Friday, February 26, 2010


It was another very slow down of trading, but we had a positive tone, and the bears were unable to dig their claws in, even though we had a fair amount of bad news this week. Weekly unemployment claims, consumer confidence and sentiment, as well as housing numbers all came in below expectations, but the buyers were willing to shrug it off. While the action was generally positive, it lacked zest. There just isn't a lot of strong momentum. We'll had some impressive action in retailers, and the big-cap technology names finally delivered some upside today, but we didn't have this extremely aggressive dip buying like we saw so often last year. Underperforming market players were constantly trying to catch up with the market last year, but that has not been an issue this year. We have some very clear technical overhead in the S&P500 at the 50-day moving average and the recent highs around 1108-1110. It wouldn't surprise me to see a break above that level, triggering buy stops and then a reversal, but we'll worry about that next week. For now, we are in this drifty, low-volume environment and waiting for a clearer trend to develop. I can imagine both bullish and bearish scenarios going forward, but my style is to react as things develop rather than to anticipate (usually).  

AAPL Going On A Run? Plus Some Other Techs...

The research from Morgan Stanley was good - "Apple Product Catalysts Ahead; Reiterate Overweight - Morgan Stanley" - and I must say I think Apple is setting up for a run as alluded to recently.  As I've stated previously, the iPhone is a platform and the "iNetbookkiller" product may be as big (or bigger) as the first in the line -- the 2.5G iPhone.

The more I think about this product the more I think this will spur a huge infusion of Apple Computing share into the enterprise, which would be the next holy grail for Apple share price over time.

Much like CSCO, the value of Apple's hardware has to do with the underlying software. Once you get hooked on the functionality you stick with the next generation of hardware advancements.

RMBS has increased its share buyback. I don't really like share buybacks, never have in fact. But others do and Rambus will be selling much higher in due time. It is below its settlement spike and that settlement was watershed for it.

What's this I hear about Cisco and some new tech? Wonder if it will coincide with some real government stimulus for the group in March........BRCD's a buy at $5 and a sell in the high 7s....I think VRGY's report was better than the stock has acted.....

long AAPL

Thursday, February 25, 2010

CDS; The Market, Etc.

Calling Susan Powter:  Someone must stop this CDS insanity! If I was Greece (or any of the PIIG countries for that matter) I would simply declare all CDS contracts that do not have a notional underlying interest (in other words, insurable interest) in Greek debt to be unlawful and therefore nullified.

Again, someone has to try and put a stop to the CDS insanity. Why not Greece and/or some other country?  While this would not be the end of the story, the legal structure of the CDS would at least be examined and I think the powers that be would realize the importance of insurable interest in the CDS market, just as with the life insurance market......

As far as the market, once again I think market rules (which are a real nagative), political head winds and fears of PIIGS are being magnified beyond any semi-rational measure. Moreover; the absolute futures driven nature of this move feels too contrived of late as we sell off on these one off numbers that are well within normal volatility for the given data points.

I think it's very clear we will be adding meaningful jobs quite soon. In an improving labor market, jobless claims rise initially while new jobs are added. I continue to see endless sources stating with fervent vigor that we are still in recession, or depression or we will double dip.

The more I look the more I'm reminded of 1997 and 1991 and the perceived tumult surrounding those periods.

Lastly, there has been a surge in talk about the death of buy and hold. Something I have never been a big fan of. But like I do with most other things investing related, I lean to the variant view. So the more I hear about the death of buy and hold the more likely I'll be to start embracing that as part of my strategy......

Nice Turnaround Today...

We started the day with an ugly gap down as higher-than-expected weekly unemployment claims, more problems in Greece and a stronger dollar spooked the market. For four hours after the opening, we drifted around as the dip-buyers showed little interest and the bears failed to press their advantage. Finally, at around 1:30 p.m. EST, the machines went to work, and we had a quick pop. We drifted again for another hour but then popped again and ended up closing near the highs of the day. Weakness in the dollar helped the cause, and of course the day before the last day of the month is always prime time for some end-of-the-month markups. 

Under the surface, it was an odd mix of action. Gold and retail led, while regional banks, oil and biotech lagged. We started off the day with very poor breadth, but it improved nicely and was only around 2,400 gainers to 3,200 decliners by the close. We certainly came back very nicely after the poor action this morning, but I'm not at all convinced that further upside will come easily. We still have some substantial overhead resistance, little leadership and a lack of energy. We did have higher volume today, but the major indices were still in the red at the end of the day, so it is technically a "distribution day." It is a muddled picture, although the late-day recovery is definitely bullish.  Stay nimble while we wait for a clearer trend to develop.....

Wednesday, February 24, 2010

AAPL Research Note

Bernstein Research analyst Toni Sacconaghi this morning lifted his EPS forecasts for AAPL for the September 2010 fiscal year - and for FY 2011 - to reflect “upward pressure” on gross margins from a mix shift to the iPhone.For FY 2010, he goes to $11.99 from $11.67; for FY 2011, he now sees $13.73, up from $12.72.

Sacconaghi thinks that iPhone revenues will grow from about 30% of Apple revs in FY 2009 to 45%-50% in FY 2011. He estimates that iPhone gross margins were 58% in ‘09, well above the company average of 40.9%. If you assume flat iPhone gross margins and ASPs, corporate gross margins would lift by 400-500 basis points, he notes.The Street consensus, he says, is for gross margins to be down about 10 basis points over the next two years. For that to be accurate, he says, would require a $100-plus drop in average iPhone prices over the next two years, and a 700-plus basis points drop in iPhone gross margins. He thinks that is not realistic.

Sacconaghi is also now calculating the iPad into his forecasts: he sees sales of 2.2 million units in FY 2010, and 6.8 million in FY 2011.The analyst expects iPhone sales to hit 45-50 million units in FY 2011, up from 20.7 million in FY 2009, and 8.7 million in FY Q1 2010.

long AAPL

Better Today

After the pullback Tuesday, we managed a decent bounce today. Breadth was good but the volume was weak. The dollar pulled back, which helped some of the commodity names, but the most impressive action was in regional banks and retails. Interestingly, cruise lines also did well today. Does today mark the resumption of the V-ish bounce, or was this just a brief reflexive rebound after yesterday's selloff? The S&P 500 wasn't able to regain the 50-day simple moving average, and I don't see the sort of frenzied dip-buying we enjoyed so often last year. Still, this market has been remarkably sticky to the upside for many months, so it is tough to have much faith in the bears. 

I can understand why some folks think the market will continue to act just like it did last year, and continue to run up out of these poor technical patterns, but it isn't a bet I would make, based on the action I am seeing in individual stocks. What has troubled me most over the past couple weeks is the bulls' lack of energy, although we have had so many positive days. We don't have strong pockets of momentum or hot money chasing high-beta names. Even the big-cap technology names, such as GOOG, AMZN and AAPL have been struggling, though they did act somewhat better today. 

long AAPL

Tuesday, February 23, 2010

Some Tech Stuff

Well, BRCD is getting crushed again for just producing a pretty good quarter. They guided a bit soft but so does everyone these days. I personally wouldn't make too much of the muted guide. They are in good subsectors and CSCO won't kill them. I really liked the FDRY deal when it was done by BRCD, which greatly improved BRCD's balance sheet. However, FDRY now makes up a good share of BRCD's total sales and FDRY is notoriously lumpy in delivering sales which was a reason the market never valued them richly. Let's just add BRCD to the list of Tech names that are growing in that 12-15% range with a PEG under 1.  I would be more aggressive in the low $5's and a seller in the high $6's or low $7's.

How about a healthcare proposal?  Let's get leadership from ACN, IBM, AAPL, CSCO, HON and MMM (essentially efficiency and innovation experts) all in a room for one day and let them figure out the first 5 things they would fix first in our our healthcare system. Then address these 5 things, let things play out for 18 months and then do it again and tackle the next 5 and so on.

Goldman's technology conference starts this week. Maybe that will shake things up a little bit as most of the key players are in attendence......GOOG will be talking to China shortly, about "should I stay or should I go now..."; I'm going to be watching BIDU closely.

