods. There is no question but traders are keeping a very close eye on the currency markets these days, which makes for some potential surprises should the dollar suddenly strengthen, though there isn't much we can do about it other than be aware of the situation.

Next week, trading will be thin around the Thanksgiving holiday, but there is often a positive bias to the action. If that doesn't develop, it could be a very ugly bull trap, but there is nothing very worrisome about the technical condition of the major indices at this time.

The main thing I'll be watching for next week is pockets of "hot action." The thinner holiday flows often result in "hot-money" traders aggressively playing certain themes or sectors. With the bigger money on the sidelines, there could be some substantial moves if you are in the right things.

As always, I don't want to over-anticipate, but conditions look pretty good for some trading action and I'll be working on watch lists this weekend.....

Thursday, November 19, 2009

Backing and Filling - Setting Up For Some Gains By Thanksgiving?

For the third day in a row, we had a little last-minute buying that took us well off the lows of earlier in the day. Even with that bump, the action today was quite dreary. We were solidly in the red, and breadth was around 4 to 1 negative.

All major sectors except for gold miners were down on the day, with oil and commodity-related names looking the weakest. The dollar was up, which may be part of the problem, but we seem to have been less sensitive to the movement in the greenback in the last couple days.

In the bigger scheme of things, this is only the second day of any significant weakness out of last 14 trading days, and it wasn't a particularly aggressive selloff. Volume was about the same as yesterday, there were few signs of panic, and the vast majority of the selling occurred in the first 30 minutes of trading. I'd call it an "orderly selloff," but I'm not sure that the sanguine attitude is a way to produce a quick low.

Some backing and filling is a healthy thing. In fact, if we had a few more days of this sort of action, it would be a perfect setup for some good upside around the Thanksgiving holiday, which tends to a very positive time of the year. I'd prefer to see the dip-buying cool off for a little longer, but it is hard to keep those folks contained.

I see DELL on the wires after the close with a poor earnings report. That is pushing things back down a bit, but I suspect Dell may be dismissed by some as a company-specific problem rather than an industry issue.

In any event, it looks like we are going to have a bit of rest. Whether it is a pause that refreshes or the foreshadowing of something more dire, we will have to wait to see......

Wednesday, November 18, 2009

Market Drifts On A Day (Wednesday) That's Typically Down During Expiration Week...

We had another late-day flurry of buying, but overall it was a very lazy day of trading. We had a little red on the screens, but it was very minor and hardly deserves the description of "profit-taking." On the other hand, we didn't have much energy either, other than in the last few minutes of trading.

Agriculture stocks were a particularly bright spot, and early weakness in the dollar helped gold, but oil and commodity names disconnected from the dollar trade and were weak even though the dollar was down. Other than that, it was a very mixed day with some aimless drifting.

The indices have been close to flat for two days now, and that helps us to deal with the overbought conditions, but we still have plenty of charts that look extended. Also, that doubled-headed, head-and-shoulder formation on the IWM looks ominous. If small-caps start to underperform again, that will be worrisome. However, the senior indices have done nothing at all wrong and look quite healthy. We are sitting on the brink of new highs and churning a bit as we consolidate. It is hard to find fault with that, although this mediocre volume adds some confusion.

When the market has momentum, it is amazing how sticky we can be to the upside. Even when the perma-bulls are ready for a day of rest, we can't seem to manage one. We just have to make sure we respect that strength and don't over-anticipate a change in trend. The bulls are still firmly in control.....

Tuesday, November 17, 2009

What Do Buyers Do? They Buy...

The market looked quite sleepy most of the day, but the buyers woke up in the final hour of trading and delivered another solid close. The SPDR Trust is now up 11 of the last 12 days after starting the month in a very precarious technical position.

Volume was quite light today, but breadth was solid, and a rebound in the dollar didn't hurt oil and commodity-related stocks much at all. The weakest action came in retail after slightly disappointing earnings reports from TGT and HD.

Overall, we continue to have extremely positive action. It is obvious that there are a lot of underinvested bulls with bids under this market, and they are not letting things dip much at all. We are a bit technically extended, but we seem to be dealing with that with just a little slower action and some churning. One theme that we have seen often since March are these straight-up moves in the market without any meaningful basing or pullbacks. The bears just keep on getting squeezed, and the dip-buyers become even more aggressive.

If there are a lot of pessimists in the media who are trying to convince us that things are bad, they sure aren't doing a very good job of convincing anyone. This market is acting like it doesn't have a worry in the world....

Monday, November 16, 2009

Are We Still Listening To Meredith Whitney (See Earlier Post)?

Meredith Whitney made some bearish comments and took some steam out of the market in the final hour, but it was still a tremendously strong day, with around four-to-one positive breadth and new annual highs in the major indices. Volume was mediocre yet again, but it just doesn't seem to matter.

