Wow, what a ride!
As I mentioned in yesterday’s post, we expected the Russell to lead us higher and we picked up both IWM and TNA out of the gate but, of course, we like our leverage so my 9:46 Alert to Members was:
Bottoms WERE: Dow 10,200, S&P 1,075, Nas 2,200, NYSE 6,800 and Russell 620. As I said yesterday, "don’t forget there’s a 5% drop to support below these levels).
For now, we’ll be watching the 2.5% lines at Dow 9,945, S&P 1,048, S&P 1,145, NYSE 6,630 and Russell 605.
My working theory is RUT is weakest because they are getting killed by cut-off of unemployment checks. That means that an upside play on the RUT could go very well in case they extend benefits today. I like TNA $37 calls for $3.20 and IWM $63 calls at $1.25. These are risky of course because if the extension is defeated we could go further down so take quick profits off the table on half to make a buffer and make sure you do have some disaster hedges.
We bounced right off those 2.5% lines and got our $3 copper signal at 10:24 so we knew we were good to go as we took those calls plus GOOG, BAC, GS, QQQQ, IBM, TXN, AAPL, WFR and BIIB. Other than BIIB, which is a long-term spread, all of our shopping was done by noon and the rest of the day we just said "Wheeeeeeeeeeeeeee!" as the market went up and up and up – and they haven’t even extended the unemployment benefits yet!
I have been saying we need to keep an eye on copper $3 during this whole market breakdown as $3 copper is NOT the right price for a Global Depression, which is what the market has been pricing in and at 10:24 as copper hit our bull target, I said to Members: "Copper $3! That’s like the little snapping sound when the bear takes the bait in the bear trap." Now we are back testing our "bottoms" which, as I said yesterday, are really the middles of our 5% Rule range but our view of earnings season so far is that we shouldn’t be in the lower end of the range and the recent action, as I summed it up in yesterday’s post, was silly.
Now things get serious as we need to hold our levels or it will be time to take the money and run on our short-term bullish plays (and boy, did we have our fun already – both the IWM and TNA calls went up 40% yesterday alone!) and look back at some disaster hedges – pretty much the same ones we’ve been using since the beginning of July.
Asia was not sure how to take our finish yesterday but the Nikkei finally stopped falling at 9,278, almost 1,000 points below the Dow as the Yen barely held 87 to the dollar in overnight manipulations. The Hang Seng went up 1% (222 points) to 20,487, finishing at the day’s high and the Shanghai was more subdued with a 6.66-point gain, but they are the leader back at 2,535 already. The BSE continues to knock on the door of 18,000 – this is where we ran into trouble last time so we take everything with a grain of salt until we clear ourselves internationally.
Europe is off to the races this morning with 2% gains across the board as they are a lot less worried about the upcoming stress tests than the MSM alarmists in this country. FTSE 5,242 is just 8 points under goal, DAX is 51 over at 6,051 and the CAC is 40 over the line at 3,540 – nice recovery guys! Note today’s moves are NOT reflected in the charts below but you can see we’re looking pretty good all of a sudden – even the Baltic Dry Index found a bottom of some sort:
We are looking strong again pre-market and it’s going to be a dull day for us if we keep going up as we did all our shopping below 10,000 for the past few weeks and nothing looks very cheap to us once we’re over 10,200. As I keep having to remind people, I’m not bullish – I’m rangish so we tend to go long below 10,000 and go short above 10,500 and unless we get some really strong or really weak earnings, that’s not too likely to change. For now, we’d be thrilled to establish a base at our "bottoms" that sticks for a change and gives us confidence to do a little more stock picking.
So watching and waiting is our rule for the day. We get more earnings from the Financial sector plus the EU stress tests next week so we’ll have to wait and see how much our $3.7Tn taxpayer contribution ($27,000 per taxpayer – so far) to that sector has helped their bottom lines. Speaking of robbing from the poor to give to the rich – Brett Arends has an excellent article on income disparity, pointing out that the wealth gap in the US is, by far, the worst in the civilized world, far worst than Russia’s oligopoly and rising to a level that can only be compared to Zimbabwe, Argentina and El Salvador when comparing the lot of the average citizen to that of those in positions of power.
