Wednesday, January 30, 2008

Brace for some Rapids: Amazon's Earnings Thoughts

This earning season, we have already seen the humbling of technology prodigies Apple (AAPL) and VMWare (VMW). Even Intel, the blue-chip giant, plummeted 15% after good earnings.

I think that history will repeat itself when (AMZN) releases results after the bell today.

Yes, Amazon reported the best Christmas quarter ever. Yes, with eBay changing fee structure, some big (million-dollar) salespeople may be moving accounts to Amazon. Yes, they are expanding internationally.

So what's wrong with being long Amazon now?


One benefit (at least to value-oriented investors like myself) of the recent market retraction has been a restoration of rationality. We have seen Apple's forward P/E drop from 40 to a reasonable 25. VMWare, which went into its earnings with a forward P/E of 70, was quickly humbled and delivered a 30% decline from sobered investors.

Amazon is going into its call with a forward P/E of 45. Amazon is becoming a blue-chip, mature company; no longer can it be driven by speculation. I don't believe that it'll drop 50% after earnings to join Google and Apple at a 25 forward P/E, but when a company is looking to make $1.50 next year, the shares shouldn't be sold for $75.

Analysts and investors will look at this quarter's profits and margins, and price movement may indeed be determined by that. But if Amazon fails to pump up next year's numbers, look for a healthy revaluation a la Apple, VMW, and other former high-flyers.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Tuesday, January 29, 2008

Fed or Foe?

Tomorrow, the Federal Reserve Open Market Committee (the FOMC, or simply, the Fed) will emerge from deliberation and direct monetary policy in this country.

Futures have priced in a 50 basis point (.50%) cut.

Therefore, the Fed will cut at least 50 basis points. Many market analysts have pointed out that the tail (Futures markets) may be wagging the dog (the Fed), which is probably partially true. However, at this point, both fiscal policy (taxes, etc. - determined by Congress) and monetary policy (interest rates, etc. - determined by the Fed) seem aimed to prevent recession (or a slowdown) at all costs.

Fiscal "hawks" had been concerned about inflation in the past, but it now seems that cuts in favor of economic stimulation have taken priority. Little resistance has been seen when the Fed has cut in the past; as more write-downs and bad news continue to trickle out, I don't know why opposition would materialize now.

So 50 basis points is a virtual guarantee for tomorrow's announcement, while 75 is a realistic possibility. Here's how I see the market reacting:

  • A cut of 50 basis points will be immediately disliked. Financial stocks and homebuilders may sell off. (This will be bad for me, since I currently hold Countrywide shares and Hovnanian LEAP calls.) However, I think the market will eventually right its overreaction (whether it be by the end of the day, week, or in a few weeks).
  • A cut of 75 points will please the cheerleader analysts. The market will probably finish up a few percent. The downside? Much of the gains due to the announcement of interest rate cuts may be superficial and short-lived, considering monetary policy doesn't even affect the economy for six months.
  • A cut of 25 points will be disastrous for the markets tomorrow. Even if the Fed rationalizes it with improving economic data, the same cheerleaders will boo the decision as irresponsible and unreasonable.

Since I have already mentioned them, I'll reiterate an investment idea I've made before:

Buy Countrywide (CFC).

Countrywide is set to be bought by Bank of America sometime this year. When the deal closes, investors holding CFC shares will get .1822 BAC shares for each one of CFC. As of the market close today, a share of Countrywide costs $6.31 and BAC sells for $41.94.

If the deal closed tomorrow, Countrywide would essentially be bought for $7.64 per share. Or, to look at it another way, you can buy a Bank of America share for $34.63 by buying the corresponding amount of CFC.

Of course, there is some possibility the deal won't close. However, BAC's deal terms cited only unknown, unexpected, and misleading information as a reason for breaking the deal. Countrywide reported earnings today, losing a ton of money, but nothing was surprising or misleading, and BAC said nothing about any problem going forward from this point.

Yes, there is inherent risk of owning a financial stock right now. But the arbitrage spread is still over 20%, so there's lots of money to be made in a very questionable market. If you're looking to own Bank of America over the next 5, 10, or 20 years, this may be your best opportunity.

If the Fed doesn't please tomorrow, both BAC and CFC may get hammered. It's certainly going to be a volatile few months for financials, but the reward may be worth the risk.

For my sake, and for the portfolios of millions of investors like me, I hope that the tail keeps wagging the dog tomorrow.