The only thing that matters in this market is that the dollar is sinking like a rock and there is a flood of cash looking for a better alternative than 0% interest rates.

We are riding a wave of momentum that has nothing to do with news or fundamentals. We have had a number of negative economic stats lately, such as Michigan sentiment and the revision to September retail sales, and they just haven't mattered.

This is a market driven by folks who are scrambling to find more long exposure and bears caught in a perpetual squeeze. Of course, analysis like that from Meredith Whitney is meaningless, because this market isn't interested in those arguments right now. She may actually be 100% correct about the problems, but the market just doesn't care, because people are too busy playing catch-up.

Sometimes it pays not to think too hard. This is one of those times.....

Why Do They Keep Putting Meredith Whitney On TV?

Meredith Whitney's an embarrassment. She comes on TV with no new information, with nothing other than some valuation calls, some "double-dip" rhetoric and a poorly reasoned rap on weak retail sales, and we listen. I am sure if you are a client of Whitney's you knew you had this one in the bag and the usual suspects -- GS, JPM and BAC -- got hammered. If I were a hedge-fund manager, I would have loved to have been "in shape" ahead of that interview.

I no longer think that Whitney does credible work. She has ignored anything that's happened, anything that's gotten better. She thinks the capital raises basically meant nothing. She talks about how Bank of America was cheap at $3, but not anymore. Was it expensive at $4, Ms. Whitney?

Is there any evidence WHATSOEVER that JP Morgan is weaker than at any time since the crisis began? Does anyone think that about Goldman Sachs? Does she not acknowledge that there is not only a normalized earnings model for so many banks out there, given the big fee increases, but that the notion of staying as negative as this seems almost foolish? No, make that foolish.

I think that you need to buy JP Morgan off this and I think you just got another chance to buy Goldman Sachs.

I think this is insane!


Intel's decision to boost the dividend is, in part, a sign, I believe, that it doesn't understand the market's reaction to the strength in the chip market and, in part, a statement that the AMD nonsense is now behind it. Very bullish. It also means it has plenty of money for capital equipment spending -- I hesitate to think how much they had reserved for AMD, which is why I think that while AMD had a nice pop, Intel should have had one, too. The stock, I believe, is now poised to go above where it was when it reported its great quarter.....

long INTC

Friday, November 13, 2009

Living In Interesting Times; And Why It's Not Paying To Be A Bear Right Now

Just pulling together some thoughts after an interesting week. Do you realize that global central banks and government agencies have thrown upwards of $30 trillion dollars at the crisis through direct lending and indirect backstops, with roughly 65% of that coming from stateside sources?

That's a big number any way you slice it and begs the natural question: is the needle pointing towards hyperinflation?

Not necessarily. If they were creating currency, that would be the most probable path by a long shot and I would be long any physical asset I could get my H1N1-free hands on. But since they're creating credit, it's a whole different analysis regarding how the economy, investors and other countries are likely to respond....

That "fits" with my view that we're sitting at a critical crossroads. The first path is the continued socialization of markets and bearded nationalization of troubled institutions. A lower dollar is a necessary precursor to—but no guarantor of—this dynamic and would continue to punish savers who preserved capital.

The other option is orderly destruction of debt, deflationary pressures and an eventual “outside in” recovery that paves to the way towards true globalization. The result would be a higher dollar and lower asset classes in the intermediate term but a sustainable foundation for economic expansion thereafter.

Deflation in a fractional reserve banking system means policy makers have, for all intents and purposes, lost control of the economy. It would also impact the top tier of our societal structure tied to the marketplace, which would be problematic for politicians and the constituencies that bankroll them. That, as much as anything else, is currently dictating policy......

As for today's market, after a one-day pullback, the buyers were back at work. Volume fell, but, for some reason that escapes me, this market seems to consistently rally on declining volume. Breadth, however, was quite strong and some of the stodgy big caps, like DIS, MSFT and MCD, performed quite well. Some of the big-cap technology stocks, like AAPL, AMZN and GOOG gained nicely, but volume on the moves was quite light. Once again, weakness in the dollar bolstered gold, oil, steel, coal and other commodity-related names, but financials were an obvious weak spot.

Under the surface, there was some choppy action and it looked like we might roll over as the day wound down, but the buyers stepped up in the final hour and pushed us up with some help from a dip in the dollar.

Technically, the major indices, with the exception of the small caps, have been churning for a few days right below key break-out levels. This is a pretty good-looking setup for a move higher. I'm still concerned about some of the weak small-cap action, but overall, the major indices are not an inviting short here.

