Friday, July 30, 2010


Upside reward and downside market risk now appear to be in balance.

I see nothing in terms of market price action or economic commentary that would dissuade me from my baseline expectation that the S&P 500 will be range-bound between 1,025 and 1,150 over the balance of the year.

Accounting for the weakness in S&P futures this morning, the S&P cash index now trades at about 1,095, so it's right around the middle of my expected second-half low and high for the index.

Hence, upside reward and downside market risk now appear to be in balance.

Some of the rationale for my range-bound expectation:

The forward P/E for the S&P 500 (on a realistic corporate profits estimate) is now under 12x vs. an average over the past three decades of 15.5x and about 17x when inflation and interest rates are quiescent (as they are now).

Yes, the upside to stocks may be capped -- I am using only 13x to get to my 1,150-1,160 S&P target -- by the ambiguity of the current soft economic patch and by the emergence of several nontraditional headwinds (higher marginal tax rates, costly regulation, and federal, state and local imbalances). But the wide gap between historic multiples and today's valuation seems to argue that the concerns are known and discounted.

The downside to stocks will be supported -- I am using 11x, which takes the S&P to the 1,025 level -- by the low probability of a double-dip and by growing evidence of a modest and shallow domestic economic expansion that is capable of sustaining itself.

Normally, I would argue that in a range-bound market, differentiated investment performance (over the next five months) should come from superior individual stock selection and by identifying changing group rotation, but today we live in a risk-on, risk-off world that is heavily affected by the last algorithm standing on a day-to-day basis. With the correlations of different asset classes historically high, the fundamental convictions of a micro ("bottom up") investor will often be challenged (in the months ahead) by the macro world we face.

Bulls On Parade; A Recovery From A Very Ridiculous Open

We had some ups and downs this week, and there were quite a few stocks that moved big on their earnings reports, but overall we ended up almost exactly flat. The IWM is up about $0.11 as I write, and the Nasdaq is down a little for the week, while the S&P 500 is up.

If you ask the bulls, they will say a flat market is a victory for them because it helped us consolidate the move off the July low and we didn't give back too much of the gain. We are still above the 50-day moving average and in good shape for another run at the June and July highs.

If you ask the bears, they will say they won this week because the upside momentum cooled off and we weren't able to hold the highs over the 200-day simple moving average of the S&P 500 around 1,115. With earnings season nearly over and the end-of-the-month strength, the bears are hoping that things will start to fizzle more next week.

In my opinion, the bulls have a better edge. The profit-taking over the past four days has been quite mild, and we have recovered nicely just when it looked like downside momentum was going to pick up. Another move over that 200-day simple moving average is going to trigger some stops, and it won't take much to take out the June high after that.

While that short-term scenario looks pretty good, I'm concerned that trading is going to slow significantly in August and September now that earnings are out of the way and the main focus will be macroeconomics. The economic picture is still mixed enough that it won't take much to scare market players on to the sidelines. On the other hand, I see quite a few stocks that have good numbers to provide some underlying support and that is going to help us.

Volume was light, but breadth was decent and the bounce off the poor open was another positive for the bulls. The bulls have the edge, but this week's battle will likely see some clearer resolution in the first week of August.

Thursday, July 29, 2010


A micro investor does not get paid in a macro world.

Why are serious investors frustrated?

Because we live in a risk-on, risk-off world that is heavily affected, on a day-to-day basis, by the last algorithm standing.

And with correlations of different asset classes high, a micro ("bottom up") investor does not get paid in a macro world.

A Whipsaw Market

If you just look at the close, it doesn't look like much happened today, but we suffered some major mood swings and did a great job of whipsawing traders. We started the day with a very strong open, following upbeat action overseas, but the sellers hit it hard, and we went from about four-to-one positive breadth to two-to-one negative in a matter of a few hours.

Just when it looked like we were ready to really panic, we found some support and went straight back up until we were slightly positive. That, of course, set us up for another flurry of selling to end the day.

We ended well off the lows, but had some fairly small losses for the third day in a row. Technically, that doesn't look bad on the daily charts, but the aggressive selling of the gap up and weakness in technology and semiconductors are a bit of a concern. This is a market that can be easily spooked on the one hand, but where there is enough complacency that the dip buyers can be quite aggressive on the other. That makes for some choppy action, like we had today.

We have plenty more earnings reports hitting tonight, which is giving us some big moves in individual stocks, but this is a difficult market to trade. It is easy to have stops hit if they are too tight, and we continue to have plenty of selling of good news. I'm seeing some big dips on earnings after the close from the likes of THOR, CSTR, CAVM, WYNN and APKT. If the tendency of earnings season holds, some of these will come back, but it has been a very tricky earnings season this quarter, which has added to the challenges we already faced.

Wednesday, July 28, 2010

Would You Short This $26 Stock?

Would you short a $26 stock that sells at much less than 1x its growth rate, with about a fifth of its market cap in cash and no debt? Would you short a stock that conceivably might be selling at less than 13x next year's earnings? Would you short a stock that's cheaper than virtually every tech stock in the world on the out-year multiples?

I wouldn't; but many would, and are. That stock is AAPL - simply divided by 10. Funny, but when I look at many websites, blogs, stories, tv shows, etc. the stock most people want to short is AAPL. Apple! The one company I follow that has blown out the top line, the bottom line and every line in between. The one company that has products that can be stocked, that has demand worldwide and is a multi-faceted juggernaut. Plus, it appears to have a product line that is insensitive to price and products that people stand in line for in an era where no-one stands in line for anything.

To which I say, I have 499 other stocks I would short other than Apple. Why the obsession with taking this one down?

I think, though, I know some of the sub-rosa, or even, perhaps, subliminal reasoning behind it: the dollar amount of the stock price.

If Apple were to be divided by 10, believe me, it would not be such a juicy target. The points, the sheer number of points it can drop, though, makes it so tempting.

I believe that Apple's going to at least $300. I say that because that's where it will be bumping up against the market multiple on the number I think it can earn next year - easily, most likely. The fact that it is "a lot of points", or that the chart says it is stalling, is meaningless to me.

I need a fundamental reason to short, a catalyst to short, or sell, and I just don't see one.

long AAPL


The close, as in most days trading, was decided by the last algorithm standing!

Not many bids today.

Run, don't walk, to read Pimco's Bill Gross's August commentary.

The Beige Book is supportive of the soft-patch scenario.

The market is staring to look weak.

In the main, second-quarter earnings (a rearview-mirror indicator) are beating consensus estimates (Twit Olympics?), as the manufacturing profit recovery has outpaced the economic recovery.

More forward-looking economic measures, however, are pointing to an extension of the current soft patch and a moderating domestic economic expansion -- but no double-dip.

* The Dallas Fed Manufacturing activity was reported at -21 in July vs. -4 in the prior month and compared to consensus estimates of -2.5. The trend in new orders was undisputedly poor at -9.6 vs. -8.3 in prior month and +15.8 in May.

* The Richmond Fed Manufacturing Index also came in weak at 16 vs. 23 in the prior month and compared to consensus estimates of 12. Again, the trend in new orders continued to deteriorate at 24 vs. 38 in the prior month and 50 in May, as did wage growth.

* The Chicago Fed National Activity dropped dramatically to -0.63.

* Last week's same-store sales, reported by the International Council of Shopping Centers, increased by 0.6%, down from the prior week's 1.4% gain.

* New-home sales came in at 330,000, about 20,000 better than expectations, but the previous month was revised downward by 32,000. Moreover, this series fails to account for home contract cancelations, which now account for approximately 20% of all contracts at the major, publicly held homebuilders.

* Consumer confidence eroded and was reported at 50.4 vs. a prior reading of 52.9 and compared to consensus of 51. The current assessment was unchanged, but future expectations for the economy tumbled. The employment component weakened after four consecutive months of improvement.

Real GDP expectations for the second half of 2010 and the first half of 2011 are coming down at the economic forecasting shops I respect -- including ISI ("Global Soft Patch") and JP Morgan ("A Bend in the River") -- as the ambiguity of second-half growth continues to point to a cap in the upside to stocks in the months ahead as P/E multiples remain pressured.

Unless transformative policy focused on improving the jobs outlook is shortly implemented by the administration (unlikely), the brunt of decelerating economic growth will be felt by a continued subpar employment picture.

Market bulls argue that the economy is in fine shape and that weak consumer confidence belies strength in the manufacturing sector. Market bears argue that elevated unemployment will ultimately reduce corporate profitability and expectations.

Simply stated, even though I continue to believe that we have seen the lows for the year, I can see a number of economic outcomes, many of which are less than benign. That uncertainty, coupled with the emergence of a number of nontraditional headwinds in early 2011 (higher marginal tax rates, more costly and cumbersome regulation, etc.) suggests that investors should err on the side of conservatism over the balance of 2010.

Since I Own AAPL, Not A Good Day

The underlying action was worse than the senior indices indicated, but it was still a fairly contained pullback. Small caps lagged and there was some particularly harsh profit-taking in smaller technology names, but volume was very light today, and there weren't any signs of panic. All we've had is some light-volume consolidation, which actually looks fairly healthy, given that we were rather overbought at the open on Tuesday.

We are at a juncture where we need to wait for the market to give us some clues as to where it is headed. This minor weakness we are seeing now could easy develop into something more dire, or the bulls may step up and deliver another leg up after some healthy consolidation.

We have dozens of earnings reports coming up again tonight, but the only one with much market moving potential is V. Weekly unemployment claims in the morning will also be of interest, but the summer doldrums are setting in, and I'm afraid things are going to remain slow.

long AAPL

Tuesday, July 27, 2010


The VIX could put in a triple bottom, and this would be a concern for the short term.

Gold continues to break down.

I believe that today is an option expiration day for gold, which is further adding to the commodity's volatility.

Strong results from European banks provided a boost for U.S. banks this morning.

If it weren't for the strong earnings results for European banks overnight (giving the U.S. banks a bid), the market would likely have traded somewhat lower today after several days of stellar performance.

U.S. July consumer confidence disappointed again at 50.4 vs. 54.3.

Bears/shorts are trapped, and bulls are emboldened in a one-way market importantly influenced by high-frequency strategies and algorithms that accentuate the trend (in either direction).

