rovo's Market Journal -- 2011

[livinincali]

If we had a regulated derivatives market for Credit Default Swaps and other over the counter insurance contracts on debt defaults we could probably completely ignore Greece's problems. Unfortunately the big banks have billions and perhaps trillions of dollars of credit default swaps that are all triggered by a default on Greek debt. Because there's no collateralized exchange for these contracts nobody has any idea if anybody else can actually pay in the event of a default. The leverage ratios are also so high that even a small net loss on a sovereign default could be a big deal to the capital ratio of some of these banks. The reason they are so desperate to avoid a Greek default is because they want to keep this chain reaction from happening. The problem for the US market is that if somebody was substantially on the wrong side of the bet they might have to liquidate other assets such as stocks and bonds in Europe and US Markets to pay for these insurance claims. The ultimate problem is that 80-90% of the world's paper wealth is backed by somebody else's debt, or ultimately claims on people's future productivity.

[rovo]

In three of the last four days AAPL has touched $360 per share and dropped after hitting that point. The 52 week high is 364.90 and this was recorded in February.

Earnings are due next week and the current market share price is implying a poor quarter. Maybe this will be a poor quarter for Apple but if it isn't the share price will explode upward. Trailing PE of 17 with a growth rates of:
EPS Growth (MRQ) of 92%
EPS Growth (TTM) of 78%
Revenue Growth (MRQ) of 83%
Revenue Growth (TTM) of 71%
TTM = Trailing Twelve Months. MRQ = Most Recent Quarter

[rovo]

Jul 14, 2011 9:41:44 GMT -5 @wxyz said:

Over 361 right now. I dont see how the earnings could be bad in REALITY. However the PSYCHOLOGICAL or financial analyst view could be. Their main products seem to be untouchable for the moment. But, I will admit, I dont follow stocks like AAPL on a daily basis even though I own it. I have given up trying to figure out why people do what they do in response to earnings reports.

Analysts are calling for AAPL earnings of $5.75. I'm looking for $6.42. AAPL has beat estimates for 14 of the last 14 quarters so it is expected for them to beat the possibly low-ball estimates.

Also, analysts have stock price estimates from $450 to $550 by year end. I don't put a lot of credibility on analysts projections but the numbers show a complete disconnect between expectations and current market price.

I have orders in for another 200 shares but it is unlikely they will fill. Those orders would take me to a nice round number in share holdings. I like the round numbers. ;D

[rovo]

So I have been looking at the port and trying to decide what to and what to keep. There are a few short term trades I would like to get out of but overall I don't see any problems with my larger holdings. I see lots of problems with the economy but I'm not going to base long term, large holdings, on monthly economic numbers.

In particular I've been looking at HI as I'm currently holding 14K of this puppy. I went in this morning and upped my sell prices for the 4K I have for sale. HI appears to be fairly valued with the current PE of 15. It will depend on what happens in the fiscal Q3 earnings report due early in August. Expectations are for $0.39 but I think this number is too low by at least 10%. The K-Tron group of HI has blown there numbers right off the chart for Q3 so the overall earnings are dependent on the burial segment doing something. HI has won an injunction prohibiting importation of "knock-off" caskets coming in from Mexico and this could help a little (or maybe a lot). These knock-offs were rather brazen using HI technology (patented) and I think they even had the "Batesville" name replicated on the imports.

[rovo]

Google reported tonight and the results were excellent. Per share profits were better than projected and a lot of the revenue / profits came from the Google phone. Several phone suppliers are expected to do poorly based upon new phone connections but it doesn't appear to be a slow down in phone sales, just a shift from the likes of Nokia to the likes of Google.


Google 2Q results show company thriving under Page

July 14, 2011 6:31 PM ET. By MICHAEL LIEDTKE

SAN FRANCISCO (AP) - Google Inc. CEO Larry Page's traditionally standoffish relationship with Wall Street turned into a warm embrace Thursday after the Internet search leader released strong financial results for its latest quarter.

