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There were a couple of new BLOGS
posted this week. I posted an update on Apple Computer (NASDAQ: AAPL),
and the unfortunate total demise and bloodbath in Titan Global (OTC
BB: TTGL), for which I have no explanation. I know we are in a tough
market, but TTGL is really ridiculously priced. With Q1 numbers
coming out within a week, I am prepared to sit on the sidelines and wait
for more information. I don't want another CPNE on my hands. For
those of you were weren't around, CPNE was a huge win for the OTC
Journal in early 2006, but the stock fell apart long before the company
divulged how badly their business had deteriorated.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
If you submit a comment or question, it will not appear on the site until
I have responded.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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Another Week,
Another Drubbing: Where To in '08? |
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There have been 8 trading days in
2008, and the market has been hammered on 7 of them. Not much fun, but
maybe not such a bad thing. The following are givens:
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The US is definately in the throws of
an economic slow down, fueled by a full blown depression in the housing
industry, the sub prime melt down, slowing new job creation, and a liquidity
crises (see sub prime meltdown, and firming dollar against the Yen Carry
trade).
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For most of '07, we had a pretty darn
good bull market, especially in the large multinationals and old economy
names (see John Deere, Boeing, Caterpillar, Exxon, etc).
-
The financials and anything related
to the housing sector are getting absolutely killed, and there's no bottom
in sight for these sectors.
So, how cheap are stocks? There are
a lot of different ways to measure where stocks should be trading relative
to value.
One tried and true way: It's called
the ERP: The Equity Risk Premium: This is a measure
of the risk the market is pricing into stocks relative to bonds; specifically
the 10 Year Treasury. The ERP measures how much risk the market is
willing to take relative to the risk free investment in US Treasuries.
The higher the number, the more "undervalued" stocks are in theory.
As of the end of last week, the S&P
500 was forecast to deliver $101.08 in EPS in 2008. That's a 7.2% yield
in earnings based on the closing price of the S&) 500 at 1401.02.
The 10 year note yields 3.85%; 7.2%-3.85%
equals 3.35- therefore, the ERP is 3.35. So how scared is money
of the market? Well, historically speaking, there have only been 3
times in the last 50 years when the ERP was higher: During
the Cuban Missle Crises in 1962, when President Nixon resigned
in 1974, and when inflation eclipsed 10% in the late 1970's. Today,
the
ERP is higher than it was post 911 or at the peak of the Bear
Market in '02.
Wow- stocks are cheap. Of course,
earnings estimates could come down. Estimates for large caps have come
down considerably for Q4 '07- but they are not dropping dramatically for
calender 2008. Analysts are looking for most of these big writes downs
to be one time events.
Here's why I don't believe the current
market environment is not such a bad thing. My worst fear is a market that
goes down a little everyday for 9 months. Like 9 months of a Chinese water
torture. I'd rather get this correction over with through a violent market
correction in a shorter period of time. At this rate, big money is going
to start believing stocks are cheap sooner than later, and we can get back
to appreciating values.
I am in the more moderate camp of
believing the US Economy will suffer through a slow down, but not a recession.
It will be shallow and short lived- UNLESS (there's the big
"U") the FED does not take some aggressive action in the January
meeting. If the FED does not lower the FED funds rate by
at least 1/2 point, and start talking about recession being
a greater risk to the economy than inflation, we will go into a recession
and we will have to rethink our stock market investments as a whole.
The market is overdue for a bounce,
and I believe it will be next week. But, it might be just a bounce in either
an ongoing declining market or a market that wants to flat line on low
volume for a few weeks.
A cooperative FED should bring a
turn in the market's fortunes as the rhetoric in the financial media softens,
and the excess write downs turn to rebounds in bond portfolios. There are
lots of funny money write downs hitting balance sheets of financials- some
of the writedowns will eventually become write ups.
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Apple
(NASDAQ: AAPL) Update: Betting On A Big Week |
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The Apple hasn't bounced.
Like Sir Isaac Newton and gravity, in '08 the Apple has only fallen
from the tree. Unlike Newton's apple, I believe AAPL is due for
a bounce, and I have bet a fair amount of capital that next week will yield
a rather impressive bounce.
Next week is the MacWorld
conference in San Francisco, and to the Consumer Electronics world it has
become bigger than CES in Vegas. Steve Job's keynote address is
now bigger than Bill Gate's similar effort the week before.
In fact last year, AAPL was
up 8% on the first day of MacWorld. Of course last year,
Steve
Jobs introduced the iPhone, and you know how that worked out.
I just got one- having surrendered my Blackberry to get it, I can tell
you the iPhone makes the Blackberry look pathetic.
This year the pundits are prognosticating
a showing of new Apple Notebooks with flash memory in replacement
of hard drives. Analysts are also looking for announcement related to iTV
and movie downloads. Warner Brothers recently signed, so who might
be next?
I fully expect Jobs to pull
and unexpected rabbit out of his digital entertainment hat. Perhaps it
won't be as robust as the iPhone, but still could lead to an 8%
pop, as last year the stock had traded up for 8 days prior to the event.
This time, the stock has been tanking, and I believe fund managers are
just looking for a reason to dive back in.
Analysts are currently forecasting
AAPL
will deliver 30% earnings growth in '08 to nearly $5.10 per share on
$3.17
billion in revs. Mac sales are accelerating far more rapidly than any
other PCs- with 34% growth this past fiscal year while other manufacturers
are slowing.
I'm making a fairly heavy bet on
a trade in AAPL by owning call options. I still own 10 Jan 130 calls
at about $12- currently about $41, which I have to sell or exercise next
week. I am now down nearly 30 points from the absolute top on those, which
I purchased last August.
I have accumulated 20 February 185
calls with an average cost of $11.50- I was trying to buy 10 more today
at $9, but never got filled. Any sort of pop in the stock over $180
next
week will have me offloading these trading positions, and repatriating
some of the capital into some sort of longer term position, as I believe
the stock will be a lot higher down the road. I hope it's another big down
day on Monday so I can grab some more. I'm probably not the only guy around
with the idea, but I'm still willing to make the bet against the backdrop
of the free fall in the early '08 going.
Steve Jobs will give his keynote
address on Tuesday morning. If AAPL climbs 8% next week, it will
end up at about $185- not a huge gain by AAPL standards,
but roughly a 15 point move on a security owned at $11.50- well
more than double your money. It's gambling, but I like my chances. Play
along if you like.
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