Having said that, and as I have written, there remains enough ambiguity to the duration and depth of the current domestic soft patch and with the emergence of a number of nontraditional headwinds, the upside to the expected second-half trading range is swiftly appearing in sight (with the S&P 500 around 1,150).

Tech Thoughts

RMBS got another favorable ruling, and while the stock spiked initially, it's given back much of the gains today.

I look for the stock to trade substantially higher again; in the coming weeks/months. I don't think the mid to high $40's are out of the question for RMBS.

AAPL is finally acting like it should. I also still expect my mini-super-spike notion to occur, which challenges the old highs and possibly breaks them to over $300.

FNSR reaches new highs here and other optical players are getting their bullish mojo going again as well. The ADCT merger did less for the group than I thought it would initially; maybe we are seeing a somewhat delayed reaction to that deal now that market sentiment has moderately improved for the time being......

I thought last week that the market was due to run a good bit. I'm selling nothing so far, but am looking to shed a little if we go a few percent higher.

long AAPL

Uncertain Sledding?

It was an uneventful day for the indices, with the DJIA managing a slight gain, while the other major indices suffered slight losses. There was a peculiar mix of action, with recent laggard AAPL showing relative strength, and a variety of more defensive stocks acting fairly well. Banks also helped to keep the losses contained thanks to strength in overseas names like CS, BCS, RBS and DB.

The negative action today was in steel, gold and basic materials. X reported a weak quarter, and AKS sold off as well, which killed the recent uptrend in steel. Retail also struggled, but the action I found was troubling was in technology names that reported some good numbers. A good example was VECO, which had an excellent report last night, but reversed hard and closed solidly in the red.

The selling today wasn't severe enough to kill the uptrend we've been enjoying since the July low, but there were a few cracks forming that we will have to watch. Earnings season is winding down, with mostly secondary stocks now reporting, so that driving force will no longer be a factor. The focus will shift more to macroeconomic issues, and there are plenty of potential landmines there.

The market has gone from oversold at the beginning of the month to overbought as it comes to an end, so we'll have to be increasingly nimble as we watch to see whether we can consolidate and go higher, or start the process of rolling back over.

long AAPL

Monday, July 26, 2010


AAPL just keeps getting cheaper and cheaper. I honestly do not understand why it's not above its highs right now. VERY, VERY frustrating.

long AAPL

Small-Cap Rally

The action today felt much like it did in March or during one of the many V-shaped bounces we had in 2009. It was just a steady move higher with consistent underlying support from dip-buyers. What droves the rallies off the March 2009 low were chronically underinvested bulls who never really embraced the market. With sentiment being quite poor lately, it looks like déjà vu as the market embarks on another V-shaped move.

The most interesting thing about the action today was that the small-caps led, rather than some of big-cap momentum favorites like AAPL, GOOG or VMW. I'm not sure why that is the case. Perhaps market players are trying to regain performance by chasing high-beta small-caps, but I'd still expect some of the high-beta big-caps to act better.

The S&P 500 managed to climb above the 1113 resistance in the final minutes of trading, and it is not showing much hesitancy at all. I thought there would be a little more of a pause before we would crack that level, but this is a market being driven by fear of being left behind. Too many folks struggled with that over the past 15 months, and they aren't going to let it happen again.

So once again, we are back in the familiar situation of being extended on light volume but with no signs of weakness. This is the point where many market players have gone crazy over the past year, as we would just keep on going and never offer any easy entry point along the way.

If there has been a lesson to be learned in this market since the lows last year, it is that you shouldn't fight the strength no matter how technically poor it might be. Volume and overhead resistance just don't matter much when we have one of those runs. It is understandable that you might be hesitant to buy, as we look quite extended, but more importantly, don't be too anxious to try to short this action.

long AAPL

Friday, July 23, 2010


The shorts were on the run today.

There is no credibility to the European bank stress tests. Ignore it, as it is just not that stressful!

I envision the rest of the summer to be uneventful.

With many turning bullish on either fundamental or technical grounds, I believe that the market is muddle-valued and will be range-bound between 1,025-1,150.

I would be patient, and I would resist the temptation from the talking heads to now chase strength.

While I feel the emergence of these animal spirits, I am at the polar opposite of Mae West, who once said, "Too much of a good thing can be wonderful."

I envision the rest of the summer to be uneventful -- at least as it relates to the U.S. stock market!

A Bullish Week

The bulls did a nice job today of building on Thursday's strength. Not only was breadth quite good, but volume was heavy. Small caps led the charge today, but an amazing recovery by AMZN, after being pounded last night, added some vigor to the Nasdaq. The S&P500 managed to break through the 1100 level, as I anticipated, and even managed to hold above it at the close.

Overall, it was an impressive week for the bulls, who were on the ropes last Friday and looked ready to give it up again on Wednesday. What we ended up with was a trap for the bears, who were caught leaning the wrong way as good news from Europe hit several times overnight. Too many bulls were underinvested and had to chase to add some exposure and, of course, the bears were forced to cover some shorts.

So now what? We still have hundreds of earnings reports to come, but most of the major market movers are out of the way. The interesting thing about earnings has been that we had some very aggressive sell-the-news action, but then, this past week, those dips on the earnings news turned out to be pretty good buying opportunities, the action in AMZN today being the best example.

Technically, the S&P500 managed the 1100 break, but many continue to believe that it is going to be very difficult to take out the next key level around 1113. Interestingly, the IWM, with its outperformance today, looks much better technically than the senior indices. It is above its 50- and 200-day simple moving averages and has cut through the downtrend line that connects the April and June highs. If it continues to hold above the 50-day simple moving average, it is going to look pretty good.

The bulls definitely made some progress this week and are in good shape to build on it. A little backing and filling at this point wouldn't hurt at all, but we saw some signs today that the dip buyers are out there and are providing some underlying support. There are a lot of market players with too much cash on the books, and they have the potential to keep us running.

Thursday, July 22, 2010


MSFT beat on all metrics -- sales, earnings, operating margins and deferred revenues.

All product segments -- Windows, Business, Server and Tools, Online, Entertainment and Devices -- exceeded consensus forecasts.

Costs well under control.

Booking growth strong.

Cash flow up by nearly 50% as the company bought back $3.8 billion of stock.

Don't listen to most of the talking heads in the media as they are mo-mo players, who change with the wind.

I always find it amazing how so many grow bullish after one good day in the markets (and, similarly, grow bearish after a tough spell).

I am seeing this phenomenon all day on CNBC today.

The lesson?

Don't even bother listening to most of the talking heads in the media as they are mo-mo players, with no conviction, who change with the wind; they are just like chameleons.

Did I mention the market has no memory from day to day?

Bernanke is typically among the last to recognize a problem (e.g., the subprime crisis).

By the time he has, the markets are already in the advanced stages of accepting it.
Rearview observations are often irrelevant in predicting future prices.

Yes, Chairman Bernanke might have been the fool on the hill in his hawkish and inconsistent testimony yesterday, as he pushed back the thought of stimulus while at the same time saying that economic uncertainty was growing. Equally surprising was that he said that the Fed had not completed a review of their alternative stimulus options.

In a perverse way, though, his economic warnings are bullish for the market, as he is typically among the last to recognize a problem (e.g., the subprime crisis). By the time he has, as he did with yesterday's recognition that "it is different this time," the markets are already in the advanced stages of accepting it.

Markets are a discounting mechanism. Rearview observations and, at times, observations regarding current circumstances/fundamentals (especially at important turning points such as the time of the stock market's generational bottom in March 2009) are often irrelevant in predicting future prices.

The forward P/E for the S&P 500 (on a realistic corporate profits estimate) is now under 12x vs. an average over the past three decades of 15.5x and about 17x when inflation and interest rates are quiescent (as they are now).

Is the upside to stocks capped? Maybe one should use only 13x to get to an 1,150-1,160 S&P target -- by the ambiguity of the current soft economic patch and by the emergence of several nontraditional headwinds (higher marginal tax rates, costly regulation, and federal, state and local imbalances)? But the wide gap between historic multiples and today's valuation seems to argue that the concerns are known and discounted.

The downside to stocks will be supported -- I am using 11x, which takes the S&P to the 1,025 level -- by the low probability of a double-dip and by growing evidence of a modest and shallow domestic economic expansion that is capable of sustaining itself.

Maybe we are in a growth slowdown, which is fairly typical when an inventory cycle matures. Meanwhile, financial conditions appear to be easing. Credit spreads have stopped widening, and liquidity spreads are also improving:

* Two-year swap spreads, which typically presage a lower VIX and better corporate spreads, have narrowed since May.

* The Bloomberg Financial Conditions Index, which leads GDP by a quarter or so, is improving and, according to the lynx-eyed Mike Darda, is consistent with 2.5% real GDP growth.

* The euro is ripping higher.

* Three-month Libor has been flat to slightly down since May.

* Europe's economic plight might be overstated. For example, Spanish bonds have risen while the S&P has swooned.

* Junk bond yields have dropped.

There is risk to the upside of stocks for several reasons:

* Neither Bernanke's nor investors' expectations are elevated (as they were six months ago).

* Retail investors are underinvested and have not committed to domestic equity funds. Hedge funds have de-risked and are generally inactive. Who is left to sell?

* Should bonds begin to drop in price (rise in yield), a massive reallocation out of fixed income into equities could be triggered.

Man up, investors! The economic news has now been discounted in the markets. Chairman Bernanke told us so yesterday.......

Thinking A Bit More About The Market.....

Seeing as no one is ready for it, I'm wondering if we now work higher for awhile. Some I respect are out there saying the market is trying to buck the head and shoulders pattern. I don't give this too much due but it's out there. At the moment the right shoulder trend line is breaking on the Nazz......

Also, MAYBE just MAYBE, I think in the weeks to come we may see continuing evidence of my highly variant growth thesis........out of real measures of economic growth.

It seems as if Bernanke's eye is actually on the ball of the real threat - which is future inflation and overstaying the stimulus measures.

The difference this time is we have so much room to raise rates; as well as so much valuation compression currently existing.

