Buzz on the Street: Stocks Rally Ahead of Labor Day on Weak Volume

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Monday, August 30, 2010

Newton In Reverse?
Jeffrey Cooper



Apple (AAPL) tailed up on Friday after undercutting the well watched 240 level and is following through today setting up a test of the overhead 20 dma and the 250ish level.

Often a good low is put in after a flush of widely watched support, so the action in AAPL will be interesting to observe here.

See AAPL's daily chart below.


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What we Need to Go Higher
Quint Tatro



In order for the bulls to keep taking us higher I believe we need two things. 1.) Non-believers and 2.) New Shorts. In order for this to materialize I think we need pullbacks that make the hairs stand for longs and weed out the short term traders. We’re seeing this materialize as I type and I suspect late comers from Friday’s ramp are starting to get a little ancy. Furthermore, those who opened up their screens this morning or late last night are probably feeling pretty good about their new found short positions. From my perch my line in the sand for this rally attempt is Friday’s lows. It’s as simple as that. If we lose Friday’s lows in the near future, thus falling back below the critical 1040 level, I will once again assume the bulls have failed and the bears are in control. If that doesn’t happen, I’ll be looking for long side setups and watching the action closely.

Intel (INTC) is not getting enough credit for Friday’s green close, post a trading halt and issuing lowered guidance. It is my belief that this pup does need to continue with its character change from Friday and move higher in order for the market to have a sustained bid. To put my money where my belief is, I took some INTC long down here and will bail if it does not hold Friday’s low of $17.80. The pre-halt price is $18.17. If INTC climbs back above this level, I’d look for the bulls to start running other areas.

Position in INTC

Dancing With the Stars
Smita Sadana



After taking trading opportunities in names like Baidu (BIDU) and Hewlett-Packard (HPQ), I have Apple (AAPL) on my radar. I think it might try to play catch-up with the market's move on Friday. Apple's  Sept 1st event might draw bystanders into the stock, especially given its recent lackluster performance. Buying enthusiasm as evident by an increase in volume will be an important tell.

Its 20-day SMA is at 251.35.

As a reminder, I always operate with stops. Imagine the risks of driving without adhering to road signs!

Position in AAPL


Tuesday, August 31, 2010

Market Thoughts
Smita Sadana



The bears fought strong and hard this morning, but the bulls managed to have their say. Just like Friday. Could it be that the market has become relatively immune to bad news?

I would lean on Russell and Transports to help define the short term picture. I would also stick with the index ETF’s, rather than establish large positions in specific names since there is nothing worse than the feeling of watching selected stocks do nothing, even if the market decides to move higher. Individual names do not necessarily respond well to this choppy environment - a 90% buying day, followed by a 90% distribution day.

Speaking of select names, GS is one name that I am looking at, on the long side.

Position in SPY, IWM, GS

Rocco Communications Withdraws Offer for Mediacom
Steve Birenberg

I'm getting burned this morning at Mediacom Communications (MCCC). The stock is down 19% after CEO Rocco Commisso withdrew his June 1st offer to take the company private at $6.00. I bought MCCC in January at $4.47 based on projected free cash flow of $1.30 growing slightly in the future. I still have a nice profit but today's decline has a material negative impact on my performance. After a quick initial analysis of limited facts, I added more today at $5.50 because this is a very cheap stock and based on speculation and Rocco's press release this might not be over.

MCCC has over $3 billion in debt, projected EBITDA of $557 million in 2010 and $571 million in 2011. Debt to EBITDA is over 6 times and debt makes up over 90% of the enterprise value. When I bought the stock in January, I figured if the EBITDA multiple held steady around 6 times that $1.30 of free cash flow value would transfer from debtholders to shareholders each year. Essentially, MCCC was a publicly traded LBO. Other cable stocks trade close to 5 times EBITDA so some of this story was in the stock but the free cash flow shareholder enhancement was significant and I figured at worst I was early. In addition, with cost of capital low due to strong credit markets and lots of NOLs, free cash flow, not EBITDA is the better valuation metric.

The story remained the same until June 1 when Rocco offered $6. Obviously, he saw the LBO story and figured he should keep the upside for himself. He already controls the company with 87% of the voting power and 40% of the economics. Once an offer was on the table, valuation has to include many years of future free cash flow that drives the deleveraging and sets up a very attractive return-risk profile for private investors. Right away, the buyside media mafia was talking $8 to $10 for a deal to get done. I'd have been happy to tender at $8 even knowing that at that price Rocco was likely getting a steal with huge leveraged returns.

All was quiet until today when Rocco withdrew the offer. He says that he made a "meaningful increase" to his original offer. He also complains about the process of the Special Committee of the Board, noting that he was willing to abide by a vote of all other shareholders.

I am hearing that he may have raised his offer to $7.50 to $8. If so, I am mad at Rocco because to go to $9 would have cost him just $70 million more given the small equity market cap. On the other hand, I am hearing that several of the largest shareholders were threatening the Special Committee with lawsuits if they agreed to anything less than $9-10.

If all this is true, it seems like the Board is in a very bad spot. How can they not go public with an increase in the offer to $7.50 or $8? How can they allow a few large shareholders to influence their decision-making?

Of course, we haven’t heard form the Board yet. Rocco struck first in the PR war. If the Board strikes back and indicates that Rocco's "meaningful increase" was only to plus or minus $7, the potentially bullish analysis I just presented takes a big hit. In that case, $5.50 probably offers little upside in the short-term.

I can’t wait for the full story to come out. In the meantime, I still like the risk-reward tradeoff as the free cash flow isn’t going anywhere and the possibility of a deal still exists. What worries me is any downgrade in the forward estimates. That seems unlikely given the stable, albeit low growth profile of owning cable systems, but competition from satellite, telcos, and internet video is intense.

Position in MCCC

Bullish Pattern Emerging
Tarquin Coe



Last week's reversal by the S&P 500 from 1040 and this morning’s retest has confirmed that level as concrete support. The index is expected to rally from here and in doing so build the right shoulder of a potential inverse head-and-shoulders. Trading over the past week looks to be building the inverse peak, of the right shoulder, of the pattern. A break through the pattern’s neckline at 1130 would literally open the flood gates, as bears rush to cover shorts. That breakout would activate the pattern’s target to 1250, some 18% from current levels. Other key technicals, including sentiment, momentum, breadth and volume all support the potential of this base.

The bullish ramifications of this pattern are huge and all bearish equity positions should be exited. The risk to reward ratio also favors buying the SPDR S&P 500 Trust (SPY); using a sustained move beneath last week’s low as a stop.


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