Technology leading market's rally, a pause ahead?

The 52 week high list looks like a who's who of dynamic companies, with the list being dominated by some of the best and brightest in Technology. The Nasdaq has outperformed its peers on a year to date basis and as several analysts predicted, it is the tech sector that is leading the rally.

The Nasdaq's Year to Date performance gains of 34% dwarfs the gains put up by the S&P (18%) and the Dow Jones (11%). Even looking at the gains since the lows of March, the Nasdaq and technology is still the driving story for the market. Nasdaq at 68% leads the gains of the S&P at 60% and the Dow Jones at 51%. Either way, the bull market rally since March, on the back of the idea of recovery, and finally improving GDP numbers has been broad and long. The Bulls have been on a 6 month celebratory train, but will it last and is Tech's run over?

Not quite, the road to recovery, while already swift due to massive government intervention, still has to play its course and incite a recovery in the job market. Unemployment in America is still rising, though not as quickly, towards the psychological 10% mark. If job creation instead of job losses show up in the remaining quarter of the year, market bulls will have more reason to bang their chests, and more importantly, put their wallet where their mouth is.

Secondly, the housing sector still needs to improve. Articles on the Huffington Post and other sources, are already touting that banks are going back to packaging risky loans, and many analysts are waiting for the other shoe to drop when it comes to commercial real estate. While some may scoff at the success rate of the White House loan modification program, the last estimates put the percentage of home owners helped with refinancing at 13-15%, the fact is there are some getting help. Housing starts were lower than expected most recently but this has been a metric that has consistently come in higher than expectations.

Now, about those 52 week high names. Well technology giants Apple (AAPL) and Google (GOOG) dominate the list, while other techs such as Ebay (EBAY) show up, and even others such as IBM (IBM) and INTC (INTC) are just off those levels.

The prudent thing for the market to do and investors to do would be to take a breather after such a scorching rally of late, however, as market participants are keen to know, markets stay irrational for longer than expected.

Disclosure: Author owns AAPL, GOOG

Technology Market Leadership Part 2: Apple beats again

With the Nasdaq pacing the other market indicators throughout the trading day, it was clear that Technology was on the mind of most Traders.  With eBay (EBAY) reporting numbers to an enthusiastic response, next in line was the mighty folks from Cupertino, waving their iPhones and Macs, sans Legal Copy (If you haven't seen the latest I'm a Mac ads you are missing out on high comedy).

For Apple (AAPL), this quarter was met with tempered expectations.  Charts and Graphs flew across the Internet, projecting the sky was falling for the Mac.  Well not exactly falling, but some rather large chinks in the armor were showing.  Microsoft (MSFT) ads that actually garnered praise! Mac sales at a year over year drop for the first time since 2003! Apple not in the fast growing netbook Market! Pres, Androids, Berrys aplenty! Where's Steve?  I think you get the gist, a lot of shouting and hand waving by analysts and the media, some thoughtful, most not so much.

Even, Apple's number 1 business fan, CNBC's Jim Goldman, in a recent piece was comparing Macs to PCs on price and intangibles, made a point to mention that Macs come with Photoshop!? Perhaps a confused slip of the tongue but nonetheless tried and true stockholders are wondering if anyone outside the Apple circle truly understands the business. And in all likelihood, that's the reason the shares are so under appreciated and victims of manipulation and rumor.

But there's a little something called cold hard facts, and Apple's been providing them aplenty, quarter after quarter.  And with that, providing what seems like quarter after quarter of what I like to call 2/3rds guidance. When will the pros just forget about those last two sentences in every Apple press release.

But now to the hard hitting stuff, the news that matters, the numbers.