For The Market With No Memory, What Will Happen Tomorrow?

After some weak action on Wednesday, market players were poorly positioned for a sudden spike up this morning. Positive economic news out of Europe and some strong earnings reports from the likes of FFIV, UPS and CAT caused sentiment to flip and a mad scramble to cover shorts and find some long exposure.

The action today is a particularly good example of why the biggest moves tend to occur in bear markets and downtrends. Market players aren't ready for them, meaning they have to chase the move if they want in. That also explains why we don't see sharp reversals once we have a strong start to the day. There is suddenly a big supply of buyers anxious to buy a dip, and that prevents intraday turns.

We did have some slight selling in the final hour as nervous holders took some profits. In view of how this market has been flip-flopping lately, I have to wonder about the likelihood we'll gap down to start tomorrow.

Earnings reports are rolling in as I write. DECK, CMG and AXP look solid but SNDK and AMZN are getting thumped. It looks like Amazon is weak due to exchange rates, which is the same thing that hurt IBM. AMZN is being absolutely pounded, which is not a good sign at all. MSFT just hit and is a little better than expected but is trading down a little. AMZN is going to give the bears some hope here, but the bulls did gains some momentum today.

Obviously there is a lot of news out there to digest, but I think the bulls will make a strong run at the resistance at 1100 in the S&P 500 in the near term. The really big hurdle after that is the 200-day simple moving average around 1113. I believe the bears will make a stand there, and with the most important earnings reports out of the way, it will be tougher to find more positive catalysts.

The inconsistency in this market from day to day makes trading quite tricky, and AMZN is doing its best to reverse us once again. There should also be some news about European bank stress tests overnight, so be ready for anything in the morning.

long SNDK

Wednesday, July 21, 2010

Thoughts From A Frustrating Day

Bernanke Says, 'Eat #$@#$%^%, Markets!'

Bernanke's hawkish testimony was not what Mr. Market ordered.

And I thought there was an inconsistency in his growth projections for the U.S. (3% a year in 2010-2011), although there has not been as much uncertainty of the economic outcome in a while.

Meanwhile, he emphasized exit strategies and de-emphasized further quantitative easing.

In essence he said, "Drop dead, Mr. Market!"

Yesterday, I had heard that the Fed was considering the elimination of 25 basis points on bank excess reserves.

Today, Chairman Bernanke said it was an option.

I believe the market is now muddle-valued.

While we have likely seen the lows for the year, the upside seems capped by the ambiguity of the current soft patch and the emergence of a number of nontraditional headwinds (higher marginal taxes, more costly regulation, etc.) in early 2011.

I believe the possible S&P 500 range for the balance of the year will be tight, between 1,025 and 1,150.

If I am correct, the best strategy today is to sell premium. Strangles and straddles seems to be the way to go now.

We now have a universe of market participants of too few real investors.

By exaggerating broader market moves as well as individual stock price moves, quant funds might be inflicting more damage than good in the efficient pricing of equities.

Yesterday, the high-frequency-trading nerds were in full swing, but to the upside this time. Many interpreted the late-day rally as "the first anecdotal sign of positive trading action in some time, and it carried through into the close," as BTIG's Mike O'Rourke commented last night.

Few complain when the algorithms take the market up (like yesterday). But I would prefer to be intellectually honest, even when the programs take the market up, and I will not stop writing about this subject until the SEC acts responsibly and curbs certain high-frequency-trading strategies.

High-frequency-trading strategies are now widely estimated to be 60% to 70% of total daily volume. On top of that, add on the substantial role of package trading for ETFs. Ergo, real buyers of stocks (individuals or institutions) are getting to be too small as a percentage of total trading to produce a balanced U.S. stock market.

There is a market void.

Flash prices to high-frequency trading must be stopped. As well, paying for bids and offers by various exchanges must be stopped.

At the core of these high-frequency-trading systems is a program that, by whatever means, tries to "run ahead" of a buyer or seller -- unlike index arbitrage, which was the link between markets in which high-frequency traders try to use advance information to run ahead.

Portfolio trading was done to accumulate or distribute at low-cost real portfolios. Is an investor paying one-tenth of $0.01 per share (or less) to trade a client or a broker who should be regulated?

The SEC absolutely has created this mess, with regulations that never envisioned essentially free access by unregulated clients that look like brokers.

The SEC has tacitly acknowledged this mess by saying five minute halts with 10% moves.

In other words, it is dealing with the symptoms not the cause.

We now have a universe of market participants of too few real investors. Investors are losing confidence in the legitimacy of the markets and are leaving the building under the not so watchful eyes of the SEC.

Kill the quants before they kill us!

More AAPL Thoughts

Apple said that revenues next quarter would be higher than expected. At $18 billion versus analysts'-predicted sales of $17 billion; this was probably the biggest key in pushing the stock a bit higher today in a terrible tape. The company also reported third-quarter numbers that well exceeded estimates -- but I think this was expected. What wasn't expected was that we could finally see a quarter that was "good enough."

Apple can keep up the momentum; but does have many worthy foes playing catchup due to tremendous iPad results. I expect AAPL to further penetrate the enterprise as iPhones and iPad's take on RIMM in phones and all the other computing incumbents that sell under-utilized desk and laptop computers. I still also expect a touchscreen computing platform with AAPL's Mac lineup, and that should yet again shake up the enterprise channel in the future. However, this space will be very competitive and HPQ has thrown a shot across the bow already.

Bottom line, I still see nothing to change my low to mid $400's target view on AAPL, a target I've had since the stock was probably around the $144 level. At this point I still see the $248 level being the new dream price level for initiating or adding to core positions. That said, AAPL is still a key tool for the machines that can push the whole market down incredibly fast.

Again, it's worth noting that the stock is trading at a ridiculous PEG. Even stripping out the added growth from the favorable accounting change, we are talking one of the preeminent growth companies on the planet - trading with a PEG below 0.50. And, stripping cash, it's still about 0.35 = that's very, very cheap. Again, there is only one reasonable explanation; and I won't even utter it here as the horse is beyond dead and decayed. Point being, we have massive valuation compression, and as that valuation compression unwinds, AAPL and many other names have far more upside than the pundits declare - with seemingly total certainty......

long AAPL

Bernanke Gave The Excuse To Sell

Bernanke started off all negative, thereby killing the rally that was coming off of earnings reports, which were not just predominantly good but were almost uniformly good. You had to get short off the earnings reports right into the speech. But then, who can take the chance that tomorrow's claims are good, and CAT, this tremendous macro juggernaut, says terrific things and raises its outlook and UNP reiterates that everything's as tremendous as it just said?

You want to be negative for that moment?

Or, you could simply say, the heck with it, this is all too hard, let's square things off, because all the hard work doesn't matter. I mean if you nailed WFC for a good story and didn't hit the eject button immediately, if you didn't sell AAPL into the ramp, if you decided GS is out of the woods, you got your head handed to you.

Can there be anything more nightmarish?

Then Bernanke spoke. Need to figure out what Congress wants. What he's worried about. He's all about the macro, and the companies, obviously, are totally micro. Even though he did tell us that he can help us, he spent more time talking about how to stop being helpful. Congress was more concerned about keeping the spigot on and less about Bernanke trying to instill confidence, so confidence got crushed and so did stocks. Plus, we had to hear about Greece again! Our companies are saying don't worry about Greece, we're making money. That, as usual, didn't get into the testimony.

So, stock analysis once again felt like a huge waste of time for today. Just another day ruined by Washington -- one of what seems to be hundreds.

long AAPL

Tuesday, July 20, 2010


I'm hearing from the European and U.S. futures pits that the Federal Reserve is planning to eliminate the 25 basis points it pays on excess reserves shortly.

IBM: Even if the tape rips, the stock might be left behind after its awful service bookings....To me, IBM is now in the penalty box -- even if the tape rips, it might be left behind after its awful service bookings.

The risk is probably no more than $2 to the upside over the near term, and the downside is likely $6 to $8, into the $115 to $120 neighborhood.

Spains' Salgado says all Spanish banks pass the E.U. stress tests. This should be viewed positively on our markets.

It seems to me that one of the basic tenets of the bullish market case for 2010 was that economic growth would be strong enough for us to grow out of our problems (read: fiscal imbalances).

To some degree, that thesis now appears to be in jeopardy.

I don't believe that we are moving into a double-dip, and I do believe that stocks, as they head south, are providing reasonable value.

The key question that market participants must come to grips with, however, is whether growth is slowing at a rate that jeopardizes the consensus expectations for employment growth in the last half of 2010 and for corporate profit growth in 2011.

We are now clearly in a soft patch; its duration and depth is uncertain.

Many who expected more rapid growth in jobs and GDP now seem to be relying on valuation as a justification for higher S&P 500 targets. This might be a slippery slope in light of the lack of economic clarity and the proximity of the emergence of several nontraditional headwinds (e.g., higher marginal tax rates and state and local job layoffs) in early 2011.

I still am of the view that we've seen the lows in the S&P for the year. As I have said in the past, however, there are numerous economic outcomes -- some are less than benign -- so a 2:1 upside/downside is not too exceptional and still may not warrant an above-average commitment to equities, especially in the short term.

Furthermore, in light of the clear evidence of weakening growth and confidence, the burden of proof lies on those that have S&P targets over 1,150 now, which means almost every Wall Street strategist. To make a much higher forecast than 1,150 requires profit estimates to be met ($83 a share for the S&P in 2010 and $90 a share for the S&P in 2011) and a larger narrowing in the gap between the market's P/E and its historical average than might be justified based on those nontraditional headwinds and the lack of economic clarity.

The short-term looks uncertain as we continue to work off the sharp rally and overbought condition of the past few weeks.

In other words, for now, we appear to be in a muddle-valued market, but, if share prices drop any further, value will likely be emerging in the weeks ahead.

AAPL Earnings

AAPL reported another record quarter tonight after the close, and the shares are indicated about $7 higher in after-market trading. Earnings and revenues beat consensus on stronger-than-expected Mac, iPod and iPhone sales and solid iPad results. Earnings were $3.51 per share compared with $3.11 estimates, and revenues were $15.7 billion versus $14.75 billion in the prior-year period. MacIntosh revenues grew 33% year over year to 3.47 million units, iPhones grew 61% year over year to 8.4 million units, iPads totaled 3.47 million units and iPods saw an 8% decline to 9.41 million units.