As for some random thoughts on tech, there is no differentiation yet back in the market.  This is negative.  GS is up; that is a positive.  Is it time to add GS, GOOG and AAPL again?  Selling windows are closing; tech conferences are coming, including the aforementioned GS's.  The technicals in the market (seem to be) lining up.  So, to answer my own question, yes I think it's time! 

The market is down this much on consumer confidence?  Let's be real now; I think it's a futures-driven sell program into a thin market that will run its course in hours to days.  If GOOG gets back to China (they never left of course), that could be a fulcrum event for the whole market.  It may pay to be short BIDU by then.....

long AAPL


AAPL stock stinks right now.  So what gives?  The news flow out of the company is nothing short of amazing, meaning good - no, great.  I am hearing big uptake within the enterprise for the Mac. I am seeing smartphone market share going higher.  How about the CEO of CBS, on his call, talking about the power of a product that's not even out yet -- the iPad -- there could be something big going on. 

So why is the damn stock going down? Why hasn't it rallied more? That's not the way Apple trades, unfortunately.  It pretty much waits for an event, runs up huge before it -- hint hint, what it will do with the iPad -- and then gives up some of the gain and consolidates. That's what I think it is doing now. I don't think it even matters how much good ink Apple gets for anything, including the iPad, for what will be great social media applications. The stock is going to be buffeted by the market on bad days and just hold its own on good days until we are close enough to the iPad run-up stage. I am a huge believer in the new product, given its television download potential -- older folks might not realize how many kids watch programs on their little iPod -- and its utility for Facebook. I also believe that an a la carte menu for TV shows vs. a monster cable bill reminds me very much of what happened to the CD after we got to cherry-pick only the songs we care about. But that's not Apple's problem. It is agnostic about who it destroys. Cable seems to be the most vulnerable, in that cable doesn't offer a cell-phone bargain, and the iPad users are all smartphone users. I believe that the stock just drifts for now. And that's about all you can expect, particularly now that the market has turned so sour....

long AAPL

Right Now, This Market Stinks.......

Although a number of market pros dismissed this morning's consumer confidence numbers as irrelevant, the report provided a convenient excuse to sell a market that was technically extended on low volume. We also had some strong overhead resistance around 1108, which is the 50-day simple moving average of the S and P 500.  So we finally have a pullback after a 10-day bounce, which brings us to the eternal daily question: Now what? Do we continue to correct, or is this little dip going to draw in the dip-buyers and quickly put us back on the fast track to the January highs?  Who knows.  Many are looking for more downside in the near term, which means it probably won't happen.  

However, we went up straight up on low volume, and that means we have very little underlying support, and that it makes it easier for us to slip back down. That is the danger of a V-ish bounce like we have had over the last 10 days. Breadth was about 2 to 1 negative, but all major sectors were in the red. I'm not sure where the strength was today, because the various watch lists on my screen all were extremely negative.  Especially AAPL, which is the one I'm really interested in.  

The dollar was stronger today and closed at its highs, and that was a negative for oil, commodities and gold. Without those groups, and with some severe selling in financials and semiconductors, there wasn't much that was very pretty today. This market is very used to quick snapbacks, and that increases the danger that dip-buyers will jump in too early and find themselves trapped.  It's certainly possible that the character of this market has changed from what it was last year, and we shouldn't expect the same sharp V-moves or aggressive dip-buys. The bulls did pull off another pretty good V-move over the last couple weeks, but it is fizzling right at the 50-day moving average, and that is a change. The bears are back on the field, and it may be time to play some better defense.........

long AAPL

Monday, February 22, 2010


We faltered in the final hour of trading, but once again, it was a day of floating high on nothing but a lot of air. Volume was light, breadth was around flat, and the indices had only minor losses. Given how extended this market has become over the past ten days, the selling was pretty mild. We remain quite extended on light volume, with some technical overhead to deal with. At a minimum, the market needs to consolidate some of the recent gains to build a foundation from which to move higher. Although recent evidence suggests otherwise, even strong markets need to rest once in a while and allow stock to rotate into stronger hands. The higher we go without a rest, the greater the risk of a sharp selloff. 

We have an unusual number of stocks that have made parabolic moves and plenty of others that have run into resistance. That doesn't mean they can't keep running straight up, but the odds for the shorts are getting better every day. Both bulls and bears would be better off if this market pulled back, but the market beast seldom does what is in our best interests........

Friday, February 19, 2010

The Fed; And AAPL

What the fed just did - raising the discount rate - is a positive.  No, actually it's hugely positive for the eurozone as it's a stimulus without spending a dime.  It takes away many bearish trump cards all at once.  Rates will be historically low for a very long time, and it also signals a return to more 'normal' times.  Regarding AAPL, I must say I'm frustrated at how it trades.  Even at slightly over 200, it's trading at a peg of about .35 to .50x.  That's ridiculous......But AAPL just trades this way sometimes.  When the naz is locked down, AAPL is stuck.  If we had the uptick, the stock would probably be $35 to $50 higher right now, as it would be harder to pin stocks to an index.....

long AAPL

The Bulls Get It Done

It was a mild day of action, but it is a victory for the bulls. With the news of the Fed increasing the discount rate and an extended market facing some key overhead resistance levels, the bears had some ammunition but failed miserably at pressuring this market.

Like last year, we have had another light-volume, V-ish move that seems to attract more buyers the more extended it becomes. Once again, it paid to ignore the skeptics, the charts and even some of the fundamentals and stay unwaveringly bullish. When the market acts like it did this week, nothing works better than just buying and holding on tightly.

I have to admit that I've been a doubter of the bulls' ability to keep producing this type of action, especially now with some signs that the Fed is mulling over ways to drain some liquidity from our economy. The logic of the bulls is that things are still way too slow for the Fed to raise rates, but apparently they aren't slow enough to hurt the stock market.

That is what is at the heart of the disconnect between Wall Street and Main Street. On Wall Street, the economy is good enough to keep stocks moving but bad enough to keep rates low. On Main Street, there is little economic growth, few new jobs and continued chaos in the real estate market. The only people who have benefited from all that cheap money created by the Fed are the folks who have plowed it into the stock market and kept it running up.

It is very easy to find reasons to distrust this market, but we must always remember to respect the price action no matter how misguided we may think it is. The bulls have been in control this week, and that is the most important consideration of all.......

Thursday, February 18, 2010

Gee, How Tough Are Semi's To Invest In?

If you've ever wondered how tough it is to invest in semiconductors, look no further than AMAT today, which reported a great quarter and fabulous guidance but the stock is down 5% on heavy volume. Of the roughly 20 companies that reported quarterly earnings between last night's close and this morning's open, I count six technology companies among the group; every one of those companies raised guidance but only three of those stocks are trading higher. Sixteen of the 20 companies (regardless of sector) either affirmed or raised guidance. Tough market.  The bears have been right for so long that this action has me wondering if something lurks just around the corner, but it sure isn't related to corporate earnings.......

Spike Late In The Day...

The market was deadly dull until about 2 p.m. EST, when we finally took out the highs of the day. That triggered a short squeeze and buy stops, and we ramped straight up over the next couple of hours.

The bears have been wrestling with a market that has stayed quite sticky to the upside for a week now, and when it decisively moved through 1100 on the S&P 500, they said, "The heck with this," and covered their shorts.

Other than great earnings news lately, there isn't any particular fundamental reason for the strong action - the economic reports have been weak, and the dollar has been showing some relative strength.

I wouldn't be too surprised to see us bounce all the way back near the 50-day simple moving average. We closed just a smidge under that level on the S&P 500, but the bears are obviously becoming quite nervous at how easily the bulls are pushing this market up on such lousy internal action. We still have not had a technical accumulation day since the low eight days ago.

Last year there was only one factor that really mattered, and that was the high level of liquidity. It felt very much like that again today. We still have quite a ways to go to make it back up to the January highs, but low volume and technical resistance just seem to be minor annoyances to the bulls at this point. I'm still not convinced that conditions are the same now as they were last year, but when we have a squeeze like we saw into the close today, you sure don't want to fight it too hard......

Wednesday, February 17, 2010

Thoughts on CDS

This short answer is simple. And it can be answered by this question:

If the uptick rule is so important, then why not also have a downtick rule?

