Buzz on the Street: Facebook's Happy Ending
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
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Monday, October 22, 2012
GOOG, the VIX and Ghosts of '87
Last week was interesting. We saw Google (Nasdaq:GOOG) botch their earnings release and it showed they have some serious issues with their acquisition of Motorola Mobility. Professor Comeau already detailed what those were here, so I won't waste anyone's time by regurgitating it.
Besides, that's not what I'm curious about at this point. And it is a genuine curiosity since I don't know the answer. What I noticed in Friday's meltdown, as everyone talked about where they were and what they were doing when the Crash of '87 happened (I was a sophomore in high school, hoping this girl on our high school field hockey team who was in my Chemistry class would notice me and I would take her to Homecoming. She didn't.), the VIX saw an uptick. To 17.06. I don't think folks realize just how far this market has moved on no volatility whatsoever. While the VIX's move on Friday represented a 13% move, it's from a low base. Convexity affects all asset classes, just not equally.
What I think we need to prepare for at this juncture is what a move to the VIX up to the low-mid 20s would look like. A potential 5-7% move lower in stocks isn't out of the question and seems like a move folks would be wise to prepare for. Whether you'll want to get long or short depends on your outlook and the positions you have today, so I can't speculate on what will make the most sense for anyone's portfolio.
In the meantime, you may want to get ready for some more volatility, especially if earnings keep coming in like we've seen.
Facebook Options Look Cheap
Call me crazy, but Facebook (Nasdaq:FB) options are looking awfully cheap ahead of earnings tomorrow.
The $19 straddle on the weekly options implies a ~12.5% move by the end of the week. While 130%+ implied volatility readings seem expensive on the surface, in this case, the pricing actually seems awfully conservative to me when you think about how controversial Facebook is, and all the mixed noise this quarter, which includes:
1) Mark Zuckerberg's bullish-on-mobile interview at the TechCrunch Disrupt Conference
2) COO Sheryl Sandberg's CNBC appearance where she talked mobile engagement but not revenues.
3) A mountain of analyst target-price cuts and the BTIG downgrade to sell.
4) The Barron's article.
5) The blow-up at Zynga (Nasdaq:ZNGA), which destroyed sentiment towards social gaming.
Now last quarter, Facebook had a mild disappointment in certain metrics and it fell by nearly 12%. I suspect the stakes are higher this time around. The Facebook bull camp has been burned twice already -- on the IPO itself and the second-quarter results in July. After a third disappointment, those folks will probably throw their hands in the air and give up, sending the stock into the dumpster. And as it stands now, a lot of the hope was driven by Zuckerberg's TechCrunch conference interview, even though it's not evident that he was talking about near-term results.
On the other side of the coin, if Facebook beats in the face of huge negativity, it's likely going to skyrocket as momentum investors come back and extrapolate a good quarter into the future. I am still short Facebook (though I've reduced the scale of my bet), but I fully acknowledge that if I'm wrong, I'm not going to be a little wrong -- I'm going to be a lot wrong. For that reason, I am looking at buying calls to hedge against this scenario simply because the calls look so cheap in comparison to the potential upside move in the stock.
As we head into the thick of earnings the markets are at an inflection point and so are key stocks. I've spoken about the weakness in transports and semiconductors for weeks. Now you can add on high beta tech as of the end of last week. Financials are the last group that is holding us up in my opinion.
Caterpillar (NYSE:CAT) earnings out today and the guidance was weak, we all know that by now. Same thing was said when Q3 earnings kicked off with Intel (Nasdaq:INTC). Use them as a proxy, along with everyone's darling stock Apple (Nasdaq:AAPL), as a guide. We still have not fully broken down, although the feeling in your gut says otherwise. Below are the charts of CAT and INTC. Both are approaching uptrends established at the 2009 low. Important?
Looking at the broader tape, we have the 1420-1425 area that has been widely highlighted and is now being watched with utmost importance. Imagine the amount of sell stops that are sitting there? Anyone not truly committed to the bull case with kick their positions if violated. Why? Again we find the uptrend established at the 2009 bottom sitting here. We have the uptrend established at the June 2012 low. We have the previous spring 2012 highs (past resistance flips to support). Looking at the QE world we live in, you can argue that we are experiencing a post QE hangover pullback, thus far under control. Look back to Oct-Nov. 2010. We received a 4% pullback after QE II was announced and created a bull flag just before the market lifted higher for four straight months.