Margins were down year over year to 39.1% from 40.9% (looks like the iPad did cause a margin hit), but up from 36% last quarter. However, revenue strength will be the focus of investors. Apple's international results were also impressive, with Europe up 66% year over year and a 160% increase in Asia Pacific. Guidance is expected to be higher on the revenue line, at $18 billion versus the $17 billion consensus, although lower on EPS, at $3.44 versus $3.82 consensus. Typically, management is very conservative with forward estimates, and I expect the company to beat these figures handily.

Apple continued to pile up cash as well, generating $4 billion. The call is just starting, but even with the move in after- hours trading, the shares continue to be attractive at 15x earnings (13x adjusted for the $45 a share in cash).

long AAPL

Not A Bad Day

Virtually every earnings report issued on Monday night and Tuesday morning was hit with selling to start the day, but the bears were pressing a bit too hard. The dip-buyers stepped up at the open and drove us steadily back up all day.

As usual, volume wasn't very good, but breadth was close to 4-to-1 positive. Semiconductors and pharmaceuticals lagged, but strength in oil, steel and commodity-related groups more than made up for it.

Technically, we didn't breach any significant resistance level, for those that believe that stuff. Any time you have an intraday reversal, however, it is at least a minor positive. The bulls still have some hard work to do if they are going to turn the technical picture positive, but the action today was a decent start.

The big issue going forward is whether or not we will continue to see sell-the-news reactions to earnings. Apple will be a particularly good test of the prevailing psychology, but we still have hundreds of reports to deal with over the next couple weeks.

long AAPL

Monday, July 19, 2010


It looks like the banks are picking up a bid.

I'm hearing that Paulson made another big purchase.

Speaking of financials, high above the Alps, the Gnome is saying Paulson has purchased another 100 million shares of C today.

Today's action is a reminder how fragile the financial system remains in Europe.

The markets are weak now on a report that Hypo Real Estate Holdings failed to pass the EU bank stress test. While this is a "no $*!% " conclusion and was widely anticipated, it is a reminder how fragile the financial system remains in Europe.

The Baltic Dry Index is starting to rally.

There was little in the way of added value extracted from Roubini's presentation at the Jewish Center of the Hamptons.

But I now think that he is more well-intentioned and perhaps even more studious than I previously thought. He is an engaging speaker; Yesterday afternoon, Nouriel Roubini was the speaker at the Summer Institute lecture series at the Jewish Center of the Hamptons.

In the interests of full disclosure, I have been critical (perhaps, at times, too critical) about:

1. the way in which the media have embraced Nouriel;

2. in Nouriel's apparent inflexibility and dogma; and

3. in his inaccurate stock market forecasts.

Nouriel gave his standard talk: The U.S. is entering either a "U" (at best) or a "W" (at worst), while over there, he estimates 0% growth in the eurozone over the next 12 months.

Reduced fiscal and monetary stimuli, the cessation of temporary benefits (inventory build, Cash for Clunkers, homebuyer's tax credit, etc.) and diminished confidence (consumer and corporate) spell subpar growth (1.5% estimated second-half domestic growth). Deflationary pressures remain the mainstay in the aftermath of the last economic and credit cycle and in the face of tax policy (higher January 2011) and the obliteration of the shadow-banking system and securitization markets.

In the U.S., Nouriel says we are kicking the can down the road and that we face a fiscal train wreck with no visible exit strategy in sight.

The one part of his talk that stood out to me was in the section of his speech in which he talked about some possible solutions to our fiscal imbalances. Specifically, he feels that we, as a nation, have been overly preoccupied with housing-central policy. He argued that housing provides little in the way of sustained productivity and growth and that many of the benefits of home ownership (such as the mortgage-interest deduction) should be reassessed.

Is It Time To Get Defensive?

I sure hope the earnings report that start to roll out this evening are interesting, because I can't take too many more days of action like we had today. It wasn't bad action, but it was sleepy, slow and random.

So far, IBM and ATHR are trading down after releasing earnings while we await TXN. We have had a definite sell-the-news response to earnings so far this quarter, so these reports will be a good test. So far, it looks like that theme is continuing.

We'll have a further test in the morning, when GS, JNJ and and a few others report, but the buyers seem to have very high expectations, and even when they are met, like INTC did, we still aren't seeing sustained upside traction.

The bottom line is that we are in a downtrend, and sellers are treating all news as negative. Until that changes, playing defense may make the most sense, although that's not what I'm doing. It isn't very exciting, but it pays off nicely when we don't have to spend time trying to recoup losses.

Friday, July 16, 2010


Kass added to his C, BK and WFC positions today; I'm thinking very hard about getting back into C again, now that it's under 4 again.

LNC is looking more and more compelling as it falls.....

It still remains my view that the S&P 500 has made its low for the year, but, from my perch, the developing downbeat economic conditions may trump the nonrecurring events at BP, GS and AAPL.

I anticipate a 2010 S&P range of 1,025-1,150 over the remainder of the year.

long AAPL

Tricky Market

The most notable characteristic of the market today wasn't just the big point loss but the unrelenting nature of the selling. It was steady pressure from the opening bell and the market couldn't manage a bounce in the final minutes. What made it even worse is that the bulls had some good news to work with, namely the GS settlement with the SEC and progress by BP on the oil leak in the Gulf, but the action started off weak and just grew weaker.

The mediocre earnings from GOOG didn't help matters, but the earnings from the banks were the real culprit. In addition to so-so numbers, there was plenty of talk about how the new financial regulations bill passed by the Senate on Thursday may prove to have far higher costs than previously anticipated. In its conference call today BAC said the new rules, particularly on debit cards, may trigger a $10 billion charge. What may be even more worrisome is BAC says that rival banks may have underestimated these costs as well.

A number of other culprits out there share the blame for the poor action -- such as the very poor sentiment surveys -- but some say the biggest problem was that we simply had a bearish technical setup to deal with. The market had bounced straight up on generally light volume and then stopped right around key technical resistance. The market was overbought and ready for some consolidation. Unfortunately, the consolidation turned into some pretty aggressive selling and it's reinforcing the fact that we are still firmly in grips of a downtrend that has lasted for two and a half months now.

The big question is whether this is the fourth failed bounce since the market topped in April or is this just a severe pullback? There isn't much technical support down to the lows of the year but the hundreds earnings reports scheduled for the next two weeks could help to perk up sentiment and help the market find its footing.

Thursday, July 15, 2010

I see Kass is selling most of his trading longs into this afternoon's ramp - interesting. The ramp seems to have been caused by positive rumors on AAPL; no recall, GS and BP. It sure doesn't seem likely AAPL recalling anything; otherwise they would have been pulling them from shelves, etc. - which it does not appear they are doing. In fact, unscientifically, the AAPL store in the Country Club Plaza was absolutely packed today at 3:30.

Kass is adding to LNC today; I need to get back into that one....

Without alot of studying yet of JPM's quarter - first impression of it is that it was just OK, a little less than meets the eye.

* Trading results were not as bad as feared.

* Non-performers came down nicely.

* Pretax improvement was materially from cost-cutting.

* Deposit growth was disappointing.

* Lower loan-loss provisions aided EPS by 36 cents (nonrecurring) against that nonrecurring charge of 14 cents for the U.K. bonus tax.

* Bottom line: I estimate recurring earnings were better at around 83 cents a share vs. Street expectations of 71 cents a share.

long AAPL

A Bit Of Rage....

So the day the FinReg circus starts, the SEC comes out to accuse GS of being.....a market maker. Gee. Now, the day FinReg passes, the SEC settles with GS and extracts a few hundred million to pay for its next pound of bureaucracy. DISGUSTING.

#2 - Greenspan now says all of the Bush tax cuts should be allowed to lapse. For an old guy, he sure can dance. While he's entitled to his opinion of course, didn't he come out in favor of Clinton's tax hikes and then Bush's tax cuts? And what sort of objectivist comes out in favor of fiscal contraction while recovery is still uncertain? Old Fed chairmen, like old soldiers, should just fade away. Greenspan keeps coming up like a bad burrito....

What's Good Right Now Is We Have Fewer Uncertainties....

It looked like it was going to be a fairly quiet day, but a flurry of news hit late in the day and spiked us up sharply. The SEC said that it is making a major announcement this afternoon, which market players think will be a settlement with GS; BP says that its leak-capping efforts are looking good; and AAPL is scheduled to announce something tomorrow.

On top of that, GOOG's earnings are out, and the company missed on the bottom line. The stock is down $20 quickly on the news as market players try to sort out what is happening there.

It is a very chaotic trading environment, but under the surface, we had poor breadth and some very mixed and choppy action, which reflects a high level of uncertainty. It is very tough to find good leadership in this market. There just aren't many pockets of momentum, which is what is needed for a good trading market.

We'll see how all this news shakes out overnight, but I think upside progress is quite possible tomorrow and next week as well.

Details of the Goldman Sachs settlement will be out soon, and we'll have more color on Google shortly. The best thing about these headlines is that we'll have fewer unknowns floating around, and that is always a good thing for the market.

long AAPL

Wednesday, July 14, 2010

Yes, I'm Biased, But The Media Hand-Wringing Over AAPL's iPhone4 Supposed Antenna Problems Is The Lamest Tech Story Of The Year....

I’m beginning to think that Antennagate -- the so-called scandal over the AAPL iPhone 4’s reception issues -- has become the most ridiculous tech story of the year.

Let’s recap the problem.

A small number of people reported iPhone 4 reception problems related to how they held the phone. I say a "small number" because there's still absolutely zero evidence of a high return rate or widespread customer dissatisfaction.

Then, a whole bunch of media types started trying to recreate the problem themselves by holding their phones every which way, trying to get the signal to drop.

So while these techno-hypochondriacs didn’t actually suffer from or notice this problem, they were determined to do so once they saw the opportunity to jump all over Apple.

