March/April 2009: Things are looking up

You heard it here first-- things are going to be looking up by the end of the first quarter 2009. Sure, it's tough now, but it's official-- all of 2008 was a recession. So we've hit a bottom and there's nowhere to go but up, right? That's if the credit card market doesn't explode, which I don't think our new President will allow. So be prepared for some tax credits and more US debt to prop us up until the real expansion comes... in the form of clean tech and renewable energy jobs. Biotech may also have a role as well as new manufacturing and agribusiness opportunities. The world has to be fed, right? Also, corn is looking more important in this new world. Underneath all the depression there is a new foundation being built...

Yes, really, I think we've hit bottom... Friday's jobs data may not be so bad...

Sources
1. Recession-Hit Automakers Brace for Grim US Sales
By THE ASSOCIATED PRESS
Published: December 2, 2008
Filed at 12:16 a.m. ET

With the decision by the NBER, a group of academics, the United States has fallen into two recessions during President George W. Bush's eight years in office. The first one started in March 2001 and ended in November of that year.

[The 2001 recession lasted 8 months... we are already into month 12...]

2. Recession Began Last December, Economists Say
By EDMUND L. ANDREWS
Published: December 1, 2008

3. Dow Plunges on News Recession Began in Dec. 2007
By THE ASSOCIATED PRESS
Published: December 1, 2008
Filed at 11:13 p.m. ET

4. Cheer Fades as Stocks Plunge 9%
By MICHAEL M. GRYNBAUM
Published: December 1, 2008

5. National Bureau of Economic Research: Determination of the December 2007 Peak in Economic Activity [PDF]

How much are we spending?

"On Tuesday, the Federal Reserve pledged $540 billion to make sure [money-market mutual funds] really are [safe]."

Add that to the $700 billion plus that the Treasury department has already spent... Representative Carolyn Maloney (D-New York, 14th District: Manhattan, Astoria) summed it up nicely at the The Causes and Effects of the Lehman Brothers Bankruptcy meeting with the House of Representatives Committee on Oversight and Government Reform on Monday, October 6, 2008 (lines 864-871 of the Preliminary Transcript):

"We are facing what has been called the most serious financial crisis since the 1930s. And the potential cost to [the] taxpayer is staggering: $29 billion to J.P. Morgan to buy Bear Stearns; $85 billion to AIG; $200 billion to Fannie and Freddie; $700 billion rescue package; $300 billion to the Fed window opening it up to investment banks; $50 billion to stabilize the money market funds. A staggering $1.7 billion potential cost to taxpayers."

Plus whatever has been spent between then and now. How much is all of this going to cost us? Can we really trust the Federal government to get us the best deal for our taxpayer dollars? Check out Frontline's report on the Resolution Trust Company and how some people profited by putting out offers on houses, such as $1,200 for a house worth $80,000 and getting the deal, without any kind of a counter offer by the government. The story goes on to say that these people submitted over 20 offers ranging from $50 to $8,000, and getting them all.

Sources:
1. NY Times Dealbook blog
Fed Adds to Its Efforts to Aid Credit Markets
October 22, 2008, 7:56 am

2. The Causes and Effects of the Lehman Brothers Bankruptcy
Monday, October 6, 2008
House of Representatives,
Committee on Oversight and Government Reform
Preliminary Transcript PDF available here.

3. Frontline 1991: The Great American Bailout

4. Fed Chairman Endorses New Round of Stimulus
By EDMUND L. ANDREWS
Published: October 20, 2008

"The government announced last week that it would invest $250 billion directly into the nation’s banks as part of a $700 billion bailout package to ease the financial turmoil and loosen the credit markets. In addition, the government has helped bail out the mortgage finance giants Fannie Mae and Freddie Mac as well as the insurance giant the American International Group."

5. JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount
By ANDREW ROSS SORKIN and LANDON THOMAS Jr.
Published: March 16, 2008

"The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s 'less-liquid assets.'"

No really, the sky is falling

This time it's for real. If you want to see someone squirm, watch the White House Briefing with Secretary Paulson from 1:45 PM on 9/15/2008 on cspan.org. I wouldn't be surprised if he resigns soon.