I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Monday, January 28, 2008

Earnings Predictions: Jan 28

The markets are teeter-tottering daily as economic and corporate data test the confidence of investors worldwide.

Coupled with Fed cuts, statements, and meetings, as well as a slew of economic data, the earnings season injects even greater unpredictability into the market.

Here's three of my predictions, justifications, and analysis for three major companies releasing earnings after the bell today.

  • VM Ware (VMW) will probably be headed lower after releasing earnings today. They currently sport a 70 forward P/E; without a major beat, Wall Street will not be able to continue to justify such a lofty valuation. Odds are, VMW may beat but fail to impress Wall Street. I wouldn't be surprised to see a 10-20% haircut if that's true; just look at Apple's fall after lower-than-expected guidance. However, if they manage to blow out and revise upward, it'll be a major boost of confidence in the economy. I think the first situation is much more likely.
  • American Express (AXP) may report a good quarter, but in their call, I bet that they cite some unpredictably in the future because of a weakening economy at home. I think AXP is a solid company that may be unfairly beaten up if the report is somewhat cautious.
  • Sandisk (SNDK) may be a bright spot in the reports today. This quarter may be good, as many flash-memory-using devises (iPods, phones, other MP3 players, etc) seemed to sell well during Christmas, but more importantly, I think they'll affirm a quickly growing demand for their memory in lots of devises. The first flash-memory-based computers are just coming out now; in three years, flash will be the standard storage medium. I think a bright future forecast will propel SNDK out of it's current undue hole.

With the possibility of cautious or negative reports from major companies, the markets may be in for a wild day tomorrow. If things go better than I expect, the case for a market bottom will strengthen.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Tuesday, January 22, 2008

Terrible Tuesday

After US Index Futures trading on global markets had priced in a 5% plunge when the markets open today, the Fed decided to try to salvage the situation by cutting rates by 75 basis points.

Immediately, futures gained lots of lost ground, as Nasdaq 100 ETF is only pricing in a mere 2% decline. (QQQQ quote taken 8:30 AM).

But was this the right thing to do?

I'm not so sure.

First, let me establish that I don't want stocks to fall. I own an Ultrashort Oil & Gas Fund (DIG), which can be seen as a hedge against oil (and the entire economy), but I am very, very long, which is clearly not the place to be right now. I'd like nothing better than to see the market go up 20% tomorrow, but for logical, meaningful, substantial reasons.

The Fed's early cut is purely symbolic, not something that will actually have an effect on the financial situation in America. Since the policy (rate cuts) take many months for their effects to be felt in the economy, realistically, waiting until the meeting to cut 75 points would have provided the same stimulus in the second half of this year. If anything, I think it may have been better to cut then - if things got even worse, then they could cut a full point without making it seem like the sky is falling.

I can't say that a decline of "only" 5% isn't bad (especially since some stocks I own, like Countrywide (an arbitrage, at this point)) were set to open down 10% or more. But global markets have faired even worse over the past two days - Indian and Chinese markets are down 10-20% since last week.

It's hard and unreasonable to tell people to do this, but if people could just act rationally, and avoid clicking "close" next to all of their positions, we'd be a lot better off. For example, I follow Activision (ATVI) and Electronic Arts (ERTS), two stocks who should have shot up after news of an absolute blowout of video game sales numbers during the holiday season. However, both were flat (or down) last week after the announcement was made, and both were/are pricing in a 5% dip today. Clearly, if we're in a recession, people are still buying Guitar Hero and Call of Duty; if anything, investors should be buying up shares of a seemingly-stable niche.

Now that the day's news (BAC's awful earnings and the Fed cut) are on the table, it looks like markets will open down about 3%. What they do during the day is anyone's guess - We could finish positive, or we could lose 10%. According to WSJ articles over the weekend, markets have priced in 80% of the impact of a recession - this potential decline today should increase that figure further. I truly believe that a recession is fully priced in; there's clearly some stocks that are still overvalued (I think that tech like Apple, RIM and Amazon are still grossly overvalued), financials seem to be fully discounted.

Barrons wrote an article about the bond issuer MBIA this weekend; they stated that the company's liquidation value is at least $30, while the stock currently trades around 8. Countrywide is being merged into BAC; the terms of the deal, which can be broken but are generally unconditional, priced CFC around $7; now, when CFC converts into BAC at .1822 shares, you're essentially buying BAC stock for $25 (instead of the market's $33) if you buy Countrywide today.