Let’s look at the conclusions from some major publications’ pre-Antennagate iPhone 4 reviews:


“We're not going to beat around the bush -- in our approximation, the iPhone 4 is the best smartphone on the market right now. The combination of gorgeous new hardware, that amazing display, upgraded cameras, and major improvements to the operating system make this an extremely formidable package.”


“With the iPhone 4, Apple again shows that it is a powerful player in the smartphone wars. It won't be for everyone, the call quality and reception remain sticking points, and T remains a sticking point, but the handset's striking design, loaded feature set, and satisfying performance make it the best iPhone yet.”

Wall Street Journal:

“Just as with its predecessors, I can't recommend this new iPhone for voice calling for people who experience poor AT&T reception, unless they are willing to carry a second phone on a network that works better for them.

For everyone else, however, I'd say that Apple has built a beautiful smartphone that works well, adds impressive new features and is still, overall, the best device in its class.”

But since Antennagate hit, everybody and their mother has some type of issue with the iPhone 4. Again, nobody knew they had problems with the iPhone 4 until they went looking for them.

In fact, the highly respected Consumer Reports delivered a magnificent troll job this week when it said it “couldn’t recommend the iPhone 4.”

Here’s its explanation:

We reached this conclusion after testing all three of our iPhone 4s (purchased at three separate retailers in the New York area) in the controlled environment of CU's radio frequency (RF) isolation chamber. In this room, which is impervious to outside radio signals, our test engineers connected the phones to our base-station emulator, a device that simulates carrier cell towers. We also tested several other AT&T phones the same way, including the iPhone 3GS and the Palm (PALM) Pre. None of those phones had the signal-loss problems of the iPhone 4.

I’m just playing devil’s advocate here, but who cares about how well the iPhone 4 performs in an isolation chamber? I don’t make phone calls from my isolation chamber. No, I only use my isolation chamber to breathe in pure oxygen and protect myself from germs.

But wait, there’s more.

When Consumer Reports first looked at the iPhone 4, it said “some reviewers have reported problems with reduced reception when the iPhone 4 is being held in the left hand. So far, we’ve been unable to replicate the problems.”

Unable to replicate the problems. Unable to replicate the problems. Unable to replicate the problems. Get it?

I’d like to know: How in the blue hell does Consumer Reports place admittedly “anecdotal indications” from an isolation chamber above what it found in normal use?
I can’t find anyone who regrets getting the new iPhone. And all the Apple Store employees I’ve spoken with said they’re not seeing many returns or complaints.

So Apple’s in bit of a pickle. It has a product that 1) was a media darling at release, and 2) is selling like crazy right now, but 3) is getting destroyed in the media over a technical problem that clearly doesn’t affect many people in real-world use.

If the iPhone 4 is so bad, why aren’t people lining up to return them? After all, every iPhone 4 in existence is still in the 30-day return window. And why is it back-ordered? Do people just want to be screwed?

Yes, Apple could behave better. It's censoring message boards discussing the reception issue, and Steve Jobs has appeared cold and callous, clearly underestimating how big the media storm could get.

But should Apple institute a recall, as some experts believe will happen?

Absolutely not, because the antenna problem isn’t common in regular use. All iPhones have had reception issues because of the strain on AT&T’s wireless network, so why go crazy now?

To make nice, Apple should offer free bumpers to anyone who wants them, extend its return policy to 60 or 90 days for those who want to give iPhone 4 an extended test run, and offer an “I’m sorry that you’re upset” apology.

That’s it.

This isn’t a Toyota-type issue, where people have actually died, nor is it nearly as serious as Microsoft’s Red-Ring-of-Death Xbox 360 fiasco.

The iPhone 4 isn’t perfect. AAPL has a long history of making imperfect (in the eyes of critics) products that sell like crazy and redefine how we work and play.

Let’s get real.

The iPhone 4 is suffering from a minor technical problem that’s been completely blown out of proportion by the media, who knows that negative Apple stories go over big.......

long AAPL

Today's Thoughts

Despite the flatline, the day belonged to the bulls, as six days of an up tape could have been an excuse to sell 'em.

Is Intel a Sell?

After its great margin report, should you sell it or even short it?

The question at hand is whether INTC is a sale/short after the great profit margin print last night.

Stated simply, Intel's price action is unimpressive.

The 30-year bond auction was a successful one, with a strong bid-to-cover ratio.

Participation of indirect bidders was high, and the yield was at the lowest level in over a year.

A package of C, MTG, PMI and RDN could double over the next 12 months.

long INTC

Why Doesn't The Market Give INTC The Multiple It Deserves?

What's wrong with INTC? Not a thing, actually. It should be trading over $25 right now, but isn't. Put simply, it's not margins or expectations or growth prospects. Well ok, it's a little bit about growth prospects.

But to put it simply, I think INTC is suffering from the competition of investors' hard earned dollars. Do you want to chase INTC and their very cheap forward PE of 10 and PEG of .75:1 (depending on cash)? Or would you rather buy a QCOM or AAPL, which have very similar forward PEs but with a PEG of about half that for each. Same for MSFT, ORCL and CSCO.

On the other hand, you have names like JDSU, or other fiber players that might be very cheap on renewed earnings; and with a stellar EPS growth rate to boot.

So again, INTC suffers from investment competition/comparison. At some point they play catchup; but I suspect that happens when AAPL is over $300, BRCM is over $44 and CSCO is over $30.......


At Least For Now, INTC Once Again Could Not Hold Last Night's After-Hours Gains

A little spike in the final minutes put the indices in the green, but overall, it was another example of how good news from INTC is not such great news for the market. The buyers were quite excited last night over the comment from Intel that it was its best quarter ever, but Intel is just one of those stocks that people like to sell when it is at its strongest.

It absolutely should not, but based on past experience I would not be surprised if Intel continued to fade in the weeks ahead, but the more important issue is whether it will mark a short-term top, like it did the last two quarters. Technically, we are very ripe for a pullback as we hit technical resistance. A pullback could be quite healthy, if it stayed contained and allowed us to consolidate the last seven days of gains. The biggest danger is that there will be a rush to lock in recent gains if selling intensifies.

Earnings from JPM will be the main focus in the morning, followed by GOOG after the close. We are set up well for a further sell-the-news reaction to these reports, so I'd maintain some caution.

Aside from Intel, the most interesting news today was the minutes from the Fed's meeting in June. The FOMC made it clear it is contemplating further monetary stimulus should the economy continue to slow. It also cut economic predictions due to concerns about the weak job market.

The question the Fed minutes raises for investors is whether it is good news that we might see another flood of cheap money, or bad news that we might need it? The cheap money is what gave us the rally that started in March 2009, but it calls to mind economist Paul Samuelson's famous dictum that "there is no free lunch on the monetarist menu".....

Tuesday, July 13, 2010


Piper (Gene Munster) is saying that an Apple recall is unlikely.

The last time S&P futures gapped up 1% after five straight up days was September 2006.

According to Jason Goepfert at sentimenTrader, the last time S&P futures gapped up 1% after five straight up days was September 2006.

There were two other times in history (March 2003 and September 1996) that this phenomenon occurred.

Both dates marked the launch of bull markets.

Three reasons for a rally -

Retail investors are uninvolved and will likely redeploy cash into the equity market.

Hedge funds have de-risked and will be forced to re-risk on any sustained advance.

If bonds start to falter, a huge asset allocation trade into equities could ensue.


1. Retail investors are uninvolved. Inflows into domestic equity mutual funds have been nonexistent for an extended period of time. Market tops are usually associated with heavy retail inflows.

2. Hedge funds have de-risked. And they are only modestly exposed to stocks. Further signs of a sustained equity market advance will certainly lead to a re-risking as hedge-hoggers rush to rectify underperformance pressures.

3. If bonds start to falter, a huge asset allocation trade into equities could ensue.

In other words, there are few left to sell and a whole lot of potential buying interest.....

German investor confidence for the month of June declined to a 15-month low and for the third month in a row. Nevertheless, the DAX is strongly higher this morning, as is the rest of Europe.

It's not the news that counts but it is the manner in which Mr. Market reacts to the news that counts.

Case in point, German investor confidence was announced overnight. In the month of June, it declined to a 15-month low and for the third month in a row.

Nevertheless, the DAX is strongly higher this morning, as is the rest of Europe.

Perhaps, at only 12 times a realistic earnings expectation for the S&P 500 in 2011, the bad news has been fully discounted.


Is AAPL setting up for a spike? I sure hope so, as I've been extremely frustrated with AAPL stock, my largest holding.

On a big up market day, there was notable selling of AAPL on an issue that, while an annoyance that should be fixed, should be more than swamped by the fact that AAPL is selling new phones and "iNetbookkillers" at rates far exceeding anyone's estimates (I would imagine). The iPad's success should have been worth $20 more for the stock price than it currently trades.

And then there's VZ and/or the CDMA launch of the iPhone. I'd be the first to say that I'm surprised AAPL has been slower than I thought to this market. Even so, it's a matter of time before they are selling an extra 4-6mm phones a quarter. As I've often stated, I think the firm VZ deal is worth $15-30 points - if not more.

And what about valuation and valuation less cash? Very, very compelling. AAPL has $46 per share in cash. That puts the forward PE at around 13 times and the PEG less cash under .5 again. After the coming quarter, AAPL will have closer to $50 per share in cash - if not more than that. In a normal, sane, uptick world AAPL would at least have a forward PEG less cash of .8 to 1.0......

With all that stated, however, I'm more aware of AAPL's risks than most. I think Android-based phones will give the iPhone tremendous competition. I also think other computer makers are increasing innovation in many ways. And I really think the Chrome OS will be the fastest growing OS for years.

However, at these prices I'm all in. Further, if one adds in various market dynamics, AAPL likely has at least market-based upside; although I'm betting it's better than that....

Sentiment readings just now coming out show the masses are again more prone to hyperbole and fear than ever before - even in the face of much data pointing to a continued trend of strength. ISM and PMI numbers between 52-56 are still strongly expansionary; and numbers close to or above 60 - like we just had - are seemingly being universally ignored.

And the jobs are coming, even though very few see that happening yet.

And enterprise spending on tech has experienced a decade of underinvestment, and AAPL is better positioned than many to garner enterprise spending increases.