• Revenue: $8.16Billion vs $7.7Billion expected
  
• Earnings: $1.33/share vs $1.09/share expected
  
• Mac Units: 2.2Million vs 2.1-2.2 expected
  
• iPod: 11Million vs 10Million expected
  
• iPhone: 3.8Million vs 3.3Million expected

That's as clean a sweep across the board as you can see.  The worrisome figures for most coming in was the Mac line, however this business is on solid footing now as the recent desktop line upgrades start to bring in repeat customers while the popular MacBook designs continue to impress laying Mac styling in front of and towards the general public.  In an economy where the most popular computers across the board are $300-$500 netbooks, Apple is doing very well at its "premium" price points.  The upgraded Mac Mini and the last generation MacBook give Apple some penetration in the sub-$1000 market.

iPhones continue to be big, and not only for Apple.  Analysts were scrambling to revise their iPhone estimates upwards as AT&T (T) reported very strong wireless results as part of their quarterly report.  With 1.6Million iPhone activations (only 300K less comparatively to the holiday quarter) AT&T was quick to point out that iPhone subscriber churn is extremely low (customers love their iPhones) and iPhone ARPU was 1.6 times the average (customers love spending on data plans).

Basically the iPhone's little sister, the iPhone Touch continued to increase in popularity as the AppStore has proven to be an incredible driver of not only adoption, but also loyalty.  With Apple about to cross 1Billion applications downloaded this marketplace becomes the fastest growing software distribution channel in history.  With combined iPhone and iPod Touch sales totalling 37Million units and counting, the install base for developers is only continuing to grow. And as Apple readies the reported and rumored "iPod Touch HD", their curveball into the netbook/tablet market, be sure it'll be accompanied by an AppStore of its own.

How did Investors react to the news? At first nonchalantly, Apple sold off late in the day as worries seemed to creep into the stock.  After-hours however a 3% gain on solid results but sluggish guidance.  The guidance number was partially explained on the call, which I'm sure has yet been properly disseminated.  Apple is recording no Revenue from iPhones sold after their March event of iPhone software 3.0.  This is all due to some technically complex accounting rules that allow their subscription based model to yadda yadda yadda (Insert Legal Copy). In a nutshell, by doing this they can legally give iPhone users the upgrade for free.  iPod Touch users however, are stuck with another Hamilton (Doesn't have the same ring to it as a Benjamin does it?).

Since the software is set to come out in June, that's essentially an entire quarter of 0 recognized iPhone revenue.  Kinda sounds like it fits nicely in the gap between Apple Revenue guidance and Analyst Revenue expectations doesn't it? Provided that the analysts have finally deciphered the enigma code that is Apple's subscription accounting method wherein all iPhone revenues, profits etc are split amongst 8 quarters while the rest is deferred into an ever increasing cash pile which at the moment stands at $29Billion.

To be fair, Apple has begun giving Non-GAAP accounting to try to set Wall St. straight.  And by those metrics, the earnings are just staggering.

• The Current Quarter: $1.84/share
  
• Last Quarter: $2.58/share
  
• Quarter before that: $2.74/share

So the last 3 quarters of "real" earnings paint a picture of $7.16/share in earnings for a stock priced at $125. That's a P/E of 17 in 3 Non-GAAP quarters!  Considering the $33/share in cash that Apple holds, that 3-quarter P/E ratio falls to 13. Looking ahead to the next quarter on a Non-GAAP basis and Apple is likely to earn close to $9/share (vs a comparitive estimate of the GAAP earnings of about $5.55/share).

This company is still undervalued, and while their entry into the netbook/tablet space will be closely watched, so will be the return of CEO Steve Jobs.  Rumors and stock market games aside, Apple is an incredible money printing design house and because of its accounting rules it still seems "expensive" to some.  An injustice that will hopefully be corrected as next-quarter analysts will have a full year of Non-GAAP numbers to look over and use in their predictions.  Then maybe it'll be Apples to Apples.

Disclosure: Author owns AAPL, T, holds Call Options in MSFT

Technology Market Leadership Part 1: Ebay's Quarter

Technology was in the spotlight again today. The Nasdaq was the pace-setter in trading all day as a couple heavyweights were set to report earnings.  Online Auction pioneer Ebay (EBAY) and electronics darling Apple (AAPL) continued a slew of positive earnings reports cementing tech's leadership role in the road to market recovery.
The auction business for Ebay had been stumbling for quite sometime, in fact even before the recession, so today's quarterly report may just be what is needed to turn the corner here. Ebay, is trying to reign in its businesses and truly become the global auctioneer.  This was most evident of late as management outlined a plan to take its Skype Internet Phone product and churn out an IPO next year, separating the unit after years of failed synergies.  Ebay also bought a controlling stake in Gmarket, a South Korean online auction house.  Best way to break into new markets? Why, buy local of course!