The results represented Page's first report card since he became CEO at the start of the second quarter to end the decade-long reign of his mentor, Eric Schmidt.

The performance was far better than analysts anticipated, erasing any doubt that Google can still thrive under Page's leadership. Investors signaled their approval by boosting Google's stock by more than 12 percent. That restored the stock price to where it stood before Page became CEO on April 4.

Page, one of Google's co-founders, made analysts even happier by sticking around for the company's hour-long conference call with analysts. That was a contrast to a cursory appearance he made at Google's first-quarter call three months ago, which had fed perceptions that Page considered investor relations to be a waste of his time.

In his remarks, Page stressed that he intends to be a "careful steward of shareholders money," while reiterating his intention to invest heavily in hiring more employees and expanding into other markets in pursuit of even bigger profits in the future.

"I see more opportunities for Google today than ever before because, believe it or not, we are still in the very early stages of what we want to do," Page, 38, said during the call.

Google earned $2.5 billion, or $7.68 per share, in the April-June period. That's a 36 percent increase from $1.84 billion, or $5.71 per share, a year ago.

If not for costs covering employee stock, Google says it would have earned $8.74 per share. That figured easily topped the average estimate of $7.84 per share among analysts surveyed by FactSet.

Revenue increased 32 percent to $9 billion, the first time in Google's 13-year history that it has brought in that much money in a quarter.

After subtracting Google's advertising commissions, revenue stood at $6.9 billion — nearly $400 million above analyst projections.

Google's stock increased $66.06, or 12.5 percent, to $595 in extended trading after finishing the regular session at $528.94. The stock price stood at $591.80 when Page became CEO.

The company fared so well because advertisers were willing to pay higher prices to promote their products on the Internet's largest marketing network. The average price paid per advertising click on Google's network rose 12 percent from last year. Web surfers also found the ads more enticing, clicking on them 18 percent more than they did at the same time last year.

Page delivered the impressive results even while standing by his vow to invest in projects that may take several years to pay off.

Google's newest venture, a Facebook-like social network called Plus, debuted two weeks ago and has grown quickly amid positive reviews.

Page said Thursday that more than 10 million people already have joined Plus even though it's still requires an invitation to get into it. By comparison, Facebook has more than 750 million users.

Google is hoping Plus can become as big a hit as its Android software for mobile phones and tablet computers. Although Google gives away the software, it has enabled Google to expand its advertising dominance into the mobile market as more people increasingly connect to the Web away from their home and office computers. Page said more than 550,000 devices relying on Android are being activated each day.

"All of us at Google want to create services that people in the world use twice a day, just like a toothbrush," Page said.

To help carry out its ambitious agenda, Google increased its payroll by 9 percent, or 2,452 employees, in the quarter to bring its work force to nearly 28,800 people. The additions included 450 workers inherited as part of the company's $700 million purchase of airline fare tracker ITA Software.

Through the first half of the year, Google added nearly 4,400 workers. That's well ahead of its pledge to hire at least 6,200 employees this year. Even Page indicated the hiring is occurring a little faster than he anticipated.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

So now the big question is ..... has Google also stolen market share from Apple? I guess we will find out on Tuesday.

[rovo]

I just picked up 10 option contracts for AAPL.

AAPL Aug 20 2011 $370 Call for $8.60 per share.

I'm trying to increase my exposure to Apple.

[rovo]

Europe June New Car Registrations -8.1% On Yr At 1.27M -ACEA (Dow Jones)
Renault Group June Europe New Car Registrations -21% - ACEA (Dow Jones)
Volkswagen Grp June Europe New Car Registrations -0.5% - ACEA (Dow Jones)
PSA Group June Europe New Car Registrations -12% - ACEA (Dow Jones)
Ford Europe June New Car Registrations +0.7% On Year -ACEA (Dow Jones)
GM Europe June New Car Registrations -9.7% On Year -ACEA (Dow Jones)
Fiat Grp June Europe New Car Registrations -8.4% On Year-ACEA (Dow Jones)
Toyota Europe June New Car Registrations -27% On Year -ACEA (Dow Jones)
Daimler June Europe New Car Registrations -2.5% On Year -ACEA (Dow Jones)
BMW Grp June Europe New Car Registrations +2.1% On Year -ACEA (Dow Jones)
Nissan June Europe New Car Registrations -4% On Year - ACEA (Dow Jones)
Hyundai June Europe New Car Registrations +9.8% On Year -ACEA (Dow Jones)

[mtntigger]

So, when are you going to buy your wife her Ford? You could have this up to 0.8% easily.
The answer is "by Oct."