Bottom line, I still view the stock as a $400 stock in $250 clothes.

Oh - I haven't even mentioned earnings that are coming in a week or so.......

long AAPL

INTC's Report To Give Firepower To The Bulls?

The first truly big name of the week delivered, and delivered in a big way. Intel's numbers were strong, and the company's outlook not just respectable but also impressive. The post-earnings reaction seems notorious for selling off, even after solid reports, but thus far Intel has held its ground.

The market is moving aggressively higher after hours, slicing through the resistance we met at the end of the day. Neither ETF rebalancing nor short-covering pushed the market higher at the end of the day, as we actually pulled back right before the close, contrary to the impact that rebalancing leveraged ETFs should have had. However, Intel is providing bulls all the firepower they need to have us pointing toward an open over 1100 tomorrow on the S&P 500.

One name that did not deliver to market expectations was YUM. Top- and bottom-line numbers were solid for the quarter, but the company's outlook was a bit weak. Furthermore, growth numbers, especially after seeing Intel's flashy numbers, were disappointing to bulls.

Has Intel given us insight into the tech sector this quarter or just raised the bar way too high? I would venture that it has done a little bit of both. One thing that it certainly has done is provide a positive tone for earnings and a boost to already increasing optimism.

Volatility actually performed much better in the face of a strong market today, and I would be concerned as a bull if it continues to demonstrate relative strength tomorrow. It is quite possible that bulls were demonstrating some extra caution heading into INTC's earnings report today. I would even conclude that it was likely. Now that we've all seen the report, and it was strong, a drop in the VIX should be seen. If not, then the market will be demonstrating continued concern for upcoming reports.

It is difficult to envision what will turn this market again, as it continues to act like a large vessel that cannot turn on a dime. Once it builds any directional momentum, it becomes unstoppable over the short run......

long INTC

INTC Summary

INTC reported a very strong number and raised guidance for the third quarter. For the quarter just ended, the company posted earnings per share of 51 cents on revenue of $10.8 billion. Gross margins came in at 67%. The company guided third-quarter revenue to a range of $11.2 billion to $12 billion (the Street consensus was at $10.9 billion). The company also guided gross margins to 67%, plus or minus "a couple of percentage points."

By my rough math, it looks like third-quarter EPS estimates should move to about 55 cents, whereas the Street has been projecting 48 cents.

Other highlights:

* Demand was strong across all channels and product lines.

* The company said it is "very comfortable" with the level of inventory across the channel.

* The PC and server segments are healthy. This matches what ORCL said just a week ago about its new hardware business.

* The company says it can react very quickly to any slowdown in demand.

* Europe appears to be doing well, but the company is watching billings for any hint of slowing.

Overall, it was the best quarter in Intel's history. Yes, the BEST in its history. The recovery remains strong, and the company is doing an excellent job managing the cost structure. I don't want to a cynic in light of such great numbers, but I am starting to wonder how much better the margin outlook can get. Can Intel really do 70% gross margins? Maybe it can in a perfect scenario with a robust economic recovery and upgrade cycle.

long INTC

More On AAPL

AAPL shares are off 3% today after Consumer Reports issued a report confirming problems with the antenna on the latest iPhone 4 (no problems have been associated with older versions, like the 3G and 3GS). Notwithstanding the antenna problem -- which has led to its signal falling up to 20 decibels -- Consumer Reports placed the iPhone 4 at the top of its smartphone ratings due to its industry-leading display, front-facing camera, gyroscope and higher-quality video camera. But Consumer Reports is a well-respected product reviewer and will likely turn up the heat on Apple for an official response -- offering a bumper case for free or a discount, perhaps -- and a possible recall. Although the recall solution, in my opinion, is highly unlikely. Because 75% of consumers use a case anyway, a case solution to fix the problem seems the likely result.

Apple needs to fix this issue before the key back-to-school and holiday seasons. I believe it will do so, and even if the company recalls the phone, it is manageable from a financial point of view. Although a recall is highly unlikely, such an event would be manageable, costing roughly $100 million for the 2 million to 3 million iPhone 4s that have been sold since the launch on June 24 ($20 a phone mailing costs would be $40 million to $60 million plus the $1 fix for the antenna chip, plus labor). On a quarterly revenue run rate of $13 million to $15 million, a recall would be very manageable. So far there have been no change to build plans or demand patterns based on this issue; even if there is a slowdown to units sold, once the fix is in place, any demand lost should be made up. Estimates for the June quarter are for 7.5 million iPhones and 40 million for 2010.

I've added short-term calls today -- I believe this is a short-term issue and an opportunity to get into one of the best growth stories in technology. Shares remain attractively valued at 18.6 times 2010 and 15.6 times 2011 (very conservative) estimates.

long AAPL

Hedge Funds Smell Short-Term Blood On AAPL; Take Aim

This AAPL action on the heels of the Consumer Reports iPhone 4 downgrade is a dream scenario for hedge funds ahead of the July 20 earnings report.

There is no better money making opportunity than the Apple slingshot. Apple's pristine balance sheet, exponential growth opportunity, and innovative future product pipeline give hedge fund's confidence that this stock will always bounce back after being beaten down. As a result they use any and all resources to beat it down when they can.

Monday was the Consumer Reports release, so what do the hedge funds do on Tuesday? They feed the media with stories of a recall, "PR experts say an iPhone 4 recall is inevitable!"

Beyond this kind of hysteria, the truth is that under a worst case scenario Apple would recall the few million iPhone 4's that have been sold and the problem would be solved.

The scope of such a recall for a company with approximately $45 billion in cash is inconsequential.

A second alternative to this reception problem would be to re route antenna efficiency by way of a software update. This solution is most likely.

The third alternative would be to include a free bumper cover with each iPhone 4 purchase. As a side note, Apple might be making more money from the $29 bumper than GOOG makes from its Android OS but that's for another article on another day.

The hedge funds know an iPhone 4 solution is coming but that doesn't stop them from taking full advantage of the trading action. Everyone selling today is already plotting their re-entry on Thursday, Friday, or Monday ahead of earnings on Tuesday.

The iPhone 4 is not a lemon; consumers love the product. However, AAPL needs to find a quick solution to this problem. The iPhone 4 is off to the best sales start of any smartphone in history, Apple can't keep it in stock, and 80 more countries are eagerly anticipating the international launch this fall.

Investors should be buying this slingshot dip as the bounce will be fast and furious when it arrives.

long AAPL

Monday, July 12, 2010


Someone forgot to tell CSX that the domestic economy is having a double-dip. The company delivered a beat.

When I watch C move higher -- slowly, step by step -- I think that the meek shall inherit the market! And I can't help but think that the strength has positive market implications.....

Perma-bears and perma-bulls get attention, and that's about it.

"We mean, of course, the planetary pictures in the sky which are developing towards the tightest harmonic alignments in the most potent areas of the zodiacal circle ever record in Earth's written history. These portend increasing and maximizing intensity and rapidity of 'change' on every level of existence: mineral, vegetable, animal, human and spirit. Will capitalism survive? Will democracy survive? Will our markets survive? Will governments survive? Will humanity survive? Will Earth survive?"

-- Arch Crawford, Crawford Perspectives (July 10, 2010)

Both perma-bears and perma-bulls are attention-getters, not moneymakers.

Buy American, I am.

The three year auction was fine, with an in-line yield and a better bid-to-cover ratio than the past several auctions.

Some back-and-filling after last week's spike would be healthy.

Again, for emphasis: Some back-and-filling after last week's spike would be healthy.

long C

Earnings May Stir Emotions

It was a very uneventful day, but that is probably a good thing as the market needed to consolidate last week's hefty gains. While the major indices showed gains, once again, it was due to outperformance by a few bigger caps such as MSFT and WMT. Under the surface, breadth was solidly negative, with the Nasdaq having two losers for every advancer.

Semiconductors led, but it was troubling that basic materials and mining rolled over. Steel, coal, gold and agriculture were all weak, and many stocks in those groups were popping up on my short-sale setup scans.

We'll have some chatter about AA's earnings tonight, but that is just filler for the business programs that don't have much else to talk about today. It is INTC tomorrow and GOOG and some financials later in the week that will determine the short-term direction of this market.

Frankly, I'm just hopeful that earnings stir things up and cause some stronger emotions. If we have too many more days like today and Friday, it is going to bore traders to death....

Friday, July 9, 2010


I am of the belief that many parallels can be drawn between poker and trading/investing.

Poker and trading/investing hold many similarities.

Poker, like trading/investing, is a game of people. In both activities, one needs to get inside one's opponent or the masses' collective heads in order to be consistently winning. Importantly, in both venues, one has to know what makes your opponent or the market tick; what is the mood of your opponent or the psychological condition of investors who set share prices?

Neither activity can be gamed just mathematically or statistically. Many computer programmers have tried to game poker and the stock market but they have failed owing to the inability to understand the perception of the moment as judgment requires a human mind.

Here are some of the specific parallels I have observed.

Pay Attention...and It Will Pay You. Concentrate on everything when you are playing/trading. Watch and listen; remember to do both and relate the two.

Understand When to Play Aggressively...It's the Winning Way. Don't be a tight or a loose player/trader; be a solid one and recognize when it is time to press your bets/positions. To attain superior returns in poker and investing over the long run, grind it out (in stocks until you are up 30%-40%, and then if you have convictions, go for a 100% year). If you can avoid losing and put together a few 100% years, you can achieve outstanding long-term investment performance.

Tells: Look For Them and You Will Find Them. Poker players and stock markets have tells -- giveaway moves that are very revealing. Learn to recognize them. History is your textbook.

Be as Competitive as You Can Be. Go into a poker game and into a trade with the idea of completely destroying your opponent or scoring a major investment coup. If you win a pot or make a successful trade, nearly always play the next pot or make the next trade shortly thereafter -- within reason. Although the cards and trades might break even in the long run, rushes do happen and momentum often feeds upon itself. When you earn the right to be aggressive, you should be aggressive. When one has a tremendous conviction in a poker hand or trade, you have to go for the jugular.

Art and Science...It takes Both. Both activities are more art than science -- that's why they are so difficult to master. Knowing what to do is about 10% of the game. Knowing how to do it is the other 90%.