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Tuesday, October 23, 2012
ES Hits Sell Target
I posted yesterday that stronger sellers would come back at ES (SPX futures) 1434.25. They did oblige as the high during last night's trading was 1433.25, 1 point shy. As for NQ (NDX futures), it is retesting Sunday night's low, which will enable cash (NDX) to do the same test. Eventually we will test 1365 (futures, cash is a little higher), making the same retrace off June lows that NQ(NDX futures) did. Per my other post, gold would sell and it is going down as well, testing 1700..
For today's trading, ES has a gap at 1396.75 and naked volume point of control at 1398, a potential magnet.
The continuing revelation of slowing earnings growth further reduced guidance is weighing on equities; bonds, commodities and currencies have related but separate global and monetary concerns. Interesting factoid courtesy of Bespoke regarding yesterday's technical and machine driven afternoon squeeze; in the past 30 years there have only been 48 occasions in which the S&P 500 (^GSPC) has been down by more than 0.5% heading into the last hour and then managed to finish in the green. The market tipped the lows, found barely any stops and no new selling and then everyone figured this was just another false breakdown and the rally will resume and the buy programs went into overdrive. Do we need to review the theory of max pain ?
The Courage of Your Convictions
Yesterday I sent out a late Buzz as markets were worsening, noting the deterioration and corrective risks that I continue to hammer in my writings. Then, as if to spite me, markets surged in the final minutes to close green. The move was unjustified, and today appears to be the reversal of that. The October Correction appears to be in full swing for now as all the wrong areas lead, the deflation pulse beats, and the nouveaux bulls who refused to believe in the June melt-up call pile in. There are times when markets need to refresh the fear, and I believe that is what is underway now. All along I have stated that a move back to Dow 13,000 would not surprise me, and we are rather close to that. The question now is if a deeper correction is coming. I maintain that the set up is for something similar to the May "mini-correction" given that various market internals look similar to that period earlier this year. However, remember that everything in markets is a moving target. This remains a challenging period to attempt catching a falling knife. I will be discussing this on CNBC today at 4:10 PM EDT. Tune in.
Wednesday, October 24, 2012
Yesterday, Facebook (Nasdaq:FB) delivered exactly what investors needed to see -- a big acceleration in mobile revenue, and that's driving a huge 25%+ rally, and a big hole in my pocket this morning as I went into the report very short.
Quite stupidly, I failed to modify my strategy even though an obviously lucrative trade appeared on my radar screen.
Given the enormous controversy surrounding Facebook, I was very, very confident that the options were too cheap heading into the report, and with the benefit of 20/20 hindsight, the smart trade would have been to simply bet on a big move rather than a directional one.
At current prices, the $19.50 straddle (buying both the call and put) on the weekly options should open up around $4.70 -- an 88% gain from yesterday's close at $2.50.
So I'm going from sitting on a decent-sized gain to a decent-sized loss because I went for the big payoff instead of relatively easy money.
The lesson is simple -- it makes more sense to swing for a high-probability single or double over a lower-probability home run.
Yesterday I shared, "Facebook (Nasdaq:FB) continues to hold the all-important $19 level BUT earnings tonight will move the stock $5 in either direction, in my view." The stock is trading $5 higher this morning BUT I'm not there. Harumph.
NDX (^IXIC) 2650 -- the 200-day moving average we were spying yesterday -- also held, with eight handles to spare. See the chart below -- I can't tell you if that was a test or the test but it warrants a mention as we stair-step our forward strategy.
The fly in yesterday's pie was the financials -- Goldman Sachs (NYSE:GS) and Deutsche Bank (NYSE:DB), in particular -- and they remain on our radar today. I will also note that Barclays (NYSE:BCS) opened RED in a green sea, which is typically a telling sign of supply.
What's the difference between the Federal Reserve and the European Central Bank? The folks across the pond aren't afraid to utter the dreaded "D" word. Remember, Deflation in a fractional reserve banking system means that policymakers have, for all intents and purposes, lost the battle of evermore.
