Monthly Archives: January 2008

Google Misses

I sure hope you paid attention to yesterday’s blog. I just wish I had!

Google today missed analyst estimates and the stock got hammered in the after-hours. It was down 6.6%. This was such a predictable outcome and I just wish I had done something about it. Well never mind, no point worrying about that now.

On another note the Dow halted just above a significant mid-retraction zone. If it weren’t for tomorrow’s payroll numbers I would probably open short positions. The problem is I don’t have a clear steer on what to expect. The AP jobs report earlier in the week showed 130,000 new jobs, but initial claim was at the highest level in years. I am also sure the payroll numbers are subject to political manipulation. The market has fairly low expectations (67,000 increase), but given the current mood it is impossible to predict how it will react. A negative number will probably be an excellent signal to start shorting the Dow down to 11,000. If this happens watch global equity markets fall. A positive number will probably lead to a short term rally.

Finally watch the Aussie closely. It is hitting trouble at the 9000 level, but I can see this being broken though in the next few trading days and possibly a new record high being set. The Reserve Bank of Australia is due to announce on 5th Feb. If they do keep rates on hold, or even increase, this will lend more support to this movement.

Bearish signs are everywhere

As widely predicted the Fed cut rates by 50 basis points and the dollar got smacked. While I am pretty happy about the profits I banked on the Aussie today, the action on Wall Street was incredibly bearish. All three major indices gave up substantial gains on the day in the last half hour of trading to finish down on the day. On Friday the employment reports come out, so this might still give some short term support to stocks. After this point I am fairly certain I am going to start shorting the indices.

I have been doing more analysis on the system and there is a definite mid-retraction zone at 12,550 on the DJI. With today’s substantial pullback from just above this level, this looks like it might be a key point and I am disappointed I missed this in my earlier analysis. As I mentioned though, I think there might still be a chance to get in on this later in the week.

I closed out all my Aussie positions on the first spike, then bought in again on the post move dip. I can still see appreciation in this over the coming months, although it is now at the key 9000 mark.

On another note Amazon got fairly badly beaten up in the afterhours market, largely based on a revised downwards outlook. The same happened to Yahoo and eBAy. Google announces tomorrow and I wouldn’t be surprised if the same happens again. I might be tempted to short this stock tomorrow, but am going to see what happens to AMZN during the day and also the rest of the market.

The week ahead

I feel quite tentative towards the market this week. Obviously the Fed start their meeting tomorrow and are due to announce their decision on Wednesday. This morning the futures market indicated an 84% likelihood that they are going to cut rates another 50 basis points to 3%.

Well you know my feelings about this!

To be honest I think that the Fed have boxed themselves into a corner. Not to cut rates, will probably lead to a market rout, such is the clammer calling for one. Cutting rates will simply delay the inevitable and probably be more destructive in the medium/long term.

Given the nigh on certainty of a cut I am going to stick with my long Aussie position. It has performed really nicely in the last few days and I am sitting on a decent surplus and think I am going to open further positions tomorrow and/or Wednesday.

In terms of other areas to look at Cable has reached a long term tertiary value zone and could be expected to rise again, testing the highly important $2 level. Volume flow has flattened in recent weeks indicating that the selling of Cable might have been abated, at least temporarily. To be honest, I am less confident on this one and doubt I will trade it, although I will not be surprised to see it rise.

Finally keep an eye out for the following index set ups:-
- FTSE100; @ 6,245 – short
- FTSE100; @ 5289 – long on a very short term basis
- DJI; @ 13,144 – short
- DJI; @ 11,051 – long

I believe the FTSE plays will happen a lot sooner than the Dow, but we might see a surge in US stock after Wednesday.

Long Aussie Dollar

I mentioned in my blog on Tuesday that I was opening a frivolous position in the Aussie Dollar.
Today I feel a lot more serious about it.
Just to recap three factors caused me to go long on a June contract:
(i) The Governor of the Reserve Bank of Australia made a statement that they would not follow the US in cutting rates as they were far more concerned about inflationary pressure. This really struck a chord with me.
(ii) AUD/USD was in a medium term value zone at about the 8650 level
(iii) I was sitting on a nice stack after Tuesday’s madness!!

OK so I am bragging with point 3, but after today’s eBay carnage, I can be allowed that – more on eBay later….. Points 1 & 2 however are compelling arguments and so far the Aussie $ has risen. I have looked into this currency more and I can see it appreciating over the next few months. The Reserve Bank is due to make their next announcement on monetary policy on February 11th, where I expect them to keep rates on hold. There is an off chance they might even raise them, if their last statement is anything to go by.This is extremely significant. Even though credit conditions are extremely tight, the carry trade still is still an important feature of global banking. If the Fed cut rates further next week, the difference between Aussie and US rates could be as much as 375 basis points.

