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.

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.