David Lentz

Options Trader Friday Outlook: Up, Up and Away

There is a chasm between those who apparently believe that the turbulence of the recent past was a "random storm", turbulence in the dynamics of market capitalism, and those who believe that there were specific practices (mostly corrupt, all insanely risky) followed by the larger players in our markets. Whichever is correct, there are consequences.

The United States of Bananamerica is now saddled with a mountain of debt that is simply unbelievable to those who understand what numbers with 12 zeroes before the decimal point imply. Unemployment seems to be fixed at the current levels for several years to come -- no one can truthfully point to a date when the number of jobs will increase, as a declining number of jobs has been our national trend for many years now.

And IF it should be the case that this recent turbulence was due to specific causes, and NOT "just a random fluctuation in the markets", what has changed to prevent the exact same thing from occurring next year, next month, next week, or on Monday? Have the banksters pulled back from the brink and are now using smaller amounts of leverage? Nope. Are they shying away from the ultra-high-leverage CDS casino? Not a chance -- they are rolling the dice to gamble their way out of their pit of toxic losses. Have they at least brought compensation in line with performance? (Don't make me laugh)

In a consumer-driven economy, how does it manage to grow when unemployment seems anchored at the current levels for as far as the eye can see? When residential mortgages continue to be devoured in a firestorm of foreclosures, that the goobermint seems to have not the slightest inclination to address? And how are small businesses, the bedrock of our commercial economy, to survive when CRE has a problem similar to the residential real estate markets, and they are unable to pry operating capital loose from the grip of the banksters?

None of this indicates in any what, shape or form that traders cannot manage a decent living. Just don't expect a rip-roaring bull market that has any degree of momentum or underlying substance to it. Things can and will turn on a dime.

General Electric Moves On Down the Largest Company List

An interesting additional thing to have shown would have been the percentage change in their market caps. Without looking, I'm fairly confident that the market cap of every company listed is smaller today than it was a year ago.

If one looks at these in terms of industry groups (financials, manufacturing, consumer staples, etc), there is a clear rotation. Again, this isn;t exactly news either, but it's a nice way to quantify the sector rotation.

Awaiting Apple Earnings and Guidance

One last thing when contemplating taking Apple private -- there are not many investments for that amount of money that return in the range of 25%-30% (Reuters reports Apple's return on equity to be 27% for the last 12 months).

Awaiting Apple Earnings and Guidance

The precise wording on forward guidance will be really interesting. I suspect it is being sliced and diced a thousand different ways right now. The other thing that will be interesting is whether or not Steve Jobs attends the earnings webcast -- usually he does not, unless there is something that is viewed as of major strategic importance to the company to be discussed.

If the stock were to fall to the $60 regime, there is the potential of taking the company private via a debt-leveraged stock buyback scheme or (because debt is pretty hard to come by in this economy) via a consortium of well-heeled investors + the (in a quarter or two) $30+B in cash within the company. I can see Steve Jobs, Bill Gates, Larry Ellison, and other Silicon Valley billionaires kicking in enough to do this.

Apple is a tremendous generator of profits, and would be an outstanding thing to have as one's private company in an uncertain world. Seems like billionaires, watching their equity holdings shrivel and wither, might want to take cheap, profitable companies private. Maybe even Warren Buffett might overcome his aversion to tech companies if the price was right.

If the economy ever improves, they can always sell them back to the public at huge profits in a future IPO.

Awaiting Apple Earnings and Guidance

Roger -- I believe the earnings announcement is scheduled for 10/21 -- that's about a week after the expected/rumored new product intro on 10/14.

Awaiting Apple Earnings and Guidance

papita -- if you think that the market will bottom before Apple reports, then you have absolutely no idea about what is happening in the global economy.

How many people will be buying Macbooks and iPhones if the unemployment rate is 25%? How about if the credit card companies fail?

In today's WSJ, the front page story is that one mortgage in six is under water in the USofA. The state of California is requesting a bailout from the federal government. The national debt has jumped up by about 50% in the past couple of months, after doubling over the past 8 years. There is a very real possibility (possibility, not probablility -- I hope) that the United States might suffer economic collapse, and idiot senators and representatives are throwing hundreds of billions of additional debt on the bonfire.

And you think that the markets will bottom in the next couple of weeks?

Get real.

Awaiting Apple Earnings and Guidance

Zach, what do you think the chances are of Apple announcing a stock buyback program, to deploy some of that huge cash cushion they have and support the stock price? It would seem to be a desirable thing to do, not only for the stockholders, but to support the compensation and bonus programs for the employees.

I expect an increasing number of companies with ready cash and good profits to be weathering the storm this way. Several already are.

How would a significant stock buyback program (say, $15B) at Apple change your thinking?

Options Trader: Friday Outlook

The thing that is most worrisome is that the powers-that-be are seemingly running helter-skelter, pulling one scheme after another out of ... in order to deal with the crisis of the moment.

I suspect that a lot of these "fixes" are simply triggering the next crisis.

In the end, we will be unable to avoid the consequences of decades of fraud and abuse, mainly in the mortgage markets, but also in the broker-dealer community, the banks, and who knows where else.

I suspect that the bottom lies ahead. There is no value in this market, only chaos.

Earnings Power vs. Investor Sentiment

Nice article, sparking substantial discussion.

The fly in the ointment, as pointed out, is the fallibility of the "consensus estimates" of future EPS values. If they were at all reliable, stocks would never stray from those lines.

But in truth, they're ALMOST ALWAYS low when earnings are doing well, due to the intersection of the tendency of companies to lowball guidance, and the tendency of analysts to lowball estimates (it's much better for an analyst to make estimates a little under actual reported earnings than to err on the other side), and they're ALMOST ALWAYS high when earnings sag, as the causes for sagging earnings are normally not predictable and tend to arrive as a surprise.

Picking localized highs/lows to sell/buy at turns out to be usually no better than throwing darts. I find that if I track PE vs time for any given stock, one can see when it is historically on the high side, and also when it approaches the lower range of historical PE fluctuation. It can hug the upper/lower end of the range for quite a while, but usually in bubbles or recessions, there is often a distinct spike that makes a reasonable point at which to buy/sell with a bit lower risk over a reasonable time period (1-3 years) that the decision will work out.

If you're a day trader, with short time horizons, then none of this matter to you, as your universe is a matter of hours/minutes, not weeks/months/years.

That's about as reliable a thing as I can find.

Looking forward, the possibility of a significant recession with rising unemployment might make for a buying opportunity in AAPL, with it declining to something around 130 as the water goes out of the stock PE pool, and all the boats go lower, NO MATTER WHAT THEIR EARNINGS ARE DOING.

But even if you bought it on New Year's Eve for about 200, you would likely be profitable within a year, and making respectable profits in a couple of years.

Of course, if you bought in near 130 at the bottom of this hypothetical recessionary blood-letting, ... well, in that event you should send me some money to celebrate on 12/31/2008. Good Luck.