Yes, now I have to link to some Zepp!
Expect a probe lower and watch our tells (breadth, financials, Apple (Nasdaq:AAPL) for their relative reaction to said probe, if and when. And don't trade scared -- trade to win, never trade "not to lose."
Good luck today.
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ES and NQ Views
The only reason that S&P futures (ES) didn't suffer even greater carnage yesterday is because of NDX futures' (NQ) support location that we have been highlighting over the past several days.
If ES was trading at NQ's comparable location, the ES contract would be trading in the 1370 area, see below. Both charts include the Tuesday overnight session indicated by the far-right candle.
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Thursday, October 25, 2012
Rarely I've heard so much uncertainty about an upcoming Apple (Nasdaq:AAPL) quarter as I am hearing this time, including from folks who know this company inside and out. With that caveat, here is my 1 cent on the subject.
What I can't shake about this Q is that the iPhone 4's obviously were not selling, and short supply of 5's was pretty well advertised; what I can't wrap my arms around is whether the supply constraints were within the company's plans. iPad sales were also probably on semi-hold because of the pending iPad-mini announcement. And desktops/laptops got a major refresh on Tuesday; if "Apple disciples" got wind that was coming, we could see weakness there as well. And what's all this stuff about trade-in programs? Since when does AAPL need a trade-in program; Weren't there times when people would pay full price for a prior generation gadget while the next-gen was priced even higher? It just doesn't feel right to me.
Bottom line: I think there's a high chance that FQ4 is going to be a dud, but that they'll crank up FQ1 guidance pretty high. But here is the catch: FQ1 estimates are already for 64% sequential revenue growth, and that's the single highest Q/Q expectation I can find going back to 2002. So the bar is set very high. If they can get over it, and Q4 is not too bad, I think the stock gets a pass. Otherwise I think it sees the 200DMA ($586); on a miss and poor guidance, it could easily print a sub $550 price, if only for a short time.
The wild card remains margins. The pricing of the iPad Mini at a premium is a huge tell that AAPL is conflicted/struggling with how to hold margins at what - I think - are ultimately unsustainable levels.
I have a position in AAPL that won't make me or lose much of anything unless the stock goes below $550 or above $660. I'm not interested in being exposed to what even people much smarter than me can't see coming, but I know I am a buyer/seller at the $550/$660 area.
Now that we're officially halfway through earnings, let's break down how this season has been so far.
Of S&P 500 companies:
- 39% have beat revenues
- 71% have beat earnings
So the cost-cutting measures are really working.
Of NDX-100 companies:
- 48% have beat revenues
- 73% have beat earnings
Of Russell-2000 companies:
- 46% have beat revenues
- 57% have beat earnings
The major problem is that the average sales beat over estimates is the worst it's been in 2 years (negative). You can see that in the chart below.
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FIO: Nothing Wrong With This Report, Just Didn't Raise Guidance
I love the smell of fear in the AH's sessions as so many times the first reaction, especially if its severe get largely washed away within hours to days. That has largely happened with Fusion-IO (NYSE:FIO) thus far, though not completely. I could say that the drop to the $23's was one of the stupidest drops (aside from the FIO drop to $18 earlier this year and the Facebook (Nasdaq:FB) drop to $19 just days ago), I've ever seen. But unfortunately it happens with far too much frequency in the last few years.
The best way I can describe the FIO quarter is that there was absolutely nothing wrong with the quarter. Current quarter growth was well over 50% and coming quarters are chugging along in the 40-50% range. The only thing the company could have done is raise guidance, but they specifically stated they were being more conservative given the market climate being somewhat poorer, as so many other companies have been reporting.
I was a bit off in my numbers last night, but correct in the reasoning. In short, over last quarter and the upcoming quarter, the company met and/or slightly exceeded prior guidance. The company moved one large order from next quarter to this quarter. Thus consensus was $110M for Q1 and $123M for Q2, for a total for first half equaling $233. The current quarter came in at $118M Q1 plus $118M Q2 equals $236M for the first half. Bottom line, the reported "miss" by many outlets is largely incorrect if not put in any proper context.
