Did it take 2 hours for investors to assimilate the potential upside in Fannie Mae thus creating a $.05 bid and $.10 ask in the January 2.50 Fannie Mae calls in early hour trading? Better yet, what potential upside am I even talking about? Some analysts believe the Fannie Mae equity is literally worth zero. So what drove the asking price (a 100% increase to the previous asking price of $.05) when the underlying Fannie Mae common shares were unchanged, as matter of fact down in early trading on November 2nd? As a holder of Fannie Mae calls, here is what I have to say.
Even though Fannie Mae is one of the most speculative plays out there considering its volatility and unusual volume trends, some very interesting news came out just last night and I believe the markets just picked up on that news, 2 hours after the opening bell, or when the asking price for those options doubled…
Recently, Fannie Mae got hammered down when an analyst downgraded the shares contending that it must be recapitalized to survive and even if it was rejuvenated, the amount FNM would owe would still be so great that still Fannie would not endure. However, just last night, there were some sparks. The Wall Street Journal stated how Goldman Sachs was attempting to buy near $1 billion of tax credits from Fannie Mae and that GS could gather other investors for the deal as well. I interpret that as ‘a lot more than $1 billion of tax credits’ could be picked up by GS and other investors. If such a deal was to happen, it would give a lot of needed relief to Fannie’s balance sheet. The only problem is that the government, being the controller of Fannie Mae, will not approve such a deal because it might not be in taxpayers’ interest and that it is enabling GS to cut its tax bill. My first thought is if the government owns Fannie Mae, doesn’t the ‘taxpayer’ theoretically own Fannie Mae therefore making it ridiculous for the government to block such a deal if it is good for Fannie Mae? Maybe it is too good for Goldman Sachs and therefore should not be approved because Wall Street is recovering better than Main Street? If that somewhat is the case, consider it absurd!
Anyways, back to these tax credits. Why would it be very good for Fannie if Goldman was to buy these besides the obvious point being that it would relieve Fannie of some financial distress? Well these ‘tax credits,’ or “low income housing tax credits” have been traded in a market where “observable transactions” have been curtailed. “There is decreased market demand for tax credit investments because there are fewer tax benefits derived from these investments by traditional investors, as these investors are currently projecting much lower levels of future profits than in previous years. This decreased demand has reduced the value of these investments.” – Page 23, Fannie Mae Form 10-Q for the quarterly period ended June 30, 2009
I think the 100% increase in the asking price for the January 2.50 calls is factoring in the probability that the government would approve such a deal and this decreased demand in ‘tax credits’ can very possibly be stabilized or increase if investors do want these tax credits. Goldman Sachs is expecting to win approval sometime this week, and if that is the case, Fannie could see significant upside. Keep in mind that FNM is again extremely volatile and is also reporting its 2009 3rd quarter results on November 4th – any surprises could send the stock flying. Also, I believe Goldman Sachs can convince the Obama Administration that this deal will benefit the ‘taxpayers’ as well.
Furthermore, Fannie Mae stated the following during their 2009 2nd quarter report: “Taking into account unrealized gains on available-for-sale securities during the second quarter and an adjustment to our deferred tax assets due to the new accounting guidance, the loss resulted in a net worth deficit of $10.6 billion as of June 30, 2009. As a result, on August 6, 2009, the Director of the Federal Housing Finance Agency (FHFA), which has been acting as our conservator since September 6, 2008, submitted a request for $10.7 billion from the U.S. Department of the Treasury on our behalf under the terms of the senior preferred stock purchase agreement between Fannie Mae and the Treasury in order to eliminate our net worth deficit. FHFA has requested that Treasury provide the funds on or prior to September 30, 2009.” This intertwines with the reason as to why Fannie Mae needs to be recapitalized.
But perhaps with Goldman (and other investors) seeking these tax credits and hopefully reaching a deal, it could offset the burden Fannie faces with its quest for $10.6 billion from the UST. And let us keep in mind that although many do argue government intervention has fueled this recent run-up in equities, we shall not forget the prosperity that comes with private capital.