If you can stomach a short term loss, in five years, they should identify early 2008 as the best buying opportunity in years. Yes, the economy may not be great. Yes, the subprime problems are not over yet. But companies (and the entire market) are heavily, irrationally discounted, and an investor with a strong stomach will thank his nerves a year or two from now.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.


The Fed cuts rates 0.75% overnight after index futures were pricing in a 5% decline.

More to come in a full writeup on the state of the markets.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Thursday, January 17, 2008

My Economic Stimulus Plan

Later today, President Bush is supposed to discuss his plan to stimulate our "weakening economy."

His plan is likely to give money back to individual taxpayers and ease business liabilities, stimulating both consumers and industry. Bush proposed rebates of up to $800 for individuals or $1600 for families, while lawmakers wanted to lessen that amount and limit who receives it (Yahoo! Finance article).

I think that this plan is stupid.

Maybe it will help the economy a little bit if each family of four goes out and purchases four new iPhones. However, I think that a simple injection of money into the economy through intending to increase consumer spending is short-sided and futile.

Instead, I believe that the government, if they are going to aid anyone, should look at the corporations.

Over the past days, weeks, and months, foreign sovereign funds have injected billions of dollar into US corporations. Most of the major financial companies have received large investments from outside sources. Japan's major investment banks are reportedly pooling billions of dollars for investment in a struggling Wall Street counterpart.

I'm not an isolationist, but why let wealth leave our country when we could easily keep it here?

Instead of dishing out money for people to buy new purses, the government should focus on preserving stock market capital, and thus, the value of millions of individual Americans' investments.

If the government doesn't want to directly purchase equity or bonds like foreign investors have been doing, there are much easier solutions; provide long-term, low-interest loans or simply open the discount window, repercussion-free, at a rock bottom interest rate (say, 2%). However, as long as qualified financial analysts looked it over beforehand, putting $20 billion of Social Security money into Wall Street could end up being an excellent long-term investment.

If the government is still interested in helping individuals, they should help financially-responsible people who were romanced into adjustable-rate mortgages. I'm sorry, if you bought a $500,000 house on $30,000 of annual income, I don't think that you deserve to keep it. However, for someone with a steady job who just can't make the adjusted-up payments, the government could step in to help those individuals.

First, the government could work through the mortgage broker to negotiate a new rate that the borrower can pay and will still provide profit for the lender. That way, everyone wins; shareholders of the big banks (BAC, who will soon own Countrywide, etc) won't unjustly miss out on profit that was already accounted for, while individuals will face a more reasonable repayment rate.

My last article discussed how the US economy is already contracting; if it's not, it's certainly slowing down. Discussing ways to improve economic conditions is the right thing to do, but simply handing consumers a check isn't.

Help out the people that truly need help - from Joe Dirt's adjustable mortgage to Merrill's write downs, there's better ways to fix the economy than to hand me $800.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Tuesday, January 15, 2008

We're in a Recession, and on the way to $60 Oil.

As the markets continue to slide (now hitting their lowest levels in almost a year today), commentators and analysts are afraid to say "recession."

If you turn on CNBC or read a business newspaper, you'll see the terminology of choice - "possibility of recession" or "on the path to recession."

I want to be the first person (that I know of) to go on record saying this: The United States is currently in a recession.

What does that mean?

Well, if the recession started around the 2007's Q4, then we may be in for a bad earnings season. However, many of the blue-chip companies important to our markets and economy have extensive international operations, where growth is strong. (IBM pre-released that they will have a very strong quarter.) Also, a weak dollar aids companies with extensive overseas operations, so while you may not get to vacation in Europe this year, the bottom lines of many conglomerates will swell (or, at least, not crumble, if the domestic economy is weak).

Looking back, markets usually perform worst right when the economy is in recession - that may explain the 10-15% losses in major indexes over the past three months. Of course, if our markets emerge with just a 15% slap-on-the-wrist, we should consider ourselves lucky. If the markets endure another 10% haircut over the next few months, I think everyone will agree that we're in a recession even if the economic data isn't on the books yet.

What's good about a recession? It encourages competition and efficiency. One can easily argue that many of our core industries have been in a recession of their own for a while - American carmakers have been hemorrhaging money and laying off workers for years, while many mortgage and housing companies have already gone bankrupt. When industries struggle, the strong survive. When American companies and industries strengthen, they will be better suited to compete against rivals in Europe and Asia, eventually leading to prosperity a few years down the road. The "Jobless Recovery" following the recession of the early 2000's created a 5-year golden era for the American markets and economy.