Bernanke gives his "Humphrey Hawkins" report to Congress at 2pm and there’s a warm-up hearing on TARP at 10:30. Mortgage Applications were up 7.6%, countering the negative housing news we’ve been hearing. MS had a huge beat as did WFC, HCBK and TXT and I hear APPL did OK too so let’s see what sticks today – there’s certainly no reason to be gloomy.
Wasn’t kidding. Do you never hold overnight?
exec / overnight
On 3 day weekends following a BIG move, I will take a 1/2 position in the direction of the move. That’s pretty much it !!
JRW, you’re welcome. Consider it a little payback on behalf of those you provide levels for… which may be me at some point! It would be nice to have a little more going for me on my calls besides what I’m seeing on 2 charts (1 min, 5 min both with volume). I’m the first to admit my system is not very sophisticated!
Pharmboy/Teva: Thanks.I’ll go with TEVA for my IRA.
On YAHOO ,keep in mind there is $2.70 cash /share and 35% stake in Yahoo! Japan and 29% stake in Alaibaba.com (China) is worth (per Yahoo!) $8/share which total $10.70 /share so all of remaining Yahoo is worth $ 3.20. That’s dirt cheap,especially for an Internet company. It’s kind of a cheap China play with Yahoo! thrown in at a deep discount.
Thanks Dflam on YHOO. Should be a good trade then. Just did a few options, and can do more if it looks like the 13.5 area holds for support.
hope we get a doug kass bounce again
Little guys/Jvest – This country was founded by people who had to compete against wealthy foreign companies that had access to global resources and financing and shipping and transportaiton – all the advantages in the world and we totally kicked their asses in 100 years. As a person who has started several businesses from scratch and consulted for a hundred others I am ever-optimistic because I’ve done it over and over again. The problem with modern American workers is they are (on purpose) narrowly trianed to do specific functions in specific companies so they are of little use to anyone else. This specialization of human parts makes it difficult for people to swtich jobs and changing carreers mid-life is a real rarity these days – how does that help America adapt and stay competitive? If all you do is train people to be simple tools, then all you have is a useless collection of tools when demand slows down.
Take the real estate data business I’m restarting. We worked 10 years and took over 1/2 the state and then got bought out by our competitor at 10x earnings. What did they do once they bought us? They laid off half the people so they could do double the work with 75% of the people so they could "make a profit" on the transaction. That led to very poor quality service and very dissatisfied customers who can’t wait for us (all the fired people) to come back and provide the service again.
That’s true in many businesses out there. All those laid-off financial people are forming their own companies and stealing clients from the big boys (one of the reasons IBanking took a hit this Q). There are millions of laid-off construction workers sitting around waiting for a construction company to hire them but wouldn’t it make more sense for a 12-man crew to approach a person who wants to build a home and quote the job for 30% less, cutting out the builder’s mark-up on their labor?
It’s the defeatism (which is drummed into people by the MSM) that is killing this country. What the hell happened to people that they now think there is no way to make money unless someone hires them – that’s why China kicks our ass – they have more entrepreneurs in China than we have people and they start their companies with nothing. India too – there are millions and millions of small businesses and people do whatever it takes to fill in gaps and they work hard and struggle to make a living – what used to be the American way we were so proud of once upon a time…
Buy/Write/Exec – As I said about calls vs. naked puts, it’s math. Sometimes it works better, sometimes it doesn’t but one thing about the buy/write is its an automated way of scaling in when you first enter a position. Buying MON for $57.50 and selling the 2012 $57.50 calls for $10.25 is net $47.25 with about a $10 profit if called away. If that’s all you want, that’s fine but let’s say you have $50,000 to spend on the positon. If you buy $28,750 worth of the stock (500 shares) and sell calls ($5,125), you’ll make $5,125 in 18 months (22%) and you have 18% downside protection. If instead you sell the $55 calls for $11.40 and the $52.50 puts for $8.30, you drop your net to $37.80/45.15 so you make $7,500 if called away at a 5% lower price and your break-even is also 5% lower so 50% more profits at a 5% lower price with 5% more downside protection on that trade would have me leaning towards the buy/write.
