New Low Observer's  Instablog

On our November 2, 2012 Nasdaq 100 Watch List, we said the following of NetApp (NTAP)(found here):

"On January 12, 2012, we assessed the points at which an investor could take advantage of the decline of NetApp (NTAP). At the time, NTAP was trading at $36.85 and we suggested that the stock would be a good buy at $30 and $23.47. Afterwards, NTAP increased +34.5% to the March high and the fell below the Jan. 12th price. After falling slightly below the $30 level, NTAP rose +20% to the September high. Anyone who has not participated in the $30 purchase price can do so at the current price and potentially at the $23.47 level."

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With a gain of +38% in 6 months, exceeding the historical average for stocks over any timeframe, we recommend selling NTAP. Those wishing to continue to participate in any additional upside should only sell the principal portion for a reasonable "risk free" return.

This year, the New Low Observer team (including our ten year old daughter) went to Omaha, Nebraska for the 2013 Berkshire Hathaway shareholder meeting. The following are some observations based on the comments of Warren Buffett and Charlie Munger:

According to Buffett, Burlington Northern Santa Fe is running on all cylinders. Carloading of freight for BNSF exceeded that of the top four competitors in the industry combined. It could not be ignored that carloading is a metric for determining the health of the rail industry. In regards to getting oil from remote regions, oil travels faster by rail than by pipeline. Although this point was reiterated in the meeting, there was not enough explanation of why this is the case. Some possible explanations were that pipes require constant maintenance. Upkeep of the pipeline requires stopping the flow in order to repair the system.

A shareholder asked about book value per share growing at less than average as compared to the price of the S&P 500, to which Warren said [paraphrasing]: "…the last ten years have not been very good, 2013 will be the first 5 year period Berkshire has fallen short of the S&P 500 [index]. Berkshire Hathaway is likely to do better in down years rather than up years. Book value is the best 'approximate' value that is closest to intrinsic value." Munger [paraphrasing]: "…of course, annual gain is going to be a little less than before, because of the substantial growth in prior years." On the topic of Berkshire's book value, We found this little tidbit in the 1979 Letter to Shareholders that is of critical concern on the topic:

"If we should continue to achieve a 20% compounded gain - not an easy or certain result by any means - and this gain is translated into a corresponding increase in the market value of Berkshire Hathaway stock as it has been over the last fifteen years, your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax any time you wish to convert your twenty percentage points of nominal annual gain into cash.

"That combination - the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an "investor's misery index". When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity." (source: Buffett, Warren. 1979 Berkshire Hathaway Letter to Shareholders. March 3, 1980. page 3. http://www.berkshirehathaway.com/letters/1979.html.)

It seems that the shareholder's concern about the failure of the book value to keep pace with the price of the S&P 500 in the last 10 years isn't as significant as the threat of a high inflation period. Buffett closes on the topic with the following thought:

Continue reading...

Disclosure: I am long BRK.B.

On May 8, 2013, Apple (AAPL) reached as high as $463.84 on a closing basis. Since that time, Apple has been in a declining trend. The failure of Apple to materially exceed the previous intermediate peak of $463.58 could indicate that there is significant downside risk.

For now we believe that Apple has established a "line" where either accumulation or distribution of the stock is taking place. The failure to exceed the $463.58 indicates, for now, that the next technical test is at the $420 level.

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One of the primary issues with the current run from the April 2013 low is the fact that trading volume has been in a declining trend. Declining volume with a rising price is a very unhealthy situation. Typically, falling volume in the face of a rising price is resolved with rising volume and a declining price.

In the chart below, the last two instances of rising trading volume resulted in exceptional price declines. (Keep in mind that these rising volume occurrences have taken place within a -50% decline in average trading volume since the bull market began March 2009.)

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We'd be cautious about the prospects for Apple in light of the fact that the stock appears to be on the cusp of a rising trend in the trading volume which happens to coincide with a declining price.

After already falling to our $420 conservative downside target, a decline below $384 would mean that Apple could decline to our extreme downside target as indicated in our April 17, 2012 article found here (http://seekingalpha.com/article/503161-considering-the-downside-prospects-for-apple).