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Two Words: Money Flow

Why is it always clear in hindsight?  Well, I guess I did see it start to happen a number of months ago but I definitely did underestimate the impact on US equity markets of this phenomenon, that is, massive reallocation of capital from both fixed income investments as well as emerging markets into the US equity market.  This, along with a very accommodative Fed adding nitrous oxide to the fire is what has been unrelentingly driving US stock markets higher.  You see it all over the place including the unrelenting selloff in the entire treasury curve, the selloffs in many emerging markets, and the unrelenting rise during the same period in the US equity markets.  Duh!  I feel like a rookie for not plowing into this trade.  While I have been net long this entire time, I have still given up most of my P&L to my futures hedges.  Will this continue, who knows?  For the time being I believe it will until I see signs that it is not.

It's the money flow stupid!

NYSE merger with Deutsche Boerse

Last year I had a field trip to the NYSE. Stock exchanges demand a kind of reverence and awe, the impressive building, the unending security checks to get in !! I was lucky to be there for the opening bell.  had expected the trading  floor to be bustling with activity (pre-opening and post as well). Behold my surprise to see an almost deserted trading floor. There were at most couple of people manning a single post. Welcome to the electronic age!!

It felt like somewhere down the trading isle, NYSE was left behind. After the opening bell, the markets opened but it was quiet and calm everywhere. There were some traders watching videos, reading newspapers and some even taking a nap. Now thats a job, we would like to have!!. Barring all the emotional melodrama surrounding the NYSE, it makes sense that they would like to merge with Borse. Revenues I am sure are down for them with ECNs taking over. It will probably take NYSE a while to come upto speed with the Nasdaqs of the world. So strategically this move is good for the firm. There is immense competition in the trading markets and given the volatility of the market microstructure worldwide, it is very difficult for firms like NYSE to remain profitable.

It is interesting to note that the derivatives and technology units at NYSE Euronext were responsible for  over half of the group’s revenues. This underlines the evolving nature of the exchanges into wide-range financial institutions rather than focusing on activities such as listings and equities trading. NYSE and Deutsche Boerse deal will expand this idea globally.

Barron’s Summary - Sat Feb 12, 2011

  • The World’s Most Respected Companies – new Barron’s survey – Apple is #1, followed by AMZN and Berkshire. 
  • Pharma – companies like ABT, PFE and MDT should start shedding non-core businesses – the stocks could jump 30% or more if the companies broke themselves up.  PFE is already moving ahead w/a plan to restructure.  ABT could have the most upside if it decided to break apart.
  • InterContinental (IHG) – positive comments; the Holiday Inn revamp is almost done while the overall lodging industry is seeing rising profits and revs.  The stock may have near-term downside if an upcoming earnings report is anything but stellar.
  • Egypt – some stocks there could rally as a result of the Mubarak resignation – pos. on the broader Egyptian market as well as Orascom Construction Industries, Orascom Telecom, and Maridive & Oil Services.  Also pos. on ElSwedy Electric and Misr Duty Free.
  • Crude – a leading analyst, Charles Maxwell of Weeden, thinks crude will hit $300 by ’20.  Says nat gas prices have hit a bottom.  Bullish on oil sands companies SU and CVE.
  • Pamela Rosenau – the CIO of Rosenau/Paul – positive comments on ECT, AWK, EPB, and ARG.
  • MMI – positive review of the new MMI Atrix (although not a big fan of the phone’s laptop dock).  Says this is the best Android device on the market.
  • CSCO, NOK – both stocks are prob. dead money.
  • CSCO – downside limited and a rally into the mid $20s is plausible although it will require a surprise-free Q and a realization of a dividend.  
  • QCOM – repeats pos comments on the stock.
  • HPQ – next critical date for the stock will be Mar 14, when new CEO Leo Apotheker meets w/Wall St.
  • AMZN – negative comments; the stock is expensive and margins are shrinking as it moves into lower-margin categories.
  • AZO – neg. comments – similar story to AMZN…stock has run a lot and valuation rich.  Says demand was strong during the recession for car parts but this will slow as the economy recovers.
  • SGI – mentioned in Barron’s – no real opinion – notes that the co had blow-out earnings and the stock has rallied a lot.
  • KLAC – positive comments; the stock is cheap w/strong rev + earnings growth.
  • IP – positive comments; the stock is cheap; operations + cash flow generation are improving; the co could hike its dividend another 33% as well as buyback 10% of its shares.
  • ANR – positive comments; the MEE deal is a good one and fundamentals in met coal are strong; the stock could easily top $60 in 12 months.
  • NYX – pos. comments; the deal will prob. wind up going through and shouldn’t face any fatal anti-trust opposition; the NYX shrs now are pricing in most of the transaction’s upside although there is still some left.
  • Exchange M&A – the article speculates that CME could look to buy NDAQ; the article also postulates that NDAQ may look to buy CBOE.
  • DVN – positive comments – production and earnings growth will both be strong while valuation is cheap.  The co’s balance sheet is strong.  Stock could top $100.
  • Gold is unlikely to continue rallying at the pace seen in ’10.
  • QE2 – the program will prob. stay in place despite some skepticism from certain Fed officials.