But to really get into this subject you need to talk about the liquidity of the underlying markets, the fact that buying equity puts without owning the equity (talking about insurable interest, really) does not raise actual borrowing costs for firms with the underlying debt, the reason(s) for the formation of the CDS market, varying levels of leverage allowed in each market, notional capital values you need in order to participate in each market, etc. I could add a few more items on this list.

But chiefly and the most simply detailed explanation is this -- While the equity value of company can be temporarily hurt via intense speculative put pressure, it's highly unlikely to result in enough pressure to cause a debt default or totally stop the flow of future credit funding to an entity requiring revolving debt. In fact, many equities(companies) have no debt so you can attack the equity value all day long and not impair the "solvency" or funding sources of the company.

On the other hand, apply enough speculative pressure on the swap spreads of an entity (which has and requires debt) and you can completely strangle the funding mechanisms, thus killing the entity. Remember Bear Stearns and Lehman?

Where To From Here?

The indices finished with some mild gains, but it was a slow and boring day of action. After the gain yesterday, we were technically overbought and facing some substantial technical overhead around 1100 on the S&P 500. The bulls just couldn't manage to make it through that level, although they did a nice job of adding a few points to yesterday's gains.

What was particularly impressive about that action today was that the buyers were unfazed by strength in the dollar. Weakness in the dollar helped spark oil and commodities to lead the charge yesterday, but the reverse in the greenback today had little impact.

Unfortunately, the market is at an awkward juncture that makes it tough for traders to be aggressive. We have too much technical overhead and are too extended to be very bullish, but we are holding up well enough that it is difficult to be aggressive with shorts. Ideally, for the bulls, we will churn for another day or two and work off the overbought condition without a severe pullback. The bears are obviously hoping that the selling will pick up if we aren't able to make better upside progress.

Breadth was good again, but volume was light for the second day in a row, and that makes for less confidence in the upside, but one thing that doesn't seem to bother this market much is lighter volume. In fact, these days I sometimes want to embrace the illogical thought that light-volume rallies will end up going further than those on heavy volume.

We have a number of earnings reports of interest tonight, the most notable of which are AMAT, HPQ and PCLN. That should set the tone for tomorrow at the start tomorrow but further upside is going to take some effort from the bulls to overcome the technical obstacles.....

Tuesday, February 16, 2010

Not Really Like 2009, But This Will Be OK If It Lasts.......

The action today looked very much like what we saw so often in 2009. We had a big gain on the first day of the week, a weak dollar was the main catalyst, there were few pullbacks, and volume was very poor. This was the recipe that drove our V-shaped bounces last year. It was very easy to find problems with the action, but the bears and the skeptics wound up with bull tracks on their backs as the rallies just kept on going.

Many technicians see key overhead resistance level on the S&P 500 as being at 1,100. They seem to think we need to move over that level to totally break this recent downtrend. We had a good run toward that level today and could easily see some follow-through momentum, but I still believe that this market is not going to act like it did last year and go straight back up to highs.

Volume today was not only light but was the lightest we have seen all the year. Normally, a market move on light volume to overhead resistance levels would be suspect, but that truism of technical analysis just didn't work very well for a long time. It certainly is possible that we see that sort of unusual action again, but I'm not betting on it.

I would say one had better not do much shorting until the bears make a better showing. I'm sure the action today has a lot of folks thinking that it is going to be just like 2009 again, but I think conditions have changed substantially in the last month or so, and further upside is not going to come as easily as last year....

Friday, February 12, 2010

Good News; Bad News

The good news: We managed a pretty good bounce after a big gap down to start the day. The bad news: The major indices are still in a downtrend, and all the bulls managed this week was to make us a bit less oversold.

After a big intraday reversal and a strong close last Friday, we were in pretty good shape for a bigger oversold bounce this week, but it wasn't very impressive action. We were particularly weak on Monday, then managed minor gains the rest of the week.

We'll see if the bulls can gain better traction next week. Our first failed bounce had a somewhat similar setup, with the market struggling to bounce for about eight days after the initial breakdown. We had one pretty good day on Feb. 2, then rolled over and sold off sharply two days later.

This time we have been trying to bounce for seven days, so far. We have made a little progress, but it has been tough going. Many believe it is just a matter of time before we roll over again, but the key to profits will be to time it right. Is another wave of selling just around the corner?

Keep in mind, downtrends will create a lot of new opportunities, especially, if you don't tie up your precious capital too quickly. There are some signs in the market action that suggest we have not put in a low, so stay defensive, or stay disciplined in the stocks you like....

Needham Ups AAPL Target On Strong iPhone, Mac Sales; The Path To 25% Smart Phone Share

Needham analyst Charlie Wolf this morning upped his price target on Buy-rated AAPL to $280, from $235, noting that Mac and iPhone sales are materially higher than when he made his last attempt to value the company back in September. He also thinks the iPad should make a material contribution to the company’s valuation.

As part of his valuation process, Wolf offers some eye-opening long-term sales forecasts for Apple products, with a startling vision of how big iPhone sales can get, in particular:

Here’s a look at Wolf’s 10-year forecast for iPhone unit sales:

* 2009: 25.5 million units (actual)
* 2010: 37.2 million
* 2011: 48.5 million
* 2012: 60.0 million
* 2013: 72.4 million
* 2014: 85.4 million
* 2015: 98.2 million
* 2016: 109.3 million
* 2017: 120.6 million
* 2018: 131.7 million
* 2019: 142.5 million

The final year number assumes the global smart phone market grows from 170.2 million units in 2009 to 569.8 million in 2019, and that Apple’s market share grows from 15% to 25%.

He sees a steady ramp in iPad sales as well, forecasting unit sales of 2 million this year, 6 million in 2011, and 9 million in 2012, reaching 19.8 million in 2019.

Wolf sees Mac ships growing from 9.5 million units this year to 24.9 million in 2019.

On the other hand, he expects iPod sales to fall to fall from 53.2 million this year to 35.5 million in 2019.

So of course Apple today is down over $1, and still trades for less than $200 - it basically trades at an astounding .35 to .45 PEG. Someday the fundamentals, the earnings, will matter. But not today.

long AAPL

Here's Why Earnings Don't Matter Right Now; And May Not Matter For Awhile......

Oh, so now Obama may not bend, may not keep his mouth shut. Our oh-so-intelligent president can now go hard-line because of a New York Times poll that shows he is doing a better job than the Republicans. You know what that means: no real jobs bill other than to protect municipal, state and teachers unions; pro-coal Cap and Trade; and encouraging unionization at WMT and the banks through aggressive Card Check.

Huge push for the Volcker Rule to break up GS and JPM. And, no doubt, another push into health care, maybe with something even more aggressive than before. Total emboldening of the anti-401(k) agenda.

Gee, that's nice. Way to lift everyone's spirits. Way to get our economy moving again.

Especially on top of China's reversal and hard landing on tap and the breakdown of the Grecian formula.

The post-Scott Brown move is dead and the permission slip for the rally has been revoked.

Gold down, oil down, dollar up. Usual suspects.

Throw in the horrendous guidance from now institutional favorite IR and something that will no doubt be bad about the rebalance of the S&P off of Berkshire's addition and we have the makings of a nasty one.

2010. Crummy year marches on. Oh, and needless to say, this nullifies the AAPL advance for certain because it is all intertwined. Ha! Right!

Maybe all will be forgiven because Europe, of all places, is up.....

long AAPL

Some Ways AAPL Can Beat Their Estimates....

Over the last 7 years, AAPL has grown earnings 88% compounded, dramatically ahead of the 3% annualized growth for the S&P 500, according to Bernstein Research analyst Toni Sacconaghi. But the Bernstein analyst also notes that current Street estimates have S&P profits outpacing Apple over the next two years - 26% to 14%.

On the other hand, as Sacconaghi points out in a research note, the Street has been extremely poor at forecasting Apple’s growth. Consensus estimates at the beginning of a fiscal year over the last 8 years have under-estimated Apple’s actual results by 24% - with the outlook two years out missing by an average 51%.

All that is prelude to Sacconaghi’s thinking on where some unexpected growth might come from for Apple in the two years ahead.

