Day's Notes: Wednesday Sept 10 2014

This week has been one of many announcements. Apple's big announcements yesterday served to boost the company's stock price above $100 since its seven for one stock split earlier this year. Geopolitical activity continue to dominate the news in the Middle East and Europe. Attached you will find your mid-week report on ,the markets and the news that cause stocks to move. 

In the report

Ted Cruz urges fellow republicans to do everything possible to stop Obama's immigration agenda implying another government shut down is in consideration.

Apple unveils new suite of products, however smart watch disappoints. 

Microsoft targeting a $2B acquisition of gaming company.

UK Bank (BOE) warns against Scottish secession and will refuse to create a monetary union if such breakup occurs. 

Opinion

Apple is playing catch up with its new line of items, nothing really surprises or caught consumers off guard. There is a sense that the company is losing its trademark competitive advantage of innovation and market domination.

Mark Carney and the BOE are wise to advise against a secession, a simple monetary union between the UK and an independent Scotland may pose similar threats as the inapt EU.

Satya Nadella commits to his biggest acquisition as the chief officer of Microsoft, such a commitment should boost investor's confidence in CEO. and show the direction in which he would like to carry the company.

Please download your full report here

This is Earnings Season

The week ended January 31st 2014 had over 300 companies report earnings; companies such as Apple,Yahoo, Amazon, Google, Ford, Visa, and MasterCard reported revenue and earnings results. While mostly positive, the S&P 500, as a measure of the broad stock market, lost 20 points in what seems to be a consolidating phase after a few weeks of  retreating. Q4 earnings reports have been decidedly positive, with 64% of companies reporting results above Wall Street estimates and financials leading the charge by outperforming the expected 28% earnings growth. This would seem to be the fuel that equity markets need to make new highs. Alas, the S&P 500 has retreated over 2% in 2014 and brushed off record bank profits and consistent impressive earnings of companies. The market seems to be driven largely by macro factors in the early goings of this year which presents a prime opportunity for value stock pickers.

Investors must be cautious as the low hanging fruit may be low for a reason. For example, the tech golden child Apple reported a $0.50 beat off a $14.00 basis and saw the stock retreat over 10% to $500. An uninformed value investor would swoop in to buy a great company at a discount, but they would overlook the company’s failure to meet expectations for iPhone sales (its largest revenue producer and main driver of growth). While iPhone sales were at record levels (51 Million,) they were short of the 56 Million expected which sent the stock tumbling. The growth priced into the stock’s price had to be re-adjusted down causing the stock's tumble. Similarly, Yahoo inc. missed its top line expectation while reporting better than expected earnings, and the stock retreated.

While this investing environment allows investors acquire great companies for amazing value, we must exercise caution in the decisions because a company’s bottom line does not always tell the entire picture of its operations.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right. 

-F 

News Letter.

Going forward, I will make an endeavour to frequently create and upload a newsletter. However, logistically I do not think this blog is the appropriate medium to share the news letter. In the interim it will have to do until we are able to develop a solution.

The link below contains MyTrading Books first news letter, be advised that it is a beta test and frequent updates to style and formats are to come in the following days.

The gist of this letter is to update you on daily macro and micro news that have a bearing on the markets and are reflected in my other blog entries.

Today we have a look at the effects the "taper" discussion is having on the market, world banks revised world GDP forecast and various acquisition and micro news. Please enjoy in the link below

Download

Returning to the unfamiliar

Since I've been buried in six volumes of riveting finance concepts developed by the CFA Institute, the markets have gone on quite a rally. Whenever it seemed to have reached some sort of exhaustion point and a correction was imminent, there was some sort of force pushing the indices to new all time highs. Perhaps irrational exuberance or a justified rally, this market has been quite different than what we've seen in the last two years. But what has defined this market rally, similar to previous ones, is investor risk appetite. This behavior has been fueled by various statistical evidence that proves that we are indeed experiencing a gradual economic recovery which has been fed by the federal reserves' determination to provide liquidity and increased risk appetite in the economy.

These events have fueled this market for several months and continue to destroy the accounts and patience of investors with decidedly short positions, and strangle fixed income investors who rely on yield. During this interesting market rallies we have seen some quite exciting stories; Japanese stocks have soared with the debasement of the yen, and then pull back slightly, Google has continued to inch towards world domination (My friend actually referred to the whole internet as Google), the tech giant Apple has been humbled in the markets, Elon Mosks' Tesla has defied EV critics and proved "profitable", precious metals have been destroyed while other commodities have seen incredible pull backs in certain areas and volatility in others, and finally the highly anticipated "tapering" of the QE initiative is being discussed extensively in the media.

Of course the main measure of the integrity of any market move is the quality of the companies earnings. Q1 earnings reporting were average overall; 65.2% of the companies in the S&P 500 beat bottom line expectation, but top line figures saw an average decline of 1% and only 49% of companies reporting above expected revenues. Furthermore, analysts revised down earnings expectations for Q2 but left estimates for earnings growth for the year at approximately 6%. The news has not been overwhelmingly bullish nor bearish , but the underlying feeling of economic expansion has led to a broad market rally.