[rovo]

Nooo ! She needs to get 10 years out of current 2004 Envoy. Cars are expensive. The hints are getting more and more frequent but I'm just ignoring them. ;D

[mtntigger]

As long as you don't ignore what's coming up in October... AGAIN!

[rovo]

Good thought. Maybe if the port takes a big turn to the positive I would consider it.

[rovo]

Jul 15, 2011 9:11:00 GMT -5 rovo said:

I just picked up 10 option contracts for AAPL.

AAPL Aug 20 2011 $370 Call for $8.60 per share.

I'm trying to increase my exposure to Apple.

Not much money involved with this play. $8,617.49 including all of the commissions for the buy. It closed up a little today at $10.50 and TD Ameritrade is saying the current gain is 22%. Looking for $40 or $50 but would be satisfied with $25. It won't take long to find out whether or not this is a winning play as Apple's results will be posted on Tuesday evening.

[2kids10horses]

In that case, I would sell the options just before the close on Tuesday. Yes, I think the earnings will be incredible. But, what usually happens is the stock tanks... the old "sell the news" ploy.

[livinincali]

Who knows how AAPL will react after earnings, but in general options tend to get expensive going into earnings. It's why short strangles sometimes are a good bet going into earnings and the premium comes out rather quickly once the major mover news is known. I assume AAPL will continue to rally into earnings next week, it usually does as people have been accustomed to the huge beats, but the short strangle play would be sell the 370 call for 10.55 sell the 360 put for 10.45 and you hope the stock moves less than 10.55+10.45/364.92 = 5.75% on earnings. If earnings come in about where the market expects and the stock doesn't move much you'll actually see both the put and the call loose value. A GOOG type moves blows this strategy up, but that type of move isn't as common as people think it is.

AAPL's biggest up moves in a single day during the past 2 years have generally not been associated with earnings releases. 4/21/2010 and 10/20/2009 are possibilities but I haven't gone back to check AAPL earnings dates.
5/10/2010 7.69%
5/26/2009 6.76%
3/10/2009 6.64%
4/21/2010 5.98%
3/23/2009 5.97%
10/20/2009 4.69%

AAPL might blow out the quarter like GOOG, but I doubt we'll see a similar performance from AAPLs stock price even if they do. People were a lot more negative on GOOG going into earnings than I've ever seen with AAPL.

[rovo]

I think there are significant differences between GOOG and AAPL.

GOOG closed at $597.62 +$68.68 +12.98%
Sales Growth (ttm) = 24.00%
Income Growth (ttm) = 30.40%
Net Profit Margin = 27.05%
EPS = $27.73
Forward PE = 16.89
PE = 23.20
PEG = 1.13

AAPL closed at $364.92 +$7.15 +2.00%
Sales Growth (ttm) = 52.00%
Income Growth (ttm) = 70.20%
Net Profit Margin = 22.36%
EPS = $20.98
Forward PE = 12.52
PE = 17.39
PEG = 0.85

Apple has twice the sales growth and twice the income growth of GOOG. If we consider the very low PEG of AAPL compared to GOOG and adjust the PEG of AAPL to match the the 1.1 of GOOG (and this is by no means a stretch), the share price comes to $472. This is based on the TTM earnings and does not reflect replacing the Q3 EPS of $3.51 with the expected $5.83.

The share price of AAPL is deep in the "value range" for stocks and yet the company has had excellent growth. I suppose the issue is ... can they maintain the growth rate?