In his report, Sacconaghi lists five sources of growth that he contends together offer the potential for more than $5 a share in incremental profits:

* A non-data-plan iPhone - basically, an iPod Touch with a voice plan; he thinks such a device alone could boost annual EPS by $2.40 a share. (Sacconaghi has pushed this idea before, I should note.)

* More modest price declines on the iPhone. He’s currently modeling a $100 ASP decline due to competition and non-exclusivity in the U.S.; but if you only cut the price $50, you pick up an extra $1.90 a share.

* A successful iPad launch. Selling 7 million units in FY 2011 could boost profits by about 50 cents a share, he calculates.

* Revitalized AppleTV that serves as a media hub. Estimated boost: 35 cents a share.

* Increased App Store gaming revenues: estimated lift, 20-25 cents a share.

Sacconaghi also notes that there could be a hit to EPS from a delayed deal with Verizon Wireless on the distribution of the iPhone. The loss of Verizon for all of 2011 would reduce Sacconaghi’s current FY 2011 forecast by $1.02. A delay until June 2011 would result in a hit of 69 cents. There’s also risk of a modest hit to profits if they were to lose their current patent litigation with Nokia.

Meanwhile, Sacconaghi contends that given the recent pullback in the stock, and potential upside opportunities, “the stock is very attractively valued at current levels.” He repeats his Outperform rating and $250 price target....

long AAPL

Participation Awards Are Not A Good Part Of Growing Up....

I have a disgust for participation awards. When I was a kid, there were winners and losers, not participants.

I lost a lot and it made me want to get better and win.

In the last sovereign debt crisis, the outcome was clear: devalue, default.

You lose. Try again.

In our brave new participation award culture, the solution is to just throw more money at you, guarantee your sovereign debt, shore up your balance sheet.

It is sheer, utter nonsense of the most incontrovertible form.

We are so scared of consequences of failure that we compound the failure's problems and create a giant, nightmarish future for all of us.

Let Greece fail. Let the TBTFs fail, if it comes to that.

We have to get back to a culture of competition, not participation. Then, and only then, the global economy can actually begin to heal.

We've all had failures (present company included) and the best lessons have come from failure, rebuild, do it better.

Thursday, February 11, 2010

Many Are Still Not Trusting Of This Market

We started off a bit wobbly this morning but we held technical support where we needed to, and that helped to bring in some buyers. We had good breadth and OK volume, but the dollar was the main driving force. The dollar weakened as the euro strengthened after it become clear that the eurozone will work to prop up Greece. We have been very strongly inversely correlated with the dollar lately, which is readily apparently as gold, oil, steel and commodities have been leading the market up and down.

There were some good long trades to be had today and I wouldn't be surprised to see some more upside in the near term, but many don't trust this bounce at all and expect that we'll have an opportunity for some aggressive shorting fairly soon. I know a lot of market players are rooting for this market to jump straight back up and resume the sort of action we saw in the latter part of last year, but conditions have changed and we are dealing with much more severe headwinds.

According to, the trading days around Presidents Day have had a negative bias. Since 1976, the Friday before the holiday has been positive only 26% of the time, and in the last 18 years we've only be up three times. I wouldn't make any market bets based purely on those statistics, but it is something you might consider if the bulls start to waver......

Why All The Love For Bonds?

It’s clear that economically things are getting better, not worse. In addition to gross domestic product numbers, credit spreads have returned to some semblance of “normal”, and the bond market has seen record refinancings. Yet stocks still sell below where they sold after Lehman failed, when the world was falling apart. Even in the week after Lehman collapsed, the S&P 500 traded as high as 1,255, more than 10 per cent higher than it is today.

In the parlance of Jesse Livermore, the early 20th century Wall Street trader, the path of least resistance for the stock market is higher, yet investor resistance to stocks as evidenced by what people are actually doing with their money remains resolutely in favour of bonds: money continues to be redeemed from US-oriented equity mutual funds, while flows into bond funds are running at record levels.

This affinity for bonds over stocks is understandable when looking at the past 10 years, but perverse, I believe, when looking at the likely course of the next 10. Bonds crushed stocks the past 10 years, with riskless Treasuries returning more than 6 per cent per year, while stocks lost money on average each year of the past 10. Ten years ago stocks were expensive; now they are not.

In the next decade, the story is likely to be quite different. As the economy gradually (or quickly) recovers, the Fed will remove the extraordinary monetary accommodation it provided during the crisis, and shrink its balance sheet. A neutral Fed funds rate would be in the 2.5 per cent range or thereabouts, perhaps higher. Long term, the ten-year Treasury ought to yield about the nominal growth rate of GDP, so somewhere in the 4.5 per cent to 5.5 per cent range, leading to substantial losses in Treasuries and probably investment grade corporates as well. High-yield bonds ought to do better, but they had their big move last year, rising over 50 per cent and providing the best returns relative to equities ever. All this, though, assumes benign inflation of 2 per cent to 3 per cent. If the inflation bears are right, bonds will be a disaster.

Stocks are quite a different story. After spending 10 years in the wilderness, high quality US large-cap stocks are cheap compared to bonds. Names such as Merck trade at 12 times this year’s earnings and yield more than 10-year Treasuries.

IBM has record earnings, trades at 12 times this year’s expected results, buys back shares every year, and has grown its dividend 25 per cent per year the past five years. Stocks have historically provided inflation protection that bonds cannot. Like Edgar Allan Poe’s famous short story, The Purloined Letter, these values are hidden in plain sight.

In addition to large cap stocks, so-called “low quality” recovery names are still quite attractive, with many of them trading below book value. Regional banks, for example, were among the worst stocks in an otherwise good year in 2009, but have begun 2010 strongly. Many of them have ample capital, will see loan and credit losses peak this year, yet trade below tangible book value and therefore with a negative deposit premium. This year should also see a merger boom, as corporate balance sheets are mostly flush with cash, and profits are again headed higher. Healthcare and tech are fertile hunting grounds, as well.

Broadly, I think the names that trade at low valuations on traditional accounting factors such as low price-to-earnings, low price-to-book, and low price-to-cash flow will be the winners this year. Companies whose stock prices already discount mid-cycle earnings, as many materials and industrial cyclicals do, may fare less well. Industrial metals prices have had very large moves, as has oil - both appear to be well ahead of fundamentals. If the Chinese continue their tightening cycle faster than the markets currently anticipate, things could quickly unravel. It’s important to keep in mind that China is structurally short oil, and higher prices are not its friend.

The dollar remains a wild card that could underpin a strong stock market if its new-found strength against the euro continues, as investors in Europe appear to be substantially underweight US equities. A euro at 1.25 to the dollar at the end of this year would not be a surprise, and it still would not be cheap.

I think 2010 will be a good year for stocks, and a challenging one for bonds. Low inflation, good economic growth, ample liquidity, rising corporate profits, attractive valuations, and continued investor scepticism should combine to move the market higher, perhaps substantially so. The current consensus appears to have the market up high single to low double digits. If the consensus is wrong, I think it will be because it is too low, not too high. At least that is what the facts, data, and evidence would lead one to believe, if one were unencumbered by a theory that says otherwise....

Wednesday, February 10, 2010

The Relative Correction In Some Stocks Is Nearing 20%.....

I've seen lots of commentary on iPad margins and room for price cuts. I think it's way too early to bake in lower prices. What AAPL is simply doing is making it clear that they will make this product (the iNetbook-killer) available to the masses. As previously mentioned, upon my initial look I immediately moved to a view that they would sell north of 7 million units in the first year, which was a variant high estimate at the time. Subsequently, folks have been playing the "who can have the highest estimate of first-year sales game." I won't waste my time with that absurdity, but I feel that the "iNetbook-killer" will take similar, if not more market share in that category as the iPhone has in smartphones......

ARRS' cable bandwidth is on the move and the company reports tonight. I expect a quarter of at least as good as HLIT. With the recent pullback, they trade under a 10 PE and at just 4 times net cash.

FNSR is on the move today as they see Q3 revenues well ahead of its prior guide. Is the optical sector finally rationalized to the point where we see real earnings and pricing power finally out of the FO sector? If so, then FNSR is still very cheap.