Money Management. The same sound principles of money control apply to the business of tournament/professional poker and to successful investing. The way to build long-term returns or poker winnings is through preservation of capital and home runs.

The Important Twins of Poker/Investing, Patience and Staying Power. Come to the poker table or to the markets with enough time to stay and play for a while.

Alertness is a Key. You must stay alert at all times.

Control Your Emotions. Allowing your confidence to be shaken can turn a simple losing streak into a terrible case of going bad. Keep your emotions in check. When you lose a pot or make a poor investment decision, get up, walk around the chair or take some deep breaths. Don't lose your poise. If a trade or poker hand does not work out, walk away from the position/hand. Be confident enough about your ability to win afterwards.

Does Team Obama Really Want A Second Term? Maybe They Do....

After two weeks of straight down action, market players, who had been expecting an oversold bounce, were extremely frustrated. This week, the market not only delivered their oversold bounce, but it turned out to be the best week of the year for the indices, with a gain of over 5%.

The biggest bounces tend to occur within downtrends and bear markets, because market players are not positioned for them and have to scramble to add long exposure. In addition, the shorts, who have grown complacent after some good gains, add fuel to the upside as they rush to lock in gains and/or are squeezed. Both those factors were at work the last three days of the week as we jumped straight up.

The first thing the bears are going to say about this action is, "look at that pitiful volume". If there were some real accumulation taking place by major institutional buyers, we should have seen a jump in volume rather than a steady decline all week as we moved higher.

The second thing the bears are going to point to is that there is a tremendous amount of technical overhead to deal with as we move toward 1100 on the S&P 500. That mattered in May and June, and it is going to matter again in July.

The bulls are going to counter by pointing out how irrelevant overhead was last year, as we had a series of V-shaped moves back to the highs. However, it has definitely been quite different after the breakdown this market has suffered since the end of April. Is it possible that the bulls could pull off another V-ish move through that 1100 level?

What really adds some complexity to the situation is the start of earnings season next week. INTC, on Tuesday night, is the first big report on my radar, but it is followed by JPM, GOOG, BAC, GE and C later in the week.

The way earnings are perceived is going to determine the direction of the market. The big bounce this week probably increases expectations a bit and gives us greater risk of some "sell-the-news" reaction, but it is the forward guidance that is going to be the focus. If we start hearing about slowdowns in Europe, or concerns about a dip in the economic recovery, we could roll over quickly. The good news is that for the most part, earnings have been quite good over the past year, despite this horrible economy. Many market players expect that to continue, and if they are right, there is a good chance we can keep on climbing higher.

As for the administration, there is no coincidence. A change at the White House, a change that says, look we are not creating jobs, we are not getting this economy moving, we must be doing something wrong, did mean something. Losing people like Jeff Immelt and Ivan Seidenberg from the ranks of people who are cooperative with the president means something.

They don't want to lose - they want the second term. Obviously they want the Congress to stay Democratic; and they aren't suicidal. For awhile, I thought for sure they were.

So did other market participants.

Think about what's been happening here. We have taken Europe off the table for now. We have taken China off the table -- soft landing. We have stabilized the key Spanish banks. We have gotten to the point where it is reasonable to believe that BP will have things under control and that the great job-creating cleanup will begin while there is no ban on offshore drilling.

And now we have the White House starting to look at the stock market and realizing that it matters -- the Kudlow interview of Geithner -- and starting to talk about how capital, not just labor, matters.

These are all good things. Now, of course, the ideologues will say that housing is still bad and credit is bad -- I am not even sure of that one anymore -- and no jobs are being created. But if I am right that the anti-business agenda is on hold, then companies will be rational. They will hire.

Next week, earnings begin. Given the euro stabilization and given the Chinese soft landing, I have no reason to believe that the earnings or the conference calls will be necessarily downbeat.

Unfortunately, all things always begin with the crappy AA. This company's estimates are like the housing estimates. They are perennially too high. The ridiculous analysts are looking for 11 cents.

Take is from me: Anything better than a loss is better than expected.

The moment is positive. Those who are staying as negative as they were are simply out of synch with the moment.

They will have to defend themselves, for the first time in two months. The bulls, at last, can have something to stampede to......

long C

Thursday, July 8, 2010


I am hearing that Meredith Whitney cut her rating on GS.

Here are some sobering and cautious thoughts on the claims announcement released this morning from Dan Greenhaus of Miller Tabak:

* Initial claims were less than expected, falling to 454,000, down 21,000 from the prior week.

* As reported, continuing claims fell to 4.413 million from 4.637 million in the prior week.

* Our measure of total continuing claims fell another 280,000 to 9,214,367. Over the last four weeks, this measure is down nearly 900,000.

Over the next several weeks and months, there is the very real possibility that several labor market indicators including weekly jobless claims, total continuing claims and the unemployment rate, will "improve" on their face. However, there is almost no doubt that the recent decline in continuing claims data reflects the lack of benefit extensions on the part of Congress. On July 1st, the House was able to extend funding or unemployment benefits however the Senate failed to pass the measure and will not revisit the issue until after summer recess ends on the 12th. As it stands now, we're not sure any bill extending benefits will pass in nearly any form.

In the meantime, nearly 3 million people will cease being able to file for benefits, the result of which we're seeing already; total continuing claims have fallen nearly 900,000 over the last several weeks. When viewed that way, the decline in continuing claims is unquestionably a negative for spending power and economic output. According to J. Rodgers Kniffen WWE, this will result in a lost of about $41 billion in incomes, a not inconsequential amount.

Will The European Bank 'Stress Tests' Be A Catalyst For A Global Relief Rally?

The financial press has been abuzz with speculation, mostly negative in nature, regarding the “stress tests” being performed on the banking systems of Europe.

Let us put this in perspective: Do folks remember how stressful the stress tests were in the US? As many will recall, the stress tests created a great deal of uncertainty in US markets before they were finally released. This is similar to what has occurred in Europe. But as details emerged in the US as to the likely results of the stress tests in March and April of 2009, and when they were finally revealed in May, the stress tests turned out to be a major positive catalyst for the US financial sector and the stock market as a whole.

Bank regulators and central bankers are not in the business of creating runs on banks. Thus, I think that we can be reasonably certain that the results of the stress tests will be crafted in such a way that show that European banks are generally sound and that with a few well placed capital raises and plenty of assistance for the European Central Bank, the European banking system “will be as strong as ever.”

Thus, chalk up one more factor favoring a global equities relief rally in the next 10-20 sessions......

Things Are Beginning To Get Good Again

Good. It's good that credit losses are dropping, and dropping fast, including residential housing, despite myriad jeremiads from the press that say otherwise. Nice. Nice that employment numbers were out of synch with the last few weeks. Nice. It's good that President Obama doesn't seem to want to push up the capital gains and dividend taxes. (Doug Kass points out that Congressional approval is needed, but one of the great shams of this era is that there is a notion that somehow Congress has a mind of its own. Congress is Obama.)

Good. It's good that retail sales aren't that horrid. In fact, they are better than expected. Remember the last time that happened? The market went dramatically higher on it.

Nice. Nice that we got no pre-announcements of bad quarters, typically meaning quarters that will be 5% to 10% worse than the estimates. (Not all play by this rule any more, but there are enough that do.) Nice. Nice that the auto sales were far better than expected. Go buy some F; it's going higher.

Good. It's good that the market can see good news for good news and that PG and BA are moving up.

Nice. Nice that stockpiles for oil tumbled and rail-car loadings are up.

Nice. Nice that congress is on vacation.

Combined, these are all reasons to buy. But the best reason to buy is the golden bearish cross -- don't you like that technical/golf allusion? It works. It works because the S&P pressure brought down so many stocks, ranging from the soft goods like PG to the hard goods like NUE (still attractive), that you can pretty much pick and not be worried that you are paying anything remotely expensive, given how low things have gotten; see COST.

Oh, all right. Let's play the game. Obama's bad for stocks. The euro's still a worry (although the shorts have been overrun). Spanish bank bond haircuts. Bad GS numbers. Baltic Freight. Housing going down (even though it is going up). Low mortgage rates as a sign of no demand (even as so many are going to refinance) Municipal bankruptcies. No hiring.

But you know what? If consumer balance sheets are getting better, if housing defaults are decreasing, if corporate balance sheets are getting better and refinancing is occurring -- three-and-change percent TWC notes? Holy moly! I remember when it was almost insolvent! -- is it right to be as bearish as you might have been?

Especially when capital gains and dividend taxes could remain low -- something I thought was an anathema to Obama.......

Nice enough to think that at long last, the clouds are lifting. Or, even better, just maybe, they've lifted.

Wednesday, July 7, 2010


What's good is I still see little "excitement" regarding today's rally.

There is no excitement on the part of the bulls in most quarters. Nor is anyone that I can see saying that this is the start of something great.

In direct contrast to two months ago, the talking heads on CNBC are almost uniformly bearish; that's good.

Once again the U.S. Post Office is raising rates.

My favorite play on the news remains a short in Pitney Bowes.

The markets are tracing out a low for the year.

The markets are traveling on a path of fear and that share prices have significantly disconnected from fundamentals and from other risk assets.

I'm focusing on the mounting and extreme negative sentiment, the more positive employment signs within the June nonmanufacturing ISM (and in the Conference Board's Employment Trend Index) and the continued overall strength of the combined June manufacturing and nonmanufacturing ISM. All these indicators pointed to upbeat payroll growth and a moderate domestic economic expansion over the balance of 2010 and into 2011.

Also, despite the schmeissing in stock prices, other risk assets and credit metrics improved last month. Specifically the two-year swap spread, three-month LIBOR, the TED spread and junk bond interest rates all declined. Meanwhile the euro rose and even stock prices in several European bourses rose in June.

Meanwhile, negative sentiment is building up. As evidence, I observed the deeply oversold oscillator and the increase in the relationship of bears to bulls in the Market Vane survey (which is closing in on March 2009 levels). Also, Cassandras were in full force of late. The Sunday New York Times had a prominent interview with Robert Prechter (who predicted a depression in stock prices -- and a Dow Jones Industrial Average of 1000) while CNBC dragged out Dr. Nouriel Roubini to guest host "Squawk Box" on Tuesday.