Plus, another benefit of a recession will be a massive decline in the price of oil. Sure, there are fundamentals that should provide support for oil at a historically-high level, but that level is NOT $90/barrel. The price of oil is no longer driven solely by fundamentals; now, the emotion and whims of traders, coupled with news, creates buying frenzies of selling panics. If it is declared that the US is in a recession, I think that we could see $60 oil. The actual impact on the worldwide demand for oil will probably be negligible, but psychologically, news of a recession would be very significant. I wouldn't have the guts to bet against the price yet, but if we see $60 or $50, it would present a great buying opportunity.

Though things are looking grim, I'm buying. I increased my position 50% in Buffalo Wild Wings, a stock that's fallen over 50% because of one slightly week quarter. (People will eat wings even if the economy is retracting 1%/year instead of growing 2%.) No debt, lots of cash, tremendous growth, and a superior product are all reasons to invest in Buffalo Wild Wings. Check out articles in my archive; all of the analysis is still valid today.

I also bought Intel after the bell today below $20/share. It's truly a irrational world when the media focuses on a 2 cent miss instead of the 51% increase in profits. Why should a solid company lose 15% of it's value for THAT? Especially as the economy is looking grim, a show of good corporate growth should be rewarded by investors, not thrown to the curb. As long as there's nothing awful on the call, investors should hopefully start acting rationally and Intel may pop back up to it's closing level today.

So, I want to go on record making two predictions, which admittadly, may not end up being factual:

  • It will later be shown that as of January 2008, the United States is in a mild recession
  • Oil will dip to $60/barrel sometime in 2008

Bold? Maybe. Only time will tell.

I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Monday, January 14, 2008

Cover your Calls and Sleep Well.

Trying to make money in this current market is a daunting, confusing task. The S&P 500, the benchmark index representing a broad scope of the market, is down over 10% since October and over 7% since the last two weeks of December.

Are we bottoming? Transitioning to a bear market? Is this a hiccup in the 5-year bull run? I surely don't know.

But I can recommend one strategy that can increase gains, lower cost bases, and minimize losses in a volatile, unpredictable market; write covered calls.

In this market, I like to use it to enter risky positions, in essence, at a lower entry-point. Here's an example of how to do that.

A year a go, Merrill Lynch (MER) was trading at $100; today it sits at $56. You believe that Merrill is a great company, and that it'll eventually get its act together. However, due to write-downs, the continuing housing crisis, and the possibility (or probability) of recession, you don't know if this is the bottom. But you would rather enter now than miss any upside.

A share of stock can be bought for $56. You go ahead and buy a lot of 100 shares for $5600. (We're excluding commission for this exercise; if you trade at a discount broker like Tradeking, commission is negligible anyway).

Cost= $5600

Right now, a contract of January 2009 calls at the $65 strike price is selling for $5. Once you own 100 shares of stock, you can write one contract of those calls that are "covered" by your shares (hence the term "covered calls").

If you go ahead and do that, you'll take in $500 right away. You can look at this money many ways; you can think the trade like you bought the stock for $51/share, or right now, your investment automatically made you 10%.

Here's the great thing about a contract like that; it's a win, win, lose-less situation.

  • Win: Say that the economic clouds blow over, and Merrill recovers to $75 next year. Your options will be called away, and your stock will be sold for $65/share, not $75/share. However, you still made a 30% return (20% stock move plus initial $500 credit for calls), only missing out on another 5% of upside.
  • Win: Merrill is approximately flat in 12 months. With the stock at $57, your gains would have been negligable just holding the stock, but by selling calls, you made a handsome 10% as the stock price remained stagnant.
  • Lose, but less: OK, this isn't the bottom. Merrill is $44 next January. But because you sold calls, taking in $500, your losses were less extreme than if you hadn't done so.
As you can see, the only bad thing about covered calls is that it can limit upside potential. However, as long as you have extra cash (or margin in your account), you can simply buy more shares if you like the company and your shares are going to get called away.

The amount of money you can take in depends on expiration and strike price. Sticking with this MER example, if you think that performance will remain poor, you could write Jan 2010s @ $65 strike and take in $8.30/contract, or take in the same $5/contract for the $75 strike price.