I understand that Fannie Mae is a very non-ending, delicate, and tedious situation, that is why I encourage as much criticism and additional thought to this analysis as possible.
Monday, November 2, 2009
Wednesday, October 28, 2009
Las Vegas Sands Corp.
Throughout the past week or so we have seen soft earnings from many of the large casino companies that have severally pulled down the whole sector. Wynn down ~16%, BYD ~33%, and LVS ~24% this past week. Even though LVS hasn't reported earnings yet for this quarter, the stock is still down 24% this week. Their earnings will be reported Thursday after the market closes. Analysts are expecting LVS to lose one penny per share, which shouldn't be too hard for them to beat.
"Analysts polled by Thomson Reuters expect Las Vegas Sands to lose one penny per share on $1.17 billion in revenue, compared with profit of 2 cents on revenue of $1.11 billion in the same period a year earlier."
It also seems that analysts are actually confident in this company, since it seems to have better management than other casino companies.
"ANALYST TAKE: Jeffrey Logsdon of BMO Capital Markets, who lifted his earnings expectations for Sands this month, told investors Sands would likely see strong performance in Macau.
Logsdon reaffirmed his "outperform" rating and said an improving economy and easing visa restrictions will likely bring even better results later."
I also think that it is worthy to note that most scared investors have already pulled out of this stock during the weak when other casino stocks have provided poor earnings. This has pulled LVS down 25% before any news of earnings have been presented. To me this means that investors are expecting poor earnings and have already brought down the stock price to show that. I think that there is huge potential upside if LVS presents positive earnings tomorrow and a smaller downside if earnings are week b/c this is already reflected in the stock price.
In order to hedge your risk you could buy put options in other casino stocks while buying calls in LVS since bad earnings from LVS will drag down the rest of the sector as well.
Let me know what you think.
"Analysts polled by Thomson Reuters expect Las Vegas Sands to lose one penny per share on $1.17 billion in revenue, compared with profit of 2 cents on revenue of $1.11 billion in the same period a year earlier."
It also seems that analysts are actually confident in this company, since it seems to have better management than other casino companies.
"ANALYST TAKE: Jeffrey Logsdon of BMO Capital Markets, who lifted his earnings expectations for Sands this month, told investors Sands would likely see strong performance in Macau.
Logsdon reaffirmed his "outperform" rating and said an improving economy and easing visa restrictions will likely bring even better results later."
I also think that it is worthy to note that most scared investors have already pulled out of this stock during the weak when other casino stocks have provided poor earnings. This has pulled LVS down 25% before any news of earnings have been presented. To me this means that investors are expecting poor earnings and have already brought down the stock price to show that. I think that there is huge potential upside if LVS presents positive earnings tomorrow and a smaller downside if earnings are week b/c this is already reflected in the stock price.
In order to hedge your risk you could buy put options in other casino stocks while buying calls in LVS since bad earnings from LVS will drag down the rest of the sector as well.
Let me know what you think.
Tuesday, October 27, 2009
What Happened to the Armour?
I will be very straight forward. This morning, Under Armour had reported its 2009 third quarter financial status, and quite frankly, I thought it was a great quarter. From Under Armour’s website came the following facts:
• Net Revenues Increased 16.2% to $269.5 Million
• Net Income Increased to $26.2 Million; Diluted EPS of $0.52
• Cash & Cash Equivalents Increased $53.2 Million Year-Over-Year to $93.4 Million at Quarter-End; No Borrowings Outstanding Under $200 Million Revolving Credit Facility
• Inventory Decreased 6.6% to $152.8 Million at Quarter-End
• Company Raises 2009 Net Revenues Outlook to $830 Million to $835 Million (+14% to +15% over 2008) from $810 Million
• Company Raises 2009 EPS Outlook to $0.85 to $0.87 (+10% to +13% over 2008) from $0.80 to $0.82
- http://investor.underarmour.com/releasedetail.cfm?ReleaseID=418803
This entire quarter, the street and other financial sources only talk about ‘top line growth’ – it is all about top line growth to see if the economy is healing, consumers are spending, and companies are doing better from not just slashing costs in whatever ways possible. Last quarter, cost cutting is what led many stocks to beat expectations and thus create an earnings rally. Under Armour’s top line growth of 16% was very interesting and bullish to me. Being a holder of call options in UA, I was not just very disappointed to see the stock sell off as much as 12% today, but puzzled as to how such downside could occur.