Bottom line, growth rates remain robust and it seems that FIO is causing a huge amount of industry disruption and grabbing large chunks of market share. I remain with my interim target in the $36-38 area and longer term see the shares in the $50's and higher.
I should have grabbed shares last night in the $23's and frankly tried, but by the time I was bidding the stock was around 24.50 and never ebbed back that low. I'm evaluating entry levels on the name currently, but could really add anywhere under $28.
Friday, October 26, 2012
Amazon's Minus One/Plus Two Setup
Amazon (Nasdaq:AMZN) left a Minus One/Plus Two sell setup on a backtest of its 50 dma on October 18.
Current resistance looks like the prior 240 peak in July coincident with the October 15 low prior to the snapback to the 50 dma.
A 2-day rally toward around 240 could carve out another Minus One/Plus Two sell setup.
See AMZN w/50 dma here from July:
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Apple Earnings Take
Apple (Nasdaq:AAPL) shares are barely changed following the report after a 15% pullback over the past month. I think there are several takeaways from the quarter. First, the stock price action indicates that the stock already reflects the lower expectations. At $610, the shares seem to have discounted the weak EPS guidance. Second, I think we should start to accept that Tim Cook provides realistic guidance. Most of the quarters since he took over have been closer to company guidance than to analyst estimates. Analysts have been trained to view Apple guidance as extremely conservative. Maybe that is changing under Cook's leadership. Whether this is because Apple's financial momentum is waning is a key question.
Most importantly to me, Apple may have finally reset growth expectations (or the market have reset growth expectations for Apple). Trailing twelve month earnings growth over the past eight quarters has varied from 60% to 96%. If guidance proves correct, earnings growth in calendar 2012 will be just 20%. For a long time, Apple shares have traded at what seems like a very low P-E multiple relative to the growth rate of its earnings and to its product and market share momentum. This is because investors had long anticipated that the growth rate would slow if for no other reason than the law of large numbers. Apple sold 37 million iPhones in the December quarter a year ago. The guidance implies around 46 million this year. To sustain 20% growth means next year they must sell 55 million. At some point, the end market and Apple's market becomes mature.
Investors are smart and realized this was coming and kept Apple's valuation in check. Current controversy over iPad demand and corporate gross margins is likely to be what determines whether Apple shares get their upside mojo back. Management discussed the huge opportunity for iPads against 300 million PCs still sold each year (Apple has sold 100 million iPads in 18 months). iPhones still have growth as smartphone penetration continues to grow on a global basis but the sheer size of iPhone revenue ($29 billion in the most recent quarter representing 55% of sales) means that iPads have to pick up the slack. Broadening the product line with iPad mini makes sense in this regard.
Gross margins also have to firm up. Another key question is whether Apple has to accept lower margins to drive product sales. Maybe the competition is catching up? This is a fair interpretation of the guidance. Management indicated that margins should rise as production ramps and products mature. Apple does usually guide gross margins conservatively. If that proves to be the case this quarter then investors will be comfortable in the company's competitive position and the likelihood that future growth is sustained at 20% or even re-accelerates.
I believe that the combination of recent worries, the reported guidance, the acknowledgment of the slowing growth rate, and the 15% pullback in the shares have effectively reset the investment case for Apple. Backing out cash, the shares trade for less than 10 times forward earnings. Against 20% growth in FY13, this is a very reasonable valuation with much lower expectations on the part of investors.
A new catalyst will have to emerge to get the shares back on track. Signals of strong demand this holiday season and easing of supply constraints are the most likely until the company reports earnings again in January. I think both of those things will occur. If they do, then it will be clear that guidance is going to be comfortably exceeded. This is the bull case for the near-term. It is also the case I believe will occur. And never forget that as the largest market cap stock on the planet, Apple shares are going to be heavily influenced by sentiment and direction of the overall market.
Taking Short Profits
If the SPX (^GSPC) regains its intraday low would suggest taking some short profits off the table. I'd watch Financials (NYSE:XLF) for clues. XLF is trading weak and if it breaks lower, the rest of the market should follow. If it recovers sharply then chances are good we are seeing some kind of short to intermediate term bottom.
I am covering the balance of the Baidu (Nasdaq:BIDU) short now.
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