I believe this puts the market at a disequilibrium and presents active investment professionals some trading opportunity. Owing to the idea that all stocks are not created equal, I put it to you that there are some stocks showing tremendous value potential and others that are generously valued, and a stock picker with great market timing will be able to take advantage of this disequilibrium. Over the next few weeks i will look to profile some companies which i believe fit into these categories and give my rationale behind each thesis.

That is not to say that this is an active managers market in the least bit, Passive investment strategies will find ample opportunity to re-enter this market in pull-backs, but as we have recently witnessed, pull backs come scarce and shallow in this medium term bull market. The 3 weeks from May 20th to June 6th was the largest pull back the market has experienced since april, with stocks barely retreating 5%. The Dow barely broke below its 50 DMA before employment numbers released on June 6th lent a beacon of hope to which investors hung on and ignited a rally.

This new paradigm bags the question "is this market doomed to succeed ?" I say this because it seems that regardless of the tenor of news that is released, a market rally occurs. Bad economic numbers briefly quenches the exuberance, until investors realize that the Fed has basically guaranteed free money until numbers improve, this is followed by a rally. Conversely, good economic data is initially met with market excitement and the prospect of "tapering" or the Fed cutting the proverbial umbilical cord is completely thrown out of the window. While there are clear forces supporting the market, what will cause the ceiling to reveal it self, and how will the market retreat?


Please look out for a daily news letter coming soon to My Trading Book as well as various reports on companies and macroeconomic themes.

Till then
There's always a Bull Market somewhere.

Company coverage

An analyst typically chooses a sector in industry and covers stocks within that sector. If you know me personally you would understand my fascination with tech gizmos and consumer goods. You can actually go into my room and see a ridiculous amount of gadgets that I cannot possibly use at once. My sister makes fun of me for that but it's a fascination I just can't overcome. Lucky for me I know the root cause.... Father (this piece of knowledge will save me at least 4 hours in therapy). The point I'm trying to make here is that as an analyst my fascination will play into the kind of stocks I cover. That fascination tends to be a competitive advantage, it helps me to notice subtle changes that have ripple effects on the company and the stock price as a whole.

In this post I will give outlooks and my personal opinions on 3 tech stocks which I follow closely and one consumer good (Also have a fascination for watches) Fossil.

The First and obvious tech choice Apple
I am very bullish on this Tech Giant. After being one of the only companies to withstand the barrage of bad news from Europe on Friday; one must assume that investors truly believe in the growth story at Apple. They continue to maintain a large amount of Cash in hand totalling $98 billion dollars, which may be the only ruffle in their sheets. Investors will soon begin to demand value for that large cash balance. It will be interesting to see what AAPL is able to do with such buying power and future potential. I will continue to hold a position in this company, and add unto my position on pull backs and hedge for downside protection with in-the-money puts.

Second and perhaps just as obvious as the first: Google
Google continues to recover after dropping due to earnings release that missed projections. The sentiments in Google stock are that they are still a strong growing company with the ability to branch out into more technological ventures; their acquisition of Motorola speaks to such prospects. It is very possible and likely to see Google reach the highs created prior to earnings release. I continue to remain bullish on this stock going into next week and further out until they fail to break the resistance created by their all time highs at $640.

Our Canadian love child RIM
RIM took a major hit in its stock prices over the previous week. What was supposed to be a correction in price was amplified by major bad news regarding a loss of a huge part of their market share which is the U.S department of justice (A loss to the Apple iPhone). Seeking a position at this time would be like trying to catch a falling knife. It is tough to see where the Canadian Tech company might bottom out, I will continue to stay away from RIM but seek an entry position $13.00 shows much value and promise.

Finally my consumer good/ Additional stock Fossil
On Wednesday a very bearish signal developed in this stock, a candlestick with a long upper wick signalled that Prices increased to a point where investors saw no value in the stock then retreated to close the day much lower. This forms an immediate resistance point and an opportunity for a short in the market, at least temporarily. I took this as a signal and entered a short position on the stock. I’m bearish in the short run, but will seek to hedge my position going into earnings.

AAPL - NOV Outlook In my Opinion.

AAPL - OUTLOOK FOR NOVEMBER
The last 2 days have been very unusual for AAPL, while all major stock indices increased in value; this tech giant has seen two days of reducing returns. Right now (Nov. 11 2011 at 10:00 AM) AAPL is trading at its 38.2 Fibonacci retracement line which acts as a major area of support, if this area of support does not hold the next major support area will be the 50(EMA) on the weekly chart which is at $352.
After testing new highs of $420 in mid October, AAPL looks to be consolidating on a pull back and traded in a range of (390 – 410) for about a week. The past few days broke below the trading range on slightly higher than average volume.

Outlook for AAPL
AAPL daily chart is showing over sold signals from both Bollinger bands as well as stochastic oscillator, this indicates that the short term swing to bearish territory is coming to an end, a reversal sign should be accompanied by high volume. However, if a reversal sign doesn’t show and a bearish move continues prices could go down to $352 (about 8% from current prices), before its next level of support.