CSCO Q2 FY11 Earnings Review

Well, it looks like John Chambers actually did it again, disappoint that is.  The company’s quarter came in light on guidance citing weak government and cable spending.  The following is a summary of the quarter:

·revs came in $10.4B vs. the St $10.233B

· GMs came in 62.3% vs. the St 63.24%

· EPS came in 0.37 vs. the St 0.35

· they bought back 89MM shrs in the Q

· inventory $1.602B as of the end of the Q vs. $1.5B last Q

· def revs $11.807B (vs. $10.7B last Q)

· OMs came in 24.45% vs. the St 24.33% = inline

· tax rate came in 19.7% vs. the St 21.9%

· EPS would have been ~0.36 if the tax rate had been inline w/the St (so still a bit ahead of the St)

· total product B2B >1

· product orders +8% Y/Y.  Product revs +3% Y/Y

· Services were “outstanding” - revs up 18% Y/Y

· Product bookings - +8% AsiaPac, +6% US, EM +27%, Europe +LSD

· Enterprise solid momentum - orders +10%.

· US large enterprise orders up high 20%s….financial services though was down mid teens

· Global public sector orders +7% although was very mixed…says this unit will be very challenged in coming qtrs and will prob. only grow MSD going forward

· US public sector orders +9% - however, challenges at state/local and Federal levels will worsen

· our set top business challenged still - orders fell 15%

· Service Provider orders +9%

· Consumer business fell 15% Y/Y

· For FQ3, sees revs up 4-6% Y/Y (vs. the St +4.6%); for FQ4, sees revs up 8-11% Y/Y (vs. the St +7.8%)

· For FQ3, sees OMs 23-24% (vs. the St 25.9%); sees tax rate 21% (vs. St 22%); sees EPS 0.35-0.38 (vs. St 0.40)

· F11 revs seen at mid/low-end of prior 9-12% guidance range

· For H2, sees GMs 62-63% (the St is @ 63.7% for FQ3 and 63.9% for FQ4)

· inventory purchase commitments fell 4% Q/Q

· says we plan on issuing a dividend in F11 w/a yield in 1-2% range (repeating what they have said before)

· giving some more guidance on its recievables portfolio for Cisco Capital….says credit quality has been strong in this business

· says they are expanding their focus on bolstering GMs….Chambers says he has formed a focus group to work on this problem

· Chambers was asked about the 12-17% long-term guidance and didn’t really answer the question….implying that he may be backing away from the range

· Chambers says customer momentum “feels good” around…says linearity strong in the Q w/each month improving over the prior one

weekly diurnal view-astro finance

diurnal means of the day. a solar revolution of the earth. each weekend i produce a chart which measures micro-cycles over the course of 500 minutes of the trading day. from 8am-415 pm. each am i produce a 2nd diurnal for another index.the chart i produce on the weekend is the sp500. the 2nd chart i produce is in testing.by next weekend i will know which 2nd index adds value.
lets take a look at the chart—- it suggests as working hypothesis a down week. closing in for a more precise look the chart suggests a tues 2/8 top followed by a cyclical low at 12 pm on wed 2/9. continuing on there is a top suggested on thurs at the 930 am open.
a closer look at the thurs 2/10 forecast indicates that thurs is the potentially the weakest dayof the week. finally fri 2/11 suggests a 11 am low.in subsequent blogs im going to call attention to some of the symbols on the chart.

Select this link for my chart:


Barron’s Summary 2-5-2011

· MSFT – Barron’s notes that hedge fund T2 Partners is bullish on MSFT shrs; valuation is very cheap and they still have decent growth prospects.

· JOE – T2 Partners is neg. on the stock; says the stock is trading at 3-4x what it is really worth.