Under such conditions I can see the AUD only going one way. I see two clear impediments in the Aussie’s march upwards. In the short term resistance is at 8850. If it can progress through this barrier, then the next line to break is 9000. Beyond that I can see it hitting its November high of 9250, or possibly even going further.

eBay
eBay got smashed today and I got burned. It was down 8% on huge volume in comparison to the 3 month moving average. Most commentary seemed to focus on the change in CEO and business strategy, which was felt not to be a positive step forward. I still don’t agree with this, but it will take time for the results of the changes to be seen. The critical value zone for this stock is at $23.18 and I can see that being tested. If this is the case, I think I will be tempted in on this stock on a buy and hold basis, but I will weigh it up nearer the time.

BP in a primary value zone

OK, so I am medium term bearish at the moment, but today an exciting set up occured on the system. BP (British Petroleum) closed at 503.5p. This is pretty much plum in the primary value zone. If you are part of the buy and hold crowd and are looking for a faithful stock to load up on then this is a great opportunity. In January 2007 the stock was in the primary value zone, it rallied 20%; it then pulled back to the primary value zone and followed this with a rally of 25%. It is now back into the primary value zone after a rough couple of weeks in which the price has taken a beating.

Yes I know BP has had all manner of problems, but since Tony Hayward (the Chief Executive) took over last May he has been working on a turnaround plan for the company. The company is selling a product the global economy is hooked on, prices are near record highs and they have some of the World’s largest proven reserves (a very different situation to that of Shell) and they pay great dividends.

This surely is a great company to buy into.

Validation of three primary value zones in succession clearly indicates that there is not much downside in this stock at present

eBay announces

eBay announced its results today and I have been quite surprised by the after-market reaction. So far the prices indicate a 5% decline at tomorrow’s open. It is worth mentioning that the stock indicate an 8% fall when the announcement was first made, but this improved over the course of the conference call.

Non-gap EPS was $0.45 against high-end expectations of $0.41, with higher operating margins and free cash flow than the previous quarter. Overall the company reported an extremely positive Christmas trading period, with like for like sales having increased by 54% against the same period. This was all in line with my basic assessment of the company’s prospects.

Tonight eBay also announced the resignation of long term CEO, Meg Whitman, who will be replaced by John Donahoe, who has been with the company since 2005. I am usually bullish about management changes. While it is too soon to assess this change, it does appear to have been handled in a structured manner, which bodes well. Whitman is staying on the board, which will help with continuity.

This evening I listened to the earnings call and noted the following particular points on the last 12 month’s performance:

- PayPal now represents 8% of all global online transactions. 2008 to be best year yet for PayPal, as it will be a major driver of growth.

- Skype has generated roughly $370,000,000, give or take 70% higher than last year

- 5.5 million tickets were sold to 33,000 events.

- The advertising partnership with Yahoo are going well, which the management team expect will be a substantial contributor to growth.


Overall these results represent a record financial year.


The earnings call presented a pretty optimistic picture going forward. Although the revised growth targets down (as most seem to be doing at the
moment), but still forecast growth of 11-14%. To achieve this, the new CEO wants to focus on implementing some changes to the business model to incorporate success based pricing rather than fixed price auctions. During the call the CFO stated that a lot of effort has been spent over the last few quarters assessing this. In particular eBay is going to focus on reduced upfront fees and increased success fees, changing the risk/reward ratio in the favour of customers, with the expectation of increased volume. Further announcements on this are due in the next couple of weeks, they said.


In summary both the new CEO and CFO said the “best days are ahead of us”. I am still quite bullish on the prospects of eBay. I took advantage of today’s prices and this is one I am going to hold for the time being. If it does slip down to the next value zone, I might be tempted to start accumulating some more. In terms of the short term prospects, tomorrow is going to be a very important day. I want to see how the main market reacts.

Can we trust a word of this Fed?

I loved today, absolutely loved it. I might be an uber-nerd but watching all those charts, fly up, fly down, fly up again, well, it was just amazing. I did admittedly trade like a drunk at the roulette tables, going one way then the other, but I thought “hell, why not? Everyone else seems to be at it today!!!!” Luckily (and it was by pure luck) I came out up on the day.

As soon as I closed all my positions reality set in. I really believe that today could spell disaster for the medium term.Last week I wrote about Dow 11,000. I might even revise this figure down now.

