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

Can The Market Rest After AAPL and TXN?

AAPL reported well ahead of expectations and the whisper number and is now jumping to an all-time high over $200. Guidance was reduced a bit, but no one believes it because they play the same game every quarter. TXN numbers also look decent, and the stock is up a bit, but it's always Apple that excites the bulls.

Given that the market has gone straight up since the beginning of the month, a reasonable person might wonder if we are due for a rest, but reason is not something this market cares about. We are running very hot, lots of folks are frustrated at missing out, and the news flow continues to be good. While looking for some consolidation or profit-taking seems like a reasonable idea, the market just isn't a reasonable beast.

Look for the bears to start talking about blow-off tops when we gap up in the morning, but as I keep saying, you just can't fight this price action. We are riding a huge wave of liquidity-driven momentum, and it is showing no signs of slowing........

long AAPL

those arrogant banks...

so the banks receive the mother-of-all bailouts in the form of free deposits, usurious interest rates and fees, hundreds of billions of tarp money, hundreds of billions of government backed debt, and manipulated accounting rules, and how do they show their appreciation?

of course, they fight every piece of reform legislation out there; consumer protection, off balance sheet liabilities, size restrictions, reporting improvements, etc. and worse yet - THEY REFUSE TO MAKE LOANS!

when will the cowards in this country's financial leadership wake up to the face that banks can raise private capital? when will the pols get that no bank should be immune from free market forces including the privilege to fail, debt holders and all.

i do get saving the banking system in the crisis. what i don't get is how the feds ignore what is happening now. maybe geithner meant it when he said the banks should raise private capital on friday. but the feds show little willingness to not coddle each and every financial institution in this country, including the most incompetent...


i read quite a bit the endless trashings of government officials and companies. the idea that bernanke is doing a terrible job - a constant theme out there - is unbelievable to me. has everyone forgotten what almost happened last year? do people realize how fragile things were? the unreal nature of the commentary out there boggles the mind. one would think we are at dow 6000 going to 5000, not at dow 10k. do people look at stock prices? one can sell millions of shares right here, right now, so go lock in the gains - i don't care! but please remember that once he woke up, bernanke's done well, the market's done well and people who own stock are making money! it is just surreal, totally surreal.

What's Expected For AAPL Tonight?

AAPL will report earnings after the close today. Consensus estimates are for EPS of $1.43 on revenues of $9.22 billion (according to Reuters). Expectations always run high for Apple, and this time, they are likely high again due to the strong run up in the stock price, the fact that the company has topped estimates handily for the last four quarters and talk in the market that both Mac and iPhone sales have been strong.

Apple is also notorious for giving very conservative guidance and this time will be no different. Last quarter, it guided to $1.18-1.23, at a time when consensus estimates were for $1.30. Today's estimates are well above both of those levels. The company also said it expected gross margins to be roughly 34%, while expectations today are for margins above 35%.

Here are some of the other metrics investors are looking for:

# iPhone units sold of 7.5 million - This metric most likely determines the path of the stock price short term; strong past and predicted iphone sales most likely sends
the stock price higher

# Mac shipments of around 2.8 million units
# iPod unit sales of 10.5 million
# Comments on rumors of an upcoming Tablet launch (doubtful)

There has been a lot of talk that worldwide demand for iPhones is currently outstripping supply, and that if the company were adequately supplied, it could have sold a lot more phones. The CEO of 3 Italia (wireless carrier) indicated that the company is selling 20,000 iphones per month, but could sell double that amount if it had the supply. While this has positive implications for sales over the next few quarters, I will be interested to hear if management addresses this concern at all during the call.

There is also a lot of talk about when management will adopt a new accounting standard, which will change the timing of when the company can recognize revenues from iPhone sales, and would boost current estimates. While GAAP EPS estimates for 2010 are currently just north of $7.00, adoption of the new accounting standard would take estimates above $9.00. Analysts don't think this will change the stock valuation, as it is already known by the Street, but I still expect it to have a mildly positive impact.