Things I'm Thinking

I bet many more people are selling the strength than buying recent weakness.

At some point people will be forced to buy strength as there will be little weakness to buy.

I wonder how much real distribution has taken place versus futures-manipulated selling?

I still don't like the blame being placed on the algo's -- it's the trading rules, not the players, which are to blame. Then again; there is a lot of debate whether it's the gun or the person who pulls the trigger. Given that, I'm sure this debate will rage on for some time. Is it the high frequency trading; or elimination of so many rules that provided so much balance to the markets previously?

It seems many notable bears have been growling loudly of late. Also, many who were proclaiming victory in the form of a V shaped recovery have already admitted that stance was wrong. Personally, I think it's way too early to say that anyone can be certain of either a V shaped recovery or a double dip. I'm in the variant growth camp still, and I fully realize that we will need to see at least 3-4 more quarters of data to proclaim a forecast was indeed correct.

Did I see chip sales were up 48% year over year in May? So people weren't buying houses, but companies were buying a ton of semi's. Again, great case in point about what is happening in the economy. We don't need increased home sales for solid growth. My guess is the real underlying housing demand will surface within weeks to months; and the first time credit will be much like cash for clunkers was to car sales.

Back to the semi's: the strength was broad based but especially notable in networking and connectivity. Hence BRCM is flying today and MRVL is holding even, as it caught a downgrade. At current levels I'm favoring MRVL but like them both.

Oversold Bounce? Still A Downward Trend?

Market players have been waiting a couple of weeks for it, and today we finally had the much-anticipated oversold bounce. There was a little hesitation early on, but, as we continued to hold and made new intraday highs, the shorts covered and the underinvested bulls were more aggressive with their chasing.

Historically, all the biggest gains of the market have tended to be on an oversold bounce. The biggest upside moves occur in bear markets and downtrends, because market players aren't positioned for them. The shorts are overconfident and squeezed, while the bulls have idle cash they need to put to work. The end result is action like we had today.

Breadth was almost 5 to 1 positive, and the point gain was substantial, but volume was mediocre. In other words, it looks like a dead-cat bounce. However, if you paid attention to the action from the bottom of March 2009 to the top in April 2010, you are very aware of how often those sorts of bounces just kept going and going.

Since the top in April, we had another day that was very similar to today, and that was following the flash crash. The S&P 500 bounced 4.4% on May 10, following the flash crash, but two days later the market topped out right at the 50-day moving average, and went straight down.

So the big question is, whether this is going to be a bounce like we saw during the rally -- when we went straight up on light volume -- or is it going to be more like the failed bounce that occurred after the market turned down in April?

There have been plenty of buyers over the last few weeks who would be happy to escape some positions as they move back to even, and the bears are going to be looking for new entries fairly soon -- especially since volume was light.

I think we could run to 1070-1075, but the really big hurdle comes at 1100, and that is where the bears will likely become very aggressive -- if we make it that far.

I continue to have confidence that we have seen the lows. We went down too far too fast, and that finally resulted in the reflexive bounce that we had today. If we make it back to 1100, then we can talk, but at this juncture, we should simply enjoy the bounce.

Tuesday, July 6, 2010


TSLA has dropped below its issuance price.

Much in the way the bears were worn out at S&P 1,200-plus, the bulls are being worn out at the 1,025 level. It's all very symmetrical!

The ISM nonmanufacturing release was a bit shy of consensus, but remember, how the market reacts to the number is more important than the number itself.

Larry Summers is engaged in concocting some unconventional approaches to kick-starting jobs and economic growth.

Stay tuned.

In contrast to the complacency that embodied the rally, fear has now been introduced into the market.

The Ranks of Cassandras Grow

For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years," he said. This time, he said, "If I'm right, it will be such a shock that people will be telling their grandkids many years from now, 'Don't touch stocks.'

-- New York Times interview with Bob Prechter

On cue, the New York Times Jeff Sommer prominently interviewed Bob Prechter in Sunday's Business section. The Elliott Wave devotee is forecasting a DJIA "well below 1,000 in the next five or six years."

Prechter's comments are a classic example of Roubini-like hyperbole. As I have often written, both perma-bulls and perma-bears are attention-getters, not money-makers. Avoid their views like plagues. I do. Those views might make for juicy headlines, but they are not typically substantiated by rigorous in analysis. Importantly, their views rarely prove accurate nor value-added.

It is for these reasons and others that the reputations of Cassandras are not usually long-lived. And some Cassandras, similar the original one in Greek mythology , who was granted the gift of prophecy by Apollo after spending a night in his temple in which snakes licked her ears clean (so that she could hear the future), simply don't even live long. (She was killed by Clytemnestra when she was 21 years old.)

"Already I prophesied to my countrymen all their disasters."

-- Cassandra

The World Grows More Realistic

Two months ago, things were not as good as they appeared, and now things are probably not as bad as they seem.

Two months ago, many strategists/hedge-hoggers were targeting a 1,300 level for the S&P 500, and now, in the face of what should have been an expected slowdown in the rate of growth, some of the same optimists have abruptly reversed their constructive views (e.g., Barton Biggs).

When the market was in an uptrend that seemed never-ending, it was argued that economic expectations were too optimistic and that a zero-interest-rate policy would catalyze growth but would not likely lead to a self-sustaining economic cycle. It's possible jobs growth would be lackluster (as we had entered the era of the temporary worker), housing's recovery would be tepid (despite historically low mortgage rates) -- and that these factors (among others) had produced a limited margin of safety for stock prices. A period of lumpy and inconsistent economic growth lied ahead, I opined -- one that would be difficult for investment and corporate managers to navigate.

As stocks corrected, slowly at first and then with greater tenacity, I have recently expressed the view that the equity market was beginning to take a path of fear rather than traversing the path of fundamentals. Many of my concerns have been now adopted in the consensus, and, in reaction, share prices are now overshooting lows that I had expected to be supported by conservative but elevated and reasonable profit estimates.

Though the market's price momentum (the voting machine) is horrible, valuations (the weighing machine) are compelling, representing the classic conflict between the trader and the investor.

It is important to recognize that, notwithstanding the yearlong rally from March 2009, stocks have been stagnant for years. (The S&P 500 is now back to levels seen in late 2001.) So, as an asset class, stocks were never stretched to the degree of other asset classes -- commodities, private equity, residential and nonresidential real estate were all lifted to multiple-sigma events.

I do try to remain realistic and recognize many of the reasons for the lack of progress in equities in nearly a decade. Some discount from historic ratios seems appropriate given the reality of the current and prospective cycle. Most notably, taxes are rising, fiscal imbalances are large and unprecedented, there is an absence of drivers to replace the prior cycle's strength in residential and nonresidential construction, the tail of the last credit cycle remains long during the current deleveraging environment, and we have remarkably inept and partisan politics.

These factors, now increasingly accepted by many, will serve to cap the upside of equities but not preclude a healthy advance, as, with an 8.8% earnings yield against a 2.95% return on the 10-year U.S. note, the corporate profits/interest rate differential is among the widest in decades. (The same favorable comparison applies to stocks vis-a-vis investment-grade bonds.) In other words, the U.S. stock market's P/E multiple of 11.5 times compares quite favorably with a U.S. bond market's P/E multiple of over 33 times.

Interest rate indicators are mixed in terms of their growth message. Though the absolute level of treasury and investment-grade yields indicate less than 1% real growth, the Fed's own model indicates less than a 5% chance of recession, and the shape of the yield curve points to continued growth.

My baseline expectation is that, despite the hyperbolic dire market warnings and the admittedly poor price action in the markets around the world, the domestic economy is simply decelerating from a V-shaped recovery toward moderate expansion.

Though a further drop in stocks will take more of a bite out of consumer confidence and spending, I continue to expect corporate profits to remain high, and, despite the current economic soft patch, I see little to alter my expectations, as companies successfully navigate an environment of relatively slow growth with productivity gains and a tight lid on costs.

I still see S&P earnings approximating $90 a share in 2011, slightly better than 2.0% economic growth (in the second half of 2010 and for all of 2011) and steady jobs creation.

U.S. stocks now sell at only 11.5 times vs. a multi-decade average of 15.3 times and at over 17 times during comparable periods of quiescent inflation and interest rates. By contrast, at 1,020, the S&P appears to be discounting slightly less than $70 a share in 2011 S&P profits, approximately 0.5% economic growth and some job losses.

Stated simply, expectations for the economy and markets are now reduced and are now more reasonable.

A Positive Word for Housing

The recent data on sales activity confirm my concerns regarding housing. This weak housing data has been a clarion call for economic bears, but, again, I am adopting a variant view on housing.

I see latent demand and a number of other pro-growth factors coming to the support of housing in 2011.

Barring a flood of shadow inventory coming out, the residential real estate industry's outlook for next year has improved, reflecting record-low mortgage rates, a multi-decade improvement in affordability, a widening benefit of home ownership vs. renting, dramatically lower home prices compared to 2006-2007 levels and the underproduction of new homes compared to household formations.

It is time for our executive and legislative branches to step it up.

While I recognize this might be hopeful thinking, as we move toward midterm elections in November, the chances of thoughtful, innovative and market-friendly fiscal policy initiatives could brighten the outlook for economic growth in 2011-2012.

Stocks are just as cheap today (if not cheaper) as they were when Warren Buffett penned his editorial in October 2008.

In a New York Times op-ed on Oct. 16, 2008, Warren Buffett said to "Buy American. I Am." At the time of that column, the market looked as broken as it does today -- share prices have fallen seven consecutive days.

Last night, the S&P futures were down by 9.50 -- they were up this morning by a similar amount!

While equities took another leg down as the financial crisis spread, the S&P 500 ultimately rose by over 30% above the level of the Oracle's editorial.

In October 2008, the S&P stood at approximately 940, within 10%, or only 80 points, from last night's close.

I attempt to make the case that we have been traveling the path of fear, not on the path of fundamentals.

From my perch, stocks are just as cheap today (if not cheaper) as they were when Buffett penned his editorial.