This market has been much tougher to trade for many market players than the indices would seem to indicate. There is a lot of frustration out there and that is probably one of the reasons we continue to have such a strong market with some unusual technical characteristics.

It is easy to find reasons not to like this market, but a far bigger positive is that the price action is positive. Until the price action actually reflects some concern over the negatives, it won't pay to be bearish.....


Thursday, November 12, 2009

A Welcome Selloff?

It has been a while, but the bears finally managed a decent payday. Despite some seemingly good news from WMT, HPQ and INTC, the market focused instead on a strong dollar and a buildup in oil inventories. Those are the primary justifications for some profit-taking. Of course, the fact that the market has had another V-shaped move and is somewhat overbought is another reason to support the selling.

What is most worrisome about the market lately has been the action under the surface in small-caps and secondary names. The major indices have been boosted and still look pretty healthy, primarily because of bigger names like AMZN and GOOG. If you look deeper, you will see some major technical deterioration in many stocks.

After the run we have had, a one-day correction is something we should be happy to see. The market needs to consolidate and to shake out weak holders before it can attempt another leg up.

What we really have to watch for at this point is a situation where the dip-buyers jump back in but are then trapped in a quick reversal back down. The dip-buyers need to suffer some pain a few times before they will stop jumping in and supporting the market so quickly. They are a very tenacious group, and they have had little reason to fear the dip-buying approach so far.

Overall the S&P 500, DJIA and Nasdaq are still in good shape technically. They bounced too far, too fast in the past couple weeks, so they need to pull back and consolidate a bit. We can probably dip another 2%-3% or so without doing any real technical damage, but if we start to move back below the 50-day simple moving average, which is around 1060 on the S&P 500, then the picture changes quite a bit.....

Wednesday, November 11, 2009

Late Post - 2 To Consider and Some Veterans Day Thoughts...

Although the firm has not filed its 13HF yet for the quarter, there were two interesting filings yesterday from Baupost Group. The firm is managed by one of the more successful managers in the past two decades, so when Seth Klarman moves money around I pay attention. He purchased a stake in ENZN. The company recently announced that it is selling its specialty pharmaceutical business for an upfront payment of $300 million and royalties on the existing product line. The only remaining business will be their technology platform and the royalty stream. The company said it is evaluating options on how to return the value to shareholders....

Baupost also upped it s stake in satellite and wireless communication company ViaSat (VSAT). They now own over 14% of the company....

As for Veterans Day, this holiday was known originally as Armistice Day, as the cessation of hostilities on Nov. 11, 1918, was an armistice and not the end of World War I. It did not become Veterans Day in the U.S. until May 1954. Similarly, Memorial Day was originally a day of remembrance for Civil War casualties.

The appalling slaughter of World War I carried through past the signing of the armistice agreement at 5:10 a.m. (back-stamped to 5:00 a.m.) for a cease-fire at 11:00 a.m. Over the next six hours, more casualties were incurred in a war that had already been won than were to occur on D-Day on June 6, 1944. Some, including the American commander John J. Pershing, were opposed to letting the Germans off without a full defeat. Their opposition proved prophetic for what was to follow.

We often place life-and-death decisions for ourselves in the hands of others who, to put it as simply and bluntly as possible, don't give a damn about us as individuals. As Tim Melvin noted in reference to small banks, or as the ongoing kerfuffle about Goldman Sachs signals, we placed our economic and financial well-being in the hands of those who were insufficient to the task at hand and really did not care a whit for the taxpayer any more than Pershing, et al., cared for the cannon fodder of 1918.

We honor our veterans for their bravery and sacrifice, and should well do so. Our enduring human tragedy is that their presence was, is and shall always be necessary.....

I Think It's About Time To Short Some Gold...

In the contrarian of contrarian moves I'm thinking of building a gold short and do not anticipate needing to play with stops. As I felt with last years's oil bubble, I feel gold is fully emblazoned in one currently. And the move in gold this year could turn out to be like last year's move in oil, which many tried to argue was backed by the seemingly indisputable fundamentals but was more like a great work of fiction. The oil, and now gold, commodity fervor is more likely backed by structural issues related to ETF's and their weight in the front month contracts, lack of position limits in futures and the age ol' tradition of momentum begetting momentum and/or investors chasing...Moreover, the number of calls for gold to $2000, or $3000 or even $5000 has also reached a new level of intensity....

This would not be a timing trade per se and timing the turn on a bubble deflating is near impossible and I'm not doing that. I would simply be allocating a very small part of my gains this year to this new gold short, and as gains built, likely continue making the short position larger....

Given my macroeconomic stance, I do feel as though my timing on this potential trade may be pretty good. Time shall tell. If I'm wrong I'm wrong and it won't cost me much. However, if I'm correct and this fervor fades the move could be quite quick as well as sharp and the gains made on the double short could easily exceed 30% or greater....

position: thinking of shorting gold

Good Grief! No One Belives In This Market...

