Weekend Reading – Part 1

July 14, 2007

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Well I was going to be in a great mood this weekend until I read Lance Lewis' excellent article on putting the market into perspective.

It turns out that the fantastic run we've had in the S&P the past 12 months (happy anniversary by the way!) doesn't look quite as hot when you convert it to a stable currency – like the Euro.

I'm not even going to print the chart that compares the S&P to gold because some of you have just eaten and things could get messy! This is nothing we haven't been discussing for ages but Lance went and put all my worst fears into pictures and they sure are worth several thousand words at least. How can we make this a positive? Well an optimist (who's had A LOT of Kool Aid) may say that this just shows how much more our markets have to go and that we shouldn't be surprised to make another couple of hundred S&P points since we are still miles below our International high (this is the kind of BS that gets me invited to the Republican cocktail parties!).

A pessimist would say that the entire global market rally, measured in Euros would look very similar to this chart (other than the BRIC countries, who never had a party in 1999) and all we have here is a very normal almost 50% bounce that is getting very toppy indeed. You can see how I get thrown off the yacht with that kind of talk!

For a happier view of the Dow, click here!

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Oh, a note to new members as I haven't done this in a while (the kids are away so I have free time this weekend): There is no theme or whatever to this so excuse the rambling nature of this post and really excuse the spelling/typos as the hardest thing I do every day is try not to look like a foreign exchange student by cleaning up my typing mistakes. I don't do that here – this is straight from my brain to paper so enjoy if you dare!

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NEM looks like it's breaking out. They have unhedged themselves (and spent a lot of money to do it) and are near a 2-year low with very low expectations (due to the spending) coming into 8/2 earnings. I was trying to find a good entry and I do have a lot of gold already but gold is pretty good in a commodity driven rally as it will also do well if the whole thing blows up on us. Jan '09 $45s are $5, yes $5 and you can sell the Aug $45s for .43 (aren't options great?) but I'm just going to establish a position and see how the month shakes out. The roll down to the $40s costs $2.30 and I would pay that for the $45s since the Aug $42.50s ($1.10 out of the money) are $1.15 but, with 18 sales to go, why even take a risk?

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I talked about hedging MSFT into their 7/19 earnings and I decided that SWH Aug $42.50 puts at $1.30 will make a nice cover. This index is 21% MSFT, 18% SAP, 14% ADBE, 11% ORCL and 11% CA.

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Bloomberg had a good point about how we could have a rosy retail comps report on Thursday followed by a terrible offical Retail Sales report on Friday. The same store sales comps group accounts for just 17% of total sales. The real numbers are the Friday numbers and they show serious problems. Retail sales are 1/2 of the economy and the only positive spin on this is that the Michigan Consumer Confidence index was up a lot and that's really interesting given the high oil prices and negativity of June. It's also interesting that I mentioned on 4/11 how this is a very easy to manipulate tool that shouldn't be relied on. Also, on 4/11, the prior rating (March?) was 88.4 and this market rally was based on a reading of 92.4, way better than last month's 85.3.

Speaking of manipulation, Larry Kudlow said yesterday (and I kid you not!) that the reason the market rallied was because Bush was resolute in keeping the war going. Yeah, that's the ticket!

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Speakng of Bush (and I can now as it's the weekend), I made a note of this when he was speaking but this is what he ACTUALLY said during Thursday's conference:

… there's a lot of constituencies in this fight — clearly the American people, who are paying for this, is the major constituency. …
A second constituency is the military. …
A third constituency that matters to me a lot is military families. …
Another constituency group that is important for me to talk to is the Iraqis. …
And, finally, another constituency is the enemy, who are wondering whether or not America has got the resolve and the determination to stay after them.

The term "constituents," of course, refers to the people served by a politician — the voters who put Bush in office and keep him there. It's good to see that we, the ordinary people, rate "major" attention – too bad have to fight for that attention with the Iraqis and the "enemy" when the President has to decide who he is there to serve!