These recent announcements meant Ebay's dragging share price was finally finding some life, rising 22% over the last month, including 3% today before their numbers. Investors had more to smile about as Ebay delivered a solid report, sending shares higher by 5% in after-hours trading.

Highlights from Ebay included earnings of $357Million ($0.28/share) based on GAAP. Non-GAAP numbers, the numbers that analysts were looking at included profits of $500Million ($0.39/share). Expectations were beat by 5 cents a share and eBay also generated free cash flow of $577Million from its quarterly $2.02Billion in Revenues.  These totals point to overall revenue declines of 8% and profit declines of 11%.  Analysts however, certainly feared for worse.  Ebay guiding within expected ranges also helped its cause in after-market trade.

So where does Ebay's growth and strength come from? PayPal, classifieds and Skype were the main drivers of Revenue year-over-year upside, so the main auction businesses still remain mostly catatonic.  But with Ebay looking to expand its online presence Investors are likely to chalk this one up to the economy.  Auction related business fell 18%, while Skype and Payments (PayPal etc.) growth on a revenue basis was 21% and 11%, respectively.

Granted the online auction slide doesn't look all that fantastic, but with economic recovery the expectation is that this business can pick up again.  With eBay looking to expand into more markets, the additional global reach of the brand will certainly broaden the revenue stream. With its collection of shopping and auction websites, including Shopping.com and Stubhub.com et al, eBay finds its reach expanding into specific niche businesses making it that much tougher for any start up or smaller competitor. Ebay has also ramped up its online classifieds business, and that grew 23% year over year. Taking all these together, CEO John Donahoe's vision and three-year growth targets look that much more likely.

Given eBay's recent run-up it is intriguing but not ideal to jump into the company stock tomorrow.  However, these numbers and the guidance that came with them confirms that eBay is very much ticking and should be watched.

Disclosure: Author holds no position in EBAY

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

Earnings Week Preview Oct 15 - Oct 19

Busy crop of earnings lie ahead as Major Technology firms and the Financials are set to report quarterly numbers. Citigroup (C) is up first on Monday followed by Bank Of America (BAC) Thursday. The Internet giants lead Technology into the full earnings swing as Yahoo (YHOO), eBay (EBAY) and Google (GOOG) all report on consecutive days.

The Biggest mobile phone maker Nokia (NOK) will have investor eyes squarely on it Thursday and big Bio Techs Pfizer (PFE) and Genentech (DNA) also square off this week. The extended rally since the Fed rate cute has pushed investor confidence higher but it has also made for some weary trading as even slight earnings upside may not be enough to push stocks much higher past record levels.

As Technology has led the rally of late, all eyes seem to be on those uber-growth firms, and whether they can maintain their lofty valuations by trumping street expectations for yet another quarter.

Markets start October with a Bang as Dow hits All Time High

The rally continues in the wake of the Fed Rate Cut last month and stocks extended gains as the calendar changed from September to October. The Dow hit an all time intra-day high of 14,115 points as the index gained over 190 points. The Nasdaq followed suit with an almost 40 point gain and the S&P held up a 20 point gain. Canadian markets ended with about half the gains of its US counterparts as investors bought stocks across the board bidding the TSX up 100 points. The advance was broad and spanned every sector. Volume was also much heavier than the week prior as investors on the sidelines during the end of the quarter jumped back into the markets to fuel the rally.

Citigroup (C) drifted off its highs late but was up over 3% in the afternoon as it provided an optimistic outlook for the remainder of the year. The financial heavyweight announced that profit fell 60% due to loses in credit and mortgage securities totalled almost $6Billion. Guess the big bank guys weren't as smart of those Goldman Sachs (GS) traders who shorted such monstrous amounts of mortgage investments to cover up and make up hefty losses. Nonetheless investors were pleased as Citigroup told the markets they expect a calendar 4th quarter that would return things to the norm. Goldman gained another 3% to close at $223.