Woo-hoo on NFLX!!! They just turned this into a very nice day! Congrats to all who took that focus put play…
SDS/Hoss – It’s a good play but keep in mind that you don’t want to take too many short-term insurance plays as it’s kind of like spinning the chamber in Russian Roulette over and over again – eventually, the damn thing is going to blow your head off. Generally, we go with one-month hedges when we think we are very stretched and due for a pullback or very worried about an event. It’s fine for now and maybe through the weekend but you don’t want to ride it to zero if it isn’t working next week. Very nice job working it on JPM. This is what I try to convey to people – after a while, you can have a whole porfolio full of "free" stocks that have no basis and you can just sell calls and generate an income with very few worries.
Thanks Matt/JRW – That’s why he gets the red box! Someone’s gotta man the bear side of this game…
FXP/Amatta – I see what happened, I must have been looking up FXI and forgot to turn back! There are no weeklies on FXP. Same strategy on FXP would be taking the $40 calls for $1.40 and selling the $37 puts for $1.70 and the goal is to sell the $41 calls for $1.40 and buy back the $37 puts and have a free $1 hedge.
Hurricane/Jrom – You can’t short-term bet on storms, you need to make longer-term bets on storm season but, as I said earlier, nat gas is a better way to play as it’s still dirt cheap anyway.
Postions/Garbon – I do not track every position. We have a Buy List under the Portfolio Tab and that is updated as needed and we added 9 more Dow Plays and WFR to that list and THOSE are the trades I track long-term. If you want to see how they are tracked, go back in time to older Buy Lists and see the updates, which are usually done once every month or so. For the other 100 Trade Ideas I publish each month (or week sometimes) it is up to you to follow the strategy (see strategy section) and I am here almost every day to answer questions you may have on any individual trade but if you don’t know when to buy or when to sell or what to do without being told – stick to the Buy List because you shouldn’t be trading short-term anyway. The same goes for not having time to follow trades every day – stick to the Buy List, as it has only long-term trades that are low maintennance. As to David, there was a 12:50 Email sent out on RS and you need to go to the Oxen Group tab, where he has his own chat under the most recent article. Have you read the New Member’s Guide since you joined this morning or are you just skipping ahead to the good parts?
AAPL/Flips – Congrats. The fact that you should sell into the excitement is simply playing the odds. Especially with options, it’s very rare that you get a much better price than what you get when a stock first rockets higher or falls back on news. Of course, it depends on the news etc. but, playing the percentages, getting out it the right move 3 out of 4 times. So just because I think AAPL should be higher than $254 after those earnings in now way changes the fact that you should take $265 and run after a positive announcement. Also, just because I think AAPL should be over $260 doesn’t mean I would buy it at $260 – that’s just where I think the investing public should be valuing it but, as I’m sure you’ve noticed – they are idiots… 😎
BP/Jdub – Damn, that guy sounds like he knows what he’s talking about, which makes it very scary but the fact that he’s short on the stock makes the whole thing very suspect.
4:00 PM On the hour: Dow -1.53%. 10-yr +0.22%. Euro -1.04% vs. dollar. Crude -1.59% to $76.35. Gold -0.55% to $1185.10.
At the close: Dow -1.07% to 10120. S&P -1.28% to 1070. Nasdaq -1.58% to 2187.
Treasurys: 30-year +0.93%. 10-yr +0.33%. 5-yr +0.17%.
Commodities: Crude -1.51% to $76.41. Gold -0.61% to $1184.40.
Currencies: Euro -0.89% vs. dollar. Yen +0.17%. Pound -0.65%.