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CNET has earning on 7/26 and the Jan $10s for .55 got a huge amount of interest yesterday, as did the Oct $10s for .32. You get more bang for your buck out of the Octobers but it's an all or nothing bet most likely. Fool just got behind them and all I can say about them is EYEBALLS! 288M of them (give or take a few one-eyed readers) every month – that's a lot, about 7.2M people on the average business day plus their publication base.

This is more of a buyout play than an earnings story as they are having trouble containing costs or increasing revenes but there's a war heating up over eyeballs and there aren't that many places where you can grab 7.2M HNW readers like this. Perspective: Fox, America's number one network (I know, it must be time to leave!) averages 8.48M viewers per show and I would hazard to guess that the average CNET reader is a slightly more desirable demographic than "Are You Smarter Than a Fifth Grader" (which my 5 year-old LOVES) or "Don't Forget the Lyrics."

"America is the only country that went from barbarism to decadence without civilization in between" – Oscar Wilde

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EXP and USG are lagging their group so we need to watch them if TEX has legs.

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Shift Happens (nice presentation on why China isn't going away and other interesting tidbits):

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Hannah Slater has a nice fundamentals for dummies report titled: "The 18 Warning Signs That Tell You When To Dump A Stock" There's an almost cool little device that let's you put in a stock and it creates links to research on each item but I think this would be a gold mine if it gave an automated report instead.

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BSX finally settled their lawsuits for "just" $195M – that's been a huge drag on the stock and we need to watch the Aug $17.50s we sold against the Jan $17.50s in the LTP – just in case.

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The above "Shift" video makes mention of the "One Laptop Per Child" program, which I am a proud supporter of, and it's nice to know that Intel has finally joined the program after a year spent trying to convince the OLPC we've been going in the wrong direction (a $100 pc) while they rolled out their $250 Classmate computer.

There wasn't a single catalyst that led to the agreement; it was more a case of Intel and OLPC "coming to a collective realization that we'd be better working together than working apart," said Walter Bender, OLPC president, software and content. And I'm sure that one of those "no single reasons" was AMDs strong support of OLPC giving them the inside track on making the chips for 100M laptops in '08-'09…

It's an education project, not a laptop project. — Nicholas Negroponte

Virtual Portfolio Positioning: Bad for MSFT (Linux machines given to the youth of the developing world), bad for AMD (now they have to compete for the contract) great for whoever makes these parts so we can't wait for someone take the production model apart like an IPhone so we can start "supporting" the contributing manufacturers!

Current tech partners on the development project are:

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We had $1 Trillion in M&A activity in the first half, that's out of a $50 T global equtiy market so that's 2% gobbled up in 6 months – so much for the greater PUBLIC good! Add to that about $500Bn in buybacks and we can see where that rally fuel is coming from.

June was the slowest month of the year so far but followed a very busy April. I will remind you I said last week that the first sign of the market apocalypse would be the unwinding of M&A deals and we've seen a couple this week (GE/ABT, SLM/Private) but nothing to be alarmed about… yet.

In addition to $50T in equities there are $45T in bonds but that's all peanuts compared to the $415T in derivatives contracts that are outstanding! In addition to our options betting ($7.5T), derivatives include the dreaded CDO's ($28T), Commodities ($6.9T, up from 1.4T in '04), FOREX ($40T) and Interest Rate Contracts ($291T). Kind of puts the $5,000 you have on Apple into perspective doesn't it?

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I'm not quite sure what all the excitement was about this week but it doesn't seem like earnings. Here's a few recent reprts from some of the big boys:It's nothing like the almost 70% beat level we had last quarter and DNA, YUM, INFY, HELE and ETE aren't up 5% combined!

GE is up 3% for the week, FAST up 13%, AIR is flat, and AA is up 14% so I guess the trick is to be in-line – no one likes a show off! 😎 Even the losers got lucky this time, with everyone but WDFC posting good gains. Are we in a sell on the news market? Let's watch out for that next week, especially as it will have a major effect on GOOG and AAPL. Maybe someone is out there squashing premiums, no matter what the results…