Back in September, I couldn’t believe that the Fed cut rates. I was even more shocked that they cut them by 50 basis points. They then compounded this move with further rate cuts during the rest of 2007. These looked like they were designed to bail out Bernanke’s pals on Wall Street rather than operate a sound fiscal policy. While the Fed issued statement after statement about watching for the risks posed by inflation and that the credit crunch was a self-inflicted wound of the financial sector, their actions were completely contrary to this. Inflation has not gone away (and is surely going to worsen) and if the investment banks were so insistent on lending money to rednecks to buy caravans, well more fool them.

Ben Bernanke succeeded Alan Greenspan in February 2006. After an extremely volatile summer on the stock markets this was his first real test. I felt at the time he failed it. He had made a big deal about being his own man and not bowing to market pressure. Many felt that these comments heralded the end of the “Greenspan Put”. The September rate cut was the first real sign that whatever he says cannot be trusted.

Today was even more proof of this. Towards the end of last year, Bernanke gave a speech that under his stewardship the Fed would not surprise markets. To support this he announced that the minutes of Fed policy meetings would contain more information to dampen down market speculation about interest rate policy. He promised not to cause any surprises! Cutting rates a week ahead of the scheduled meeting (the first unscheduled cut since 9/11) by the highest amount since 1984, is a pretty big surprise in my book.

The market is projecting a further 50 basis point cut next week.

I don’t believe these moves will save stocks and my fears are that the longer they are artificially supported by the Fed, the worse things are going to be, when the Bear really does start to lash out.Short term I see there being an upward move in the Dow, but I am still going to look for my place to enter.

On a related note, it was really refreshing to hear comments from the Aussie Central Bank that they are not going to follow the Fed in cutting rates. In fact they think they might even raise them. Looking at the Aussie Dollar versus the US Dollar I noted that it was at medium term support, having pulled back recently. I am now long the Aussie Dollar. Careful though in following me into this trade as I must warn you I made it largely based on the comments from their central bank, as I thought it great to hear some sense being spoken. I am going to look into this more into this, when I have some time, but I made enough today to be able to take a bit of a chance.

Finally eBay announces tomorrow. I did load up on more eBay today as the price had fallen so much. Apple announced after hours and their price has been hammered because of a large downward revision in future prospects. This has made me slightly nervous about eBay tomorrow, but for now I still stand by my defensive play.

Right back to the day job!!!

FTSE 100: 2003 – 2007 – Bull market or bear rally?

There’s no two ways about it, today the FTSE got hammered! Massive volume led to the greatest fall since 9/11. What is most alarming about this is it was on a day totally lacking any significant geo-political event. This gives a clear indication of the underlying sentiment of this market.

I have been worried about the FTSE’s lack of progress for the last 6 months. It has consistently failed to make new highs, unable to break through the 6750 glass ceiling. Of course the FTSE is not alone in this; the major European indices have all struggled to make it past the high-water mark of the dotcom bubble. On the other side of the Atlantic however, the opposite was the case as the DOW and S&P 500 soared. The UK economy is now facing some serious medium term pressure. In particular declining North Sea oil reserves, substantial reliance on the financial services sector, a tiny manufacturing base, population pressure on the tiny island, general malaise with a government that has been in power for over a decade and a punitive taxation system represent substantial challenges. There is an argument that the components of the FTSE100 are not representative of UK PLC. Well if this is the case why has it not advanced more strongly? Is there a problem with UK managed company competitiveness?

If you look at the long term charts, my biggest concern is that the run we have had over the last 4 years will turn out to be viewed as a bear rally. Proper bull markets make new highs. The failure of this market to conform to that basic rule surely has to be a warning sign. If these fears are realised, we really could see the FTSE fall below the 3500 level in the coming years. While this is something of a doomsday view I think it is far from being a black swan event.

Of course such falls do present excellent buying opportunities, for those investing in the long term, but they also bring a lot of pain with them. Those reaching retirement age are especially vulnerable. On the macroeconomic front continuing turmoil in financial markets will also mean more job losses in that sector, at a time when the economy can least afford them. Of course, I might be wrong. I hope I am. While I would like to see more of a retrenchment so I can start buying again, I certainly don’t want it to go on for too long.

So what to do now? The system is showing price entry points at the 5300 mark. Today it closed at 5,578, although the futures market fell another 35 points immediately after the close. I might be tempted to buy if it does hit 5300, but only a short term position, that is tightly managed. Alternatively if we see a rally, I will look to sell, as I am sure that we have not seen the end of this bear. Above all I think it vital to stay alert, looking for signs of a worsening climate or the first shoots of recovery. Whatever happens, 2008 is not going to be dull.