Regarding MU, the buy of Numonyx will be rewarded; prices under $8 will get me quite interested in MU. BIDU just wasn't that good; maybe a good short candidate.....

I'm still quite amazed, really, that AAPL is trading below $200. That's a PEG of about .35 to .45, which is ridiculous in my opinion.

long AAPL

More Struggles Today

For the third day in a row, the bulls were unable to gun us higher into the close. That is one of the characteristics of the market that has changed since we started to downtrend a few weeks ago. We just aren't seeing as many strong closes as we did during last year's uptrend.

The lack of strong closes is a subset of the general problem of much less aggressive dip buying. We have had oversold conditions and good excuses for some buying, but we aren't suddenly ripping higher like we did so often a few months back. The buyers no longer seem to be worried that they are going to be left behind as the market flies higher.

Overall, it was a slightly negative day. We ended up with about even breadth, but the only sector that did much was banks. Banks have been the biggest laggard lately, so they were probably due for a bit of a dead-cat bounce. Overall, the sector still looks very poor technically, but for long-term holdings I'd buy some bargains now - like GS, JPM, WFC.

The big picture still looks troublesome. We are oversold and we are struggling to bounce, but we aren't doing a very good job of it. I'm looking for the bulls to continue to press and probably produce some more upside, but they may be turned back as they confront overhead, especially around 1100 on the S&P500.

If you are playing long, stay selective and keep those stops tight. Don't let a trade turn into a long-term investment....

I Think The iPad Will Be A Must-Own Business Device

I'm convinced that the media, the analysts, the market, and maybe even AAPL itself is missing the most important element of their upcoming ipad device. Kind of reminds me of reading of Intel's thoughts on their just-invented microprocessor: good for traffic lights and maybe calculators.....

We keep hearing the same theories repeated over and over that describe the iPad as a niche e-reader and gaming device that might sell a couple million units in 2010 and a few more in 2011. The prevailing assumption is that nobody really needs an iPad like they need a laptop or a phone. After all, the iPad is for entertainment purposes only, right? It's time to correct those assumptions.

The iPad is Apple's upgraded version of a netbook, only it's better than any netbook ever built. Netbook computers took the market by storm in 2009 by growing more than 100% year over year to sell about 34 million units.

The real game-changing element of the iPad is that it's the first computer ever designed to be held with one hand. This simple fact is a very big deal. Because of this, the iPad is primed to usher in a new era of mobile computing efficiency that will take the business world by storm. Nobody is talking about the iPad as a must-have business device but that is exactly what it is.

Anyone who previously relied on a notepad or clipboard will adopt the iPad. Doctors will use the iPad as they move from room to room and interact with patients, teachers will use the iPad as they lecture, coaches will use it as an in-game video/scouting tool.

Think of all the real estate agents and other salesmen who operate at point of sale. Anybody who walks around at work will want an iPad to hold directly in his hands.

On one of the Apple message boards, I read of a college professor who polled 32 of his peers and asked whether or not they planned to buy an iPad. Twenty-nine of them answered with an emphatic "Yes."

So many in the manufacturing industry, in the military, in sales, or in education who need to access data while working will fall in love with this Apple device. Business specific apps will be developed that allow these professionals to execute their tasks with minimal typing requirements. For this reason, I believe the iPad will increase business efficiency in a way that has never been done, and because of this it may become Apple's flagship product.

We're dealing with the first device ever made specifically for the way we use the Internet. PCs and laptops were created long before the Internet became the viable tool that it is today. Those computers were made with the intent to create content. Those who use a PC or laptop will still need them. The iPad opens up a new user category which means increased halo effect for Apple.

The iPhone and the App Store opened up a window of possibilities but the screen is just too small to be of legitimate use in the business world. Apps on the iPad will have more real value than apps on the iPhone.

At the $499 price tag, this can most certainly become the flagship product. If Apple lowers the price, watch out......

So how many iPads will Apple sell? During the most recent holiday quarter, Apple sold over 3 million Macs, 20 million iPods, and 8.7 million iPhones. There are 75 million iPhone/iPod Touch users out there who are 90% or more satisfied. This will be the hot item of the holidays. Could we see more than 10 million units in the first full year? Yes.

long AAPL

Tuesday, February 9, 2010

AAPL Stuff; The Market, Etc.

The iPhone is looking good in a pair of market snapshots, as AAPL grabbed 25% of the smartphone market. In the past week, IDC and comScore have both issued reports of the fast-growing smartphone market that show AAPL gaining share.

In the U.S., according to a comScore report published Monday, Apple's share grew to 25.3%, up more a point, in the fourth quarter of 2009, while RIMM's fell to 41.6%, down a point.

MSFT and PALM both lost ground while GOOG's Android gained nearly 3 points to reach 5.2%. IDC's report, issued last Thursday, looked at the worldwide market, where NOK has long been dominant. Its research show Apple gaining on Nokia and RIM in both the fourth quarter and the full year. Apple's shipments nearly doubled year over year in Q4 2009 to reach a global smartphone market share of 16%....

Those are incredibly compelling share gains for AAPL. But maybe the most interesting is looking at the total sales figures and seeing how much room AAPL has to still increase share in wireless. I don't discount GOOG's smallish numbers either. While I'm not projecting this currently, I could make a low probability (though increasing probability) case where AAPL and GOOG are 1 & 2 in wireless handset share. And yes I'm talking about total handsets not just smartphones in the coming years as the original iPhone or something similar will be an entry level handset in 2-3 years.

Remember, the iPhone platform has just gotten started. In time the iPhone lineup will probably look a lot more like the current iPod lineup. In the next 18 months I would not be surprised to see AAPL make a smaller, lighter and cheaper iPhone available on any network....

As for the overall market, the incessant selling of great reports is as bad as I've seen since...1997. I bet you all were thinking that was going to be a different year. Anyway, yes, 1997, and during that time we saw former tech stars like JAVA, Ascend Communications, JDSU, NVLS, CSCO, MSFT and a host of others all trade for PEGs below or well below 1. Sun Micro in particular at one time had a PE of 14 and EPS growth of 25% which turned out to be hugely conservative. Needless to say the stock went on a humongous run after a tough few months. As did all those others mentioned above.

While that year and 1998 get a little historic press, we had a series of corrections over a 2-3 year period with one doozy in 1998.

Bottom line, I see many parallels between then and now, though this time the market is actually cheaper on a few fronts. First, it's notably cheaper on the ratio to bond yield levels. It's also cheaper on PE's and PEG's if these huge net cash positions are stripped out. Interestingly, another parallel is the tension associated with foreign jitters and, broadly, the derivatives markets.

In the end, the jitters of 1997-1998 gave way to the earnings bubble of the Y2K, Internet and bandwidth growth segments and many new highs were created, ultimately culminating in the 2000 tech stock bubble. So what happens this time?

Well, back then, the Long-Term Capital Management and Orange County and the Russian currency crisis were fixed and thus the earnings power was able to come through to stunningly higher stock prices.

The same potential exists today. The latest wrinkle isn't about Greece or Spain or the UK or US. It's more about the CDS market. And this is fixable, I think quite easily. Sure all these countries have higher debt levels but they always do coming out of trough economic cycles and coming into growth phases, revenues increase, tax receipts increase and voilĂ , debt and deficit reduction. Just look at the tax collections from the top 50 in the S&P 500 after this quarters earnings results.

The fix has to address the root. And I believe if we do that the gains in the various global markets (esp., US, Germany, Aussie and UK) will be similar to what we saw post the last 1997 market correction.....

long AAPL

Today's Bounce

For a day with the DJIA up 150 points, the mood wasn't very upbeat. We had some big point gains, great breadth and even a little better volume, but I saw few signs of buying urgency. In contrast, the last time we had a strong day back on Feb. 2, there was plenty of excitement, and many bulls were looking for the V-shaped move straight back up to new highs. Perhaps the failure of that bounce and the selling since then has taken a toll on sentiment, but it could be a good thing if we don't have a big leap in optimism. Maybe we can rebuild conditions so that we can climb a wall of worry once again.