· Interview w/Stratfor’s George Friedman – he doesn’t see the events in Egypt as the start of a wave throughout the Arab world; the army in Egypt was pushing for Mubarak’s ouster for a while now and didn’t appreciate his efforts to install his son as his successor.  The Muslim Brotherhood isn’t a major force and probably wouldn’t assume control of the country.  Iran is long way from making a nuclear device that can actually be weaponized loaded onto a rocket.

· AAPL – positive comments; article discusses the recent Piper speculation that Apple spent billions securing screens for several devices, inc. a potential TV.  Barron’s says the stock remains very cheap.

· Pandora may soon come public.

· Commodities – cautious comments – says prices are looking toppy.  Somewhat positive comments on nat gas.

· The yield curve for the moment appears to have lost its predictive capabilities.

· GLW – positive comments; the stock remains cheap and fundamentals are strong.

· IDCC – positive comments; the stock could easily jump 15% from here; fundamentals are improving and the valuation is cheaper than QCOM.

· SBUX – positive comments; the stock could have 15% upside from here; growth is strong and the co has high int’l exposure.

NASDAQ Hacked!

It has being reported that some hackers have made it into the NASDAQ network which runs the stock market. But nothing to be alarmed they never got to the actual execution part of the system. For usual broker and trader this is quite upsetting news but after working with these types of systems for over 2 years I would say it isn’t too much to worry about.

Most exchanges run on piece of software that is quite unique to its own execution algorithms. Furthermore their gateway to the outside world is defined by a particular protocol such as FIX or ITCH or any other proprietary methods. So even if the hacker do reach in through the firewall and into the system, in order to create a real trading impact they have to talk in the particular protocol which is only limited to the trading activities. You may argue that they could shut down the system but most system run on Unix or Tandem machines so this is not too easy to deal with.  What about listening to the wire transmission and getting information? Well then you need to understand the execution logic and build up the order book by yourself. So this won’t be a simple smash and grab at all. Therefore I am not surprised that the hackers just went in to show that they could break in not because they could make some money.

RIMM’s Final Nail in its Coffin

There’s a great article on Barron’s today about the Playbook.  I suggest all those involved with RIMM read it.  Here’s the article:

Wedge Partners analyst Brian Blair today writes that Research in Motion’s (RIMM) forthcoming Playbook computer “will be poorly received by the market at launch,” citing rising competition, and factors that will make the corporate world think twice about the device, he believes.

It is, overall, the most negative write-up I’ve yet seen of the Playbook, though I may have missed some more scathing notes.

Although the BlackBerry does email better than any other device, the “Playbook has no native email application,” and “we believe it’s a significant flaw” in the Playbook’s design.”

The company’s decision to make the Playbook tether through a BlackBerry for wide-area wireless access is another flawed approach, he thinks, because “80%-plus of Fortune 100 companies are using or testing the iPad and companies like the New York Stock Exchange, who take security pretty seriously, have been using the iPad since last summer.” For that reason, “We don’t expect many non-BlackBerry users will opt to purchase a PlayBook once they learn of the tethering requirement for email.”

Another issue he brings up is that it will be “a whole different tablet landscape in the next 90 days.” From the iPad having little competition, there will be the Motorola Mobility (MMI) Xoom, Hewlett-Packard’s (HPQ) rumored “PalmPad,” Cisco Systems’s (CSCO) “Cius” video-conferencing tablet, and the iPad 2 from Apple (AAPL).

Right now, writes Blair, the only argument that the Playbook can do better than those offerings, he believes, is that “its browser supports Adobe (ADBE) Flash.

In addition, developers only received the SDK for the Playbook two months ago, he writes, “which suggests that application availability will be limited at launch.” Developers can be expected to wait until they see momentum for Playbook before committing resources, he argues, further pushing out availability of apps. Moreover, the company’s shop for apps for the BlackBerry, App World, and found it difficult to use. “If the experience in downloading apps is the same on the Playbook, users will avoid downloading applications altogether.”

The tablet computer is a “consumption” device by nature, he adds, and here Apple is unrivaled in downloads of movies and music to the iPad. How will RIM compete? Partners could help the company, he offers, but he expects there won’t be anything when the device is introduced “to help solve this issue.”

Outside of email, the BlackBerry Messenger program, and the Twitter and Facebook apps, which are “solid,” Blair observes, “there isn’t much BlackBerry users do with their devices.” And, “To be successful with the Playbook, RIM would have to suddenly excel at creating a completely new mobile OS that is on par with the offerings of a desktop or notebook computer. This is outside of the company’s historic expertise, and they are taking on Google (GOOG) and Apple here, two companies with rich experience in writing software.”