Market recap: Stocks tumbled after Bernanke poured cold water on hopes for quick Fed action to boost the economy despite an "unusually uncertain" outlook. Financials rallied on a strong report from Morgan Stanley (MS +6%), while Yahoo’s (YHOO -8.5%) weak quarter dragged techs lower. NYSE decliners led advancers by about five to two. Treasurys and the dollar rose.
PhiL : I don’t want to be a pest,but on the IRA hedge, would the SDS Jan $37/$45 bull call spread currently priced at $1.93 work? I could sell puts in the IRA if you recommended it since there is lots of cash.I’m looking for an additional 10 % hedge to my existing buy/writes of approx. $ 400 k. so if my calculations are correct, I would need to spend $9650 to get $40k of insurance.
Thank you again for your help & patience with me. If you ever publish on book on hedges,I’ll buy the first one.
Jobs: Would love to see the entrepreneurial spirit rise like a Phoenix; trouble is the nanny state keeps telling everyone that only it can create jobs. 300 years ago, we didn’t have a government safety net to ease the pain (an empty stomach is a strong motivator). The 12 man construction crew still needs a leader and organizer and a guarantee that they’re going to make more than extended unemployment benefits (oh the unintended consequences of governmental policies).
SDS/Dflam – Well let’s think that through. You have $400K of buy/writes that make, I hope $60K if the S&P holds up through Jan. So you are good for a 15% drop in the S&P – not happy but even and even is good when you can afford to go shopping at a 15% discount. That means think about what you REALLY need to cover. Anyway, so all you care about is that SDS does not rise more than 30% (15% S&P drop) to about $45 and $45 is even for you so it’s really the amount OVER $45 that needs to be covered. Presumably, if the S&P drops 15% to 910, then you will be even on your buy/writes and you effectively have $400K of cash (if you choose to get out) to go shopping with. While it sucks not to make money for 6 months, it is great to have money when no one else does!
So another 10% down for the S&P would cost you $40,000 at about S&P 820 and that’s another 20% up for SDS to $54 so your damage zone is from $45 to $54 – any coverage you pay for ABOVE that level is really a bit excessive, especially if you sincerely like your positions enough to not be bothered by the fact that they are down 10% with the S&P at 800 (by the way – it’s good to know what strike each of your positions were at when the S&P was at 800 and 900 to get an idea of what kind of damage you could be looking at).
Once you look that far out of the money, hedges get very cheap indeed. The SDS Jan $45 calls are $2.75 and you can sell the $53 calls for $1.75 so that’s $1 for the $8 spread so $5,000 of those gives you $40,000 insurance. That’s our "base case" and we then try to improve on it. If we drop $5 to the $40/48 spread, that’s $1.30 so that sure seems worth it and the $35/43 spread is $2 so THAT’s getting too high so let’s say the $40/48 spread is optimal. So that’s going to set you back $6,500 for 6 months for 50 of them. Not to bad to hedge $60K in hopeful gains on the bull side. Can we offset it? You can sell 15 March $30 puts for $3.20 and raise $4,800 but that obligates you to buy $45,000 worth of SDS at $30.