Market sells on Fed mixed message

As I write this, stocks are up, but they should close down and lead to a down few weeks. The GDP came in line, not negative, but still indicates a general slowdown with no clear end in sight. The banks and financials (XLF) will not be able to break through the downtrend as the market uncertainties that lead to the rally are gone with the GDP and Fed data now known. The only remainder is the job numbers, which are a lagging, rather than a leading indicator of the economy. Many economists believe businesses will face a slow 2nd quarter before improving in the 2nd half of the year. The leader out of this pseudo-recession/slowdown will be the banks, and with Citigroup's announcement of a $4.5 billion stock offering to raise funds, after the company said it would not, and projections of more to come, it appears that there is still weakness and not enough confidence to bolster up the recent gains. (1) Looking for S&P to retrace end of March/mid-April lows. Holding May SDS and QID calls.

The rising dollar will be halted and start to fall again with the Fed's recent cut, as well as no promises against further easing. The Fed gave the market what it wanted in a 25 bps cut, but commodities are showing signs of inflation, and the unclear/non-existent language of an end to the easing will make it harder for the Fed to signal a reversal, if one is indeed coming. Criticism that the Fed is making rush judgments comes from Allan H. Meltzer, Cargegie Mellon political economy professor, who says:

"My view is that the Fed is back doing the silly things it did in the 1970s, of trying to make judgments that have long-term consequences based on short-term data... It should get back to the period of 1985 to 2003 known as the Great Moderation."

Looking for gold to reach Mid-March or Mid-April highs. Bought GLD.

Sources:
1. Citigroup Increases Stock Offering to $4.5 Billion
2. Fed Cuts Rate by a Quarter Point, to 2%

The above essay is for the purposes of discussion only and should not be taken as investment advice.

Negative GDP

We could see the first negative GDP in awhile, insuring that we are in the midst of a recession. I think the recession started in August with the credit crisis, but most likely, economists will say it started in November and will end this fall, with some growth in the fourth quarter if we're lucky. The President spoke this morning about the state of the economy and finally admitted that we are in tough times (everyone is waiting for confirmation before they say the word "recession"). A reporter asked if he had seen the GDP numbers yet, and he said he had not. However, I think he was tipped off and took the opportunity to blame Congress for the state of the economy and high oil prices (incidentally, I'm more apt to believe that high prices are being caused by a production bottleneck).

Sources:
1. Saying Times Are Difficult, Bush Presses Congress to Act
2. Amid High Oil Prices, Danger Signs in Production

Apple Earnings Call

In the Seeking Alpha Apple Earnings transcript, Peter Oppenheimer answers a question about delayed iPhone revenue recognition:

"We are doing this -- as I said in my prepared remarks -- because we announced specific new features that will be included in the iPhone 2.0 software that we plan to provide for customers for free who purchased after our announcement on March 6th. So we will delay revenue recognition on phones sold between March 6th and the date of the delivery of the software."

Apple announced the iPhone 2.0 beta on March 6th and stopped recognizing revenue on iPhones sold from that date forward. iPhone 2.0 is focused on 3rd party and business applications. It includes the SDK as well as support for Microsoft Exchange ActiveSynch and Cisco IPsec VPN. Apple will offer this as a free software upgrade to all iPhone users in June. They will probably release the software during their Worldwide Developers Conference on June 9-13. I wouldn't be surprised if they announced the 3G phones at the same time. I wonder if Apple is also delaying revenue recognition of the $299 per year Enterprise Program.

Another good question, from Andrew Neff, of the soon to be gone Bear Stearns:
"Any further thoughts on cash use, what you are going to do with all that cash?"
To which Peter Oppenheimer responded:
"We're going to buy Yahoo."
Just kidding.

More on the iPhone supply (or lack thereof), from Timothy D. Cook:

"iPhone again, we really outstripped our supply toward the end of the quarter because we sold more than we had expected. We thought there would be a -- more of a sequential decline there than there was. It was reasonably strong throughout but March in particular was strong."

That's good news. If March in particular was strong, and they are not recognizing the revenue of iPhones sold since March 6th until June, we may see a large boost in the third quarter to account for all the iPhones sold after the 2.0 announcement.

Shaw Wu, the Yahoo board's infamous analyst, asked for comments about Apple's recent purchase of PA Semi and was given a non-answer. He promptly disappeared.