With continued help from a weak dollar, the bulls keep their winning streak going. After a gap up this morning, it looked like we were really going to catch some very strong momentum as we made a new high for the year in the S&P 500, but the dollar suddenly reversed up, and we end up drifting around for the rest of the day. It wasn't bad action at all, but once we cooled off, we couldn't regain the heat.

We had good breadth, with most major sectors except retail in the green. WMT was out with some comments today about how the holiday shopping season was likely to be tough once again, and M didn't help the sector either with some weak guidance. Gold, oil and the other weak-dollar plays prospered yet again.

The market continues to have very strong underlying bids, and the sellers just aren't getting any downside traction at all. We are a bit overbought and continue to have very mediocre volume, but the bears have no confidence.

The most notable characteristic of this market continues to be that no one seems to really believe in it. The buyers are there because they don't want to fight the trend, and the bears are just worn out from being constantly run over. It has been one of the most joyless and uncelebrated bull markets I have ever seen, but that seems to be one of the reasons it keeps on going....

Tuesday, November 10, 2009

The Pullback Didn't Come Today

After five positive days in a row that took the S&P 500 near its highs of the year, we had a very mixed day of action. Volume slowed a bit once again, and breadth was poor with about 2,200 advancers to 3,550 decliners, but some big-cap strength helped to hold the indices near the flat line.

The bullish argument here is that this is just some healthy consolidation after a big move and that we will set up for an assault at 1100 on the S&P 500. While we didn't continue the recent strong momentum, we didn't see much selling either.

The bearish argument at this point is a bit less compelling. We are seeing relatively poor action in small stocks, and the IWM is definitely looking vulnerable, but that doesn't mean that the big-caps won't keep on driving the major indices.

The strongest-acting stocks tend to be quite extended - maybe - on low volume, and there is very little that is consolidating for another leg up. If you want in, you have to be willing to chase bounces into resistance.

The major indices look much better than the average individual stock, and that is what makes this market quite tricky. The bulls are still in control, but this market isn't nearly as easy as it looks...

Friday, November 6, 2009

Late Post - Why The Concept Of Selling The Jobs Number Would Be Incorrect

My take is that we will see job gains by the end of the year - and possibly as early as this month. The Total Unemployment rate is peaking or peaked and those waiting to buy stocks when we have an unemployment rate back below 8% again will probably pay anywhere from 50-200% higher prices than today depending on the name they are buying.

Further, my extreme variant view of well above growth consensus all year has been correct but I was worried (5-6 months ago) that the economists may get emboldened and raise Q4 and Q1 numbers too much which might present stock risk at that time.

Well we are here in Q4 and pessimism is still extremely high with many more concerned about a double dip than a dynamic growth rip.

Bottom line, the negativity bubble is still the last bubble that needs to pop and until that happens forecasts for economic growth and stock returns will likely prove to be overly pessimistic.

Case in point, after CSCO's report and commentary I figured we would see an AAPL or GOOG type reaction for them. That has not happened and the fact you can buy CSCO (which has just picked up a star in Starnet (STAR)) for under $25 is remarkable. With a defunct Nortel (NT) a crippled Alacatel Lucent (ALU) and a Juniper (JNPR) that seems reluctant to buy Ciena (CIEN) or Riverbed (RVBD) or Adtran (ADTN) or ADC Telecommunications (ADCT) -- CSCO appears green lighted for a sustained advance and should regain some of its former lost luster. And yes I do think Juniper (JNPR) should be more acquisitive as it and CSCO are in semi-oligopolistic status at this point....


Did The Bears Waste A Good Opportunity, Or Are The Pins Still Set Up For Them?

Despite the drama over the rather poor jobs report this morning, it ended up being a very boring day of trading. The indices were up a minor amount, but breadth was negative and volume very light.

A number of bulls were encouraged by the action and argued that if the bears couldn't pressure the market more given the poor jobs data, particularly the 10.2% unemployment rate, then they obviously have little firepower. In view of how the market has had a tendency for many months to keep on going once it starts to bounce back up, it is difficult to dismiss the optimistic spin on the action.

The bears, on the other hand, argue that the market has bounced back five days in a row and is now running into overhead resistance. While the bulls did a nice job of holding things up today, there is formidable overhead resistance nearby, and the chances of another gravity-defying V-shaped move straight back up are declining.

If the bears are going to make a move, this is a very favorable setup for them right now. We have nothing much more than an oversold bounce back to resistance, and if we are going to stall out and roll over again, this is the point where it will happen. This is a market that hasn't respected those sorts of technical setups in a while, but that doesn't mean we should ignore them. We held up well today.

