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Minyan Mailbag: Potential S&P Outcomes - MV Respect - 3:26 pm

Toddo,

We talk a ton about TA resistance and support areas for major indices on the Buzz & Banter, but I wanted to conduct a fundamental walk-through for possible 2008 S&P 500 outcomes to throw it into the collective keppe.

I had a US Strategist in my office today and we went through several of the components of his S&P earnings target and multiple to derive his year-end 2008 S&P 500 target. His S&P 500 target of 1650 was established back in January using $96 for S&P earnings and applying a 17X multiple. He acknowledged today that after 1Q '08 with S&P 500 earnings $4 below his original 1Q estimate ($19 instead of $23) that his S&P earnings number has to come down and that his estimate is more like $92 now. His numbers for 2Q, 3Q, and 4Q are step ups over 1Q actual. If he maintains (he will) his 17X multiple then his S&P 500 year end target will go down to 1564. From today's level that's +11%.

My counter argument is that we're not in a multiple expansion environment and at best the S&P multiple stays flat or only increases marginally as the bias is to the downside on earnings and investors don't pay up in that environment or in a higher inflation environment either despite what is a rather benign interest rate environment currently. Also, when you look at the underlying assumptions of his earnings, his financial sector earnings expectation needs to come way down, his Energy has to go way up and his Tech earnings growth assumption is at +15% YoY, probably a stretch. These three sectors make up 50% of the weight of S&P 500. Therefore, the $92 is likely to be optimistic but for sake of fundamental valuation let's assume it's a good number. 15X on $92 gets you 1380 on S&P 500 or -2% from today's level.

If you believe $92, the risk/reward under these set of assumptions is -2%/+11%. A minor loss if you are unwilling to pay higher multiple and a decent gain if you are willing to pay a higher multiple.

If you expect actual earnings to be more like $87, risk/reward using 15X/17X range is 1305/1479 or -7%/+5% or a negative risk/reward mix.

If you expect actual earnings to be more like $83 (some strategists on Street are there), risk/reward using 15X/17X range is 1245/1411 or -12%/0%. A much larger negative bias towards losing money from today's level.

As a point of reference, actual 2007 S&P earnings were $85 and this included $9 of asset write downs in Financials and another $1 of land write downs from homebuilders. You have to assume no further write downs this year from either group and then positive earnings growth in aggregate from the rest of the sectors to get higher S&P earnings for 2008.

Regards,
Minyan Triple M

Sprint/Clearwire Opportunities - Sean Udall - 2:03 pm

One of the bigger announcements of the day in tech land is this monster Sprint (S) / Clearwire (CLWR) deal involving Intel (INTC), Google (GOOG), Comcast, Time Warner (TWC) and Bright house. See story.

There are a lot of companies that may benefit here over time -- some are already moving like Ceragon (CRNT) and Alvarion (ALVR).

However, CLWR, the primary benefactor, has gotten smashed from premarket/morning highs. I think there is some confusion related to what happens to the old CLWR. My read on the announcement is that the "old" CLWR just got tendered for $20, but I'm still digging into this.

At any rate I view this as a solid positive for CLWR and have added the stock in the low $16's.

The other obvious lift should be going to Intel, yet they are flat as well. Again, this is how the market works and many times the initial reaction is either too extreme or just wrong.

I think both CLWR and INTC move higher on this news over the coming days and weeks.

Position in CLWR

RIMM Shot - Jeffrey Cooper - 12:36 pm

Research in Motion (RIMM) tailed off the other day at/near the same levels it did in early November (as shown in the chart below) This is significant because the November reversal occurred precisely 180 degrees ago in time. Consequently, the current reversal from resistance is 'opposition' the calendar year or circle from the prior high.


Click to enlarge

The short term trend short be determined by the behavior of this first turn up in the daily swing chart after the May 5th reversal.

If the geometry of the current pattern is in fact going to define a tuning point (high) then today's turn up should falter within the next day. Note the strong slingshot down today after the turn up, as seen in a 10 minute chart from Tuesday/Wednesday.


Click to enlarge

Looks like beaucoup short term resistance below 133 now.

Hoofy n' Boo - Terry Woo - 11:17 am

A few updates from this morning's Two Ways to Play:

From the Bull Pen:
  • Bulls like Cisco (CSCO) and may use any weakness as a buying opportunity. Sell-stops can be set below the 50-DMA ($24.70).
    CSCO is trading +0.53% to $26.43.
  • Bulls see this as positive news for the real estate sector and can scale into the DJ Real Estate iShares (IYR); sell-stops can be set near $65.
    IYR is trading -0.76% to $70.47.

From the Bear Cave:

  • Bears can play the downside in the tech ETF (XLK); buy-stops can be set above the 200-DMA near $25.75
    XLK is trading -0.08% to $24.96.
  • Bears looking for a related downside play can find one in Home Depot (HD); buy-stops can be set above $30.30.
    HD is trading -0.07% to $29.26.