In several articles that I read today, reporters kept saying that Under Armour posted quarterly earnings that well beat Wall Street estimates and the company raised its full-year outlook, but the forecast implies a weaker-than-expected fourth quarter. How contradicting is that? They raised their outlook, but the forecast is expected to be weak? If I am missing something, I hope someone explains.
Taking this a step further, what I believe drove the stock price down was how Under Armour said that its personnel costs and selling, general, and administrative expenses would increase for 2009. However, the increase in expenses would be only from the low-teens, which was the previous outlook, to the mid-teens. Not to mention, the expenses are associated with an increase in funding for Under Armour’s performance incentive plan and for the continued expansion of their factory house outlet stores. How is that bad? To me, it signals growth.
So again, why would I hear “raised outlook, forecast implies weaker-than-expected outlook?” It makes absolutely no sense! One analyst said how revenue growth would slow in Q4 yet I cannot jump on that when every one of UA’s segments did well. What about the football season underway? That is worth estimating as Steven Louis told me. How could Nike soar on their quarter and Under Armour not? Nike’s first fiscal quarter of 2010 gross margins were 46.2% compared to 47.2% the same period one year ago. Under Armour, on the other hand, had gross margins for their third quarter for 2009 of 49.7% compared to 51% for the same quarter a year earlier. This decline in UA’s gross margins also seemed like a reason to bash the stock today. However, I do not see why considering that UA’s gross margins are more attractive than Nike’s. I think that is worth pointing out. And the last point I will make: the growth in the athletic apparel industry is in Under Armour. Consider the following results that derived from the Nike and Under Armour website, respectively:
- Revenue for Greater China during the first quarter was down 16 percent to $416 million compared to $496 million last year. Footwear revenue was down 17 percent to $218 million, apparel revenue declined 16 percent to $168 million, and equipment revenue decreased 16 percent to $29 million.
- Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "The strength and diversity of our growth platform enabled us to deliver meaningful top line growth during the quarter with all product categories up for the period.
Excuse the outrage, but I still believe there is much more upside in Under Armour opposed to Nike. Maybe, Nike should think about buying Under Armour? It is just a matter of time for UA to start crushing Nike’s toes.
• Net Revenues Increased 16.2% to $269.5 Million
• Net Income Increased to $26.2 Million; Diluted EPS of $0.52
• Cash & Cash Equivalents Increased $53.2 Million Year-Over-Year to $93.4 Million at Quarter-End; No Borrowings Outstanding Under $200 Million Revolving Credit Facility
• Inventory Decreased 6.6% to $152.8 Million at Quarter-End
• Company Raises 2009 Net Revenues Outlook to $830 Million to $835 Million (+14% to +15% over 2008) from $810 Million
• Company Raises 2009 EPS Outlook to $0.85 to $0.87 (+10% to +13% over 2008) from $0.80 to $0.82
- http://investor.underarmour.com/releasedetail.cfm?ReleaseID=418803
This entire quarter, the street and other financial sources only talk about ‘top line growth’ – it is all about top line growth to see if the economy is healing, consumers are spending, and companies are doing better from not just slashing costs in whatever ways possible. Last quarter, cost cutting is what led many stocks to beat expectations and thus create an earnings rally. Under Armour’s top line growth of 16% was very interesting and bullish to me. Being a holder of call options in UA, I was not just very disappointed to see the stock sell off as much as 12% today, but puzzled as to how such downside could occur.
In several articles that I read today, reporters kept saying that Under Armour posted quarterly earnings that well beat Wall Street estimates and the company raised its full-year outlook, but the forecast implies a weaker-than-expected fourth quarter. How contradicting is that? They raised their outlook, but the forecast is expected to be weak? If I am missing something, I hope someone explains.
Taking this a step further, what I believe drove the stock price down was how Under Armour said that its personnel costs and selling, general, and administrative expenses would increase for 2009. However, the increase in expenses would be only from the low-teens, which was the previous outlook, to the mid-teens. Not to mention, the expenses are associated with an increase in funding for Under Armour’s performance incentive plan and for the continued expansion of their factory house outlet stores. How is that bad? To me, it signals growth.
So again, why would I hear “raised outlook, forecast implies weaker-than-expected outlook?” It makes absolutely no sense! One analyst said how revenue growth would slow in Q4 yet I cannot jump on that when every one of UA’s segments did well. What about the football season underway? That is worth estimating as Steven Louis told me. How could Nike soar on their quarter and Under Armour not? Nike’s first fiscal quarter of 2010 gross margins were 46.2% compared to 47.2% the same period one year ago. Under Armour, on the other hand, had gross margins for their third quarter for 2009 of 49.7% compared to 51% for the same quarter a year earlier. This decline in UA’s gross margins also seemed like a reason to bash the stock today. However, I do not see why considering that UA’s gross margins are more attractive than Nike’s. I think that is worth pointing out. And the last point I will make: the growth in the athletic apparel industry is in Under Armour. Consider the following results that derived from the Nike and Under Armour website, respectively:
- Revenue for Greater China during the first quarter was down 16 percent to $416 million compared to $496 million last year. Footwear revenue was down 17 percent to $218 million, apparel revenue declined 16 percent to $168 million, and equipment revenue decreased 16 percent to $29 million.
- Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "The strength and diversity of our growth platform enabled us to deliver meaningful top line growth during the quarter with all product categories up for the period.
Excuse the outrage, but I still believe there is much more upside in Under Armour opposed to Nike. Maybe, Nike should think about buying Under Armour? It is just a matter of time for UA to start crushing Nike’s toes.
Sunday, October 25, 2009
Take-Two, Action!
In a more recent post, I briefly discussed why M&A activity could pick up. Towards the end, I outlined some thoughts without going very in depth. One of those thoughts was regarding Take-Two Interactive, a multimedia/graphics software company that is most known for their Grand Theft Auto and NBA 2K franchises along with many other unique video games. I thought that the company was affordable (I still do) for larger companies such as Microsoft to pick up, especially considering that the Operating Income for Microsoft’s Entertainment and Devices Division grew by roughly 96% this quarter from the same quarter in 2008. Some sources have commented on how Electronic Arts or Activision Blizzard could be potential targets for a Microsoft, yet I feel that those companies have much larger enterprise values relative to Take-Two or THQ thus indicating it is very much possible to see ATVI or ERTS acquire Take-Two or THQ.
On Friday, out of the ordinary, I saw Take-Two Interactive surge 6.56% with an additional 1% or so in after hours trading. What fascinates me most is how there were more than 8 million shares traded, the most within one year (at the end of May and middle of July, about 6 million shares were traded on two separate days) and no new information seemed to have supported that move. This price action for Take-Two is not necessarily prevalent but most certainly unusual. Even if there were rumors of Take-Two putting itself up for sale or someone possibly attempting to acquire the firm, such rumors are still published. This reminds me of what recently happened with a Perot Systems employee who was charged by the SEC for buying more than 9,000 call options between the 4th and 18th of September, right before Dell announced that it was going to buy Perot. With Take-Two currently at $11.86 per share, the volume for the November $12.50 and $15.00 call options this last Friday of October 23 was more than 4,000 and 3,400 contracts, respectively. At the end of the day, I am just trying to understand where such unforeseen movement derives from.
Just last week, the NPD Group, a market research firm that gives information on consumer trends said that video game software sales grew by 5% in September. After six straight months of declines, this was the first positive reading. The sector was not too fond of this data point because analysts were expecting 15% growth but potential still exists. For the same month, video game console sales did very well. Sony PlayStation 3 sales were up 134% from the previous month, Wii sales were up 67% for the same period, and Xbox 360 sales grew by roughly 63.7% again for the same period. Even though these sales stemmed from lower costs, if one buys a system, that person will buy some games. In conclusion, what attracts my attention was this movement in Take-Two. So starting this week, I will continue to follow the sector, just with a closer eye on it and we will see where it takes us.
On Friday, out of the ordinary, I saw Take-Two Interactive surge 6.56% with an additional 1% or so in after hours trading. What fascinates me most is how there were more than 8 million shares traded, the most within one year (at the end of May and middle of July, about 6 million shares were traded on two separate days) and no new information seemed to have supported that move. This price action for Take-Two is not necessarily prevalent but most certainly unusual. Even if there were rumors of Take-Two putting itself up for sale or someone possibly attempting to acquire the firm, such rumors are still published. This reminds me of what recently happened with a Perot Systems employee who was charged by the SEC for buying more than 9,000 call options between the 4th and 18th of September, right before Dell announced that it was going to buy Perot. With Take-Two currently at $11.86 per share, the volume for the November $12.50 and $15.00 call options this last Friday of October 23 was more than 4,000 and 3,400 contracts, respectively. At the end of the day, I am just trying to understand where such unforeseen movement derives from.
Just last week, the NPD Group, a market research firm that gives information on consumer trends said that video game software sales grew by 5% in September. After six straight months of declines, this was the first positive reading. The sector was not too fond of this data point because analysts were expecting 15% growth but potential still exists. For the same month, video game console sales did very well. Sony PlayStation 3 sales were up 134% from the previous month, Wii sales were up 67% for the same period, and Xbox 360 sales grew by roughly 63.7% again for the same period. Even though these sales stemmed from lower costs, if one buys a system, that person will buy some games. In conclusion, what attracts my attention was this movement in Take-Two. So starting this week, I will continue to follow the sector, just with a closer eye on it and we will see where it takes us.
Friday, October 23, 2009
Going With Dell over Hewlett-Packard
For sometime, I have been holding on to Hewlett-Packard January 55 calls hoping that as the economy turns around and PC sales begin to pick up, HPQ would make its move towards that 55 strike (currently trading at $48.30). However, I decided to swipe out of my position in HPQ call contracts for Dell, despite the financial media just bashing on this company. Here is why:
After analyzing HPQ, IBM, DELL, and AAPL, I found some interesting results. Right off the bat, Apple does not amuse me. Allow me to take the contrarian approach on this one: AAPL is extremely overbought and to add, most analysts and individual investors are just TOO optimistic with Apple. The option contracts I was looking at were extremely over valued relative to its peers. Don’t get me wrong, Apple has great ‘innovative’ products, but they can only go for so long. What about Buffet’s ‘economic moat’ theory on this one? I still consider it, do others?
Ok, so now that Apple is gone, let us compare HPQ, IBM, and DELL. Looking at January calls that are roughly out of the money by 13%, 15%, and 12%, respectively, HPQ calls have the lowest premium demanded, followed by Dell, then IBM. With IBM also having the lowest probability of outperforming the S&P 500 index relative to HPQ and DELL not to mention the lowest 1 year volatility average (meaning the equity is less likely to move a lot thus leaving the option contracts less appealing), I will forget IBM.
Here we have it, HPQ or DELL? Personally, I have a Dell laptop and just love the computers, but that is beyond the point. DELL has a higher probability of outperforming the market by roughly 2%. The volatility is much higher than HPQ suggesting that Dell will more likely reach its strike faster than HPQ will. Year to Date, Dell has been outperforming HPQ by a near 2000 basis points. So with this all said, with the option contracts that are both out of the money by almost the same amount (considering intraday movements) with the same expiration, the premium for Dell is only $.07 more, or $7.00 per contract. I believe that is well worth it. By January, I look forward to discussing the movements both HPQ and Dell will have, going on the assumption that Dell will continue to outperform HPQ. Earlier this morning, Microsoft acknowledged strength in its Windows 7 product and PC demand is believed to have stabilized and expected to grow as businesses and people upgrade to newer computers. Of course there are other macro issues that could be figured into these assumptions but in the end, I believe Dell will flourish in terms of share price movement relative to Hewlett.
Thoughts and criticism are always appreciated.
After analyzing HPQ, IBM, DELL, and AAPL, I found some interesting results. Right off the bat, Apple does not amuse me. Allow me to take the contrarian approach on this one: AAPL is extremely overbought and to add, most analysts and individual investors are just TOO optimistic with Apple. The option contracts I was looking at were extremely over valued relative to its peers. Don’t get me wrong, Apple has great ‘innovative’ products, but they can only go for so long. What about Buffet’s ‘economic moat’ theory on this one? I still consider it, do others?
Ok, so now that Apple is gone, let us compare HPQ, IBM, and DELL. Looking at January calls that are roughly out of the money by 13%, 15%, and 12%, respectively, HPQ calls have the lowest premium demanded, followed by Dell, then IBM. With IBM also having the lowest probability of outperforming the S&P 500 index relative to HPQ and DELL not to mention the lowest 1 year volatility average (meaning the equity is less likely to move a lot thus leaving the option contracts less appealing), I will forget IBM.
Here we have it, HPQ or DELL? Personally, I have a Dell laptop and just love the computers, but that is beyond the point. DELL has a higher probability of outperforming the market by roughly 2%. The volatility is much higher than HPQ suggesting that Dell will more likely reach its strike faster than HPQ will. Year to Date, Dell has been outperforming HPQ by a near 2000 basis points. So with this all said, with the option contracts that are both out of the money by almost the same amount (considering intraday movements) with the same expiration, the premium for Dell is only $.07 more, or $7.00 per contract. I believe that is well worth it. By January, I look forward to discussing the movements both HPQ and Dell will have, going on the assumption that Dell will continue to outperform HPQ. Earlier this morning, Microsoft acknowledged strength in its Windows 7 product and PC demand is believed to have stabilized and expected to grow as businesses and people upgrade to newer computers. Of course there are other macro issues that could be figured into these assumptions but in the end, I believe Dell will flourish in terms of share price movement relative to Hewlett.
Thoughts and criticism are always appreciated.
Sunday, October 11, 2009
The Wave of Mergers NOW
It is this Monday, October 12th that marks the day, or week where I believe many companies can be acquired. We have seen M&A activity pick up with Disney’s bid for Marvel, a well run company that has strong fundamentals and a nice probability of outperforming the markets. We have also witnessed Kraft bidding for Cadbury, Dell making an offer to Perot, as well as Affiliated Comp. Services becoming a target for Xerox. Keep in mind that of these four acquirers, two are components of the Dow Jones Industrial Average. Thus a key question that comes to mind after considering the recent M&A activity is what Dow Components will be the next acquirers and who will be the targets?
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
Wednesday, March 11, 2009
3/6/09 - 6469.95: Bottom in Dow
That’s right, I’m going all-out optimistic and calling it. I haven’t been writing about the stock market, but I am an investor, so I think I’ll start right now. The market is inarguably oversold; I will attribute the last 10% or so downward to a combination of unnecessary government interference and the DOOM AND GLOOM media. If not for those two factors, we probably would have held at the 50% retracement support level.
I’m a technician, but I also take strongly into account the fundamental economic environment. From that perspective, the pieces of the puzzle here, especially looking through my perpetual lens of optimism, seem to be fitting together in the shape of a market bottom.
Tuesday’s rally was significant for a number of reasons. First, it was lead by news of profitability coming from the leper colony that is the financial sector, and from Citigroup of all companies. I don’t think I need to explain any further why this is so significant in the face of the unbridled pessimism surrounding the financials, and the entire economy for that matter.
Second, promising news came down that the up-tick rule will be restored. This is crucial in the current market environment. (If you aren’t familiar with the rule read here: Uptick Rule) If reinstated as promised, this will do wonders for the stock market (and limit profits for short sellers, but I’m making the bull case here).
On to the technicals, here is a 6 month daily chart of the Dow, with three of my choice indicators:
Now that’s a pretty picture. MACD and stochastics extremely bullish, and with the 20 day moving average in sight at approximately 7,200 there is some serious short term uptrend potential here.
Let’s now take a step back to look at the weekly 5 year chart of the Dow:
Of course, this isn’t as good looking a chart but I see that short term uptrend turning into some serious long term upward motion if that 20 day moving average is broken. On the 5 year weekly, the stochastics are starting to turn up, with a bulling crossover in our sights. Also, the MACD is turning back towards positive territory. Although maybe premature, these would be leading indicators of a bullish reversal.
What really catches my eye on this chart, however, is what appears to be a text book first half of a head and shoulders reversal. Putting this all together, if the 20 day moving average is breached to the upside, I would look for an upward trend to about 9,000 followed by a pull back, for the second shoulder, to about 8,000 before we start our long term climb back to our pre-2008 glory.
For those of you who shun technical analysis and think that these are just wild guesses, I won’t waste either one of our time explaining the reasoning and actual forces behind these chart patters or movements in oscillators, as there is a myriad amount of literature on the subject. Instead, I will make a fundamental case for the prediction:
The short term rally, as I’m calling from the 6 month chart (assuming the 20dma is broken), can be attributed to strength coming from the financials as well as the positive legislative changes expected. A short term rally would in turn relieve the media’s DOOM AND GLOOM attack on equities, which would in turn alleviate much of the downward pressure from panic selling and zero confidence. How does the second shoulder correction fit in to this fundamental analysis? I believe that this long term rally will briefly correct downward because there are still some credit/liquidity issues stemming from contagious fear that need to be flushed out by some economic optimism:
On Tuesday, the day of the rally, an article was posted on CNBC.com entitled “New Red Flag for Markets: Credit is Tightening Again." The takeaway was that Libor rates, the “Ted Spread” (the difference between 3 month Libor and 3 month T-bill rates), 2 year credit default swap rates, and the Commercial Mortgage-Backed Security index, are all currently indicating an increase in the reluctance to lend; credit is tightening up again. David Lutz of Stifel Nicolaus says, “"With those four things showing more and more strain, there's a disconnect with equities rallying the way they are. If they keep trading this way it's definitely an indication that there could be another leg down in stocks."
Couple that info with the other two key takeaways from the article:
“To be sure, the credit indicators are nowhere near the depths of September 2008 or so when lending all but dried up completely.”
“"After several months of swift declines and an environment where global central banks continue to cut short-term interest rates, any increase in Libor rates is a troubling reminder of the tension in credit markets," says Greg McBride, senior financial analyst for Bankrate.com. "The equity markets have effectively been behind the curve of what the credit markets have seen and experienced first-hand."”
And what I put all this information together as saying, in conjunction with the fundamental support I gave for a near term rally, is that we will have our short term rally, and a good sized one at that (I’m sticking with 9,000 if the 20dma is surpassed), based on a snowball effect of positive sentiment and flood of capital reentering the market, correct down to 8,000 because of credit worries, and then resume our long term upward ascent as everyone in the world realizes that the economy was never really that bad. This will be accompanied by a beautiful symphony of markups by all the companies that wrote off everything in sight and all types of good news. (This is supported by a statistic that I cannot find the source again, Kudlow presented it a few days ago, that compared to the financial crisis of the 90’s, companies are writing down twice the amount of assets compared to actual bad debt).
Pretty upbeat isn’t it? Are you feeling the sun emerging from behind the clouds yet? Well, I for one, sure hope this all comes true, and I really hate to say it but it is all largely reliant on the government not doing anything stupid. If all goes as planned and as they say, and Geithner really provides solid incentives for investors to by the “toxic” assets off the banks’ books, etc. and the Dow breaks that all-important 20 day moving average, I think that we stand a darn good chance at the nation-boosting rise back up to equity prosperity.
I’m a technician, but I also take strongly into account the fundamental economic environment. From that perspective, the pieces of the puzzle here, especially looking through my perpetual lens of optimism, seem to be fitting together in the shape of a market bottom.
Tuesday’s rally was significant for a number of reasons. First, it was lead by news of profitability coming from the leper colony that is the financial sector, and from Citigroup of all companies. I don’t think I need to explain any further why this is so significant in the face of the unbridled pessimism surrounding the financials, and the entire economy for that matter.
Second, promising news came down that the up-tick rule will be restored. This is crucial in the current market environment. (If you aren’t familiar with the rule read here: Uptick Rule) If reinstated as promised, this will do wonders for the stock market (and limit profits for short sellers, but I’m making the bull case here).
On to the technicals, here is a 6 month daily chart of the Dow, with three of my choice indicators:
Now that’s a pretty picture. MACD and stochastics extremely bullish, and with the 20 day moving average in sight at approximately 7,200 there is some serious short term uptrend potential here.
Let’s now take a step back to look at the weekly 5 year chart of the Dow:
Of course, this isn’t as good looking a chart but I see that short term uptrend turning into some serious long term upward motion if that 20 day moving average is broken. On the 5 year weekly, the stochastics are starting to turn up, with a bulling crossover in our sights. Also, the MACD is turning back towards positive territory. Although maybe premature, these would be leading indicators of a bullish reversal.
What really catches my eye on this chart, however, is what appears to be a text book first half of a head and shoulders reversal. Putting this all together, if the 20 day moving average is breached to the upside, I would look for an upward trend to about 9,000 followed by a pull back, for the second shoulder, to about 8,000 before we start our long term climb back to our pre-2008 glory.
For those of you who shun technical analysis and think that these are just wild guesses, I won’t waste either one of our time explaining the reasoning and actual forces behind these chart patters or movements in oscillators, as there is a myriad amount of literature on the subject. Instead, I will make a fundamental case for the prediction:
The short term rally, as I’m calling from the 6 month chart (assuming the 20dma is broken), can be attributed to strength coming from the financials as well as the positive legislative changes expected. A short term rally would in turn relieve the media’s DOOM AND GLOOM attack on equities, which would in turn alleviate much of the downward pressure from panic selling and zero confidence. How does the second shoulder correction fit in to this fundamental analysis? I believe that this long term rally will briefly correct downward because there are still some credit/liquidity issues stemming from contagious fear that need to be flushed out by some economic optimism:
On Tuesday, the day of the rally, an article was posted on CNBC.com entitled “New Red Flag for Markets: Credit is Tightening Again." The takeaway was that Libor rates, the “Ted Spread” (the difference between 3 month Libor and 3 month T-bill rates), 2 year credit default swap rates, and the Commercial Mortgage-Backed Security index, are all currently indicating an increase in the reluctance to lend; credit is tightening up again. David Lutz of Stifel Nicolaus says, “"With those four things showing more and more strain, there's a disconnect with equities rallying the way they are. If they keep trading this way it's definitely an indication that there could be another leg down in stocks."
Couple that info with the other two key takeaways from the article:
“To be sure, the credit indicators are nowhere near the depths of September 2008 or so when lending all but dried up completely.”
“"After several months of swift declines and an environment where global central banks continue to cut short-term interest rates, any increase in Libor rates is a troubling reminder of the tension in credit markets," says Greg McBride, senior financial analyst for Bankrate.com. "The equity markets have effectively been behind the curve of what the credit markets have seen and experienced first-hand."”
And what I put all this information together as saying, in conjunction with the fundamental support I gave for a near term rally, is that we will have our short term rally, and a good sized one at that (I’m sticking with 9,000 if the 20dma is surpassed), based on a snowball effect of positive sentiment and flood of capital reentering the market, correct down to 8,000 because of credit worries, and then resume our long term upward ascent as everyone in the world realizes that the economy was never really that bad. This will be accompanied by a beautiful symphony of markups by all the companies that wrote off everything in sight and all types of good news. (This is supported by a statistic that I cannot find the source again, Kudlow presented it a few days ago, that compared to the financial crisis of the 90’s, companies are writing down twice the amount of assets compared to actual bad debt).
Pretty upbeat isn’t it? Are you feeling the sun emerging from behind the clouds yet? Well, I for one, sure hope this all comes true, and I really hate to say it but it is all largely reliant on the government not doing anything stupid. If all goes as planned and as they say, and Geithner really provides solid incentives for investors to by the “toxic” assets off the banks’ books, etc. and the Dow breaks that all-important 20 day moving average, I think that we stand a darn good chance at the nation-boosting rise back up to equity prosperity.
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