As for RIM’s new OS, QNX, it is “impressive,” writes Blair, “until you look deeper.” The demos shown have slick multitasking. This is “a leap over what other tablet operating systems can do,” but, “we see it as a visual ’smoke and mirrors’ because of the aforementioned shortfalls in getting content onto the device, offering limited applications, and excluding a native email application.”

“In short,” writes Blair, “The Playbook’s screen and hardware specs and multitasking capability look excellent on paper, but without the other pieces to the puzzle, it feels in many ways like an expensive Web browser.”

I would note that CNBC’s John Carney did a follow-up with Blair today about his report.

RIM shares today closed up $1.29, or 2%, at $60.40.

I don’t know, sounds like a pretty big failure to me.  Now I haven’t verified any of the claims made in the article but if they are true, then I don’t see who would bother with the Playbook.  I also believe that the launch of the device will be a huge loss for RIMM as not enough Playbooks will be shipped to cover the recent costs of the product.  This will lead to RIMM taking its guidance down for FY Q1 2012 and FYE 2012 as well.

Rest in Peace Playbook

death of conventional technical analysis

i began my interest in technical analysis in 1969,same year as woodstock. i think i actually took some books with me at that iconic concert. while a member of the Bear,Stearns arb dept. i could not keep my charts out on the desk.i actually had to cover my chart book with a playboy cover. thats how full circle things have come. there were only a handful of books and a couple of masters papers.now the books stores are full  of great books that give everything from indicators to patterns to how use ai software to build systems. i believe its this plethora of info that has created a major problem for conventional technical analysis. the volatility ,patterns and trend changes on a dime intraday,etc,etc. hopefully this  is the age of astrological market analysis. i suspect so.

Deal & Related News 2-1-11

· GENZ/SNY – this hit during trading on Mon – the WSJ and Reuters say the companies have reached a deal in principle on a transaction; an announcement could come as early as this Mon.  Its not clear what the new price is although the terms will include a CVR; CNBC on Mon said the cash component would be higher than SNY’s original offer of $69/shr.  WSJ

· DD – the co has no plans to raise its bid for Danisco according to reports in Danish newspapers today.  Reuters

· Lodging: CNL Hotels & Resorts is preparing for a potential bankruptcy filing before a deadline (today) to repay ~$1.5B in debt on 5 properties. The new owners of CNL’s hotel portfolio are talking with creditors in an attempt to receive an extension on the debt. WSJ

· BP – puts its US refineries up for sale – the co has placed its Texas City refinery up for sale as part of a wholesale shakeup of its US refinery business.  FT

· CMLS: Cumulus Media will acquire the 75% of Cumulus Media Partners that it doesn’t already own for 9.95M shares. Cumulus also intends to acquire all of the outstanding warrants to purchase common stock of a subsidiary of CMP, in exchange for an additional 8,267,968 shares of Cumulus common stock. Bloomberg/PR Newswire

· VRX - Valeant to acquire PharmaSwiss, a privately-owned branded generics and over-the-counter (OTC) pharmaceutical company based in Zug, Switzerland for euro 350 million.

· STWD: Starwood Capital has purchased 141 Avenue of the Americas for $72M and is planning a hotel for the location. NY Post

· NY Mets: The NY Post reports that the NY Mets might have to sell a controlling stake in the team; Owner Fred Wilpon said last Friday the owners were looking to sell a 20%-25% stake in the team. NY Post

· Mongolia coal – a slew of bidders are in a race to develop the world’s largest untapped coking coal deposit in Mongolia; Asian private and state-linked firms are among the bidders for the deposits, along w/MT and VALE.  Reuters

· AMZN: The NY Post says cites Michael Pachter (WedBush Securities) who said that Amazon may look to make a deal with Coinstar. NY Post

· Weather Central: Sir Evelyn de Rotschild and his wife Lynn Forester have acquired a 70% stake in Weather Central. Weather Central sells information to CBS’  “Evening News” and ABC’s “Good Morning America”, and the company is also mulling whether to create its own network to compete with the Weather Channel (though a decision hasn’t been made). FT

· JCG - $10M proposed settlement over the TPG/Green takeover has fallen apart, Bloomberg reported citing JCG investors’ lawyer. J. Crew has “sent the signal to the world that they are investing all resources in closing the deal with TPG as soon as possible and nobody else should bother to bid for J. Crew.”