Next week should be a very interesting contest and should give us some good insight into how things will play out as the year winds down......

Thursday, November 5, 2009

Will It Last?

Back to writing again after going to Vegas and getting back into the swing of things....The market action today resembled what we saw so often so during the summer rally. Once we started running, there was no looking back. Volume was mediocre, but breadth very strong. The bears were worried about being squeezed, and the bulls were worried about being underinvested. Apparently, no one was too concerned about buying in front of the jobs data tomorrow, or maybe the shorts figured they better move out of the way.

The pattern of the market for a very long time now has been near breakdowns and then very aggressive recoveries. If you harbored any doubts about this market, you have been continuously surprised.

I think this action today is a celebration over the fact that the Fed is not doing anything to drain liquidity out of the system. Of course the knee-jerk selling that took place following the FOMC announcement on Wednesday was a good way to sucker in some bears before we took off again today.

Despite this very powerful move today, I still question whether we are going to pull off another V-shaped move straight back up. We have had some real changes in character lately, and while the market seems to have problems with short-term memory, I think the buyers may not be quite as euphoric going forward.

The bulls' biggest argument right now is that performance anxiety is going to drive a lot of money mangers to buy "beta" (stocks that move faster than the market averages) in hopes of catching up. I'm not sure that it is that simple.

We'll see what the jobs report brings in the morning. If we miss expectations, it will be very interesting to see if the buyers who missed out today are willing to buy a dip tomorrow. That has been the inclination since March. On the other hand, we have had a lot of "sell the good news" reactions lately, so keep that in mind if the numbers are better than expected.....

Friday, October 23, 2009

Are We Selling The Good News? Does This Mean Anything?

The primary market theme this earnings season continues to be "sell the news." Even though a number of individual stocks like AAPL, GOOG and AMZN have traded strongly on their reports, the overall market keeps selling into the giddy reaction to good news.

The good news for the bulls is that despite this sell-the-news inclination, the major indices have not suffered too much technical damage. A big part of the reason is that the best reports have come from the most heavily weighted stocks in the indices such as MSFT and Apple. If you look at the iShares Russell 2000 ETF small-cap index, on the other hand, you will see much weaker technical action, because it hasn't benefited from the big-cap technology names that have been supporting the market during earnings season.

Most of the major earnings reports are now out, so we have to think about what will be the next market catalyst. Logically, if we can't rally more on the good news of some great reports, then the risk to the downside will be greater when there is no earnings news.

Another very important theme lately has been the weak-dollar/strong-commodity trade. The market has been saved numerous times lately by weakness in the dollar, which causes oil and commodities to rise. Should the dollar reverse to the upside, it will be a very convenient excuse for some aggressive profit-taking.

Technically the S&P 500 is right around key support at 1075, which is the September high, and it has done nothing more than to suffer a little healthy consolidation. Conditions are in place for it to evolve into something more, but anticipating weakness in this market has been a death wish.

We had a weak finish today, which is also a bit of a change in character. The bears have had little success in gaining traction when conditions favor them, but we'll have to be on guard that this time it may be different.......

long AAPL

Thursday, October 22, 2009

Don't Fight The Uptrend?

And now we return to our regularly scheduled programming. It is hard to believe we were even hit with a late-day selloff yesterday, given how fast this market has recovered.

Once again, the dip buyers wasted no time at all in taking advantage of the opportunity. We looked a little shaky in the early going, but once we started to inch back up, we didn't' stop. One of the most amazing things about this market is how quick and unrelenting the bounces have been. If you don't jump in as soon as we start to recover, you aren't given another chance, and that is why the dip buyers are so aggressive when we do have these fairly minor pullbacks.

The most dangerous thing you can do in this market is anticipate a change in trend. Just when it looks like the bears may be gaining a slight edge, we roar right back up, drive the underinvested bulls crazy and squeeze the shorts. If you have just stayed 100% long for months, you have been wrong about this market.

We have some earnings reports hitting and that is stirring up the bulls even more. AMZN posted good numbers and is now looking much like AAPL did after its report last week, except that AMZN has a lot more shorts in it. There looks to be plenty of good news -- and don't forget we have MSFT in the morning. The bears will once again have an opportunity to try to make some headway with a 'sell-the-news' reaction, but they definitely have their work cut out for them. My advice is, don't fight this uptrend.....

Wednesday, October 21, 2009

I'm An AAPL Bull, So The Following Isn't That Surprising...

I have found AAPL to be an exciting company; which is why I am thinking that the launch of the Apple i-phone from CHU at the end of the month will be huge and spur buying.

Which is why I am thinking that when Apple opens its store in the Louvre next month, you are going to see a new wave of buying.