You can, of course, write covered calls on positions you already own, or as I displayed, they can be used to open new positions, too. Since the only shortcoming is the limitation of upside potential, it's a great time to write calls now as the market looks like it may move sideways, if not worse, in the near future.

I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Friday, January 4, 2008

Chipotle falls, Toyota undervalued

A few months ago I wrote about the ridiculous valuation differences between Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD). I chose to buy BWLD, for which I have paid dearly; up until these last few days, an investment in Chipotle would paid off handsomely.

However, over the past few sessions, CMG has shed over 15%, with an awful 10% loss today. These huge losses haven't even been due to earnings warnings or other bad news; simple negative market sentiment has sent investors running.

I'm disappointed I missed out on $20 of negative downside; over the past few weeks, I have been eying CMG as a potential short. (Well, I use puts, because there's less downside potential, greater upside potential, and less initial investment).

Last quarter, Chipotle reported fair earnings, with good growth in new stores. However, there were some cautious indicators, like slowing or stagnant same-stores sales growth.

Due to a slowing economy, higher prices of raw materials, and a continuation of the trend seen last quarter, I expect CMG to post lackluster earnings when it reports within the next month or so. I was waiting to purchase puts so I could get February contracts with less of a time-value premium, but unfortunately, I missed out on a lot of downside movement.

I don't know what CMG will do in the short term. If the market pops 2% on Monday, CMG may bounce up 5% along with it. If market sentiment continues to be negative, CMG may still slide. Either way, my six-month forecast remains very negative. CROX lost half of its value after a mildly disappointing quarter; CMG could be no different later this month.

Meanwhile, I don't understand why Toyota continues to slide sideways and downward. Just today, Toyota surpassed Ford in U.S. auto sales, and it will likely surpass GM in worldwide global sales this year. Toyota is a huge company that's still growing, in established markets (like the US) and emerging markets (China, etc.). Sure, a weakening economy may hurt Toyota, but I think that it's time for shares to start appreciating in value.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Wednesday, January 2, 2008

Is the Worst over at Syntax-Brillian?

I think so.

Syntax-Brillian (BRLC) is still over 60% off of its all-time highs reached one year ago. 2007 was certainly an awful year for any stubborn BRLC long. (Thankfully, as I've noted before, I was on the sidelines for most of the decline.)

I jumped back in with long stock and call options when the stock was around $2.75 just about one week ago. I figured I'd give BRLC one last chance.

There's a few reasons why I think now is a fine time to buy back in. As I've previously posted, there was some speculation that there could be a buyout or merger that may affect BRLC, whether with Vizio or another company. Those whispers have settled down, but since the stock price is so depressed, it's still an attractive takeover target.

The stock is so cheap. It's current price/sales ratio is just .4 - compare that to the 14 p/s ration of Google. The unbelievable p/s ratio shows that the stock has plenty of room to run. Anything under 1 is dirt-cheap, while a high-growth stock like BRLC can have an acceptable ratio with a low-single-digit figure.

During late 2007, the stock price was probably depressed even further by tax-loss sellers. During December, lots of the negative and sideways price action was due to these chronic sellers.

The price of BRLC shares have started to tick up in the last few sessions. Coming off of a low around $2.50 on December 19th, Syntax shares are up over 20%. Each of the last six sessions have been positive. It's clear that this is BRLC's most significant, long-lasting upward action since it began its final downward slide this fall. Excluding the $1 one-day bounce in October, there had been no serious upward action whatsoever. But now, the stock has strung together a week of gains and just crossed through the 50-day moving average. Based on a history of BRLC, seen below, this may be very significant.

BRLC has clearly had its ups and downs over the years. But one pattern is undeniable; once BRLC breaks through the 50-day moving average (the blue line) after a long drop, it doesn't look back. In both the spring of 2005 and summer of 2006, BRLC lost much of its value, crossed the 50-day, and went on to set a new all-time high. I'm not going to start saying that BRLC will be at $15 in three months, but this does seem to signal the end of the bearish cycles.

All of that is just tecnical, too. It ignores the chance of BRLC blowing away holiday sales statistics or any other positive news. So there's many reasons for BRLC to trek up from this point; cheap valuation, buyout potential, positive earnings potential, the change in charting indicators, and the fact that it's still down so significantly from its high. BRLC had been tossed around (rightly so, at some points, when management failed shareholders) for a long time; now, it's time to turn its act around.

I can see BRLC doubling in 2008. Is it guaranteed? Certainly not. Is it possible? All signs point to yes.

I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

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