Now, we could consider that there’s nothing wrong with owning $45,000 of an S&P hedge long-term in a $400,000 mostly bullish portfolio so keep that in mind. Another interesting way to play this is to sell 5 SDS $45 puts for $13. That puts $6,500 in your pocket and you are obligated to buy 500 shares of SDS at $45 ($22,500). If the S&P goes up 15% to 1,229 then SDS drops to $25 and you are out $10,000 but, of course, you can roll it to 2x or 3x or 4x the 2012 whatevers for your next hedge. But, if SDS goes up and you hit your spread, you are more and more profitable the lower the S&P goes and that’s a nice offset…
How about we get completely out of the box and think of how to raise $6,500 by selling puts in something you WANT to own, even if the S&P does drop 30%? Maybe GE? You can sell 50 2012 $10 puts for $1 ($5,000) and, if GE goes that low and stays there, you own 5,000 shares for $50,000. Of course, as long as GE doesn’t go BK, you can roll to lower 2013 or 2014 puts anyway. How about UNH? They had great earnings and you can sell the 20 2012 $25 puts for $2.70 ($5,400) also against owning $50,000 worth. You could also just sell a few extra puts against your favorite long positions to raise the cash – there’s no rule that you have to sell the same thing you buy…
UNG is a good one and you can decide now to buy 3,000 shares for $9 (current price $7.58) in Jan and collect $6,000 for the Jan $9 puts. VLO is one of my favorite dip buys and 2,000 shares of that at $17.50 in 2012 will cost you $35,000 but you get $7,400 to play with while you wait by selling the 2012 $17.50 puts for $3.70. So lots of ways to have the trade paid for by selling puts in stocks you strongly feel will move up with the S&P (which hurts the SDS) and, of course, if those stocks are put to you, you did win your $40,000….
I’d like people to start considering co-ops more – they’re not just for hippie grocery stores; they come in all varieties and can be very effective. The place where I’m retiring, Korea, uses co-ops a lot, in all sorts of fields. Who has the time to read, but Kim Stanley Robinson’s excellent eco-future book "Antarctica" gets into possibilities in a very entertaining fashion. Also, his book "Escape from Kathmandu" is hilarious to old Peace Corps vols such as myself….all the stupid things I did with one or another crazy local….good time, good times.
You wrote yesterday: We have a Buy List under the Portfolio Tab and that is updated as needed and we added 9 more Dow Plays and WFR to that list and THOSE are the trades I track long-term. If you want to see how they are tracked, go back in time to older Buy Lists and see the updates, which are usually done once every month or so.
Sorry to say I’ve gone to the Portfolio tab and, on the first page, find only articles in "Archive for the ‘Portfolio Review’ Category" from July 7 back to May 1. Looks like I need more help.
You also pointed out the Strategy section, which I read and then forgot about. Rereading it goes along way to clearing up the "what to do with positions" questions I had.
I know you do not support my position on the government’s destruction of the domestic oil business. My position is based solely on fact, and not influenced by opinions of the media. California ( my state ) has huge reserves that are off limits to drilling, Some of the largest reserves within the US are in Alaska, and they are now not available because of federal government edict. The Gulf is now in moratoriunm status, and the production potential is on hold temporariy, but the industry believes it is permanent. The bottom line is: the United States has enough proven reserves to be self sufficient, but drilling is not permitted because of political and environmental gobbly-gook. This is facuual and not speculative. Even if we are not allowing domestic production….. then why would we not contract with Canada for their oil sands production as an alternative…. guess what – the Chinese beat us to the punch, and we are too late. Nice, eh?
My feeling regarding QE-02 and the Fed activity related thereto, is focused on their buying the debt of the bankruptcy prone states, and other troubled assets. I do not see the Fed attempting to buy more treasuries, unless there are no buyers. The only solution for the diminished demand for the treasuries is to raise the yield rates, as I believe we do not want to overlook the need for outside money. The rate level is the hook. TBT should be OK, as sooner or later the rates have to go up to attract suckers. The equities will jump if we get further easing, as this is positive for growth, and if nothing else, will drive inflationary pressure.
Gel- what ‘fact’ are you basing your opinion on? Everything I’ve read shows that we don’t have enough domestic supply to keep up with demand and that drilling in the pristine artic refuge won’t fix our supply problem.
HI have been away for a few days, sorry I did not respond earlier but thanks for the info on CGA good memory boy,
still in the play and hoping this stk will bounce thanks !!!!!!!!!!!!!!!
Yeah, you’re right Phil, it definitely is hard to be short-term on oil. Cant help it though, Im no JRW but have been doing VERY well trading oil contracts.
Obama incouraged offshore drilling until BP blew up a well. The reason it blew up is related to Bush oil men, we need to make the MOST money. I have to deal with people from Wyoning working for Cinthia Lumis who were more interested in sex than regulating safe oil production. Look it up, check it out you fools, eventually the shit hits the fan!
