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Want to Buy Apple Without Chasing? – Some Possible Entry Points (AAPL, SPY, QQQ)

February 15, 2012 Leave a comment

Since blowing out earnings expectations on January 24, Apple, Inc. (AAPL) has been on a tear, bringing the S&P 500 (SPY) and NASDAQ (QQQ) along for the ride. From the pre-earnings closing price of $420.50 on January 24th, to today’s intra-day high of $526.29, Apple had gained a stunning 25% in just 16 trading days.

Unfortunately, this quick run up has made it hard to begin a long position in the stock because of the complete lack of pullbacks other than the 50% long Fibonacci extension at $445 that traded during the first day after earnings (shown Here on a 90 day, hourly chart). The other issue with Apple’s recent move up past the $500 milestone is that it has attracted an enormous amount of momentum-oriented investors who have seen the move up that has already happened, and are now chasing high’s in hopes of catching some of the move. I can’t predict when the momentum will run out, but I can be reasonably sure that the momentum investors will dump the shares as quickly as they bought them once the upward trend begins to fade. Whether you are a value investor or technically-based trader, Price matters and that is why it is so important to remain calm, disciplined and patient when buying into even the highest quality of stocks.

The charts below show Apple’s 20 Year Weekly chart (logarithmic), 3 Year Daily chart (linear) and 90 Day Hourly chart and I will discuss potential entry points for each time frame. I also want to be clear before beginning that just because the safest entry points are below where Apple is currently trading, I am not at all recommending a short position and I personally would never consider it due to the high quality and debatable undervalued nature of the stock. If Apple is in trouble, the S&P 500 would likely also be in trouble and I’d much rather short SPY or by an inverse ETF.

AAPL 20 Year Weekly Chart (Logarithmic):

(Click for Larger Image)

You can see from this chart that Apple has sold off every time it ran into this resistance line going all the way back to 1994. This time might be different but it certainly warrants caution. So let’s take a look at some potentially safer entry points for longer time frame investors Here which zooms in to a 3 Year Weekly chart.  The safest play would be to wait for Apple to sell off down to the purple 50 week Simple Moving Average (SMA) which is currently at ~$379 and rising at a decent clip. For slightly move aggressive individuals, buying the 50% long at the green horizontal line at $445 or previous highs at $425 could work well and also coincide with the white 10 week SMA.

AAPL 3 Year Daily Chart (Linear):

(Click for Larger Image)

This chart demonstrates Apple’s tendency to have fast run ups, and then periods of prolonged consolidation (highlighted in grey) which offer long term investors the chance to buy on dips. Meanwhile the red declining trend lines have routinely served as a good signal to shorter term technical traders that a breakout was taking place. These breakouts have lasted between 2 and 5 months with the average duration being 2.7 months long. This most recent rally is approaching the average duration right now and has completely broken out of its 3 year rising channel that it had been trading in (shown Here). Given these indications that the stock is possibly overextended, it would be prudent to wait for a retracement into one of the 50% Fibonacci levels shown in the chart above (notice that the $445 support level is visible on both the weekly and daily charts).

AAPL 90 Day Hourly Chart:

(Click for Larger Image)

For short term technical traders, there are only really two other levels to pay attention to aside from the daily support levels (Shown by the red and dotted horizontal lines that start at the beginning of 2012). The first (and most aggressive)  entry is an extension long setup (an extension long is a Fibonacci drawn from a previous high to a new high after a significant thrusting move, as opposed to a traditional Fibonacci which is drawn from lows to high) at $490. This extension originates from the previous high set after the post-earnings gap up to the intra-day high that we hit today at $526. The next long setup is down at $479 and is just a few points away from the daily support level which could give it an extra boost. This second extension has is just the continuation of the original gap up extension long that traded the day after earnings at the $445 level.

In summary, potential buying areas on Apple are as follows (from least to most aggressive):
Weekly Entries:
50 Week SMA, $445, $425

Daily Entries:
$476, $445

Aggressive Entries:
$490, $479

Disclosure:
I am long shares of Apple, however, I did close out 1/3 of my position today to lock in profits at $498.33.

