MorningWord 11/15/12: The News Could Get Less Bad, And We Are Getting Less Bearish, For Now

by Dan November 15, 2012 9:27 am • Commentary

MorningWord 11/15/12:  This morning in his MacroWrap, my esteemed colleague Enis Taner teased readers with his inclination to hang up his “Bear Suit” for the time being. But let me be clear, this is a short term stance predicated on the SPX’s near term oversold condition, macro inputs that may suggest that selling is abating, and the dramatic short term sentiment shift we have seen of late. While I share his sentiment that we may bounce soon and re-trace a portion of the 8% sell off from the Sept highs, I would suggest that the range may be in for the year and that it could be 1400 to 1300, which at this point we are basically smack dab in the middle.  

There are a few potential problems with getting too bulled up right here. Could we rally a few % from 1340/1350? Probably, but I am not sure where the leadership is going to come from.  We have remarked time and again throughout this year’s bull run, that there were a very few stocks doing a lot of the heavy lifting for the major indices.  One by one, former leaders like AAPL, WMT, Pharma stocks, MSFT, CAT, NKE (to name just a few) have been taken apart.  Heck, CAT was up nearly 30% on the year back in February, and since it’s Q2 collapse, the stock has been wallowing near 2 year lows.

The 5 yr chart of CAT, shows exactly how perilous it’s current position is……did the matched highs from Q1 signal the mother of all double tops??

[caption id="attachment_19467" align="aligncenter" width="490" caption="CAT 5 yr chart from Bloomberg"][/caption]


I signal out CAT as this company was the poster-child for the global growth reflation trade, appreciating 450% off of the 2009 lows.  So as our economy is paralyzed by fiscal concerns, Europe’s economy has fallen back into recession, many investors will once again expect emerging market demand to be the savior for the world economy, as it was back in 2009/2010.  I am not sure that is coming any time soon is my point, so where is the leadership gonna come for a sustained rally?

The best chance for a move back above 1400 and to maintain those levels would be some fairly well telegraphed compromise on the “fiscal cliff” and it would likely be a moonshot right back to 1430, but i am not holding my breath.  We are systematically taking off shorts as we don’t see the risk reward of pressing the weakness here, and would like to play for a near term bounce in the days to come, but we are not by any means going all in, I have my list of names that I want to buy on pull backs (CSCO. YHOO, FB and maybe even AAPL & INTC).  SO the name of the game here is to move your feet, don’t get caught pressing the lows, and leg into some longs, without being afraid of taking quick profits, if u get them!





MorningWord 11/14/12:  Last night CSCO reported results for their fiscal Q1 and issued Q2 guidance that were in line to slightly better than what could only be described as modest expectations.  My thoughts yesterday morning in this space was that CSCO CEO John Chambers would see little upside by sticking his neck out to far on the guidance front, regardless of how good he felt about business given the fiscal and macro uncertainty here and abroad.  I think it is safe to say that he came short of calling a “turn.” But the status quo, with a cautiously optimistic bent for a company like CSCO that has been in a multi-year turnaround, appears to be good enough as the stock is bid up 9% in the pre-market. Far outpacing the implied move of about 6.5%.  

Late yesterday I bought a calendar Nov/Dec 16 Put Spread for .15 (read here), as described in the post, a low premium, defined risk way to play for a move lower,  in-line or light of the implied move.  I also stated that I had no idea what the guide would be and that I didn’t have a strong opinion on near-term direction.  With the stock up today, the Nov premium will basically go to zero, and the Dec will be worth pennies, at this point I will just hold onto Dec as there is no reason to sell such a low delta option that still has a little more than a month to expiration.  When I look back on this trade, which clearly isn’t over, I think it is safe to say that as a trader that I have to get in there and put some things on, full well knowing that the trade will not be a slam dunk.  In this instance, the premium was so low I felt that if I got the direction just a little right I had a very good shot of at the very least, making a little money and a strong shot of doubling my money.

As for CSCO the stock going forward, this is a name to keep a very close eye on, it appears they are bucking a few trends that have hurt some of their competitors of late, and who knows, maybe Chambers is going to pull off the turnaround of the post turn of the century tech bubble that once great tech companies like MOT, NOK, NT, YHOO, DELL etc etc etc have been unable to do.  As I said yesterday, “CSCO is a stock that should benefit from certain secular trends in the new wired world, but maybe not just yet“……well at this point, given the steady performance and guidance in a very difficult environment, the  low valuation on many metrics, the rock solid balance sheet, their dividend yield of 2x the current yield of the 10 Yr Treasury and their unique dominant positioning in routers and switching that appear to be businesses poised to benefit from a massive data center growth, all make CSCO a better than decent BUY on a pull back, which at this point will only come near term in sympathy with a broad market sell off.

Who are the buyers of the stock? Value investors? Those looking for turnaround to growth?  Those looking for yield? Those looking for international exposure, particularly emerging markets? Those looking for a turnaround in European demand? etc etc etc……and this is by no means a difficult name for mutual funds that have been underweight the stock, to pile back in for all of the reasons listed above.  The company has almost 50% of their market cap in cash, there will be decent support in the mid teens.  This is a name that is clearly on our radar as a long.  Wall Street is having a little Love-Fest with CSCO this morning and I wouldn’t chase it above $18, but I would be inclined to start nibbling on the stock if it falls back towards 17.50-17……




MorningWord 11/13/12: Brick by brick, it seems that investors are taking apart this year’s tech rally in that had largely been built by a handful of large components.  Q3 earnings season started out with fairly sizable disappointments from INTC, IBM & GOOG, and spread their way to AAPL, AMZN, MSFT, TXN, JNPR.  To be fair there have been a few bright-spots, namely: EBAY, YHOO, FB & QCOM, but in most cases, the surprises can be largely explained as stock specific.  

