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Market Shadows: Group of writers and investors: Paul Price, Lee Adler, and Ilene.
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Market Shadows & Cycle Editing
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Market Shadows
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  • Not Done Rising, But Night Will Come

    Read: MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come

    This week:

    Event Horizons: Not Done Rising. Market's going up, till the end of April. Then we'll reassess.

    Market Forces: Lee Adler's composite liquidity indicator keeps going higher: Cis Bam! Fed Drives Massive Liquidity Surge, Treasury Says Thank You Ma'am.

    (click to enlarge)

    Value Exploration: Paul Price's Virtual Value Portfolio (stocks) is almost filled up, so we sold some PUTS in our Virtual Put Selling Portfolio.

    Glimpse into the Future: Bloomberg Reports Biggest Story of All Backwards As Fed Blows Dangerous Deposit Bubble.

    (click to enlarge)

    Tags: CAT, LTM, LIFE
    Feb 25 12:17 AM | Link | Comment!
  • Telling Tuesday – Earnings Season Is Upon Us!
    Telling Tuesday - Earnings Season is Upon Us!

    By Phil of Phil's Stock World

    I love earnings season!

    As a fundamentalist, it's a time to go over the data and get a better picture of how these companies we invest in are doing. How each sector is performing gives us a clearer picture of the overall economy and, of course, there are tons of quick-trading opportunities as those crazy speculators are willing to pay us huge premiums on both sides of any bet we're willing to take. We just have to play the role of bookies.

    Take AA, for example. It reports this afternoon. Although the stock is just $9.10, we can sell the Jan 2015 $7 puts for $0.80. That would, at worst case, put us into the stock at net $6.20, which is a 32% discount to the current price. In fact, if we're willing to risk owning AA at net $7.70 (still a 15% discount), we can buy the 2015 $7/10 bull call spread for $1.50 and now we're in a $3 spread that's already $2.10 in the money for net $0.70 (because we sold the Jan 2015 $7 put for $0.80 along with it). Our maximum gain with AA at $10 in Jan 2015 is $2.30 but that's a solid return on our money. (There is also a net $0.70 margin requirement according to ThinkorSwim). If you REALLY want to own AA for net $7.70 as a long-term investment - there's not much downside.

    I love trades like this on blue-chip companies. Earnings tends to pump up the prices you can sell puts and calls for, so it's a great time to take advantage and, as I'm reviewing the Income Portfolio for our Members, we're actually finding quite a few new long-term entries just like AA, which I've highlighted in blue under each relevant review.

    On ALU, for example, although we've already made 166% off our initial entry, we still have another 38% to go through the end of the year. While 38% sounds very dull compared to 166% - it's so deep in the money now that it's attractive as a new trade - even with the lower rate of return. I had mentioned our ALU play in our Morning post, on October 18, when the stock was still $1.10 (now $1.73) yet there are still people who don't think it's worth less than $2 a day to have our morning posts delivered to their Inbox every morning before the market opens

    (click to enlarge)

    We're actually going to do an experiment this year and set up a virtual portfolio for the picks I make in the morning posts. It will be tracked on an independent site that people can follow so, hopefully, we can get the great and powerful Mark Hulbert to rank us, as we'd be right near the top if he did. That would be great exposure for our newsletters (try here).

    We have asked to be ranked before, but no luck, so we'll do a little self-promotion this year for the PSW Report (our twice daily Emails with site access), Stock World Weekly (our weekly, executive review of the markets) and Market Shadows, which is a new report we send out to Report and SWW subscribers, sort of weekly.

    Our indexes are still wriggling around between the 4 and 5% lines we laid out last week at:

    • Dow: 13,319 & 13,447 (finished 13,384)
    • S&P: 1,442 & 1,456 (1,461)
    • Nas: 3,028 & 3,056 (3,098)
    • NYSE: 8,580 & 8,660 (8,636)
    • RUT: 858 & 866 (875)

    INDU WEEKLY So we still have 3 of 5 of our indexes over the 5% lines but those are previous spike lows, not our longer-term 5% lines, where we're waiting for the Nasdaq to confirm a move up. The Dow is still seriously lagging and has yet to cross over its Must Hold line at 13,600 (see Dave Fry chart), which was our problem all of last year. It at least signaled the big drop in October when the Dow failed right at that line. That means we're going to have to take it very seriously but we're currently hoping the 3rd time will be a charm. The RUT topped out at 868 in September and now made it over that line, giving us hope.