Nobody can predict the market action on any particular stock at any particular time but I am basing my AAPL play on the expectation of a huge increase in share price AFTER earnings. There has not been a significant run-up in AAPL's share price going into Tuesday's release. Monday's and Tuesday's market action may indeed run-up but that is fine with me as I already have most of my plays in place.

[mtntigger]

I suppose the issue is ... can they maintain the growth rate?

I wouldn't even question this at this point... they will. Why? When I was in undergrad, the university maintained Apple computers for the computer lab. A couple decades later, kids going to college are still saying that macbooks are the only thing they would consider because "everyone has them." I've heard this for the last five years.
So... with older people who are getting to be decision makers in their companies and kids who have grown up with Apple being around and are 100% brand loyal, how could the growth rate not increase? Even I admit to buying an Apple product in the last year after stubbornly refusing to for years.

[rovo]

As an aside, I would just like to say that I appreciate the input from other posters regardless of your opinion. Contrary opinions make me review and think about other approaches. Again, thanks to all posting opinions on my plays.

[rovo]

This morning I put in place the final play for AAPL. I picked up 10 contracts for my tax deferred account on AAPL.

Bought 10 contracts AAPL Aug 20,2011 $400.00 Call for 4.00 per share or $4017.49 including all fees.

So now the game is wait and see what happens. Both option plays are small $ amounts with the potential for large percentage gains. My total exposure to AAPL is:
800 shares of common stock in IRA for longer term.
10 contracts AAPL Aug 20,2011 $370.00 Call in taxable account.
10 contracts AAPL Aug 20,2011 $400.00 Call in IRA

[rovo]

OK. So I added one more position to my AAPL play. Another Call option in the taxable account. AAPL is doing very good today in a down market.
Bought 10 contracts AAPL Aug 20 2011 $410 Call at 2.45 per share for a total of $2,467.49 with all fees.

[livinincali]

I'm not nearly as high on Apple's products as some of you. I do think they do really well for the average user who is looking to surf the web, manage multimedia, and some business applications. Their products are very intuitive at that level, but as soon as you go past that and start developing apple software or trying to automate mobile applications that intuitive feel really goes out the window and it's much harder to work with than counter parts in linux or microsoft applications. For most people this is fine, but I've been working in the application development and it becomes frustrating to have things obfuscated/hidden from the power user. Apple is a very rigid and controlled environment. It's great if you like their decisions and the "it just works", works for you, but it's a pretty frustrating experience if "it just works" doesn't work the way you think it should.

That said I'm sure Apple will have another good quarter, but who knows how the stock market will react to that good quarter. It certainly wouldn't be the first time if blow out earnings didn't produce blow out stock price appreciation. Technically AAPL looks fine. It's a bit overbought on the daily going into earnings, but the weekly looks good. If it does run like rovo's expecting it will be extremely overbought but it wouldn't be the first time that happened either.

[rovo]

About once a year I think I find an exceptional play. I've been correct about 90% of the time but I have not been able to reap the best gains from these plays. My weak point is knowing when to off-load the holdings. For sure I going to try to do better with this play but I fear the "when to sell" may grab me again.

The $370 Call option will rise about $0.95 for each dollar increase in AAPL shares. 10 contracts equal 1,000 shares, so about $950 for each $ rise in AAPL.
The $400 Call option will rise about $0.31 for each dollar increase in AAPL shares. Another 1,000 shares, so about $310 for each $ rise. That is unless the stock approaches the $400 strike price, at which time it will switch to about $0.90 to $0.95 per $.
Same for the $410 Call option. $0.21 per dollar until stock reaches $410 then $0.90 to $0.95 per $.

My expectation on AAPL is about $425 to $450 a share before expiration. Let's call it $425. That's about $57 per share more than current price. So, how would this gain relate to my holdings?

Common stock 800 at ~ $350. At $425 the gain would be $60K.
$370 Call: value at $425 ~ $49.50 or $49.5K less buy cost of $8.6K for gain of $41K.
$400 Call: value at $425 ~ $22.50 or $22.5K less buy cost of $4.0K for gain of $18.5K
$410 Call: value at $425 ~ $13.50 or $13.5K less buy cost of $2.5K for gain of $11K.