Airlines were the leading group today, but this continues to be a market with no leadership. The dollar weakened a bit, which helped oil, steel, gold and commodity plays bounce, but by no means are those groups leading the market. Financials have been acting quite poorly, and technology can't seem to get much going, even though that group arguably has the best fundamentals.

The main catalyst for the movement in the market today was chatter about some sort of bailout plan for Greece. Discussions are under way, but it sounds like it may be a few days before something definitive is determined.

I'm not so sure that the potential of a Greek contagion is what has really been weighing on this market lately, so I'm not very confident that a bailout there will turn us up significantly. We are in a downtrend, and we are seeing an oversold bounce today, with the Greek news being the convenient justification for it....

Market Observations

A couple of observations of what this market likes:

1. It likes stimulus and feared that the Europeans - the weakest part of the globe, if you ask me - were about to withdraw it.

2. The market loves a weaker dollar, if only because a tremendous number of very-high-profile stocks are linked to it: GE, CSCO, etc.

3. The market needs oil to create a higher low, which it seems like it is doing, and then break out to the $80s, not because it is good for the economy - it is terrible, especially for the consumer - but because it is a sign of no double-dip, which is what this decline was about anyway.

4. The market needs Washington closed and the president not talking in any way, shape or form about the economy, because he is now perceived as the enemy of capital (except in the media, where he is viewed as a friend of the common man).

5. The market loves copper going higher and believes that every tick down in copper means a Chinese bubble burst and worldwide recession.

Reality is the dollar doesn't matter that much to earnings, and we have had some big rallies with the dollar getting stronger. A breakout to the upside in oil would lead to $3 gasoline, which would put a severe crimp on the American consumer, two-thirds of the GDP. Greece was never going to go down. Neither is Spain or Portugal. (If Iceland, which was totally bankrupt didn't go down, then these other places weren't. They can't file chapter 11, you know. We learned a lot about what to do during the 1980s crisis in Latin America, and one of the things you don't do is let these countries default.) Copper's all about hedge-fund buying and has nothing to do with China, which is growing at 8% and still needs a lot of copper. There is a cyclical bust involving commercial property and a secular boom involving 400 million people joining the middle class. Finally, Obama's still busy trying to kill the market by paying lip service to jobs while actually stabbing the economy in the back with the endless chatter for a health plan that he still doesn't realize no one wants except his best pal Nancy Pelosi. You don't know this, because who in the guilt-ridden media's going to say it?

Everything else is oversold. So that's the tinder for this ridiculous set of what looks to be spontaneous combustions.

long INTC

Monday, February 8, 2010

This Market Sure Can Be Easily Scared.....

The bulls struggled to build on Friday's late-day bounce and finally gave up as the day wound down. Banks were the most obvious weak spot, but breadth finished just a little better than two decliners for each advancer, and there just wasn't much of interest. The most common description of the action today was "dull."

The bad thing about this action today is that we had a decent setup for some upside. We are still oversold, we had the late-day bounce on Friday, and Monday has been the best-performing day for the market over the past year. We didn't have any negative news of note, but the buyers just weren't interested.

What seems to be weighing on the market is increased talk about how the Fed is going to start unwinding the liquidity it has injected into this market. There are lots of very carefully worded comments about how the Fed will do this slowly and in a way not to cause any alarm, but the fact that it is even talking about the possibility of raising rates at some distant point in the future is enough to spook this market.

This market rode up off the March low on a huge wave of liquidity. Liquidity crushed any fundamental argument against the market. All year long, people struggled to reconcile Wall Street with Main Street because they didn't understand that all the funds that were being pumped into the economy were benefiting stocks far more than they were the overall economy.

Market players are now worried about the inverse. When we suck the liquidity out of this market, it may override the positive fundamentals and good earnings news. We will wonder why stocks continue to act poorly even when the news sounds so good.

The story of the market is the story of liquidity, and the Fed is starting to write the next chapter.......

Friday, February 5, 2010

A Little More On Today's Market Action

Doing a little more thinking on today's market....went out for awhile at about 1:30 - and the dow was down about 140 or so....came back at 4:00 and found out the dow finished up 10 and the naz also rallied fairly hard from its lows....This type of market is disgusting and I am embarrassed by our markets. They can be manipulated with about $100 million margined up. It is why you have to stay focused on the individual stocks you like.....

Why have so many individuals abandoned the stock market? (And that's a mistake, by the way, but I totally understand it....) Because we have, and have had for some time, such a phony market with a failed hedge fund finishing and some buyers at last coming in anticipating positive action on Monday. GS and AAPL are telling you this......

long AAPL

Forward P/E's And Some Random Thoughts

How about a check on some higher growth stocks and their forward PE's:

* AAPL - This stock less cash has a forward in the 12's and a PEG under .50.
* MSFT - Less cash MSFT forward is about 10.5, and it is a dividend payer.
* INTC - after cash INTC is under 10, about 9.65.
* ADS - forward is just over 8.
* BAC - it's 7 on EPS that is probably severely conservative.

I could type this up for hundreds of stocks (maybe thousands). And remember, that valuations never signal a bottom or top in the short run.

I think this is the last "bad" jobs report (bad according to many reports). But actually, this report was pretty darn good. 20k jobs lost is huge compared to where we were 6 months ago and longer.

I think we see anywhere from 400-600k jobs added over the next six months.

This market is still in transition. From a market where US stocks can't rise if the USD does, to a market that may just end up doing better with a stronger USD.

The relative value tech correction is approaching 20% now - given the drop in stock prices combined with the increase in earnings.

Little noticed of late is how much cash flow and book values have increased over the last 2-3 quarters....

There was a Bloomberg story about new SEC short sale rules and circuit breakers. If they come, I hope they are a lot more similar to the original uptick than the "modified" uptick rule.

Today I'm pleased to hear and see a litany of attacks on the CDS market. Again, market rules are huge and structural imbalances due to leveraged derivatives have been the root or greatly exacerbated many financial crises -- these include the 1987 portfolio insurance, 1997-1998 contained issues with global currencies, Long Term Capital, Orange County, and everything that happened during the 2008-2009 market lows.

Again my view is much of the CDS market is essentially illegal since they are in violation of the most basic insurance principle -- insurable interest. There are very good reasons that not just anyone take out large life insurance policies on people they have no connection with. Just imagine a world where we all needed to monitor how many life policies there were outstanding against us and what that total value was. Can you just imagine the fear we would face knowing that say, 2000 people had a net total of $250mm to gain upon our death. Given that, how long would our life span be?

BRCM had a blowout. Loved that quarter and I think the guide was conservative. Now with charges out of the way the earnings power of BRCM should come through. Operating cash flow was very strong and accelerating.

I still think QCOM's report was much better than the post stock reaction. Can't anyone else look past a quarter and see what QCOM might be doing in 6 months, or a year or even 2 years?

Why are there sellers of RMBS here? I just don't get this; I think this could double again.

As for banks, this pullback is big, making the upside that much bigger. The writedowns are diminishing, which is going to be the next big story for them.

long AAPL

Nice Comeback Today

When the market is down as intensely as this one has been over the last day and half, you have to expect some sort of oversold pop. In this case, we also have the tendency for very strong Monday mornings to consider. The two combined could trigger a classic-looking snapback.

I know many will be looking to remount shorts probably later on Monday. Many do not think that the downtrend is over. The sharp pop that we are currently seeing is exactly the sort of relief rally you expect within a downtrend. Give it a little more room, especially in view of the positive bias on Mondays, but don't start celebrating the resumption of the uptrend quite yet......

We Can End Bank Panics Forever By Limiting The Ability Of Lenders To Create Money From Nothing.....

Last week, voting 70-30, the Senate confirmed Federal Reserve Chairman Ben Bernanke for another four year term. What now?

The first part of the recovery is certainly complete. Since September 2008, the Fed has bought mortgage-backed securities and Treasurys, and increased the monetary base to $2 trillion from $850 billion. The flood of dollars has bank profits booming.

Too bad banks still have all those underwater mortgage-backed securities and derivatives, but Mr. Bernanke is assuming they will just earn their way out of this problem. Banks also are not lending enough to get the job-creation engine rolling again—though sooner or later they will, at which point inflationary pressures will build tremendously. So everyone wants to know the exit strategy. Raise interest rates, shrink the money supply and risk cratering the economy, or keep rolling along and risk a collapsing dollar?

