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Testy Tuesday Morning

Wow – what a lot of work to get back to last Tuesday's high! 

As usual, the vast majority of gains came in pre-market trading and the rest came in light-volume, early morning trading while the rest of the day was dominated by every buyer finding a willing seller for 75% of the day's volume.  We saw what happened on Thursday when someone big wants to sell and there are no buyers so we'll see how long the bull's luck (manufactured or otherwise) will hold out as we begin to get economic data along with some early earnings reports.

The Ag sector popped 2% yesterday ahead of tonight's earings from MOS with MON checking in tomorrow morning so we'll see how wise those last-minute bets were in short order.  SONC also has earnings tonight and we like those guys long-term.  SONC makes a decent buy/write candidate as you can buy the stock for $10.29 and sell June $10 puts and calls for $2.25 for a net entry of $8.04 with a very nice 24% profit if called away at $10 and an average entry of $9.02 (a 12% discount) if more stock is put to you below $10 in June. 

FDO and WOR also report tomorrow morning.  FDO will be interesting but a weak dollar probably hurt them last quarter.  Tomorrow night we hear from BBBY, BLUD, OHB and Sonic competitor RT, who seem a bit pricey at $7.50.  Thursday we get our first real builder, LEN along with STZ and TXI.  After the bell on Thursday we hear from APOL, CRI and SCHN with GBX and PSMT on Friday.  AA officially kicks of earnings season next Monday with GAP, INFY, KBH, BGG, SCHW, SHFL, INTC and JPM highlighting the reporters. 

We have plenty of data this week including Factory Orders and Pending Home Sales at 10 am along with December Auto Sales throughout the day (did you get a new car for Christmas?).  Tomorrow is jobs day, with the ADP Report and Challenger Job Cuts ahead of the bell followed by ISM Services (yesterday's ISM was a nice beat) and, of course, Crude Inventories at 10:30 which are unlikely to sustain $82 oil (USO Jan $40 puts for .80 are a good way to play this)We talked about the other stuff yesterday so I won't repeat it – suffice to say we have plenty of data this week to see if we justify these lofty levels.

Could Apple sell 2 million units of the new tablet at $600 each to generate $1.2 billion in 2010? Piper Jaffray analyst Gene Munster thinks they will.Apple generated almost $35B in revenue during the last 12 months.  If Munster is correct, the tablet could have a nice 3%+ impact on revenue and improve year-over-year revenue growth.Expectations are that it will be similar to the iPod touch but larger and capable of running most of the iPhone Apps and include a 3G cellular modem.Huge discussion on TechMeme.Kara Swisher / BoomTown:   The Jesus Tablet Will Walk on Water and Turn Fishes Into Moneyinternetnews.com:   Apple Touchscreen ‘iPad’ Could Take on NetbooksEric Slivka / MacRumors:   New Analyst Mockup and Sales Estimates for Apple’s TabletThe Mac Observer:   Analyst: Apple Tablet Worth $1.2 BillionDerek Thompson / The Atlantic Business Channel:   Apple Tablet: Super E-Reader or Super Mini-Computer?Everyone is talking about AAPL's new "Slate" computer so I'm not going to.  We broke this story back in September and everyone else is playing catch-up but I still like my name (from my original speculation of Dec 30th, 2007) of the IPad better than the Slate.  The IPad was at the heart of our AAPL buying premise at $86 so the real question is – do we still like AAPL at $215 or is it finally time to take it off the table? 

My decision on that will very much depend on the actual size of the Slate.  I was looking for something about 8.5" x 5.5" – the size of a book or a standard 8.5" x 11" paper folded exactly in half.  Something that size would be a companion to and would not be likely to cannibalize MacBook sales.  At a $599 price point, my IPad design would wipe out the Kindle and all other EBook readers while also making a cool little portable music player and nice little web browser.  If they left the phone functions in, I'd be in heaven and would happily stick my IPhone in a drawer and run out for my new all-purpose device.  Sadly, it sounds (if you can believe recent rumors) like AAPL has gone more towards a tablet computer format and that would be a shame and would cause me to get out at $220 and wait for the pullback.  I'm still hopeful, though…

Of course today is the day GOOG announces their own smart phone and I hear the code-name is the ME 2.  I guess 18 months from now we'll be looking for the Google Pad but it baffles me that GOOG wants to get into the low-margin phone business (for everyone but AAPL) rather than concentrate on making sure that the Android operating system with Google search (and the Google Mobile App on the IPhone is great) dominates the platform. 

Now, rather than sitting in meetings with AAPL, MOT, NOK, PALM, SNE/ERIC and RIMM on how to make phones better and searching on phones more useful – Google has decided to turn the people who control 99% of the phone eyeball market into competitors.  If I were Steve Ballmer (and thank goodness I'm not!), I'd be throwing a ton of effort into making Bing the new go-to spot for mobile devices and start cozying up to Google's competitors (ie. everybody). 

Also making enemies today is Iceland President Ólafur Ragnar Grímsson, who vetoed legislation to compensate U.K. and Dutch depositors for $5.5B in losses from the collapse of internet bank Icesave.  This will make UK's Alistar Darling very unhappy as he warned President Grimsson just yesterday: "We have spent many, many months in very productive meetings with Icelandic authorities and the Icelandic government to enter an agreement to make sure that the money was reimbursed to us."    

I guess we'll have to find out what passes for "or else" in England these days as the President listened to 70% of his countrymen and decided NOT to spend 40% of the nation's GDP to make foreign investors whole (unlike our country where we spent Trillions to make sure all speculators got paid).  This story is not about little Iceland per se, but the new paradigm that this opens up in International Risk Instruments as we have a first world economy telling foreign creditors (very sensibly) to drop dead.

Speaking of countries that are totally screwed – Greece has been forced to sell $3Bn worth of FLOATING-RATE notes in a private placement in order to keep the lights on in December and it looks like they'll have to do it again in January.  Greece needs to sell $78Bn worth of debt this year to finance their deficit or about 2 weeks worth of what America needs but add up enough of these poor countries and you are talking real money that will be competing (by offering higher rates) with our US Treasury sales this year.  Have I mentioned I like TBT lately? 

Lenders who want to insure against Greece's default (Iceland just did it) by buying Credit Default Swaps must pay $260,500 per year to protect each $10M or 2.6% so for Greece to attract any interest at all, they need to well cover that additional 2.6% "cost of lending" in their payment promises.  This is why Iceland's official default is so dangerous – it may lead to a change in CDS assumptions that will begin to boost global rates and quickly drive up borrowing costs, first for nations, an then for everyone else who borrows from nations (ie. everyone).

Asia was up this morning because we were up yesterday and Europe is up this morning because Asia is up so it's up to the US to break the cycle this morning (we betted it would yesterday).   It's the same commodity led nonsense that took us up yesterday and we're just not buying it.  We also tested our levels (see yesterday's post) and failed to hold them, which is also a bad sign so we will remain skeptical until we see them held through a closing but more likely we test our lower set first and that's what we're playing for so far in 2010.

KFT's offer for CBY got too sweet for Warren Buffett and he voted no with his 9.4% block of KFT shares on the deal.  "Does the board now believe those purchases ($3.6Bn in stock buybacks at $33 in 2007) were a mistake and that Kraft's true value is only the current price of $27 per share — and that it is therefore fine to structure a major acquisition based upon that price?"  Buffett asks.  "Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote."

That's why Buffett is my hero!  It's good to see someone putting their foot down and standing up for value in this market…



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