Correct that, until the oil polutes the gulf!
Do you still like LLY as a longer term hold?
The proven oil reserves that exist domestically, have been documented by many, however I base my data that is provided by the formost expert in the energy sector – Dr. Kent Moors. This guy is well known by all who are engaged in the oil and gas business worldwide. You mentioned you follow the Nymex, then he is somebody you follow. He has stated many times over the US could be energy dependant on no one, if we only pursued the existing reserves we have domestically. California has enough proven reserves alone in its Monterey Shale deposits, that stretch from San Francisco to Los Angeles to supply our needs for 20 years without the need for any imported oil. The technology exists to extract the oil in a totally environmentaly safe manner ( no chemicals). Occidental Pet is now engaged. Add in the other known reserves in Alaska, the Gulf and East coast offshore and we are energy independant – but for the interference of our own government. All this consternation about imbalance of payments for energy imports is BS – we do not need to import one single barrel. We need to export the ignorant politicians, IMO
Deano, No, I like BMY, MRK and GSK better. LLY is only until year end at most. Too much uncertainty in their pipe.
KG/qcmike – I looked into King Pharma (KG) and there is nothing there that really excites me. They have a pain killer up for review in Q4, but it is a rebrand of a drug, so not much to be excited about. They could be a takeover target for a mid-tier pharma, but there is nothing that is driving the growth (which is falling). Here is their most recent few Q data on their big guns;
Branded Prescription Pharma Revenue ($M)
Total Segment Revenue
In short, they are all going DOWN. I would rather risk money in something like QCOR (makes money) or CRIS (potential to have one winner in 19 tries). Anyway, that’s what I think.
To one entrepreneur from an another – With good preparation and a spirit of enthusiasm, coupled with the desire to succeed, and the esprit de corps in full dress, it prevails every time. I have taken on the bigest of the big and proved it could be done. The big guys are complacent and do not have the agility to move as quickly as you, and they take their position for granted – very vulnerable in all cases The new guy on the street with new and better ideas is at an advantage. .I wish you much success, and I would expect no less!
Well, let’s vote ’em all out gel! You, me, 1020 and JRW to the govenor’s mansion and then beyond (I will let you decide who’s whom)! If we can turn around this state, then the US should be easy!
shadow… Safe sex and safe oil production are not interchangeable… I do not see the correlation.
Phil, I read, re-read, and then printed out your 6:43 post to Dflam on hedging. Very nicely laid out, and very much appreciated. Why in the world does hedging seem so counterintuitive, so unnatural? Like doing acrobatics. Are we that programmed to think the market will only go up?
Not going to cloud anyone’s judgement, will keep my thoughts to myself….take a look at the 3 year chart on MA….ok i’ll say it…scary if you ask me. Lots of charts bouncing against the 50 day, recent action doesn’t evoke much confidence. If markets take off from here it would be the ultimate head fake.
Corning announces new capacity investments
Apple to challenge top chip buyer in 2012, says iSuppli
Some option issues have 2 sets with different prices, e.g. VZ has 2 sets of 2012 $20 LEAPs, one trading at $8.5 and the other at only $6.7 (almost no premium!). Why is that? What’s the difference? Thanks!!!
You are forgetting something. When we burn the oil, we put carbon in the air that will affect the climate of the planet and thus will affect the lives of or kids and grandkids for a long time to come. Is that factored into the equation. Also, Shale oil cannot be extracted in a clean safe manner. It uses tons of water and I wouild be surprised if it used no chemicals. In other words, we need to move off of oil.