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Q1 2010 Market Overview and Investment Outlook

Overview & Outlook
The first quarter of 2010 was one of extremes and started things out with a bang. The S&P 500 began the year at 1116 and quickly rose to 1150 before undergoing a 9.2% selloff (the steepest since the recovery began in March of 2009) down to 1044. Investors (such as myself) took advantage of the “sale” on stocks during the selloff and used it as an opportunity to add to positions. The ensuing buying pressure caused a 12% rally and the S&P 500 ended the quarter up at 1169.

Optimism abounded during the first quarter as corporate earnings continued to meet or beat expectations; auto sales maintained their upward trend and 4th quarter U.S. Gross Domestic Product (GDP) registered growth at an annual rate of 5.6% (the strongest growth since 2004). The jobs picture also improved in the first quarter with a drop in the unemployment rate down to 9.7% from 10% in December.  March was especially strong as the economy added 162,000 jobs, the biggest monthly gain in over three years. Unfortunately, over 40,000 of those jobs were temporary Government hires for the Census and, after dropping to 9.7% in January, the unemployment rate has not fallen any further.

The signing of the health care reform bill by President Obama eliminated some uncertainty in the markets; influencing performance positively. Although the long term effects of this legislation are not yet clear, companies can now move forward with a solid understanding of what the rules of the game will be. Economists had been arguing that until the bill was either signed (or killed) it would be very difficult for companies to hire new employees because they wouldn’t know the true cost of employment.

Credit markets also continued to improve with the spread between corporate and government bond yields falling back to historically normal levels. Inflation was beginning to be a concern for investors towards the end of 2009 but the Consumer Price Index (CPI) data from the first quarter of 2010 allayed those fears by showing very muted gains. This maintains the foundation that the Federal Reserve needs to maintain its “exceptionally low levels of the federal funds rate for an extended period” while also providing financially strapped consumers with lower prices for their everyday items.

Despite the good news, there continue to be significant caveats and reasons for caution:

  • Unsustainable GDP Growth
    The blistering 5.6% GDP growth rate from the fourth quarter is not likely to be repeated because it was primarily driven by companies stocking up their inventories for the holiday season. Inventory stocking is typical in the fourth quarter but its effects were magnified in this case because companies were being cautious last year and maintained especially low inventories during 2009. To provide some context, we would need three more quarters of 5%+ GDP growth to drive unemployment down just 1%.
  • Weak Jobs Market
    Although the unemployment rate has fallen from its peak, it is still at historically elevated levels. U-6 Unemployment (a broader and more complete picture of unemployment) had been slowly declining but has now been ticking upward since February and registered at 16.9% in March. The picture gets even worse when you look at the details. Out of all the unemployed Americans, 44.1% have been unemployed for more than six months (almost double the worst level seen in our last recession). Also, many people who have been unemployed for more than a year are no longer being counted in the official statistics. This trend has only been getting worse and could mean that a lot of the jobs that have been lost are not coming back (particularly in construction, manufacturing and financial services). Unemployment rose in 24 states, while California, Florida, Nevada and Georgia all set new records for joblessness in March.
  • Rising Oil and Commodities Prices
    Over the past couple of years, oil companies have drastically cut their capital expenditure budgets for building new capacity because global demand had significantly slowed. Following strong stimulus programs from around the world – most notably China’s – demand for commodities and oil has been rising and global demand for oil is expected to set all time records in 2011. This strong demand combined with a diminished supply of oil could cause another sustained run-up in oil prices, which would severely dampen the economic recovery taking place.
  • Interest Rate Policy and Bank Lending
    A key driver of this recovery has been the strength of banks and their ability to keep credit flowing throughout the economy so that consumers can spend (even when they shouldn’t) and companies can expand. The more money banks make, the more credit they can provide. With the Federal Reserve holding their overnight lending rate at effectively zero, it has been extremely easy for banks to make money by borrowing from the Fed (AKA U.S. taxpayers) at a rate of 0% and then lending it out to companies at a rate of 5% or more; essentially providing the banks with windfall profits. Eventually the Fed will need to raise rates to stave off inflation, which will severely crimp the margins of banks, limiting their ability to continue contributing to growth.
  • Continued Uncertainty Around Financial Regulation
    Now that health care legislation has been passed, the administration and congress can turn their attention toward regulating of the financial services industry There is strong political and popular will to ensure that a financial crises of the magnitude that we saw in 2008 does not repeat but it is still unclear whether it will be done in a way that would impair the ability of banks to provide credit. Major banks made themselves easy targets by taking taxpayer money (whether they claimed to need it or not) and then spent lavishly on employee compensation stoking outrage that continues to smolder.
  • The U.S. Budget Deficit and Tax Increases
    In combating the recession and reforming the healthcare industry, the U.S. budget deficit has grown to unprecedented levels. This has been exacerbated by falling tax revenues due to lower corporate profits and consumer income. President Obama has already said that taxes will need to be raised for upper class Americans but it is not unreasonable to assume that lower income levels could also see higher taxes. Of particular concern for the stock market is that taxes on capital gains and dividends may also be raised, which would most likely be perceived negatively by the market.The elephant in the room however is looming social security and Medicare expenses that will continue to balloon as the baby boomers retire. Any reform will most likely require a mixture or higher taxes, reduced benefits and tougher eligibility requirements. Faced with the prospect of higher tax rates and decreased social benefits, investor sentiment is likely to wane.