Nokia (NOK) also made headlines, and started the day well down, as it announced the purchase of Navteq (NVT), the navigation software company, for over $8Billion. Nokia shook off the early heavy drop before the market opened and managed to close the day in the green and even hit a 52-week high above $38/share. Nokia hopes to leverage Navteq's expertise in maps and navigation into its future lineup of mobile phones. The loser here apparently was Garmin (GRMN) as its shares fell 10% on investor speculation that it lost the bid for Navteq's service and now faces stiffer competition from Nokia.

New highs were aplenty in Tech stocks as Ebay (EBAY), Apple (AAPL), IBM (IBM), Hewlett-Packard (HPQ) and Google (GOOG) all hit new marks, while Research In Motion (RIMM) and Amazon (AMZN) came oh so close. Google continued its sharp rise adding $15 and crossing the $580/share price mark for the first time in its young public history. As major techs get set to report earnings in the coming weeks it'll be increasing difficult to judge which of those companies are too inflated for their own growth prospects. But now, while the rally is in full swing, investors are coming back into play and buying Technology ahead of earnings and the seasonally strong holiday quarter.

Disclosure: Author is long AAPL, GOOG, GS, C

Major Techs hit 52-Week Highs, Can the Rally Continue?

Post Fed Meeting, stocks have been on the upswing with new highs seemingly being made daily. While the market has rallied broadly, will we see a pause or can the ride continue? The Dow still sits about 200 points from its highs, Nasdaq 50 and the S&P about 30. In other words, there are still gains to be made towards the end of the year.

Technology has been on fire lately, as early earnings reports have been positive and multi-national companies are cashing in overseas as the US dollar weakens against other major currencies. Oracle (ORCL) had a great quarter and hit a 52 week high of $22.17 on Friday. It wasn't alone as many major tech players were just at or set new highs at the end of trading on Friday. Those companies included Google (GOOG) at $560, Ebay (EBAY) at $39, Cisco (CSCO) at $32, Amazon (AMZN) at $91, Research In Motion (RIMM) at $93, BIDU (BIDU) at $285.

So what's the trade for Monday and the rest of the year? Success will come to those companies that are getting a majority of their revenue in International currencies. Due to the US Dollar's record decline against the Euro, European business will drive profits this quarter and next. Big Tech is in good shape to continue to rally into the next round of earnings numbers due to and increasing dependence on Worldwide business for accelerated growth.

It's seemed lately that you can toss money into any tech stock and watch it rise, however, to truly pick a winner into the end of the year it's important to stand back and pick apart the business and the stock's valuation and determine which bet is best. It's vital to look at growth projections and current valuations to see that AMZN with a P/E in the 120s and a forward P/E of 51, is a much shakier bet than high growth GOOG or RIMM who sport forward P/E's in the 30 as the latter companies can seemingly growth into P/E's in the 40s and 50s. Steady Oracle and Cisco, who are experiencing revitalized business growth sport forward P/E's around 18, and a strong case can be made that these companies deserve P/E's in the 20s going into next year.

Technology has gotten its spark with the market rally over the last week and this sector will be a good one to be in come Christmas and the last calendar quarter of the year. Investors should take heed and come up with a criteria of which Technology companies should become the best investments. Here's a primer of things to look for when evaluating potential technology investments this holiday season.

1) Which companies will create, advertise, sell or re-sell the upcoming must-have gadgets or be involved in the back end of another record online-shopping season.

2) Determine which companies sport the largest percentage of International business.

3) Determine which companies have the ability to mold into their inflated P/E ratios so that any downside risk can be minimized with strong growth.

Disclosure: Author is long GOOG

Market Musings: Oil Records, Interest Rate Uncertainty put Market on Edge

As North American Markets rallied today oil prices soared towards record highs on fears that OPEC would be unable to meet demand. Oil approached records of around $78/barrel as investors bought up these futures into the winter season, expecting diminished oil supply numbers from the US.

Before you run off to buy Exxon Mobil (XOM) or Chevron (CVX), it's important to note that these mega-oils already saw around 2% gains today and stand close to 52-week highs. OPEC, the world oil production policy maker announced that it would increase production by 500,000 barrels per day to help ease prices. The general fear of market uncertainty due to the US Credit situation is putting the world economy on notice and forcing policy making organizations to take steps to control pricing of various goods. The news of the production ramp sent oil futures back to the $77/barrel range.