Which is why I think when we see holiday sales for all the new Macs, you are going to see a bump in the stock price.

Which is why, when we see the new accounting that Apple said it would adopt, you are going to see people go to my $13 earnings per share number.

Which is why this is still the best story out there.

Is it too late to buy? If you bought it yesterday, look at all of the points you could have made as the stock was pressed down by the Galleon wind-down and related selling by hedge funds that think they may be under investigation.

Apple is a story of invention and manufacturing and customer service and excitement.

It is a 30% grower. Give it a 30x multiple on that $13 EPS number and you can see why I am so excited...

A Late Day Sell-Off That Clears The Decks?

A downgrade of WFC by a long-term bank bull in the last 45 minutes of trading was timed perfectly for maximum impact. The bulls were looking extremely confident once again as they celebrated further weakness in the dollar, but the downgrade by Dick Bove hit just when the buyers usually begin their last-hour push. That triggered a cascade of selling, and it was too late in the day for the dip-buyers to make a move.

The good thing about a fast intraday double reverse like we had today is that it quickly helps to kill the froth that has been building. A correction doesn't have much impact when it is mild and quickly dismissed. The selling yesterday was hardly a blip, and it did very little to help build up that wall of worry that had been the driving force behind this market's relentless rise.

This is the first late-day selloff we have had in a very long time, and that just goes to show how complacent the bulls have gotten lately. While it is a bit painful if you are holding long positions, it is healthy action in the bigger scheme of things. A little fear will help create some new and better opportunities....

Tuesday, October 20, 2009

Bears Post A Victory

For the first time in about 14 trading sessions, the bears managed to notch a fairly clear victory. We did bounce back in the final hour. Volume was light and the point loss wasn't anything major, but in view of the very strong earnings news, the bears did manage to score some points.

Last night, market players could hardly contain their giddiness over the reports from AAPL and TXN. There was even more good news this morning from the likes of CAT and CMA, but the sell-the-news reaction dominated.

Sell-the-news has been the theme so far for third-quarter earnings, but it hasn't caused too much damage. The problem for the bulls today was the dollar finally bounced, which caused weakness in oil and commodity-related shares, and we were technically overbought enough for some profit-taking to kick in.

The bigger picture still remains very positive. The uptrend is intact, and momentum has barely slowed. In fact, it can be argued that today's action is positive consolidation that helps to build a stronger base that will support further upside.

So give the bears a little credit for finally showing a little energy, but they are still way behind and will need quite a few more days like this before they can be taken seriously....

Don't Raise Rates Yet

The cover story of Barron's last week screamed it's time to raise rates. I feel for savers, but I still disagree. I believe that many in the financial press and punditry greatly misapprehend the current financial and economic situation in which we find ourselves.

This economic recovery and financial market improvement is far too fragile to be able to withstand a premature withdrawal of various support programs, or more importantly, a near-term increase in official interest rates.

Despite some return to normality in the credit and equity markets, consider the following headwinds facing the financial system:

# In the $6.5 trillion dollar market for commercial real-estate loans, The Wall Street Journal reports that $154.5 billion of such loans are coming due between now and 2012, some of which are having great difficulty getting "rolled over."

# It is estimated that as much as $1.3 trillion of CMBS need to be refinanced, leaving banks with the potential for further balance-sheet impairments. That doesn't even include those derivative contracts that have to be re-consolidated on bank balance sheets as of January 1, 2010. Estimates suggest another $900 billion of liabilities will hit the banks at the start of next year.

# Commercial real-estate values are plunging, office vacancies are rising and rents are down sharply.

# Credit-card delinquencies are reaching record levels and are likely to go higher until there is improvement on the employment front.

# Unemployment, itself, remains a problem for the economy and possibly a long-term chronic issue.

# The broadest measure of unemployment -- called U-6 by the Labor Department, which includes the unemployed, the under-employed and those who have abandoned all hope of getting a job -- currently tops 17%, higher than the peak in the 1980-82 recession. The Fed has rarely, if ever, raised interest rates before unemployment peaked.

# Factory usage rates, also known as capacity utilization in more econo-speak, are hovering around 70%. The Fed has never raised interest rates with so much unused capacity and rarely, if ever, raised rates before factory use topped 80%. (Usage rates are quite low globally, as well.)

The argument that the Fed should raise rates hinges on the possibility, not probability, that the Fed's accommodative stance on monetary policy is creating another bubble in financial and hard assets, like stock and commodity prices.

There are problems with this argument. Were it not for Treasury Secretary Hank Paulson's decision to let Lehman Brothers fail, we may have never endured a financial market crisis of the magnitude that we have suffered from the summer of 2007 to the spring of 2009 -- one accelerated greatly by Lehman's demise.