    We finished off our day uncovered on our AAPL longs as we got a dip right to our $513 target (again, the 5% Rule rules!) and finished right at our $523 target so now we're looking for $531 this morning. Another failure there is going to lead to at least some partial covers on both AAPL and the Qs. (For more on Apple, read here >)

    Treasury has some short-term notes to pawn off today and we're not expecting any trouble there but tomorrow is a 10-year auction and Thursday is a 30-year auction and they are going to be tough sells, so expect a bumpy ride. There's also an ECB meeting this weekend so more madness from across the pond.

    MON had earnings this morning and knocked them out of the park with a .25 beat at .62 (67%) and a 10% beat on revenue, just shy of $3Bn. MON also raised guidance to $4.40 per $96 share for 2013 and that's got a good chance to push it over $100 this morning, where it will probably make a nice short. It's a bit stretched with a forward p/e of 22.7. If you want a real bargain - BA had an fire on a 787 and should be down around $75 again, where we can look to sell 2014 $55 puts for $5 for a ridiculous net $50 entry. Maybe we can get $10 for the $70 puts and risk a net $60 entry in the Income Portfolio - we'll decide later.

    YUM is also getting crushed after serving contaminated chicken. It issued a warning that same-store sales will be off by 6% this Q, but it had already forecast a 4% hit and has held $62 on several occasions. This could be a good time to take advantage of a cheap entry, selling July $62.50 puts for $4 or maybe $5 if there's a good dip - just taking advantage of bad news ahead of earnings. The 2015 $50 puts can be sold for $5 for a net $45 entry (30% off current price which is already 15% off the pre-news top at $75). TOS says the net margin on that is just $5 so you either make a 100% gain on margin in 24 months or you own YUM at it's lowest price since 2010.

    *****

    Click on this link to try Phil's Stock World FREE!

    Jan 08 4:09 PM | Link | Comment!
  • The Trouble With Tech & The Dethroning Of Darlings

    The Trouble with Tech & the Dethroning of Darlings

    By Ilene

    Sometimes, an investment strategy is more logical than successful in practice. For example, 10 years ago, investing in the personal computer space seemed like a great way to profit from progress. The three industry leaders, Microsoft (MSFT, $26.69), Intel (INTC, $21.25) and Dell (DELL, $11.06), all had promising future.

    Paul Price (at Real Money Pro, subscription required) calculated that the 10-year EPS for MSFT, INTC and DELL grew by 180%, 144% and 62.5% respectively. Dividends increased from little or nothing, to 2.9% (NASDAQ:DELL), 3.4% (NASDAQ:MSFT) and 4.3% (NASDAQ:INTC) over the same period.

    These tech companies did well, but their share prices didn't closely reflect the growth in earnings. The P/Es got compressed. While Intel and Microsoft showed "moderately positive total returns," Dell dropped 60%. Paul determined that had we bought equal dollar weights of all three, we'd have less value now than when we started in 2003.

    Charts by Paul (click on to enlarge):

    clip_image001

    clip_image002

    clip_image003

    As Paul also noted, "Other former technology high-flyers like Sony (NYSE:SNE), Panasonic (PC), Nokia (NYSE:NOK) and Research in Motion (RIMM) have been pretty disastrous in recent years as well."

    Apple (AAPL, $523), on the other hand, has performed spectacularly well, up until several months ago. For those who bought Apple during the past year, it's a mixed bag. With Apple trading at around $523, buyers near the 52-week low ($419) are up around 25%. Those buying near September highs ($705) are down around 25%.

    AAPL 10-years (weekly)

    While AAPL's share price is high, its trailing P/E is only 12, reflecting skepticism regarding its future growth rate. Ten years ago, MSFT, INTC and DELL traded at P/Es of 25 to 30. Now their P/Es are near 14, 7 and 9, respectively. This P/E compression is typical of tech stocks as a company transitions from a growth to a "mature" company.

