RealMoney's five bloggers were all over the earnings and expiration action this week. Once again this weekend, we'd like to share the "Best of the Blogs" with TheStreet.com readers. These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Now, let's take a look at
on averaging in to a stock,
on fighting through tough markets,
on the importance of competition and
here for information on
where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Google at $600 Isn't So Eye-Popping
Originally published 04/21/2006 2:47 PM EDT
stock price is a simple calculation, just like all the others, but it's made more opaque here because of the high dollar amount of the stock. When I write that my new price target on Google is $600, people get confused.
We know now that the company, which we thought could earn $9 and not much more than that, now can earn $10. We have to figure out what to pay for that $10 in earnings with the stock price. We have to solve for the M, as I say in
Jim Cramer's Real Money: Sane Investing in an Insane World
, to get to the P, or share price. The company's growing about 30%. We should be willing to pay up to 2 times the growth rate. Why 2? Because anytime I have paid more for a stock, I have felt like I was speeding too fast and was too worried about getting thrown out of the car! I was too worried about a pending crash.
Less than that? Not even an issue. If you can get it for less than that, you should be thrilled. I say that because there aren't many stocks that are growing at 30% a year that are selling for less than 60 times earnings. Why should this one be different?
Remember, this is an
stock now. People who run money look at all of the S&P stocks, what rate they're growing at and what they sell for. If they can find any other 30% growers, they will discover that they are paying twice that rate as a multiple at a minimum.
That, to me, means, algebraically that's what you are going to have to pay, nothing less. If you can get it for less some time in the near future, please do so.
I don't think it will happen. Too cheap!
Rev Shark's Blog: Averaging In, Not Averaging Down
Originally published 04/21/2006 11:10 AM EDT
Many market participants have difficulty understanding the difference between averaging down an existing losing position and averaging in to establish a new position. I seldom average down, and I almost always average in. It may seem to some to be a distinction without a real difference, but to me the difference is like night and day.
Averaging down usually involves adding to a position that is already established because of weakness. The thinking is that the market is wrong, and therefore I can get a bargain by buying as the stock downtrends.
Averaging in usually involves using the stock's normal volatility to establishing a new position over time. I mentioned that I started a position in
today. I bought a very small amount last night when it traded down initially on earnings, with the intent that I would build a position. I had no set plans to make subsequent buys higher or lower. I simply wanted to start an initial position by making a few small buys. If the stock falls out of what I consider to be its current trading range, I'm not going to buy more. In fact, I'll probably sell what I do have.
The primary difference between averaging down and averaging in is one of intent. When you average down, you generally do so because you believe the market action is wrong. When you average in, you are simply taking advantage of volatility and not making any judgments about how smart the market may be.
The market is drifting around and not doing a whole lot. Overall, things still look quite healthy, and some backing and filling is probably a good thing.
At the time of publication, James "Rev Shark" De Porre was long BRCM, although holdings can change at any time.
Cody Willard's Blog: Fighting Through the Maze
Originally published 04/21/2006 9:11 AM EDT
"Are we gonna let de-elevator bring us down? Oh, no. Let's Go! Let's go crazy."
I haven't had a clock in my bedroom for more than three years. This morning, I awoke as I usually do, before the sun, and my mind immediately raced back to the topic that it had fallen asleep to: "What's up with trading tech in this market?"
Streaks. It's been a recurring theme this week in my blog, and that's because it's been on my mind a lot lately.
Every experienced trader knows what it's like to get hot, to get cold or to just not have a feel for things. It's not as if such streaks -- even if they exist in reality outside of one's own subjective mind -- are just luck, or attributable to a higher power. Such streaks likely reflect one's own mental place, one's own hard work and, perhaps most importantly, how in synch one is with the market.
And that brings me to my approach here. I've been much less aggressive and more hedged in my overall exposure and stance to this market of late. And it seems like I've been running in place here since I made that move. Ever feel like your hedges seem like they've worked to keep you from running to any meaningful upside and that every
pop is countered by an
drop? And why is my
short so small?
That's the reality of my positioning this morning, and as many an emailer noted to me last night, I am indeed frustrated about that. Who wouldn't be?
But that doesn't mean we throw in the towel and declare this market too tough to trade. It does mean that I'm going to remain cautious and trade smaller until I feel like this market is closer to reflecting my sense of making sense.
I'd much prefer to be aggressive. But there's a time and place for everything, and this, for me, is not the time to be so. So I'll stay very net long tech from an investment perspective, reflecting my bullishness for the intermediate-term. But I'm just going to have to stay on the cautious side of aggressive as far as trading goes.
At the time of publication, the firm in which Willard is a partner was net long GOOG and FFIV, net short ERICY, although positions can change at any time and without notice.
Steve Smith's Blog: Let the Competition Continue
Originally published 04/18/2006 12:09 PM EDT
Nasdaq Stock Market
is really setting the pace with this consolidation and competition for market share among exchanges. Today the Nasdaq announced it has begun to offer options routing to customers by connecting its routing system to the all six of the major options.
I spoke with Randy Fredrick, director of derivatives at Charles Schwab about the implications of this move. Over the near term, he feels it doesn't really change much for Schwab or the customers of other brokers that offer online option trading capabilities. These major firms all already have deals or direct access to the exchanges and offer customers smart routing and the ability to do some basic combination trades such as covered calls and married puts. But it does lower the cost and make it possible for smaller firms to start offering similar online option services at more competitive prices.
The theme of competition leading to lower prices was not lost on Fredrick, as he acknowledged: "At some point down the road, if the Nasdaq can offer the same technology and efficiency at a lower cost, we would certainly consider entering our orders through their system." Even if Schwab and other brokers that currently have this capability, Fredrick expects it will reduce costs as other exchanges and the brokers who deal with them will be forced to match the Nasdaq's price. Of course, some portion of those lower costs should work its way to benefit customers in the form of lower transaction costs.
As far as option exchanges, all should receive some benefit because this theoretically could expand the pool of people willing and able to trade options. My take is that it will be a barely measurable increase in the near term. But any additional volume that uses smart routing and is bound by the requirement to find the NBBO (Best bid and Offer) should help the exchanges that have the tightest and most efficient markets, in this case that means the
International Securities Exchange
for equity options and the CBOE for index options.
The bottom line is that while the
talks about wanting to add options to its list of products, the Nasdaq has actually taken action. By offering option routing, it will immediately begin participating and earning revenue from growing options trading volume. And it's the first step in creating a single platform for equity and options.
Tony Crescenzi's Blog: Watch the TIPS
Originally published on 04/19/2006 12:07 PM EDT
The yield spread between 10-year Treasury inflation-protected securities and conventional 10-year Treasuries has reached its widest point since last April, evidence of a rise in inflation expectations.
The spread is now at 2.64%, indicating that investors believe that the consumer price index will average yearly gains of 2.64% over the next 10 years. The increase, along with the increase in yields across the yield curve, as well as the steepening of the Treasury yield curve, are signs of increased worry about inflation.
While it is true that inflation expectations are well anchored, the Fed must be careful about ending its rate hikes at a time when inflation expectations are worsening and would probably worsen more if an end to rate hikes were to loosen financial conditions to the point that they stimulate the economy before it needs stimulus.
For example, ending the hikes while commodity prices are surging and before the economy has shown signs it is set to slow much would probably worsen inflation expectations.
George Moriarty is managing editor of RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships.