31 January, 2008

Internet Giants Falling on Guidance, Eyes Turn to Google

Earnings season for technology, especially growth technology stocks, such as the Internet sector, is typically very volatile as results speak in one language and guidance speaks another. Many companies offer guidance for future results in an effort to be more transparent to investors, but one poster-child of the Internet, Google (GOOG), does not.

The guidance game has hurt the big Internet players over the past weeks as Yahoo (YHOO), Ebay (EBAY) and now Amazon (AMZN) posted decent to good results but cut outlooks, or provided outlooks below Analyst expectations. In fact VMware (VMW) saw its valuation cut by 30% in the aftermath of its results and guidance. The growth game is a volatile one to be sure as with growth comes outsized Price-to-Earnings ratios which can contract quickly and violently when economic factors come to the forefront.

With the Federal Reserve doing all it can with Interest Rates and the Government passing through the House an economic package bill of about $150Billion it seems like the US can find its footing in the 2nd half of the year without slipping into no-growth economics. The big recession that Traders feared for months can be averted. Until then, every executive seems to be taking the cautious approach, which is making things uneasy for Investors.

Eyes will focus on Google next as the Internet giant reports its earnings after the bell today.
Analysts expect another stellar quarter with about 50% year over year growth. Google is notorious for not giving guidance and being very tight lipped about its future expectations and projects. With this company, traders only hear one voice and depending on which ear you're hearing with, that could be a good thing or a bad thing come Friday morning.

Disclosure: Author is long GOOG

Fed Cuts Interest Rate by Another 50 Basis Points

Markets were in a lull Wednesday waiting on news of the Federal Reserve and its stance on Interest Rates. In the first meeting of 2008, and with a unscheduled 75 basis point cut in the bank rate earlier, the Fed responded to recession fears by slashing the Interest Rate by .5%.

Inflation indicators were muted leading up to this month's meeting so the Trader talk all circled around a 50 basis point cut. The market got what it expected and the results were volatile. Indices jumped as news came out with the Dow going from about 12450 to 12650 before coming back completely and ending in negative territory.

To start Thursday's session, jobless claims came in higher than expected setting off another sell-off with the Dow starting the way with a triple digit point loss.

22 January, 2008

Apple Shares Slide as Conservative Guidance bests Record Results

The hype machine that is Apple (AAPL) has run into a series of Investor stumbling blocks of late. Not only is the degradation of the US economy foiling its plans for personal electronic revolution, the company has had to deal with an increased footprint, Greenpeace complaints, Product Leaks, and somewhat unrealistic expectations of itself and its results! And all the while, maintaining record revenues and profits. The Dec 07 quarter was no exception as Apple delivered earnings of $1.76/share.

Apple's own guidance, always thought to be conservative, for the Christmas quarter was seemingly aggresive in the $1.40/share range, while The Street pegged earnings in the $1.50s. Fast forward to right before earnings and The Street's consensus estimate had jumped to $1.62/share with whispers of Apple delivering close to $1.80. Consider that one year ago Apple delivered $1.14/share and their own guidance was already close to a 30% rate of growth year over year. Those ever ambitious analysts on The Street were expecting over 40% year over year growth.

So, broken down and battered by recession fears Apple delivered $1.76/share, representing a 54% year over year profit growth rate! Remarkable! With the sales breakdown producing even more records for the company. Revenues gained 35% year over year to $9.6Billion.

Over 2.3 Million Mac Computers sold
Over 22.1 Million iPods sold
Over 2.3 Million iPhones sold

And this just begins to scratch the surface of the company's historic and record setting quarter. Now analysts had their own ideas and Apple matched, or bested all of them except for the numbers of iPod units sold, however, iPod revenue grew much faster than unit sales did (17% vs 5%), meaning the product shift had begun towards more expensive and higher margin models. Analysts were expecting higher unit sales in the neighbourhood of 23-25Million for Apple's very successful music player business.

Good old trusty Apple CFO Peter Oppenheimer gave the traditional spiel of "We give guidance we have reasonable confidence in achieving" just like every other quarter but analysts were taken aback at how soft the next quarter may be for Apple. Is the economic slowdown in the US going to effect this high profile firm this dramatically? Apple's guidance of $0.94/share looks soft on the outside, considering it reported $0.87/share a year ago at that time. How quickly analysts forget that Apple's guidance a year ago was around the $0.60/share mark. But, for Traders $0.87/share represents only an 8% year over year increase in profit! And this sent the stock spiraling after hours. Apple, which had found itself at record levels above $200, just weeks ago, has seen shares fall to the mid $155 range at closing, and further down to below $140 after the results came in.

The stock took an 11% hit to $138 after results and guidance were announced. This is too much, even in a turbulent economic picture such as the one that's painted for the United States. Apple's trailing earnings with this result stand at $4.56 or a 30 P/E. For growth of 54% year over year, this is astonishingly cheap! But don't jump on the trigger just because of that. Even though the Price-Earnings Growth multiple looks very attractive, it doesn't paint the entire economic picture. If recession is as likely as The Street makes it out to be, Apple could very well fall to a PEG of 0.5, from its current 0.55. Meaning that if next quarter's growth continues near 50% (regardless of conservative guidance) Apple could trade at a P/E of 25 given current economic conditions. On earnings of $5/share that would value Apple at $125. This I would see as an absolute bottom for the stock of this successful company.

Looking at the big picture, iPhone growth is an area where Apple will continue to see acceleration in earnings, due to its carrier revenue deals, and these will become a major part of earnings in 2008 and 2009. As the installed base of iPhone users grow, the recurring revenue Apple generates will follow suit, in a major way. Monthly payments to Apple from each of its carrier partners will become the big earnings story for the stock, along with revamped and redesigned entries to its popular Notebook Computer line.

I summarized where I think the bottom could be, but what about the bullish side of Apple. Well, once Wall Street gets its head around the conservative guidance game once again, and CEO Steve Jobs brings the Press together for a couple product events (New Laptops, A Tablet, iPhone SDK, WWDC and more) the Apple story will be once again first and foremost on Technology Investor's radars and the company can regain a P/E ratio of 40 going into the end of 2008. The end result in this case, if the US economy finds its footing and can sharpen growth expectations going forward, is a company continuing its string of successes over the past few years. Earning close to $6/share in FY2008 and capping the year at over $230!

So with the Bull and Bear cases in hand, it is up to Investors and the US economy to decide where Apple will be taken for a ride next!

Disclosure: Author is long AAPL

Bank Of America & Wachovia see Profits Diminish but not Evaporate

The latest major US Financials to report earnings saw first hand the engulfing losses that have plagued many of their peers. Bank Of America (BAC) and Wachovia (WB) proved to be just as culpable in the US mortgage and credit mess as many of the other US banks and Investment Houses. Earnings for these two firms fell 95% and 98%, respectively.

Bank Of America, which till now, hadn't been hit by selling as hard as major competitor Citigroup (C), acknowledged a multitude of mortgage based losses and set liquidity provisions on its balance sheet to absorb even more. Now, while not as headline grabbing as the bigger losses of its peers, BAC managed to rack up over $5Billion in mortgage related write-downs and a further $5.5Billion in related trading losses. Even so, the company managed to eek out a small profit. $0.05/share vs. last year's mark of $1.16/share (Profits of $268Million vs. last year's $5.26Billion).

Revenue falling was also a concern as a 31% top line dive for any type of company can not be seen as healthy. Bank Of America also set aside over $3Billion for future related troubles (read: more losses due to bad loans), but it seems to have seen the worst for now. Analysts still expect somewhere over $4/share in earnings in FY2008, pegging a forward P/E for the battered bank at just under 9. In-line with what the markets expect to pay for the big Financials. BAC's cause was helped today by a 4% run-up (over 11% reversal from the open) in its stock.

If there's a less greedy bank option in the US, and one ripe for ownership for a longer haul reversal, it is probably BAC.

Another financial competitor, Wachovia, also posted a drastic decline in profit, but like BAC-and unlike others in the sector-it in fact still reported a profit! Profit numbers were minuscule at $51Million ($0.03/share) vs. a year ago result of $2.3Billion ($1.20/share). That's a spectacular 98% drop. However, it does show that Wachovia had some wits about itself to not completely jump in with both feet into a saturated sub-prime market. The revenue slide was not as great as most peers, coming in only 19% lower than a year ago at $6.3Billion.

Now, that's not to say all is well here, as in fact Wachovia increased its provisions for more losses many times over, 7 times in fact, to $1.5Billion, as well as recording a loss of $1.7Billion on loan related investments. That is a future provision of almost 1x current reported losses. This number is far more worrisome when compared to larger competitor BAC, which set provisions of only 0.3x current reported losses. Management however, reiterated that while poor results were in fact delivered today, the goals for the future and the expectations on those goals, remain very much in tact.

The Major Financials in this market-climate seem like a laundry list of the heaviest hit securities, and deservedly so, but some more than others, and a quick glance at profit declines and loan loss provisions shows which were in fact the greediest. While Citigroup tries to dig itself out of massive losses, others are simply dealing with profit cuts and slightly larger provisions. JPMorgan Chase (JPM) is an example of the latter, and along with BAC and WB seems to be the better candidate for a recovery into the later stages of this year and next.

Disclosure: Author is long BAC, WB

21 January, 2008

Recession Woes spill into Global Markets

While Americans enjoyed their long weekend holiday, watching New England inch a step closer to NFL perfection, markets in the rest of the world succumbed to US Recessionary pressures and tumbled like dominoes one after another.

In the Great White North, Canada (America's closest economic clone and partner), saw its major Index, the TSX, fall by over 600 points (4.75%). The sell-off was fueled by the Financial and Technology sectors but was market-wide. The sell-off was not limited to North America, markets all over the world closed substantially lower as closing bells in different time zones ended trading Monday.

The selling sentiment was seen largely due to disappointment in the stimulus package proposed by US President George Bush. The $150Billion tax relief plan, designed to spur consumer spending and reverse the trend of slowing US economic growth, is seen by Traders as helpful, but ultimately late. The rolling snowball of slowing growth in the US according to many analysts/economists, is out of control, with a recession in the 2nd half of the year inevitable. As much as been said recently by an analyst out of Goldman Sachs. Markets sold off heavily on worries that this slow down in America would spill over and effect economies worldwide.

A run down of the sell off in major world markets Monday:
Canada down 4.75%
Britain down 5.5%
France down 6.8%
Germany down 7.2%
India down 7.4%
Hong Kong down 5.5%
Japan down 3.9%
Brazil down 6.6%

Recession fears are real and are engulfing all Trader Talk these days, and with that it begs the question, can the minor investor survive? Or is cash the better place to be? I think survival is possible and thriving can be achieved. Investors must be patient, own quality companies, use dividends as a cushion (covered call selling too perhaps!), and look for bargain opportunities.

Now its been well written about how and which sectors perform better under slowing economic growth (Consumer necessities, Consumer Staples, Low Cost Retailers, Beverages, Tobacco etc.) but if everything is falling where can one turn? When is the bottom?

These are questions masses of smaller Investors everywhere are asking themselves and the markets of today aren't giving them many answers, let alone hope. The one beam of light for the Bulls seems to be the Federal Reserve and a potential not only cut, but slashing of Interest Rates. Investors need to keep a keen eye on not of what, but how much the Fed does at the end of the month.

Good Luck.

17 January, 2008

Markets Continue Slide. Economic Worries Standout in Dow's 300 Point Loss

Slowing US Economics have pushed sellers to the forefront this entire week, and today's 300 point Dow tumble was another straw in the year to date tumbling market house. S&P stands down 9% year to date, while the Nasdaq is off 11%.

The Nasdaq was hit hard this week as technology sold off on those very same economic fears. The winners heading into the tail end of 2007 were those being bid up to ever higher 52-week and all-time highs and soon of these companies are feeling the financial fallout as their P/E ratios get slashed worst than Real Estate on Elm St.

It didn't help this week that Intel (INTC) missed numbers, by a couple cents, and came in on the low end of revenue guidance, even though business is just fine (Revenue guidance of up to $10Billion for next quarter versus the estimated $10.1Billion). The stock took a 12% hit that day, putting it under $20/share.

Apple's (AAPL) marquee event MacWorld, was deemed a failure this year as everything announced was expected and it included nothing as revolutionary as last year's iPhone. A Router/Storage hub, an iTunes movie rental service, new iPhone software and the new thin laptop that has been criticized by many as not hitting any particular market. Only time will tell whether the super thin Mac Book Air will sell decently well at its $1800 price point. Sony (SNE) has their ultra-thin laptop line well over the $2000 price point for years. Apple shares have fallen from their $202 record and now sit just over the $160 mark, with expected quarterly blow-out earnings numbers coming next week. A troubling fall for a company built on Steve Jobs hype, which now has analysts falling over themselves reiterating its cheapness/value opportunity.

These are troubling economic times nonetheless, as investors look for safer havens, seeing their financial, consumer and technology faithful stocks being sold off in great numbers.
The Googles (GOOG), Baidus (BIDU) and Amazons (AMZN) are all down significantly as the high P/E ratio game of Internet companies is shrinking due to recessionary economic factors and fears. The banks are steeped in mortgage losses and more potential dividend cuts are luring Investors away. Even hot commodities of late like Oil and Gold have cooled quickly and abruptly by the sell triggers.

All eyes now shift to the Federal Reserve and Chairman Ben Bernanke. Traders expect at least a .5% Interest Rate cut at the next meeting, and Bernanke has pledged the Fed will be aggressive in trying to fend off recession. We'll see at the end of the month how it all plays out, but till then expect the same volatility and uneasiness when choosing the right things to buy, or in fact short sell.

Disclosure: Author owns AAPL, GOOG

15 January, 2008

Citigroup Loses It's Hat in Latest Quarter

Citigroup (C) started a new trading day for Wall Street with what traders had feared for months now. Enormous credit losses. For the bank, it was the biggest loss in its 196 year history as a company. Almost $10Billion to be exact. Catastrophic? I think so.

With about $18Billion in write-downs to assets related to mortgage and credit, Citigroup was plagued by its "both-feet" in approach to the sub-prime market which has over the course of the last 6 months completely collapsed under its own weight; scratch that, greed. Citi lost $1.99/share compared to the expected $1.03/share but even some traders expected worse, so they asked questions about further losses. Citigroup has been by far hit the hardest of the major US banks and by and large it has deserved every licking. The icing on the cake in this quarter was the recently foreshadowed risk of dividend cuts. Citi in fact, cut its dividend by 40%. Four-Zero Percent!

Management tried its best to tap dance around the "unacceptable" and staggering loss metrics but the dividend cut was the stocks undoing today. The company prays that Investors hope that now the worst is surely over. It might just be, but it will take a long while for Citi to right the ship again. The dividend cut was the last straw for many Investors and Citi's stock fell over 7% in regular trading and stands down another 1% in extended hours.

Citi's problems plagued the entire market today as all major Indices were heavy to the negative side. The whispers of the credit crisis spilling over into spending, whispers of dividend cuts, whispers of massive losses, all turned into yells, and it seems no one was screaming louder than those saying "Sell Citigroup".

Can newly minted CEO Vikram Pandit give life and convince investors of new found confidence in the major Financial Institution that is Citigroup? That's the big question Investors are asking themselves and until the stock shows some life, they're probably looking for their own hats and the door.

Disclosure: Author owns C

13 January, 2008

Apple highlights week with MacWorld Conference

Apple's (AAPL) MacWorld conference kicks off this week and CEO Steve Jobs takes the stage Tuesday for his annual keynote presentation. Steve's talk is typically for the company, its biggest stage to announce new products. Possibly none bigger than last year's keynote announcement of the iPhone.

This year the Apple rumor sites are buzzing again as Apple's banners rouse further speculation. "There's something in the air" is this year's theme. Many fans believing the company will update their very successful laptop line of computers. Apple faithful, stockholders, and fanatics alike will be glued to the various sources covering Tuesday's keynote. Historically Apple's stock has seen a bump as speculation builds towards new products and announcements but with the current market sentiment being so negative its hard to say whether fear will continue to keep Technology down, or whether an exciting new product will show Apple stock as a coiled spring ready to bounce higher.

For coverage of the keynote presentation major technology blogs like Engadget and Apple sites (AppleInsider, MacRumors) will be providing minute by minute updates.

One things for certain, Traders will have made their bets well before Steve Jobs takes the stage.

Disclosure: Author is long AAPL

09 January, 2008

Goldman Sachs fuels Recession fire, Stocks Bounce at End of Trading

Wednesday seemed to be another sea of red for the markets, and helping to push that was recession commentary from Goldman Sachs. The biggest US Investment Bank outlined its position for 2008 and it wasn't a pretty picture. The company expects the US to slide into a recession in the 2nd half of 2008 citing a rise in unemployment and the current housing crisis spilling over into the economy.

The firm revised its "preferred" holdings weightings lowering Financials and Information Technology percentages while increasing Health Care and Consumer Staples weightings. While stocks slid for most of the day an end of day buyers rally seemed to shift focus from recession talk to over-sold bargain hunting. Many fundamentally solid companies, seeing their market caps eroding over the previous weeks were bid up towards the end of day. Google (GOOG) was just one strong example of this as the company continued its recent slide, hitting as low as $622 but finishing up over $20/share to $653.

Volatility is the name of the game as it has become a trader's month. The Federal Reserve will come into focus soon enough as Ben Bernanke speaks tomorrow. Traders will focus on anything economy related, specifically pointing to troubling times, as this will give the market hope for another rate cut come the end of January Fed meeting. The market is likely to expect a 50 basis point cut given current metric declines in employment and housing.

07 January, 2008

Jobs Report Pressure Continues Monday, Markets Mixed

In what was a continuation of volatile trading from last week, stocks on Monday fell hard early but managed to see-saw their way into some gains. The Jobs numbers, which caused a market-wide sell-off last week, due to their re-igniting recession fears, were back somewhat in the spotlight as selling carried forward early Monday.

The market came back, sort of, to end the day mixed with the Dow and S&P barely up and the Nasdaq barely down (.2, .3 and -.2% respectively). The buying on weakness trade prevailed in the morning as the market took its first serious dip, as Investors bid up the possibility of another bail-out Fed Interest Rate Cut this month.

Many quality names were on "sale" this morning, but that has be taken as a relative term now. If talking about momentum built up in previous highs than sales were indeed prevalent, but if the traders market of this month and next will be one to focus on recessionary fears than stocks have yet to see their final "Sales".

Traders, keep your heads up and don't feed into the panic, play the game rationally and you'll come out just fine on the other end.

02 January, 2008

$100 Oil!

Well its finally happened, Oil breached the triple digital per barrel threshold. It was bound to happen with the supply numbers being dimished rapidly and all the civil unrest in the oil producing nations around the world.

Oil eased a bit from record levels but still managed a record close above $99.
Going into the Spring its anticipated that oil will retreat from these lofty levels, but from a technical trading standpoint Oil is still headed slightly higher, the psychological level of $100 is firmly being pushed on the commodities front.

There's a trade possible here and I would specifically like the drillers, such as Transocean (RIG), whose offshore operational rigs are plentiful and amongst the best in the business, and the company just got another endorsement from the famous Jim Cramer. While RIG has indeed doubled over the course of a year the important earnings metrics havn't yet flown off the handle. So there is still some room there to expand future P/E metrics. But as energy and oil related stocks breach further and further highs it'll take rationality to not get caught up in the expected seasonal fall.

Disclosure: Author does not own RIG