Garmin

Garmin, the manufacturer of satellite navigation equipment, was one of the fly-away successes of the latest bull market. From May 2004 to October last year, the share price flew from $14.83 to $123.80.

The last three months however have not been so kind to the stock’s price. Yesterday it touched $64.15 and was at long term support (stretching back to the start of its meteoric run). I do not believe, however, that Garmin is a buy.While the price originally rose on huge volume, this was over a long period of time. This trend has completely reversed itself in the last quarter, indicating a mass heading for the exits of institutional holders. This is always a worrying sign for a stock’s prospects. Worse still it has failed to hold two value zones.

So what prompted this?

In the event of a recession is satellite navigation one of life’s must haves? – Categorically not! However I don’t believe this is the only reason for the fall. Garmin did miss analysts’ estimates in the last round of reporting, but there are wider concerns about market saturation, the pricing of Garmin’s products and possible competitive pressures stemming from the European Galileo project. While I do like this company and enjoyed its rise, this is one to leave for the moment.

Watch out for the next earning’s announcement on the 20th of February for a future steer on the direction of the price.

Dow 11,000?

Today’s heavy sell off is a worrying sign for the medium term prospects of stocks. The Dow closed at 12,159. It is now 14% off its October 2007 high. Worse still, yesterday the Dow was in the secodary value zone. Today it ploughed through it.

While there will undoubtedly be short term rallies, not much is tempting me to go long at the moment.

A correction is generally recognised as a 10% fall in the prices of stocks. The further stocks fall the more into a bear market we go. So far this market exhibits all the characteristics of a stirring bear. It consistently failed to make new high in the last few months, saw light volume on rises and heavy volume on falls. US economic data is worsening and the general mood highly pessimistic.

Traditionally the US Presidential elections are a great boon for stocks. An incoming President signals new optimism for the country. This time however the post is likely to be a poisoned chalice. The war on terror, Iraq, Iran, Medicare, a worsening economy, a falling $ and the high oil price, are just some of the challenges facing this person.

The next value zone for the Dow is at 11,000. I think this market is heading to that price, if not worse. That said the prospect of further rate cuts could be good in the short term for stocks.I am looking to sell the next rally. The likely Fed rate cut in just under two weeks, will probably present the best opportunity to do this. Selling on New Year’s Eve (as I was thinking about doing) would have been a lot nicer though!!

Indices at Support

I checked the FTSE 100 on the system this morning after a continuous downward trend since our non-trade on 8th Jan, and its bang at the value zone today. Although we’ve not seen a large bounce-back straight away (15 points at the time of writing), I think that by the end of the week there will be a dump back down to support and then a jump off it.

I saw the same with the Dow (around support today), and given the likely 0.5% US rate cut next month, it might be worth thinking about going long. The major problem I can see at the moment though is that we are in earnings season and the market is reacting hyper-badly to companies missing targets. Centrica is also an alert from the system. The reason I highlight this one, is because Centrica is one of my favourite companies and one I have tracked for year. It has shown good historical conformation and as buy and hold, might be a stock I invest into at this point. As mentioned before, the FTSE is at support, which is really when the signals work best.

Tim is currently long FTSE100 with a January contract opening at 5970.

eBay; the first defensive .com?

General market conditions are pretty terrible at the moment. In principle I don’t want to be long anything at the moment. While indices are at significant long-term value zones and the Fed and BoE are likely to cut rates aggressively over the next quarter, the ongoing impact of the credit crunch and general signs of a tiring bull make me distinctly bearish. There is however one stock, which I really like at the moment – eBay.

“Surely tech stocks will get hammered though in a market meltdown?” I hear you crying. Well probably, yes; but I think there are some distinguishing features for the prospects of eBay. The company has been remarkably resilient to competitive pressures over the years. It survived the dotcom crash and has, what appears to be, a viable business model going forward. What I like most however is what drives sales through eBay – bargain hunting.

In what was a mixed Christmas for most stores, I would not be at all surprised if eBay announces extremely positive results next week. At a time when consumer spending is falling and there is genuine concern about economic prospects, what is the likelihood that Christmas shoppers turned to eBay? I would expect, quite high. Given eBay’s core revenue stream is based on the volume of transactions through its site, I believe that an economic downturn could do a great deal for the company’s bottom line as price conscious shoppers feel the pinch on their monthly budgets. Recent action on the charts gives me more confidence in this assertion.

Although the price has dropped this year, volume has been notably higher on the upward moves as opposed to the down. Yesterday the stock moved up on volume 15% higher than the 3-month average. eBay announces its next quarter’s results on Jan 23rd, so watch out for its post-Christmas trading announcement. I am currently long eBay with a June contract opening at $30.95