Stories other than the budget battle in Washington and $110 oil will likely move the markets, or at least some stocks, this week. In this article, I review what will make news on Monday and throughout the week, offering thoughts on how investors could play the headlines.
The Cable Television App War Heads to Court
On Friday, Viacom (VIA) and Time Warner Cable (TWC) filed separate lawsuits in U.S. District Court in New York. In a nutshell, Viacom doesn't believe Time Warner has the right to stream Viacom programming to Time Warner Cable customers' iPads. TIme Warner Cable filed suit seeking a declarative judgment that would allow them to stream Viacom networks "to any device in a customer's home," according to the Wall Street Journal.
Investors should follow this and related issues closely, as the outcomes could prove transformational. We live in exciting times vis-a-vis how people consume information and entertainment. I have made it clear whose side I would testify for. As far as Time Warner Cable and other aggressive cable companies such as Cablevision (CVC) are concerned, an iPad is just another incarnation of a television screen.
While I admit that's a slick and somewhat slippery argument, it will win out one way or another, even if a judge initially shoots it down. Many consumers want the ability to view programming on any device. Disney (DIS) jumped on board last week, allowing some cable subscribers access to live ESPN programming on Apple's (AAPL) family of gadgets. Home Box Office followed through with its plans to offer current subscribers online access to its programming.
Ultimately, I think all parties will win. The cable companies and networks like HBO will free their pay-subscribers from the traditional TV set at no cost and allow non-subscribers to pay for online and mobile access. The content providers will give in. They'll sit down and negotiate a deal where they get a share of some new advertising scheme hatched specifically for this "new" form of content distribution. Because they're the ones with the foresight in this dispute, I say go long the cable companies.
The Electric Vehicle Market Continues to Emerge
While this story relates to $110 oil, I think it has a synchronicity of its own working. In addition to the rising price of fuel, things are happening, independent of one another, that bode well for the adoption of electric vehicles (EV).
For instance, NRG Energy (NRG) appears committed to rolling out its eVgo high-speed EV charging stations. It used the weekend of the Dallas Auto Show to introduce the product at a Walgreens (WAG) in the city. If the initial launch in Dallas/Fort Worth and Houston goes off well, the company intends to expand to other markets. NRG's pilot program comes in addition to other efforts across the nation by both public and private companies. As charging stations proliferate, another obstacle to making EVs just a bit more mainstream gets stripped away.
While I am on board with Morgan Stanley's view on Tesla Motors (TSLA), I think the near-term play is Nissan (OTC:NSANY). At the moment, Nissan produces the most mainstream all-electric vehicle in the U.S., the Leaf. While several automakers reported strong U.S. sales in March, Nissan's 27 percent increase marked the best performance in the company's history. And like most producers, Nissan reported strong sales of fuel-efficient models and a solid response to incentives. All this traffic on the sales lots and talk about fuel economy will do is create even more pent-up demand for the Leaf.
As of this writing, you can't even get a Leaf; they're all reserved. It's not the Leaf will add much to Nissan's bottom line anytime soon, but the company has several things going for it. As mentioned, it's sales are in line with or better than the overall market's increase, the shares are oversold after the Japan earthquake, and, as far as EVs go, Nissan will be the player for the next year or two. If it increases production due to demand, look out. After that, I think Tesla makes a splash with the Model S. Really, I think both represent solid plays on the EV market for 5 to 10 years out. Nissan reports earnings on May 6th.
J.P. Morgan Reports Earnings on Wednesday
All eyes were on the big banks prior to their last set of earnings report. After most announced the reinstatement of dividends, their reports should draw scrutiny as they trickle in. J.P. Morgan (JPM) goes first on Wednesday. Bank of America (BAC) reports on the 15th, while Citigroup (C) and Wells Fargo (WFC) take stage the following week.
In all cases, analysts will focus on revenues. Banks used a bit of smoke and mirrors to report strong earnings last quarter. They were able to tap into money they had set aside to cover bad loans. As the ability to manipulate these funds decreases, banks must generate profits by handing out more loans and collecting interest and fees. With rates low and fees under regulators' microscopes, that might not be easy. Heck, Citigroup turned out a bad report last quarter, even with the ability to shift around its reserves.
As for J.P. Morgan, it has a lot to live up to. The bank's 2010 fourth quarter beat Wall Street estimates. Earnings per share equaled $1.12 per share, up from $0.74 cents a share in the same year-ago quarter.
Google Reports on Thursday
As one of the technology/Internet companies seemingly prepared to take over the world, investors tend to listen when Google (GOOG) reports earnings. I wouldn't call the company a fair barometer of the market's health, however. Google beats to its own drummer; for example, what they report certainly doesn't seem to predict good things from Yahoo! (YHOO).
Investors will focus on quite a bit, but I think two things stand out. First, this will Larry Page's first conference call back in the saddle as Google CEO. He's made some changes already, so they should be on the agenda. Second, via YouTube, Google looks prepared to fire a major salvo Netflix's (NFLX) way. It will be interesting to see how close Google plays things to its chest. Either way, Reed Hastings will be watching the webcast.
(Chart courtesy of FreeStockCharts.com)
While I expect a strong report and GOOG to continue back up past $600, anything can happen. If I were to play the earning's report, I would initiate an options strangle around GOOG early in the week. With a strangle you go long an out-of-the-money put and an out-of-the-money call. It doesn't matter which direction the stock responds on earnings, it just has to move hard, in Google's case, by a couple percent. This volatility should allow you to profit from at least one side of your strangle. For instance, using GOOG's Friday closing price of $578.16, you could open a strangle by purchasing both a GOOG April $575 put and a GOOG April $580 call. If you feel uncomfortable with April options because they expire at the end of the week, you can execute the strategy with May options.
For more on using options strangles, refer to this overview from the Options Industry Council.
Disclosure: Author is short NFLX via a long position in NFLX put options.