True, we were headed for an extreme makeover on the downside, regardless of Lehman's fate, but Lehman's failure brought us to the brink of systemic collapse. I believe we were much, much closer to complete collapse than most people realize, between September of 2008 and March of 2009.

The failure of Lehman Brothers, in my opinion, was one of the single biggest economic policy blunders of the modern economic era and created a crisis of historic proportion. Had the Fed not engaged in aggressive monetary policy accommodation, established a variety of financial market insurance programs and greatly expanded its balance sheet, we would, today, be enduring The Great Depression II.

Hence, it is possible that the Fed's overt actions have allowed markets to return to some semblance of normality and that the collapse that brought the Dow Jones Industrial Average to 6,500 on March 9 was an overshoot. The recent rebound we have enjoyed is part of an appropriate normalization process, not a financial market bubble.

Others, like David Einhorn at Greenlight Capital, who correctly identified Lehman as a candidate for failure, is now buying gold amid worries of a currency collapse that will end in a "death spiral" for the dollar.

He is not alone in his thinking that excess liquidity, large fiscal and current-account deficits and other global imbalances will bring about the dollar's demise unless some efforts are undertaken to correct global problems of this nature and magnitude.

Others argue that the Federal Reserve will need to raise rates to "defend the dollar". The problem with this reasoning is that no one says what we are defending the dollar from, in the literal sense.

There is an abstract theory that a falling dollar will cause U.S. creditors to dump their dollar-denominated securities, particularly U.S. Treasury bonds, thereby not only hastening the dollar's collapse, but also bringing about a massive and catastrophic spike in interest rates.

No one has remarked that the budget deficit for fiscal 2009 came in at $1.4 trillion, a record, but also $400 billion below prior estimates. It is possible that as the economy recovers and tax revenues rebound from the record contractions experienced in the last fiscal year, the budget deficit will likely continue to shrink as a percentage of GDP.

Expenditures for financial rescue programs will fall as the need for them abates. This is a phenomenon we have already witnessed, as the $700 billion in TARP funds available to aid troubled banks was never fully deployed.

This interest-rate spike that everyone foresees should be taking place right at this moment, if the thesis of unsustainable deficits is to be the driving force behind the dollar's imminent demise and an associated interest-rate spiral.

Instead, overseas investors continue to purchase U.S. Treasuries for reasons of enlightened self-interest. In order to keep their own currencies from appreciating too rapidly against the dollar, thereby reducing their pricing advantage in world export markets, our trading partners buy dollars and park the proceeds in the U.S. bond market, keeping our rates low and their exports competitively priced.

Despite the constant calls among our trading partners for more sound fiscal policies that would presumably strengthen the dollar, they will spend whatever it takes to keep their own currencies weak as a means of competitively pricing their exports bound for our consumers.

This is a process that our trading partners would abandon at their own peril. Purposefully abandoning the dollar and allowing that dreaded spike in interest rates would destroy the U.S. market in which foreign goods are bought in the U.S. This is the economic equivalent of the Cold War's nuclear deterrent, known as mutually assured destruction (MAD).

Without a functioning U.S. economy and consumer, the rest of the world is, crudely put, screwed. As we witnessed at the depths of our financial market and economic crisis, exports from our trading partners from Berlin to Beijing plunged by double digits, on a monthly basis! We caught cold and the rest of the world got pneumonia, as has been the case for decades.

Defending the dollar with higher rates, or having our trading partners abandon the dollar are perils unlikely to be realized any time soon.

Finally, there are the "gold bugs", who claim that the message of gold's recent and only nominal new high is one of incipient inflation in the U.S. This, they say, can only be cured by an immediate hike in official interest rates and draining excess liquidity, which has the potential to create hyperinflation.

What the gold bugs also fail to mention is that gold has not reached an inflation-adjusted high, which would require the barbarous relic to climb above $2,000 an ounce. That may happen, but it hasn't happened yet.

Citing monetary theory as their intellectually solid reasoning, they claim that inflation is the result of "too much money chasing too few goods."

As I have pointed out, we arguably have too much money, but we also have too many goods! That does not meet the monetarist's definition of inflation. Indeed, given all I have written thus far, deflation remains the larger of the two risks.

The Fed's printing press has, indeed, been running overtime. But it has merely replaced the $2 trillion in lost capital from the financial crisis and has yet to find its way into the real economy.

Unless and until those dollars begin to circulate in the real economy, the danger of "overheating" is illusory, as the velocity, or turnover of money is of greater significance to economic growth than simply the supply of money.

There is no demand-pull inflation taking place from an over-levered consumer, nor is that happening anywhere else in the world, except in China. China's government is mandating the purchase of raw materials. Chinese consumers are not the drivers of domestic demand, which, again, is not the ingredient for generalized inflation abroad, or at home.