Sources:
1. Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript
2. Apple Announces iPhone 2.0 Software Beta

The rearview mirror has the best view

Apple beat EPS estimates by 10 cents, but guided 10 cents lower for the 3rd quarter.(1) The stock went up to 167 as the news was released, but is now trading down, currently below 159. It's a mixed bag as to what it will open at tomorrow. Some of the disappointments may be that expectations were so high, Apple would have had to announce $1.50 per share, over $8 billion in revenue, and $1.20 EPS guidance for Q3 for the stock to go up. Also, gross margins fell, from 35.1% to 32.9% when comparing quarters year-for-year. But the positive news is goode enough to justify an entry point in the next few weeks, if Apple stays at these prices:

Apple shipped 2,289,000 Macintosh® computers during the quarter, representing 51 percent unit growth and 54 percent revenue growth over the year-ago quarter.

iPod sales increased by 1%, and did not fall as expected.

It looked bad for Apple yesterday as the stock dropped as much as it rose on Monday, but at midnight, Apple revealed that it agreed to buy PA Semi (2), a small microprocessor design company, which will give the computer company tighter control of its supply chain, as well as an edge on smartphone and MP3 competition (although Apple seems to be moving away from the MP3 space and into mini-computers).

PA Semi makes ARM processors used in small devices.(3) The Apple Newton and Palm PDAs used Advanced RISC Machines (ARM) processors (4, 5) as well as Digital set-top boxes, cameras, TVs, and gaming machines. ARM was spun out of a collaboration between Apple Computer and Acorn Computer Group in 1990.(6) One of their strengths is creating low power chips, such as a 64-bit dual core microprocessor developed last year that they claimed was 300% more efficient than any other on the market. This may signal a departure by Apple from its recent exclusivity with Intel, which is notorious for driving profit margins down while increasing their market share. Intel is promoting their new Atom chips for handheld devices. Apple is said to have purchased PA Semi for $278 million in a deal negotiated in Steve Jobs' home. The acquisition didn't seem affect the stock, except to possibly keep it above water during the day.

Next up: Visa earnings on Monday. Might be a good straddle play. Also, Saturday is the deadline for Yahoo to accept or decline the Microsoft offer.(7) It looks like they already made their decision, but you can't know for sure until Sunday. If the answer is still no, Microsoft will take the offer to Yahoo shareholders.

Sources:
1. Apple Reports Record Second Quarter Results
2. Apple Buys Chip Designer
3. ARM Powered Products
4. Apple website: MessagePad 120: W/Newton 2.0 OS Specifications
5. Palm -- About Palm, Inc
6. ARM Milestones
7. Microsoft CEO willing to walk away from Yahoo bid

Apple Earnings

Andy Zaky has a good forecast for Apple earnings of $1.33 in EPS and $7.587 billion in revenue.(1) Apple's run up has gotten people nervous, some guessing that there will be a sharp fall if they miss, others making good and bad comparisons to Google. Veldemir on Yahoo Finance says it's a setup.(2)

Google high was 747 and got whacked down to 412. (45% decrease).

Apple's high was 200 and got whacked down to 115 (42.5% decrease).

Now GOOG is at 540 which is 28% off it's high.
Apple is at 161 which is 19% off it's high.

He argues that Apple will be knocked down to 28% off it's high, or somewhere around 144 after earnings.

Fortune's Apple 2.0 blog has a nice spreadsheet of analysts who have recently upped their estimates for Apple EPS and revenues.(3)

My guess is that Apple will follow the market for the next two days, closing down to allow for profit taking and uncertainty before earnings. Apple will blast through earnings, lead by international iPhone sales and a surprising beat on U.S. iPhone sales and a large beat on total Mac sales around the world. And the stock will reach 205 or higher by the end of the week. Then it will slowly dribble down again through the summer, only to reach new highs when the new iPhone and iPhone applications are released sometime in June. Overall, a rollercoaster ride, hard to time, but fun to ride.