He has stated many times over the US could be energy dependant on no one, if we only pursued the existing reserves we have domestically. California has enough proven reserves alone in its Monterey Shale deposits, that stretch from San Francisco to Los Angeles to supply our needs for 20 years without the need for any imported oil. The technology exists to extract the oil in a totally environmentaly safe manner ( no chemicals)
The domestic oil business has gotten a free ride from the government and society for the past 100 years. I could say a lot, but I will give you one item. The price of oil does not accout for the massive environmental damage that occurs through its usage. We don’t properly tax oil so that we all have cheap fuels, and so that the oil companies can continue to make the maximum profits for as long as possible and take a blind eye to the fact that posterity will inherit a damaged world. It is more of the same- stealing from the future so that we have a largess today. It is abhorrent.
Thanks for the infor, nice work.
I’ll look him up Gel. Although I definitely am a liberal guy, Im by no means anti-drilling. My father’s business is in the sister industry of waterwell drilling. I am one of the believers in climate change and feel we need to spend heavily in R & D for alternatives (ie non food based ethanol, biodiesel, ect).
The VZ options (adjusted) reflect the .24 shares of FTR that VZ holders got as a spinoff of VZ landline business to FTR.The other option is the option that was in existed prior to the spinoff and will be priced lower.
BIDU if anyone is interested, from an analyst at a small research firm:
Baidu, Inc. (Hold)
While BIDU’s Results and Guidance Beat Consensus, Upside to Stock Price Becomes Limited
Baidu, Inc. (BIDU, $73.31, $25,581mln Market Cap, Hold, $79.00 Price Target)
BIDU (Hold) reported strong 2Q10 results that beat sell-side consensus estimates and provided 3Q10 guidance exceeding consensus expectations. We believe the earnings results and guidance have unified sell-side consensus and buy-side expectations. The unification, in our opinion, could signal that the stock has reached its upside potential. Therefore, while we believe BIDU can grow significantly, as we have modeled, due to aggressive sales force expansion and improvement in its search technology, we believe upside to the stock is limited. We maintain our Hold rating and price target of $79. In addition, we believe there is a fundamental issue in BIDU’s business operation — the lack of a thorough and effective system to prevent BIDU from becoming involved in illegal businesses conducted online, which presents an ongoing risk to the business and stock.
· 2Q10 results exceed Street expectations, credited to FIFA event — BIDU reported strong 2Q10 results with revenue of $282.3M, 48% Q/Q growth and 74.4% Y/Y growth, above the high-end of guidance of $268.1M – $274.0M and the Street at $276.7M and our $272.5M estimate. GAAP EPS of $0.35 beat consensus of $0.31 but was in line with our estimate. The revenue outperformance was driven by the World Cup event, which generated additional traffic that led to a higher number of clicks. BIDU ended the quarter with an average of 254K active online customers, 15% growth from 1Q10 or 33K new customers while ARPU increased about 29% Q/Q to RMB7,533 from RMB5,852 in 1Q10.
· 3Q10 guidance above consensus — BIDU guided 3Q10 revenue to a range of $324.4M – $333.3M, representing 15% – 18% Q/Q growth, versus consensus of $321.6M (16% Q/Q growth) and our estimate of $325.2M (19% Q/Q growth).
· Tweaking top line, 2011E EPS remains unchanged — We have made slight upward adjustments to our top line projections. For 2010, we slightly raise our revenue estimate to $1,174.0M from $1,147.6M and for 2011 to $1,660.0M from $1,610.0M, representing growth of 79.2% and 41.3% Y/Y, respectively. Our EPS is unchanged at $2.08 in 2011, and our 2010 EPS estimate goes to $1.45 from $1.44.
· Unification of views regarding BIDU’s growth from both sides of the investment community — We believe prior to BIDU’s earnings, the Street consensus was relatively more conservative in its projections for BIDU’s growth than the buy-side (consensus was based on the company’s guidance, which turned out to be conservative). However, post earnings, we believe the gap is likely bridged. As such, we believe the expectation for BIDU’s growth could be fully reflected in its stock price, and upside is limited.
· Valuation — We maintain our Hold rating, as we remain concerned with regulation risks pertaining to BIDU’s business. Our $79 price target is based on a 38X PE multiple to our 2011E EPS estimate of $2.08.