Anyway, that is what I'm expecting to occur and I should know by tomorrow night whether or not I'm in left field or hitting a homer. No guarantees for sure but I've laid out my expectations and the potential gains if those expectations are met. The options trades are very high risk.

[2kids10horses]

rovo,

I would sell the options just before the close tomorrow. I think the stock will run up to the earning report, then open lower the day after.

If you are right, and the stock continues the climb after the earning report, you could hit the "home run". But, my approach takes the "sure thing" profit. If you look at the return of the quick trade based upon how long your funds are invested, the return is huge.


Maybe you could sell off 1/2 your options tomorrow, and keep the rest for the big gain.

Good luck with whatever you decide to do.

[rovo]

Apple had a nice run-up today, closing at $373.80 and in after-hours the last bid / ask is $375.01 / $375.11 so this bodes well for a continuation tomorrow.

The options gained quite a bit today and are as follows:
AAPL Aug 20 2011 370.0 Call Cost = 8,600 Current = 16,550
AAPL Aug 20 2011 400.0 Call Cost = 4,000 Current = 5,300
AAPL Aug 20 2011 410.0 Call Cost = 2,450 Current = 3,400

What I'm thinking about doing is selling the two out-of-the-money options before tomorrow's close and hopefully they will be worth enough to cover the cost of the in-the-money option. The ITM option appreciates at a faster rate than the other two.

[rovo]

AAPL is looking good this morning in premarket trading with a gain of about $5.50 to $379ish. Breaking through $380 would take that psychological barrier out of the way. The resistance gets bigger as it approaches $400 and if it could breach the $400 per share number today it would bode well for a continued rise.

[2kids10horses]

rovo,

This brings back memories of the old Qualcomm days!

I owned options on QCOM when it announced it was going to split 4/1. WOW! What a rush! Then, right before the ex date, literally in the last hour or so of trading, they plummeted. This was back in Dec 1999.

I'm happy for your gain. I'll be even happier for you if you 'realize' some of your paper pofits.

Set reasonably tight stops. Good luck!

[rovo]

We can't lose sight of valuation when talking about AAPL. Yup, it has been running up nicely, not unlike the go-go days of the tech bubble but there is one very, very large difference. The PE of AAPL is not triple digits like all of those back then. Even with the run-up the PE is 17.82 (ttm). A very modest PE considering the growth of revenue and profit. It is still in the "value stock range" in my opinion.

[rovo]

Finally AAPL has crossed below yesterday's close and thus has closed the gap. Now we can move on to bigger and better prices.

[rovo]

We don't seem to be moving on to higher prices with AAPL. Strange in my opinion. The run-up over the past week or so has been minimal. Are results going to be bad and some know of this? I have sell orders in for two of the three Call options I'm holding but the prices are substantially above current values.

I just figured out what is going on. The market is waiting for me to take my afternoon nap before doing something. I can't react if I'm snoozing.

[livinincali]

AAPL has run up nearly 20% in the past 4 weeks from the Jun 20th lows. I call that a substantial move into earnings. I'm guessing AAPL's huge beat is now priced in so I'd make this trade today if I was confident that AAPL wouldn't pull a GOOG on earnings. I think rovo might be right about AAPL, people might panic buy it, but my gut says the trade below will at least net a profit if you buy the call and put back tomorrow.

Sell the August 365 put for 9.60
Sell the August 385 call for 10.40

Basically I'm beating earnings doesn't move the stock much more than 5%, and based on recent earnings history for Apple that is a pretty good bet.

[rovo]

According to TD Ameritrade GOOG did earnings of $8.74 vs. expectations of $7.85 for Q2. They beat expectations by 11%.

So for AAPL to match GOOG with the "surprise" against expectations of $5.85 they would have to report $6.50. I am expecting $6.42.

I'm directing this question to Cali .... What earnings would you need to have reported in order for your previous analysis to be moot?