The recent US jobs number came in drastically softer than expected as payrolls were actually cut. Analysts expected a drop in jobs but not a complete loss. This data however, carried forward the notion that the Fed must act on Interest Rates at its next meeting later in September.

I would be cautious up to this meeting because the market's resilient rally here is based on the fact that the Fed will in fact cut rates by .25 or .50%. This is a key decision for the Fed as it balances a seemingly US strong economy and a disaster situation with credit that threatens to spill over into all consumer segments. Investors need to be cautious through the next week and beyond as the markets seek to establish a direction while waiting for the Federal Reserve to make its policy announcement. With the market having priced in a 25 basis point rate cut (.25%) and now working to price in a cut of 50 basis points (.50%) investors need to understand the upcoming risks. If action by the Fed is limited it would spark a sell off that could see the Dow back into the high 12000s.

If the Fed provides further relief for the markets, come the September meeting, we could be off to the races for the annual Santa Rally starting as soon as October. Technology companies making those must-have items such as Apple's (AAPL) iPod & iPhone, Nintendo's (NTDOY) Wii and Sony's (SNE) PS3 stand the most to gain, as would Internet advertising giant Google (GOOG), and auction house pioneer Ebay (EBAY). High growth will be the name of the game for the end of the year provided the expected relief comes by way of Bernanke and the Federal Reserve.

Disclosure: Author is long APPL, GOOG and does not own any of the other companies mentioned.

What's better for eBay, More from Less or Less from More?

As eBay's (EBAY) quarterly earnings came out there seemed to be both some answers and yet more questions, so I'll pose another one. Which is better More from Less or Less from More?

In other words, can eBay continue to provide revenue growth (a.k.a. More) from a shrinking number of listings (a.k.a Less) by increasing prices, or would it be better for the company to spur growth by driving More listings and perhaps charging Less?

The company reported official earnings of $0.27/share vs. $0.17 a year ago, and when taking into account everything reported $0.34/share vs. the consensus $0.32/share. So shouldn't every thing be rosy with an earnings beat? Well not so fast because digging into core business metrics reveals another story. Listings, a staple of eBay's business fell once again by 2% compared to a year ago. To make matters worse for the stock, management said that revenue growth would outpace listing growth.

eBay has made strong acquisitions in the past with PayPal and it's recent purchase of StubHub.com. It's purchase of Skype for billions is still up in the air, however revenues from that division were $89 million in it's second straight profitable quarter. But the question still remains, what happens to the company growth prospects if the current listings trend continues? There will eventually be a point where eBay customers will not want to pay more, so the company has to find some way to entice new customers.

However, for the time being management seems confident in the overall business as it raised guidance for the rest of the year. Should you be as confident in the stock's resurgence mainly through other revenue streams? I for one would wait to see some sort of turnaround in the core listings business before paying 38 times earnings for a company that praises the performance of secondary revenue streams PayPal and Skype.

Disclosure: Author holds no position in EBAY

Earnings Week: July 16-20

Earnings season has gotten underway in full swing in the American markets.

Weekly earnings that are of note:

July 17th
Intel (INTC) : Expected $0.19/share
Merrill Lynch (MER): Expected $2.02/share
Coca-Cola (KO): Expected $0.82/share
Yahoo (YHOO): Expected $0.11/share

July 18th
Altria (MO): Expected $1.13/share
eBay (EBAY): Expected $0.32/share
JP Morgan Chase (JPM): Expected $1.08/share
Pfizer (PFE): Expected $0.50/share

July 19th
Banc Of America (BAC): Expected $1.20/share
Broadcom (BRCM): Expected $0.27/share
Google (GOOG): Expected $ 3.59/share
Microsoft (MSFT): Expected $0.31/share

July 20th
Citigroup (C): Expected $1.13/share
Wachovia (WB): Expected $1.22/share

complete earnings schedule available at Yahoo Finance
http://biz.yahoo.com/research/earncal/20070716.html

It'll be a big week for financials and banking as investors will get to see how munch of an effect the sub-prime meltdown spillover has continued to have. Also a big week for technology, specifically in the Internet space as Google will once again be in a position to overshadow Yahoo and Microsoft in the search earnings space.