    Joshua M. Brown described the situation in December:

    "In the past week alone, Apple's seen $38 billion lopped off its market cap. With the stock closing at $509 yesterday, it's lost 200 points per share from the September high or $180 billion in total market cap. To put that into perspective, $180 billion is one McDonalds plus one Disney. It's Nike plus Starbucks plus Ford Motor plus Time Warner. This is a demented amount of lost capitalization for such a short period of time and in so healthy a company.

    "The sell-off has been alternately explained as a tax-gain harvesting thing ahead of the Cliff (when it began selling off it was up 50% on the year and it's gained 8000% over the past decade). This morphed into concern over Samsung's continued market share gains which this week morphed into concern over a chilly reception for the iPhone 5 in China. And without a doubt, there are people who are now selling it for no specific reason; they're just getting out because everyone else is getting out...

    "In the first half of 2012 it was the must-own stock, money managers had no shot of outperforming the benchmark minus an overweight to Apple. In the second half, this has completely reversed itself. The darling of summer is the pariah of the holiday season.

    And now everyone who's associated with it is licking their wounds. I suspect the stock has to make a trip below $500 here, if only to test the depths of the sellers' desperation to be rid of it. The UBS analyst Steve Milunovich, whose target has declined to $700 from $780, has suggested that the shareholder base will now transition from growth guys to value guys. If he's correct here, that transition takes a long time - years, I've seen it at work." (Apple Cloverfield, my emphasis)

    Paul noted that while MSFT, INTC and DELL may have provided ample trading opportunities during the past 10 years, they delivered poor to mediocre returns for long-term investors. Regarding Apple, he warned, "Technicians and short-term traders should welcome Apple's day-to-day volatility. Those seeking safe and predictable total returns should take Apple's well-publicized 'bargain' P/E as a warning flag."

    So will AAPL turn into just another trading vehicle while it sinks to an inevitably lower price range?

    In Apple Price Target: $50 Stock By 2016, EconMatters argues that Apple shares might fall to $50 for numerous reasons:

    • iPhone not the best anymore
    • Competitors closing in
    • Law of diminishing returns
    • Overvalued market cap
    • Product cannibalization
    • Crowded trade
    • Hypothetical new products, e.g. an iToilet, could flop
    • End of cheap money from the Fed

    "The numbers just don't add up for what is essentially a glorified hardware provider... It may be a creative and stylistic device maker, but in the end, it is in an industry exemplified by compressing margins and prices.

    "In other words, the technology industry is a genre where prices and margins historically compress once new technology is introduced and becomes adopted by the masses, unlike education or healthcare where prices continue to escalate higher...

    "But mark my word, there may be earnings surprises, and good quarters along the ride, but every jump in the stock will be sold into heavily, and the stock will continue to put in lower highs and lower lows as margins compress, and investors look for better opportunities in other areas.

    "Eventually $400 appears in sight, then $300, $200, $100 and my target of about $50 a share as the company reaches the Microsoft, Dell, Hewlett-Packard, and Intel phase of a maturing Tech Company. Apple better have a hefty dividend by then or $50 will not be the bottom for this aging dinosaur."

    Apple Inc. faces many company-specific challenges in the future. However, a $50 target seems way too low. The company has about $31 per share in cash and no debt. It's growing earnings twice as fast as the rest of the S&P and pays a 2% dividend. While Apple is probably transitioning from being priced for growth to being priced for value, it's not likely that it will run through its cash, lose its entire market share, or otherwise implode. The liquidity injected into the markets by the Fed is also not apt to dry up any time soon.

    As Joshua Brown pointed out "Momentum works both ways and the trend has been a vicious one. The technicians won't touch it here on short-term time frames...and the growth-at-a-reasonable-price (GARP) gang is already all-in, they've been in and probably cannot buy much more unless they take in more dollars."

    Our bottom line: AAPL has detached from trading on fundamentals in the near term, and as such is best left to the high frequency traders.

    *****

    Special offer from PSW: Click on this link to try Phil's Stock World FREE!

    Tags: AAPL, INTC, DELL, MSFT
    Jan 08 2:57 PM | Link | Comment!
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