Despite my caution, I am hopeful and optimistic that economic data will continue to improve. I would like to believe the market cheerleaders on CNBC who say that we are in a new long-term bull market but unfortunately, the facts of the situation do not yet support that assertion. After selling off a large portion of my portfolio in December and early January, I have been gradually increasing my exposure to certain areas of the market with a defensive posturing.

During times like this when hope and optimism outweigh the raw data, it’s important to maintain perspective and discipline. Warren Buffett said it best in a letter he wrote to his investors during the stock market frenzy of 1969:

It is possible for and old, overweight ball player, whose legs and batting eye are gone, to tag a fast ball on the nose for a pinch-hit home run, but you don’t change your line-up because of it.

Market Summary
Although very volatile, the S&P 500 continued its upward march, gaining 5.39% in the first quarter of 2010 and bringing its return for the trailing twelve months to 49.76%. However, it is still down more almost 19% from the October 2007 market highs.

The MSCI EAFE (European, Asian & Far East) index continued to underperform U.S. equity markets with a gain of only 0.94% in the first quarter, bringing its’ total return for the past year to 55.19%, slightly above the S&P 500. We feel that the MSCI EAFE is still being held back by a strengthening U.S. Dollar as well as concerns over sovereign debt in countries such as Greece, Ireland and Portugal. Despite these concerns, we maintain a favorable view on foreign/emerging markets as a whole because of their stronger fundamental growth prospects and lower consumer debt to income ratios.

The Barclays Capital U.S. Aggregate Bond Index underperformed equities during the first quarter of 2010 with a gain of 1.78%. The index is now up 7.70% over the past year and yields approximately 3.8% as of the close on March 31. The recent underperformance of bonds is likely due to investors shifting money from bonds (which are relatively safe) into riskier assets such as stocks (which offer greater returns). Another downward force on the price of bonds is speculation regarding when the Federal Reserve will begin to raise interest rates (higher rates tend to depress the price of bonds) and by how much.

Final Thoughts
We are either at the end of a Great Depression style “fools” rally or entering the second stage of a longer term bull market but it is very difficult to tell which it will be. The market is longer “cheap” by almost any definition with the P/S ratio now solidly over 1.0 and the dividend yield of the S&P 500 back to normal levels below 2%. However, with a forward P/E ratio of  16.95 (as of market close on 4/23/10) the market is not exactly overpriced either. We are now in a valuation limbo of sorts.

The main reason for this is that there is currently an unprecedentedly large divergence in the corporate earnings estimates of top down macroeconomic analysts and bottom up security analysts. Historically, bottom up security analysts have predicted operating earnings 19.25% higher than those predicted by top down macroeconomic analysts. For 2010 and 2011, the difference has widened to over 28%.