1. Apple Set to Significantly Beat Analysts Q2 2008 Earnings Estimates
2. It's a setup folks
3. Analysts scramble to raise Apple estimates

CNBC has a good, balanced article on Google's earnings report, to be announced after the close today. Some key quotes:

Google and the experts following the company do seem to agree there is some kind of slowdown afoot; what the market has to digest is how severe it is, and what exactly is causing it. Remember that last quarter on the earnings call, CEO Eric Schmidt was clear in saying that the company was seeing no signs of an economic slowdown, no signs of recession. For a company that doesn't offer any meaningful guidance, analysts will be listening extremely closely to the comments on the conference call today to see if that position has changed any. If Google sees signs of a macro-economic slowdown, that could be bad news not just for Google, but for Yahoo, Amazon and others. Citigroup's tells me "there's a very clear bogey laid out there. We're going to see whether they'll repeat those exact words this quarter, or start fading away from them."

These shares are off better than 30 percent this quarter, so it's clear traders aren't expecting much. For the longer term investor, however, with Google closing the DoubleClick deal on the quarter, increasing its market share in search, Yahoo and Microsoft distracted by the hostile takeover and no real competitor offering any challenge to Google, slowdown or not, Google looks very attractive at these levels. If you're patient, and can stomach the short term vagaries.

It might be a good idea to see what the quarterly report says and consider buying more stock in the weeks after earnings. However, if you do not intend to hold this stock for the next 5-10 years, it may not be worthwhile to buy. A good comparison with Google is Yahoo. Back in the 90s, Yahoo enjoyed the same fanatical following that Google has now. They were the entryway to the internet, a portal through which you could find websites in the new World Wide Web. They also had a gimick search algorithm-- pages were searched by humans. Google has a similar algorithm, while it uses technology, humans are still behind it as it puts links with the most linkbacks in the top of the search. [The basics: A Web page is a bunch of media such as images and text and links that, when you click them, open up a new Web page. If a Web page has a lot of links to it from other pages (called linkbacks), it will become more popular when people search its contents on Google.]

Yahoo's IPO was in April of 1996 and it shot up fast, splitting multiple times in the next 5 years until the tech bubble burst. I think we are seeing the same thing with Google now. In another 5 years, or maybe less, new technology may come up and take over. There are already rumors that if Facebook offers an IPO, it will become the new darling of Wall Street, mainly because it is the new thing with so much promise (Wall Street likes growth companies, especially when they are new and unproven). With so much going for it, I don't think this is the end of Google. I think that it is in the beginning stages of it's run up.

Sources:
1. With Google's Earnings, Investors Need to Be Patient
2. Yahoo IPO closes at $33 after $43 peak

Mid-Week Update

Intel reported good earnings.(1) It looks like their March 3 warning was premature. JP Morgan, Coca Cola, Wells Fargo, and Abbott Labs reported before the bell today and IBM, EBAY, ALTR, and GILD report after the bell. JP Morgan's profit fell by 50%, but that didn't stop the stock from going up 5%.(2)

Although finances have been decoupled from tech in the past, it's good to see a rally in financials because it may indicate that the worst is over and things may be getting back to normal, or what will pass for normal in 2008. Everyone seems to be getting comfortable with the notion that the first part of the year will be slow and the second part will pick up. Just as you want to sell when your taxi driver starts giving you stock tips, you want to buy when news anchors admit that we are in a recession. No one wanted to admit it, but the recession started in August, and most likely will end in September of this year, with stocks reaching or exceeding their highs in December. According to Bob Doll, BlackRock's global equity CIO, "The current earnings recession of negative year-over-year comparisons will last four quarters. Q2 2008 will be the fourth."(3) He has 9 other reasons why BlackRock likes U.S. equities. So now is the best time to buy if you are an investor, or a short-term, 8-month holder who wants to buy some stocks and take a long vacation.

As of about 12:30, most indicies have blown past resistance by now, according to Brian Shannon's Alphatrends.net analysis from yesterday.(4) The Qs (QQQQ) are at 45.25, past the 43.50 level of resistance. He called 45.50 as a key level to maintain. The Russel 2000 Index (IWM) is at 70.71. He said it would be a buy above 70.50. The S&P Depository Receipts (SPY) is at 135.47. 135 is the VWAP and 50 DMA. If it breaks 136, this could signify a right shoulder. The Financial select spider (XLF) is at 25.33. 24.40 is support. 25 was resistance. If this holds, perhaps we can see a breakthrough 26.20 to test the 50 DMA and down trend. Let's see if these levels can hold through the close.