I think Bernanke will leave the money out there but restrict banks' ability to create more out of thin air. He'll be called crazy, but I think it'll work to a large extent.

The Fed has a golden opportunity to do away with banking panics. Investors will rejoice, but Wall Street firms are not going to like it one bit.

Our banking system has changed little since the days of Elizabethan goldsmiths writing more gold receipts (aka banknotes) than they had gold in their vaults. This "fractional reserve banking" system has caused every major panic in this country - more than 15 in about 200 years.

Whatever the era, the story is always the same. Banks keep small reserves, and then invest in supposedly safe "sure things" to generate profits beyond the interest paid to depositors.

Sure things can be real-estate loans, home equity, credit card and commercial debt. But bankers are terrible investors. There are no sure things.

Thus modern banking is protected by the twin pillars of the Fed and the Federal Deposit Insurance Corporation (FDIC). The Fed, founded in 1913 out of the failure of Knickerbocker Trust when it tried to corner the copper market, finally learned after the banking crisis of 1930 that it is the lender of last resort. And the FDIC was established in 1933 to insure depositors against losses in case the bank is so bad at investing that there is nothing left for the Fed to lend to.

The end of bank runs? Mostly. Panics? Hardly. And Paul Volcker's proposal to restrict proprietary trading won't change a thing. Banks write bad loans at the top and dump them at the bottom.

Here is some recent history. The 1988 Basel accords set minimum bank capital at 8%, meaning banks could leverage their capital at ratio of 12.5 to 1. As long as their investments didn't fall by 8%, they stayed solvent. In 2001, U.S. minimum capital was set at 10%, more or less, but banks were allowed higher leverage if some of their capital was AA or AAA rated mortgage-backed securities. The rationale was that these instruments could never possibly drop more than 5%, let alone 10%. Yeah, right.

Under the 2004 Basel II accords, so-called shadow banks (which don't take deposits) with $5 billion in capital were exempt from these regulations. So institutions such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns regularly used 20 to 1 or even 30 to 1 leverage. This allowed these firms to effectively print money, inflate the housing bubble, and then watch those same AA and AAA mortgage securities fall by 70%-90% in value.

To sum up, the Fed creates a monetary base and the banks can create $10 for every $1 of monetary base. Wall Street firms created $20 for every Fed $1. In other words, the Fed only seeds the market. Beyond crude instruments like interest-rate policy, it has little control over how much actual money supply exists. In good times banks lend too much. And in bad times, such as today, they don't create enough money because they lend too little.

Perhaps the lesson Mr. Bernanke drew from 2008-09 is not that we need more regulation but that financial firms should not be allowed to generate money out of thin air to write soon-to-be-bad loans. To seal his legacy, it is fractional reserve banking that he can rein in. Limit leverage and you take away the hot air from these bubbles.

Free marketers blanch at the idea of more regulation. But banking isn't a normal market. Banks create money when it did not previously exist. We've built a regulatory structure around this sleight-of-hand and each time are astonished that banks still fail. I doubt we will ever get to no leverage, a dollar loan backed by a dollar of capital, but I think Mr. Bernanke could be headed in that direction. One potential target is a 5 to 1 leverage limit—he could increase reserve requirements by 1% per year until it hits 20% by 2020. With credit dear, perhaps banks will do a better job of deciding what is a "sure thing."

You do need lending for an economy to function, but you don't need all that much leverage. Increased reserves may be the best financial reform we can hope for without politicians mucking it up. No need for pay czars and repressive rules.

Even a whiff of lower leverage and increased reserves will create a dollar rally, as inflationary fears—that banks will create too much money when the economy gets going again—subside. Oil at $50? Gold at $700?

If I'm right, banks and Wall Street are going to scream bloody murder at their new shackles. But so what, they've had plenty of time to recapitalize themselves and show record profits and compensation, a gift of Mr. Bernanke's zero-interest-rate policy.

Tighter control of money supply would mean the Fed no longer has to guess if banks are creating too much or too little. Lower leverage would keep bubbles from forming in the first place. Gee.

Thursday, February 4, 2010

A Little On Jobs And The Market

Just in case the world has forgotten, one can have higher jobless claims data while new jobs are being created. In fact, coming into a growth cycle economy, this is normal and should be expected for the next few months.

An analyst downgraded VZ on fears they won't see the iPhone until mid-2011. I disagree.

So Greece has a lot of debt to GDP? And this is new info?

Think the CDS market is correct? Then explain the thousands of bonds across muni's, corporates and others that cratered during 2008 and are now trading near par or higher.....

However, to be aggressively bullish we still need differentiation. It was partially around for the last six months of 2009. We seem to have lost it since the second week of Jan. When I see it back that will be my tell.

We are seeing a mini contagion again from Euroland. We fixed FAS 157. We have yet to address huge problems with the CDS market -- mainly that CDS' don't comply with the principle/law of insurable interest. And we have yet to reinstate the uptick rule. We could add position limits in the futures but that is underway currently and I believe that they likely wouldn't be necessary if we had the original uptick rule back.

Without restoring the bulk of the market rules repealed during 2007 we still stay exposed to market risks greater than the real underlying conditions would dictate. I find it amazing that we are spending so much time and money trying to change banking regulations, while not restoring the market rules that served the markets well for over seven decades and addressing this maddening CDS situation which could be fixed by requiring insurable interest.

I bring this up as even the most ardent of bulls out there needs to be continually aware of factors that can bring down any stock in extremely rapid fashion.....

A Very Ugly Day

It has been so long since we have had a failed bounce in this market that it was bound to be very ugly when one finally did occur. Too many market players have grown to trust that we will keep on seeing V-ish bounces, and when we finally didn't have one, they had to scramble to unload some long inventory.

This is the first failed bounce since July of last year. Back then, after we made a lower low, like we are seeing today, we flopped around for a few more days and then exploded higher as second-quarter earnings hit.

We don't have earnings to drive the market this time, but we do have a big jobs report in the morning. There has been a lot of talk about a huge downward revision of 800,000. That is pretty well anticipated already, but there is plenty of room for surprises.

I think we see a bounce, but I'm not sure if it happens tomorrow. I expect tomorrow to be a slightly down day overall, although some are calling for more carnage like we saw today. If we have a positive response to the jobs report tomorrow, many are probably looking to sell into the strength, and if we have a negative response, I'd look to buy the pullback.

The Dow close below 10,000 is an important psychological washout. It isn't an important technical level, but it is an important mental one that will garner attention from the popular press. To get to a bottom we need some fear and the Dow's failure to hold 10,000 will create some.

At this point, the best advice I can give is to respect the trend but get your buylists ready.

Wednesday, February 3, 2010

Is This Market On Solid Ground?

On Tuesday, the market did an excellent job of building on Monday's bounce. That had a lot of bulls licking their chops at the idea of another powerful V-shaped bounce back to new highs. Unfortunately, the action was much more mixed today, and if it weren't for the strength of big-cap technology stocks, it would have been downright negative. The strength today was very narrow, but it was in a few key stocks, and that helped to hold the indices up much better than the underlying action warranted.

So is it "V or no V?" After the action today, I'm more inclined to say we won't see the V-move back to highs - maybe. We are stalling out right around 1100, which is a key technical level in the S&P 500, and I just don't see very much positive action. We had a good oversold bounce, but we still have no leadership at all in the market. Even the regional banks, which had so many excited just a few days ago, have rolled over and now look weak.

CSCO is out tonight and it looks pretty good. This may improve sentiment in the tech sector, which may further the bounceback.....Technology stocks have seen consistent selling on good earnings this quarter, and hopefully CSCO won't fall in the same trap.....


I think firm news on a contract between AAPL and VZ is worth $15-30 on AAPL's stock price.