It the optimistic bottom up analysts are correct and the S&P 500 has operating earnings of ~$95 in 2011 (up from ~$57 in 2009), then the market is certainly undervalued and could easily run up into the 1,400’s assuming a modest P/E ratio of 16. However, if the top down analysts are closer to the mark and the S&P 500 earns only $70, then using the same P/E of 16 would imply a market correction down into the low 1,100’s.

This being said, I remain long the market and do not see any strong technical resistance other than 1,229 (the 61.8% Fibonacci retracement from 2007 highs to 2009 lows). However, until we break above that line, I am keeping my mind very open to the idea of a deep decline for two reasons. 1.) Selloffs bring lower prices and opportunities to buy great companies that might have been missed earlier during the rally and 2.) The public and political will for strong financial reform (which I feel is absolutely necessary in some areas) has been dwindling with each new month that the market continues to rally. The impetus for reform would be greatly strengthened if the market begins another dramatic selloff and stories continue coming out about issues similar to what went on between Goldman Sachs & Co. (GS) and Paulson & Co.

Bottom Line: Don’t short a market that wants to rally. I’m staying net long until technical long setups start breaking down and if short setups start working before we break above 1,229 then I’ll have to reevaluate and strongly consider going short.

-MJB

As Bullishness Returns to the Market: Can the Rally Continue? (SPY, QQQ, DIA, GOOG)

The S&P 500 is up about 5% since I changed my stance on the stock market from bullish to bearish back on November 19th and all of the fundamental reasons for the change are still intact (although I’m neutral on a technical basis). Recent news has been mixed or negative and not helping the situation is the announcement over the weekend from Chinese Premier Wen Jiabao that the yuan is not overvalued and that there is a chance of a double dip recession in China.

Many of China’s trading partners (including the US) have been upset with China’s handling of their currency during one of the most devastating economic period in recent history (China had been gradually appreciating the yuan but stopped in 2008). Adding to protectionist issues, Google said over the weekend that is 99.9% sure it will be closing it’s China.cn web portal and China made a warning to Google’s Chinese partners that they will be responsible for any search related problems on their own website.

Despite all this negative news flow, investors has been hanging on to hope with the tired lines of “things are getting less worse”. Bulls are still reciting facts about recoveries in past recessions as if the more they repeat them, the more they will apply to the current crises. Unfortunately they do not.

It would seem that people are ignoring fundamentals and the more the stock market rises, the more bullish they will become. The downside to this strategy is that most people who are bullish are already invested. It is almost always short sellers covering their positions that launch the market into it’s final peaks before coming down and this is certainly how it feels to me.

The chart above from Bloomberg gives some good color to the situation. There is no “clear” indication that we are topping out right now but there are definitely more (and better) reasons to be cautious than to be optimistic. The rally over the last month has been strongly moved by short sellers having their stops hit (trust me, I’ve been trying), and I fear that a few months from now we will be looking back at this point in the stock market as a double top and possibly the highs for the year. Be careful everybody.

-MJB

Disclosure: Net-long the stock market with over 35% assets in cash

A Look Back at 2009 and Outlook for 2010 (AA, GLD, DJIA, SPY)

January 11, 2010 Leave a comment

There has been much to celebrate during 2009 as the stock market ended its’ free-fall and set off on one of the biggest single year gains since the Great Depression. We have seen continued improvements in many economic indicators and their second derivatives such as temporary hires, corporate earnings, initial unemployment claims, and even the more comprehensive measure of U-6 unemployment registered a slight improvement in November. However, the improvements have been very slow coming and I do not anticipate any radical improvements in the near term that would justify additional sudden upside in equity markets.

Despite the improving flow of news, I remain cautious because of many structural issues  carried over from the last few years that remain to be dealt with and because of the significant caveats that apply to much of the good news we have had. For example, the big recent fall in initial unemployment is to be expected at the end of the year because companies usually try to avoid the bad PR of laying off employees going into the holidays. Also, the slight improvement in U-6 unemployment during November is more likely to be a statistical blip than the emergence of a new trend considering that it is still above the reading from September and December’s reading ticked higher as well.