The stock has had quite a run, and while it often pulls back after reporting typically conservative guidance, last quarter this did not happen. AAPL is executing very well, Steve Jobs is back, the iPhone is in China and there should be some Mac refreshes soon. Even so, I have trimmed some of my positions in AAPL. On a $10 to $15 pullback in the stock, I'd certainly add them back. If we do get a negative reaction to the earnings, it will likely to be another opportunity to add to positions as the company heads into its seasonally strongest period.

long AAPL

Friday, October 16, 2009

The Trend Should Probably Be Respected...

With the exception of GOOG, earnings reports so far this quarter have not been receiving the same joyous response that they received last quarter. Today, IBM and BAC sold off on their reports, and INTC, which had a great report on Tuesday night, sold off even more.

The interesting thing about this is that the market doesn't seem to care too much. The indices dipped a little today, but buyers were ready to jump in and we closed fairly well. They may be selling the stocks that are reporting earnings, but they are still buying other things.

We have more important reports to come next week, most notably AAPL on Monday and MSFT on Thursday, and it is going to be crucial to see if this "sell the news" behavior continues. At some point, that will spill over to the broad market. When stocks stop going up on good news, that is a major warning sign.

Technically, we continue to have amazingly strong momentum. The S&P500 bounced off the 50-day simple moving average back on Oct 5 and has gone almost straight up since then on mediocre volume. That is the perfect setup for a pullback, but we have yet to see much of one. The bears had a chance today, but the dip buyers came in this afternoon and reclaimed the momentum.

The biggest positive this market has going for it is the same thing that has been in place for months now: trust levels are low and most people just can't reconcile their views of the economy with the way the way the market is acting. How can the market not correct at least a little when the economy is undergoing a weak recovery at best? The answer is that too many people never embraced the rally and now they are struggling to catch up. What we need to continue to do is forget all the bearish fundamental arguments and respect the trend until is shows some real signs of ending.....

long AAPL

Thursday, October 15, 2009

Mixed News After The Close?

The market has been anticipating more good earnings tonight, and it looks like it is getting some mixed news. GOOG's EPS is well ahead of estimates, and the initial reaction is pushing the stock up about 12 points. IBM is now out and is only a couple pennies ahead, and the stock is down 4 points or so initially.

The market has been doing very well, even though the stocks that have reported earnings so far have not done as well. Market players still want to be in this market, but they aren't particularly interested in buying these names that are posting numbers. I suspect that isn't a particularly good sign, but the technical action of the market is still so strong that it is a mistake to anticipate any weakness.

We'll see how things play out as more reports hit. It is feeling rather frothy, and we have some signs of a sell-the-news inclination, but until it spreads to the broader market, the bulls are in control....

Wednesday, October 14, 2009

dow 10,000's great and all, but....

it's hard to believe a decade has come and gone and the dow has moved from 10,000 to 14,000 to 6,500 and back to 10,000 in that time....

back after a fairly long absence.....

went with l to honolulu on 9/30; then took the detour.....will now be posting regularly....

The Only Way Is Up?

As Yogi Berra once said, "this is like déjà vu all over again". Just like last quarter, INTC pulled off a surprisingly strong quarter that caught bears and underinvested bulls by surprise. There was a scramble to reposition, which meant even a mild pullback was a buying opportunity. We picked up steam in the afternoon and finished near the highs of the day. Thankfully, the DJIA finished over 10,000, so maybe now the media will find some other trivial story to report.

There isn't much new that can be said about this market. It continues to be tremendously strong and is causing massive frustration for folks who are trying to add long exposure. I won't even bother to mention how frustrating it must be for the bears who keep focusing on the fundamentals that simply don't matter.

We have some more very important earnings reports on the agenda this week, most notably GS in the morning, so we are likely to see volatility pick up. I suspect that the hoard of dip buyers who aren't see any real dips will continue to keep this market from falling very much. If we sell off on any earnings reports, it will likely be viewed as a buying opportunity. There is just too much positive momentum right now for the market to fall apart. You might have some qualms about paying up at this point, but you should some real doubts about trying to short this strength for anything other than a quick trade....