My view is that we will see the iPad seal a VZ agreement soon; shortly after which an iphone agreement will follow. I would also be surprised if we don't hear firm news on some deal with VZ before June.....

long AAPL

Reasons I Think The iPad Will Be Revolutionary....

iPad is the product I've been wishing for ever since I wrapped my mind around the iPhone and its limitations. Although the rumor mill was churning with all kinds of crazy possibilities for the Apple tablet, I mostly rolled my eyes, because I felt strongly that all Apple needed to do to revolutionize computing was simply to make an iPhone with a large screen.

Anyone who feels underwhelmed by that possibly does not understand (just my opinion!) how much of the iPhone's operating system's potential is still untapped.

Many have reported, from the desktop to the Web, iPhone's OS giving them the greatest sense of empowerment, and had the highest ceiling for raising the art of user-interface design. Except there was one thing holding it back: The screen was too small.

Facebook on the iPhone OS could not truly exceed the Web site until it could be adapted to a screen size closer to a laptop. It needed to support more than one column of information at a time. Photos were too small to show off. The Web required too much panning and zooming to enjoy reading.

Beyond Facebook, most of the apps many use on their iphone - such as GOOG Reader, Instapaper and all image, video, and text-editing tools - also suffered from these limitations.

The bottom line is that many apps which were cute toys on iPhone can become full-featured power tools on the iPad, making you forget about their desktop/laptop predecessors. They just have to be invented.

The iPad is an incredible opportunity for developers to reimagine every single category of desktop and Web software there is. Seriously, if you're a developer and you're not thinking about how your app could work better on the iPad and its descendants, you deserve to get left behind.

True, iPad 1.0 has a lot of limitations that make it difficult to compare to a laptop today. We're not there yet, but does it really take that much imagination to see how we will get there? Apple clearly wants to increase its investment in iPhone OS and reduce its investment in Mac OS X.

At some point in the near future, Apple will adapt the iPhone OS to even larger screens, add multi-tasking, and release something like a laptop or an iMac with the iPhone OS. When that happens, it will make perfect sense, because by then there will be orders of magnitude more iPhone/iPad apps on the App Store than there ever were for Mac OS X and Windows.

Given the concerns about the way Apple runs the App Store, one might expect me to jump on the bandwagon screaming about how Apple is evil and how iPad is the death of open computing. Nonsense. My only problem with Apple is the fact that they insist on preapproving every app on the App Store. The store may not be open in this sense, but the iPhone/iPad platform itself could hardly be more open to tinkerers of all ages.

The one thing that makes an iPhone/iPad app "closed" is that it lives in a sandbox, which means it can't just read and write willy-nilly to the file system, access hardware or interfere with other apps.

In my mind, this is one of the best features of the OS. It makes native apps more like Web apps, which are similarly sandboxed, and therefore much more secure. On Macs and PCs, you have to reinstall the OS every couple of years or so just to undo the damage done by apps, but iPhone OS is completely immune to this.

It's a bit sad losing the ability to come up with crazy plugins and daemons and system-level utilities, but I believe it's a trade-off worth making.

What people are overlooking is that the Internet is an integral part of the iPhone OS, and it is the part of the OS you can tinker with to your heart's delight.

If you want to invent a new scripting language or background service or something, you're still totally free to do that, but you're going to have to run it on a Web server.

If you want total freedom on the client side, then write a Web app. You're simply no longer going to be able to tempt users into installing software that corrupts their computer.

So, in the end, what it comes down to is that iPad offers new metaphors that will let users engage with their computers with dramatically less friction. That gives developers a sense of power and potency and creativity like no other. It makes the software market feel wide open again, like no one's hegemony is safe. How anyone can feel underwhelmed by that is beyond me......

long aapl, goog

Tuesday, February 2, 2010

I Think The Jobs Engine Is About To Get Going....

While some pundits continue to opine on how "fragile", "muted", or "non-sustaining" the recovery will be -- I continue to opine... and see... evidence of my highly variant view that US GDP be stronger than most expect. I will retract this view possibly near the end of this year when I feel most economists will by then have caught up to this view and perhaps overshoot 2011 growth.

As corporate earnings growth expands, and continues to be fueled by low interest rates, a natural economic growth cycles and additional government stimuli -- these companies in turn increase their investments to meet growing demand. Finally, the last thing to turn is the jobs creation engine. This is not abnormal but something that happens coming out of every recession. I called for jobs growth possibly in 2009 when nobody else even thought it possible and while not completely correct, we did print one month of jobs gains before the year ended.

At this point, I feel the jobs engine is about to fire up on at least a few cylinders and we will see the majority of months during 2010 exhibiting jobs gains. Additionally, in much of the year I expect these gains to be stronger than expected just as the last 2-3 quarters of earnings have been.

Even now after 2-3 fairly strong quarters of GDP growth and 2 very exceptional quarters of corporate earnings growth the consensus GDP figure for 2010 is a paltry 2.7%. I expect this number is anywhere from .8% to as much as 1.5% too low.

While much is made of the fear of policy tightening, from my perch this again will follow a semi-standard course of events. This time around we have one dynamic difference. We could tighten rates by 200 or even 300 bps and still at levels normally seen at the end of an easing cycle. Thus we tighten into a rate environment range that is still moderately to highly stimulative.

This is something I've pondered since we took rates to below 1.5% (and has been part of my broad market thesis for some time) and have not seen this thought in print anywhere as of yet. Though I suspect we'll start seeing echoes of this in the coming months/quarters to account for explanations of consensus beating growth.

Bottom line, I feel the expectations for a jobless recovery will prove to be inaccurate by magnitudes. Meanwhile, Philly Fed and ISM numbers now have room to moderate somewhat but still stay well above expansion levels of 50 plus for an extended period.....

Are The Bulls Getting Back In The Game?

The action today looked very much what we saw so often last year. We had an anemic oversold bounce yesterday, but the bulls jumped in early today and just kept on pushing us steadily higher all day. There were barely any dips at all; breadth was good and volume heavier.

The S&P 500 didn't quite manage to close over last week's highs, but it did punch through resistance at 1100, and now the next big technical hurdle is 1113, which is the S&P 500's 50-day simple moving average.

Can this market pull off a "V"-shaped bounce to new highs like it did so often last year? We certainly have had a good two-day bounce so far, and we even gained strength today, but we still have a lot of heavy lifting to do to shift the benefit of doubt back to the bears.

After last year, we'd be foolish to not consider the idea that we can pull off another V-bounce, but it is still the exception to the rule. The continued weakness in the big-cap technology names and the lack of any coherent leadership themes make this market feel much different. Maybe we still have some of that liquidity that drove us so much last year, but the news flow is shifting, and the Fed spigot is being turned off. Things feel a bit different, and I believe that will eventually matter.

The last time this market had a failed bounce was way back in June of 2009. We made a lower low in early July, and then GS and INTC ignited a big second-quarter earnings rally. We haven't looked back since, and every dip has been a buying opportunity.

It is always dangerous to say "it is different this time," but until the S&P 500 is back over 1115 or so, that is my contention.....

Monday, February 1, 2010

Nice Today, But Not Getting Too Excited Yet....

We have been struggling for almost two weeks, and we were overdue for a bounce. We finally had one today and even managed a strong finish, but it wasn't as dynamic as many of the recoveries we have seen in the past six months. Recall, however, how last year's market always saw some follow-through after we had a positive day -- we'd just keep going, even though the bounce didn't seem particularly impressive at first.

The fact that we have struggled for a week before we finally managed this bounce today makes me think that this time it may not be so easy for the bulls. Also, the fact that we have no leadership and that there has been much more technical damage this time makes me less inclined to expect an easy recovery. We have to be careful about rushing to proclaim this a failed bounce though.

The bounce today was primarily led by weak dollar plays -- namely, oil, steel and gold -- but they have been slaughtered recently, and the action today doesn't do much to repair the charts. That is the case with many stocks recently. Most of the stocks that led this market last year have corrected far more than the major indices, and a one-day bounce does little to turn the picture positive.

We are at a very interesting juncture here. If the bulls are still in charge like they were most of last year, then they are going to keep things running. If, however, this is just a routine oversold bounce within an emerging downtrend, then we are going to sputter out pretty quickly and the mood is going to get ugly again fast.

It was a good day for the bulls, but it is minor in comparison to the damage that has been done lately and does little to shift the big picture back to positive (so far).......