Sources:
1. Seeking Alpha Intel Q1 2008 Earnings Call Transcript
2. Bank results soothe investors
3. Ten reasons to like U.S. equities: BlackRock
4. Trading & Investing Video Technical Analysis 4/15/08

Barrons Blog

Apple's stock movement next week will depend on industry earnings reported (Intel on the 15th, IBM & Ebay on the 16th, Google on the 17th). If tech industry goes down, so does Apple. However, Intel could surprise and boost up the market. Also, Apple's Q2 earnings could be good, and investors could forgive the company's typically conservative estimates and bring the stock to 160 after earnings. If the Fed drops the funds rate another 50 bps, we could see another jump up at the end of the month. My guess is 165 or 170 if we're lucky. But that's a lot of ifs, and there are a lot of realistic comments in this thread, such as-- GE and UPS earnings scared people; AAPL could be at the top of a downward spiral, a la MOT; market failed 4th try to overcome resistance; CFO sold; advertisements galore; scarcity of iPhones means AAPL doesn't want to have excess inventory in a recession; what goes up on no news goes down on no news; tech's weak season; AAPL was only up due to 3G rumors-- all of these points make me want sell at a loss just to get out. I saw my money evaporate in a few days in January. I held calls that became worthless. Better safe than sorry. We'll see what next week brings.

Sources:
1. Apple Shares Sliding On Little News

Posted to Barron blog.

 

Apple: Getting Ready For March Quarter Earnings

One final note: AT&T (T) reports earnings one day before Apple; you will want to pay attention to anything they say on iPhone unit sales.

Projections

Last week Alcoa and UPS announced earnings that fell below analyst expectations and GE posted a decline in earnings. AMD announced layoffs and poor sales, and the S&P slipped to 1332.83.

However, for all the bad news, I believe there is still potential in technology. Alcoa, AMD, and UPS are not good measures for tech (although the case can be made for UPS deliveries of online purchases). Two weeks ago Oracle missed but RIMM beat profit expectations by nearly 15%, setting the tone for choppy Q1 earnings. I think we'll see a lot of up and down in this market, but overall, I hope (and here's where I worry) that AAPL will continue to be positive. I worry about hoping because I know that it's the worst thing to do in a market.

But I don't believe we will really know the effect broad-based earnings declines have on technology in general until Intel reports on the 15th, followed by IBM and Ebay on the 16th, and Google on the 17th. Only then can we really see where Apple will go.

It looks like if Apple does better than expected, but still warns for Q3, it may hold at 160 after earnings, but I don't expect to see a jump of more than 5% of whatever it is before earnings, mostly likely 145-150, if it compares to RIMM's price action after earnings. If next week is bad, I expect Apple to hold at 145 or so, but that may be wishful thinking. It could go below 140. Still, after options expiration on Friday, it could start going up again as traders place earnings bets, and even if it doesn't have much action after earnings, the Fed will most likely cut 50 bps at the end of the month and provide a boost to the market. I expect AAPL could reach 170 if we're lucky, or at least 165. So May calls are good if you can stomach the risk. However, give yourself the extra month and go into July.

I expect Intel to surprise us with good earnings, countering the AMD disappointment. I don't think we've seen the last of the good news in tech, although you should take you r profits for the summer soon after it happens. Buy back in September.

The opinions above are my own, based on Yahoo news, charts, and Bloomberg. Please do your own research.

Sources:
1. Bloomberg: U.S. Stocks Drop After General Electric's Surprise Profit Miss
2. Earnings.com: IBM
3. Earnings.com: INTC
4. Earnings.com: GOOG
5. Earnings.com: EBAY
6. Earnings.com: AAPL
7. Bloomberg: European Stocks Fall; STMicroelectronics, TomTom, Barratt Drop
8. U.S. Stocks Gain, Led by Retailers, Technology; Wal-Mart Rises
9. Research In Motion Gains as Forecasts Top Estimates (Update5)
10. SAP Shares Decline as Oracle Sales Miss Estimates (Update1)

Posted to Yahoo! AAPL message board.