At the end of the fourth quarter, the S&P 500 was sitting at the 50% Fibonacci retracement line from the July 2007 market highs to 2009 lows following more than a 64% move from the March bottom. At 19.9, the  projected 2010 price/earnings ratio of the market is certainly above the historical average of approximately 16 but it is still well within normal ranges during the beginning of a recovery.  Although I do not feel that the market is significantly over-valued at current levels, I see few catalysts for significant additional gains and after pouring over historical data, I believe there is a relatively high likelihood that the market will correct moderately to the downside as the previously mentioned issues play out and the following headwinds begin to manifest themselves:

  • Tepid Employment Outlook
  • Although the initial unemployment claims number has been declining recently, a disturbing trend in the data has been emerging in which continued unemployment has been rising in an almost inversely proportional way. This indicates that a growing number of people have been and are being disconnected from the labor market for almost a year. These people will lose their unemployment benefits soon, depressing their ability to contribute to the economy while also subtracting from the spending power of those people who remain employed because many people are now using discretionary income to support family members and friends who have fallen on hard times.

    To make matters worse, many of the jobs that have not yet come back (such as manufacturing, financial services, automotive, etc.) are not likely to return to pre-crash levels of employment and sectors that are growing such as health care are not hiring as much as they normally would be because of persisting uncertainty regarding regulation in the sector. Also, the longer someone stays out of the labor market, the more their skills become obsolete, diminishing their long term productivity and earnings potential. I’m also beginning to factor in a slight chance of a double dip recession similar to 1937 if the Government and Fed are forced to begin withdrawing stimulus and liquidity before the labor markets can fully stabilize.

  • Withdrawal of Monetary and Fiscal Support
  • A large part of the recent rally has been due to strong fiscal and monetary policies enacted over the past two years that I mentioned previously in my October 20th Buffett vs. Bullion post. However, these will be disappearing relatively soon as the Troubled Asset Relief Program (TARP) expires in 2010 and liquidity is withdrawn from the market by the Government and Fed to prevent inflationary pressures from building into another asset bubble. The U.S. Government hasn’t even come close to issuing all of the debt that is required to fund its’ growing deficits but now that a complete financial meltdown is off the table, investors are already demanding higher yields to make purchasing the treasuries worthwhile considering the balance sheet problems facing our country. If yields continue to rise, it will eventually put serious pressure on an already strained credit market and economy.

  • Hobbled Banks and Declining Credit
  • Commercial banks are the backbone of the worlds’ credit markets and they have been badly injured over the past few years by and are still being held together by unprecedented levels of legislative (termination of mark-to-market), monetary (lowering Federal Funds Rate below 0.25%) and fiscal (TARP) support. The banks are still being hobbled by a multi-year build up of toxic “assets” and unprecedentedly high default rates on a wide range of consumer and commercial loans which has significantly curtailed the ability of banks to loan out new funds in the market which would spur further economic growth.

    In recent past recoveries, credit has always continued to expand and the savings rate has continued its’ long term downward trend. However, the most recent recession seems to have fundamentally changed things. The weakened banks can no longer increase the credit they give (in fact, credit has been contracting), and Americans have begun rejecting their debt-loving nature sending the national savings rate average above 4.5% in 2009 for the first time since 1998. The markets rejoiced and rallied on the news that many of our nations’ major banking institutions had returned to profitability. Unfortunately, the opposite reaction could take place when/if investors realize that the return to profitability was heavily aided by taxpayer support and that normalized bank earnings will be lower in the near future because of the previously mentioned reasons and lower levels of lending.

  • Persistent Market Uncertainty
  • Certainty in and of itself is not necessarily a good or bad thing, however a lack of certainty is the breeding ground of volatility in the stock market which tends to reduce realized returns over shorter time frames. There continues to be a great deal of uncertainty concerning the Federal Funds Rate over the next several years and Government intervention in the market as we mentioned in our newsletter from the Third Quarter. There are also other issues which have been temporarily swept under the rug which could come back to haunt during 2010 such as health care reform, regulation of the financial industry, changes to the tax code and taxes on greenhouse gases. I feel that these are important issues which must be tackled comprehensively and in a timely manner. This will almost ikely continue to be a challenge for the current Congress and could become even worse following the 2010 midterm elections. Every day that goes by without there being solid laws on the books is another day that executives will delay hiring or expenditures because of uncertainty over what the business and economic landscapes of the U.S. will look like five years from now.