Gold's message is not one of inflation, but of concern about all manner of currency risk around the world, and not just in dollar terms. The price of gold is rising in other currencies as well, as competitive currency devaluations take place all over the globe.

There is a preference for gold in lieu of paper of all kinds.

While I may be whistling past the dollar's graveyard here and missing a key element of our economic future that demands that domestic interest rates be raised, history teaches us a few important lessons about the specious arguments being laid out in favor of higher rates or a "strong dollar policy."

First, it is far too early to declare victory over deflation by prematurely raising interest rates to counteract phantom inflation. Second, a "strong dollar policy" despite the required rhetoric from politicians and policy-makers is not always "in the best interest of the United States."

We are fighting deflation still. The combination of higher rates and a stronger dollar would kill this economy before it ever had a chance to fully recover. Quantitative easing and a zero-interest-rate policy are the proper cures for what ails our economy and will likely remain so, as the Fed says, "for an extended period of time."

I believe the Fed can let expire the various insurance programs that backstop money-market mutual funds, commercial paper issuance, sales of bank debt and the like with little impact on the markets or economy. And, they are already doing that.

By letting those programs expire, it would also put to rest the inaccurate claims that the bailout is costing the U.S. over $11 trillion! That figure includes the nominal price of insurance programs, but not the true liabilities taken on by the Fed and Treasury. In truth, very little of that money has actually been used.

As we learned in the U.S. in the 1930s, or as the Japanese have learned over the last 20 years, policy mistakes have consequences, and they can be severe.

In 1937, a premature withdrawal of support and a hike in rates by the Fed touched off a second depression. In Japan, a series of policy mistakes over the last 20 years has left that country's economy in recession for 50% of the last two decades and the Nikkei still 75% below its all-time high scored on December 31, 1989.

Does anyone want to repeat the mistakes of both ancient and modern economic history over a faulty assumption that we are entirely out of the woods? I, for one, most certainly do not...

Monday, October 19, 2009

AAPL Results

Apple reported a true blowout quarter. EPS came in at $1.82, 40 cents ahead. Revenue also surprised at $9.87 billion, as did gross margins coming in at 36.6%.

Growth accelerated for the third consecutive quarter. Revenue grew 25% from the year-ago period, while earnings surged ahead 44%. The tax rate also helped, coming in at just 26% vs. expectations of close to 30%. Gross margins were boosted by component costs coming in less than forecast, and the product mix of higher-margin products, including Snow Leopard software (high margins), which sold at twice the rate of the first Leopard release.

Macs were the standout, and the leading driver of the revenue upside. The company sold 3.05 million Macs, with the growth rate accelerating to 17% year over year. This is an order of magnitude greater than the 2% overall PC growth that has been estimated for the quarter. Apple cited a very strong back-to-school season, strength in Asian demand (up 42%), as well as a consumer who was very attracted to their portables, which grew 35% from last year. That is impressive growth, and management says the segment still has fantastic momentum.

iPhones were also very strong, with 7.4 million units sold (up 7%). The response to the new 3GS phones has been strong, and management noted that the iphones have led the J.D. Power consumer satisfaction polls. They noted that demand did indeed outstrip supply in the quarter, but the equation should be coming into balance. They start selling in China later this month and are also expanding carriers in the U.K. and Canada. By year-end, they should be selling in 80 countries.

iPods fared better than the Street was expecting, with 10.2 million sold (down 8%). Of iPod buyers, 50% were reportedly first-time buyers, intrigued by the new features on the Nano and lower price point on the iTouch ($199). iTouch sales actually spiked 100% and should be a strong seller in the holiday season. The company claimed 70% market share in MP3 players, and I believe that sales should be strong this holiday season. I know I am ready to upgrade my iPod, as I would like the new FM radio and camera functionality.

The other major factor that helped the stock top the $200 level after hours was stronger-than-expected guidance. EPS guidance of $1.70 to $1.78 was well above the whisper numbers of $1.68. Moreover, revenue guidance was in line with current estimates ($11.3 billion to $11.6 billion), a big surprise given their normal conservatism, and well above whispers of $11.0 billion. Similar to last quarter, gross margin guidance was 34%, and the tax rate at 30%.

The CFO said the company is unsure about when it would adopt the new FASB accounting standard, but it will probably occur at some point during 2010. Interestingly, if you look at the end of the press release, the company shows that if FASB were adopted now, it would have earned $3.12 in EPS this quarter. That's pretty amazing, and if we were to annualize that, we could argue that AAPL has earnings power of $12 next year. Now don't get all crazy on me for being bullish, but if you apply a P/E of 25 times to that figure, you could justify a price target of $300. I'm just saying...

long AAPL