Make no mistake about it, consumer spending for technology products is becoming a bit more fickle of late and there are becoming clearer and clearer winners and losers with many key product categories increasingly looking like 2 horse races (sorry MSFT).  As it relates to Enterprise Spending, it appears that many managements would rather plow their cash into Treasuries yielding 1.65%, pay dividends and buy back their own stock rather than invest in their business. Most Fortune 100 tech CEOs are not exactly in the Obama camp and are probably less inclined now to deploy capital in the face of that what many believe is an outright Obam’ination as it relates to the White House’s largely fictitious anti-business policies.  C-level executives who are likely to see their tax rates come under attack, both personally and professionally appear to be incentivized to “play possum” for the time being and see how the little “fiscal cliff” thingy plays out.

Oh, back to tech stocks. There will be no PC upgrade cycle, tablets and smart-phones are cannibalizing PC sales, carrier spending for telecom equipment is depressed,  more and more profits in technology are being concentrated among a smaller and smaller group and spending across the spectrum seems paralyzed with today’s excuse being the “fiscal cliff” but could be interchanged for the 2011 and summer 2012 reasons of Euro debt crisis or slowing global growth.  We have talked about all of the issues for months on the site, and what appeared to be fairly clear to us is now just starting to resonate with large holders of these perceived safety stocks, as investors seemed hypnotized by many of these stocks fortress balance sheets, low valuation and healthy dividend yield.   If you want to park many in some of these names have a ball, but recognize the days of dramatic growth are done, and now it becomes a fancy game of financial engineering to make most investments in the stocks look more like fixed income investments.

In the next few weeks, and starting tonight, we will get another spat of results from off-cycle tech companies, starting with CSCO tonight, NTAP and DELL later this week and HPQ and CRM next.  For the most part I think expectations are low for all except CRM, but I don’t see any doing much for already depressed sentiment in the space.

We previewed CSCO’s fiscal Q3 earnings event (here), and frankly see little chance of an overwhelmingly positive take away given recent carrier comments regarding capex, and their competitors results and guidance given last month, and don’t forget, CSCO CEO John Chambers is not only a big Republican, but he is a HUGE Republican.  I can’t see him really sticking his neck out on outlook when Obama holds the key one of the near-term uncertainties.



MorningWord 11/12/12:  As a 40 year old dude with a wife and 2 kids, I don’t get to watch nearly as much NFL football as I once did and that I would like to.  My viewing usually starts midway into the second afternoon game with repeated family and work related interruptions until I pass out in the 3rd period of the evening game. Ok maybe a little too much info, but this is where I kind of tie it all in, was it just me or was your NFL time yesterday totally ruined (regardless of the network) by the incessant barrage of un-watchable  MSFT Surface commercials??  I mean, I guess you can’t argue with MSFT and their hardware providers of Windows8 to give the whole thing a shot, but come on, I have to assume that they scared away more consumers with that whole “Click” business than they were likely to gain.  If you havn’t seen the commercial, have a go, but I advise that you do so with any empty stomach and then tell me I am wrong:  


I’ll give you a moment to get it all together………….ok, back.   I don’t get MSFT’s foray into hardware; they are likely to alienate any potential hardware partner who was possibly inclined to license Windows 8 for tablets whether Surface succeeds or not.  But let’s be honest, it doesn’t have a chance of being a profitable endeavor.  If you are a Bull on MSFT for the obvious reasons – strong balance sheet, strong cash flow generation, high recurring revs, low valuation and 3.2% dividend yield – I get all that, probably a safe place to park some cash.  If you expect a Windows 8 upgrade cycle, or the company’s entrance to the tablet market on the hardware side to help re-accelerate sales back above single digits, I wouldn’t hold your breath.  It seems like the more MSFT tries to innovate on an already existing category, the more they set themselves up for failure (see Bing, Lumia & Zune).  I guess you can’t fault them for trying, but at what point do investors just say enough is enough.

Obviously I am not a fan of the stock, and think that north of $30 could be a great entry point for a bearish position heading into the new year as Windows 8 sales are likely to disappoint for a whole host of reasons, the largest being sluggish corporate tech spending due to global economic uncertainty.  But the realization of MSFT’s initial failure with the Surface is likely to be fairly bad for sentiment.

One caveat on the short side for the next month would be the potential speculation that the company pays a special dividend to shareholders prior to capital gains taxes going up in 2013. The company has $66 billion in cash on their balance sheet.  Given their acquisitions of the last 5 years, Aquantive, Yammer and Skype to name a few (MSFT recently wrote off the entire $6.2 billion purchase price of Aquantative), I bet investors would have preferred to have the cash instead.  SO my point there is that SKYPE is likely to be a loser, YHOO would have been a massive loser in 2008, so this company seems like they have no clue how to acquire companies and use them to add value.  Huge dividends seem in order, and investors may start to get enthusiastic about the prospect of a special dividend as the company has done so in the past ($3 special in 2004).

If the dividend tax goes back to levels pre-2001, the rate could go next year from 15% to ~40%, when you consider that Bill Gates and Steve Ballmer own about 9% of the stock combined, I would assume this would be a fairly decent outcome for their own personal finances!  So be ready for the speculation to begin, which could give bears a better entry point for a bearish trade for fiscal Q2 results expected in late January.