    For example, (1.) Should healthcare companies hire more people to meet growing demand from regulation that would increase the pool of customers, OR should they fire people because the industry might get regulated to death instead? (2.) Should financial institutions begin putting money back to work in the economy, OR should they be divesting certain assets because of a possible return of Glass-Steagal? The answer barely matters in this case; CEO’s just need to know what the rules of the game will be so they can plan for it. (3.) Should employers like General Electric continue to take advantage of our skilled labor force as well as our great technical and legal infrastructure, OR should they relocate to a more fiscally responsible country for fear of draconian tax rates being employed to sustain Congress’ out of control spending habits? (4.) Should companies continue investing in green and other sustainable technologies to improve our planet, OR should they shut down because they won’t be cost competitive with fossil fuels unless carbon emissions are taxed appropriately?

    Maybe Congress could answer these questions for us when they are done squabbling over who gets the most pork barrel money.

    All this being said, I continue to maintain a positive long term outlook because there are still many exciting areas which I feel offer favorable risk/reward fundamentals and will take advantage of longer term shifts in the global economy. I will continue to revisit my investment thesis regularly throughout the next quarter and I am very interested to hear what executives will have to say about their outlooks on the conference calls during the upcoming earnings season which Alcoa (AA) just kicked off.

    We have just emerged from one of the worst financial crises since the Great Depression and I use this comparison because of the great similarities between then and now. The Great Depression began in 1929 when the market fell steeply following years of greed and financial excess (sound familiar?). Market sentiment quickly recovered and stocks experienced one of their greatest runs in history over the next several months as investors covered short positions and began to anticipate a strong recovery (sound familiar?). The rally took the market all the way to the half-way back point (right about where we are now) but investors began taking profits as they waited for the projected fundamental economic improvements to materialize and the market proceeded to dive, not truly bottoming until almost four years later in 1933.

    Mark Twain once said “History doesn’t repeat itself, but it does rhyme” and with this in mind I plan on returning to a more defensive posture than I was in the beginning months of 2009 when prices as well as expectations were much lower.

    Words of Wisdom for 2010
    Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
    – Warren E. Buffett

    “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
    – Warren E. Buffett

    Happy 2010 everyone!

    -MJB

    Follow-Up: Technical Trouble on the S&P 500 (SPY, GS, JPM, AAPL, CSCO, GOOG, F, GE, CAT, GLD, UUP)

    December 8, 2009 1 comment

    We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble.  On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%.  Basically, the market has gone nowhere in that time.

    What has happened, however, is that the chart has given us some more signs that the market is running into trouble.  Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.

    As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low.  It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.

    Additionally, this chart shows that we have broken the uptrend that was established since the March lows.  Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.

    For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:

    The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112.  As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.

    The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year.  Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash.  But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year.  It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.

    -Lucid Markets Team

    Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.

    Amazon and the Incredible Rising PE (AMZN, FDX, UPS, M, TGT, BGP, AAPL, GOOG, PG)

    November 30, 2009 1 comment

    Amazon’s (AMZN) stock reached a new, all-time high of 135.91 today after having another successful day, finishing up over 3% on a choppy day of trading.  What is going on, and why does it deserve a Price-To-Earnings Multiple of close to 80?

    Certainly, we can look at the obvious trends that have been taking place over the past decade or so.  The slow (or not so slow) decline of brick-and-mortar is well documented, as is the amazing, almost parabolic, rise of online e-commerce.  The large overhead and real estate costs of running a physical store put shops like Macy’s (M), Target (TGT) and Borders (BGP) at a disadvantage when it comes to pricing.  Add to that the advantage that customers in most states do not pay sales tax for online purchases (although this may change), and the advantages of Internet shopping are huge.

    But, based on this years earning expectations of 1.88, AMZN is trading at a multiple of 72 as of todays close. Granted, this is lower than was found during the bubble years but they have real revenue now and far lower growth prospects.  Analysts expect the company to grow by 25% per year, which in the next 5 years would give AMZN a market cap of about $180bn, equivalent to Apple (AAPL), Google (GOOG), or Proctor & Gamble (PG) today.

    I could not think more highly of Amazon the company.  They have proven resiliant, resourceful and innovative in their highly competitive market.  They refuse to rest on their successes, as shown by their unveiling of the Kindle; a product that is making people take E-Readers seriously for the first time.  And I believe that the company will show continued success.  AMZN the stock, however, has gone too far.  There are less pricey ways to play the shift to E-Commerce (Fedex (FDX) and UPS (UPS) spring to mind), but frankly, this whole e-shopping trade is getting too crowded for my blood.

    -AH

    Disclosure: Long TGT, no positions in any other stock mentioned.

    Changing Intermediate-Term Stance on Market from Bullish to Bearish (SPY, DIA, QQQQ)

    November 19, 2009 2 comments

    I brought up some long term technical issues regarding the market in my post from October 30th and although we broke over the downward trend line, I am now changing my overall intermediate-term stance on the stock market from slightly bullish, to moderately bearish.  I will outline my reasoning below:

    Unemployment and continued joblessness
    The unemployment number have been slightly improving of late but they cant seem to stay under the 500,000 mark. The number of continuing jobless claims are falling faster but Jon Ogg from 24/7 Wall St. aptly points out that the number needs to fall to 400,000 from the current 5,611,000 for the unemployment to stop growing.

    We haven’t even felt the real pain from unemployment yet
    Thus far, the majority of the unemployed have been receiving jobless benefits under the American Recovery and Reinvestment Act which provides extra unemployment assistance  so that they can continue to spend and contribute to the economy. This runs out in January, 2010 (only a bit more than a month from now) and nobody is even talking about it (more on this here).

    Holiday retail sales may do well after having consumers save for it all year, but this is almost certainly a case where current demand will be coming from future purchasing power. Retail and discretionary sales are down hugely so far in 2009 and instead of getting better, it’s very likely to get substantially worse in 2010. Are people really going to have the same gusto to spend when they have homeless relatives staying with them at home? This is very troubling to me because of the potential negative feedback loop it could cause with additional layoffs.

    Congress hates Americans
    Whatever happened to all that infrastructure and education spending that was going to create jobs? Oh that’s right, congress and Nanci Pelosi had to pay off all of their supporters and donors before the real economy got any money. Too bad there isn’t much left that hasn’t been appropriated already…

    All I see when I watch hearing is a bunch of stunningly uninformed (or plain stupid) grandstanding by our representatives in Congress and it doesn’t seem like the issues of financial regulation, energy independence or health care overhaul are going anywhere.  The government has succeded in changing the playing field and rules of the game, unfortunately, the new playing field and rules seem to change whimsically on a quarterly basis. I believe that all the the uncertainty created by the Government is a large contributor to the lack of investment in capital and workers because there is no way to effectively forecast and plan.

    Reading Obama’s tea leaves

    By now I’m sure many of you have noticed that President Obama has been pretty on the money with a lot of his recent ‘hunches’ and ‘expectations’ of the economy and the unemployment situation. He talked about how job losses would likely continue in 2010 and a few days later the unemployment numbers came out with the first reading above 10% since the 1980’s.

    President Obama also recently broke with the presidential tradition of being the economies cheerleader by saying “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession”.

    I think that the only reason he mentioned the deficit was to give lip service to the Chinese (who had been pressuring him over the falling Dollar) while he was on tour in Asia, but the fact that he brought the phrase “double-dip recession” into things was a little scary. This is especially eerie because of all the things that could put us into a double-dip recession, our deficit is probably not even in the top three. My interpretation is that President Obama is hinting at a double-dip recession in GDP in 2010 and using the deficit as cover.

    I feel that people would need to be very greedy and imprudent for the market to be pushed up much from here. Just some food for thought…

    – Michael J. Burns

    Disclosure: I am net long the market with slight exposure to gold though GLD