The number of the week was 12,000, and solid numbers from corporate earnings reports buoyed optimism about the economy up until Friday, when poor results from Caterpillar splashed cold water on those betting on a soft landing. Once again,
bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the
. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at
on bargains in this market,
on why there's no need to rush into trades on earnings,
on M&A and the video revolution,
on optimism about the economy, and
The Street Research Team
on the potential of American Airlines.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: The Real Bargains: Clean-Burning Growers
Originally published on 10/20/2006 at 9:07 a.m.
Do you go after the companies that saw some weakness going forward either because of higher interest rate worries or housing and auto slowdowns? Or do you forget about it and go with what's growing
That's the central dichotomy facing investors. Should you stick with
Johnson & Johnson
and now the much-loved
Or do you rotate into
Do you make a bet on
, knowing that it has no housing exposure, or do you cycle down to
These are not easy questions. Just as you got pops in oil service and the steels because of valuation or picked up 10 quick ones in housing, you have to ask yourself whether it's too risky to stay with these stocks now that they have had such a run.
Actually, if I were back at my hedge fund, I would do both. I'd bet on a
to catch up with a
, and I'd think that
was still too cheap at 5 times earnings.
I like Lowe's too much here.
But the main bet is with the winners that don't haves stretched valuations
vs. their growth rate
. That's right, I want Apple and Google,
. I want
, not stocks that can't move until they get better, which includes Honeywell and American Standard.
I know that we like bargains, all of us, but the bargains in this market are high-powered growth stocks that have no hair, not stocks that are selling at 10 times earnings and can't move. That's because only the momentum buyers are taking stocks and moving them up, and the momo crowd isn't going to endorse or embrace someone without a clean quarter.
The classic case is
, perhaps the most hated company I own for
Action Alerts PLUS. Thursday it was down about a buck and a half at one point, because it reports earnings on Monday and everyone knows this classically good cyclical, which is dirt-cheap, will report a number that will not please the analysts, even though I think it should. No momentum. Just a fact of life.
I urge you to consider that the most expensive stocks are probably
here, going into the end of the year. It's lousy that that's the case, but if you are a hedge fund, the job is to make money now, not to feel comfortable about your holdings.
is so right. Pirate Capital's troubles have caused it to go down, not problems at the company itself. Take advantage and sop some up.
At the time of publication, Cramer was long Johnson & Johnson, Halliburton and Ingersoll Rand.
Rev Shark's Blog: You Needn't Lead to Profit From Earnings
Originally published on 10/18/2006 at 8:44 a.m.
"The enemy advances, we retreat. The enemy camps, we harass. The enemy tires, we attack. The enemy retreats, we pursue."
-- Mao Tse-Tung
For the aggressive trader with a short term time frame, earnings season always offers up some interesting action. In many cases the initial sentiment and price action are an excellent opportunity to take a contrary approach and buy weakness or sell strength. In other cases the initial move is just the beginning of some lasting momentum and if you are quick to hop on the train you can go for quite a ride. Of course, distinguishing between the two types of situations is what determines your trading success.
One of the major benefits of earnings reports for traders is that they provide clarity and eliminate a level of uncertain. If you know the numbers and guidance then the only thing left is to measure trader and investor psychology. If you are adept at that trading, the wake of an earnings report can be quite lucrative.
Yesterday I posted my usual quarterly diatribe about the dangers of buying in front of earnings. It is not only risky but in the vast majority of cases it really isn't necessary if your goal is to get a jump on the rest of the market. In most cases you can put on the trade after the report at a reasonable price and without the huge risk of some surprise news. Sure, the stock may gap up or down but if there really is significant news you can still join the fray and profit after the fact. It might not be as exhilarating as being loaded up on the right side in front of the news but it is much safer and still can be quite rewarding.
Even stocks with very positive unexpected earnings news don't go straight up. They may gap up but eventually they will offer the patient hunter some chance for a good entry. Stocks that have significant developments or changes in character are revalued over a fairly long period of time. The "efficient market" theory says that all information tends to be immediately discounted in the price of a stock. In reality it can take a very long time for that to happen and that is what creates great opportunity for investors.
The great opportunities during earnings season lie not in betting on earnings but exploiting the action after they are released. This morning we should have a number of interesting trading opportunities shaping up as the market grapples with the true nature of the reports that have been released so far. You haven't missed the Yahoo, IBM or INTC trade because you aren't already in; the trade is just beginning so get to work.
Cody Willard's Blog: M&A Makes Shorting Tougher
Originally published on 10/17/2006 at 11:40 a.m.
Video over the Internet is the real deal. The video revolution is about to kick into high gear just as everybody is already saying that the YouTube deal marks the top of the hype. Not even close. I told my class at Seton Hall last night that I think we've just seen the fourth pitch in the first inning of a nine-inning ballgame. It just so happens that the YouTube guys hit a home run on that fourth pitch. More base hits, more home runs, more heartbreak and more disruptions are coming.
And, as Jim Cramer has been highlighting lately, that means that much of the fiber optic capacity around this globe is getting filled faster than most pundits thought was possible. And a boom in demand for high-capacity services leads to mergers and acquisitions and further rationalization of "The Telecom Deregulation Act," the single worst misnomer in the history of tech regulation. Now that the government finally has removed most of the worst of the central-pricing schemes and other central-control aspects of the regulatory framework, the companies are figuring out how to make sustainable business models work.
noted that I was hearing M&A talk around
a few weeks ago when I noted that I would no longer want to be short these carriers. Indeed,
is looking like a good, albeit
, play on the growth of video on the Net. I've got little faith in the management there, which has flip-flopped on its own business models and visions over the years to the point where it really does need to prove to the Street that it has a clue how to make a profit. Which is far from clear.
I'll tell you this for sure: If tech does go "techo bubble" in 2007 and 2008 as I have hypothesized for many months now, Level 3 will be another home run. I guess you could say that it has been down 0-2 in the count and has been fouling off pitch after pitch to stay in the game. But it is indeed still in the game, and the count's even at this point.
At any rate, the M&A boom continues. Tough to be short individual names when the premium buyouts hit from all kinds of sectors, from semis (
) to telecom (Broadwing) to construction (
Tough to buy, per my
opening post. Tough to be short, per this post. Looks like I'm trying to find good ways of hedging the portfolio here.
At the time of publication, the firm in which Willard is a partner had no positions in the stocks mentioned, although positions can change at any time and without notice.
Tony Crescenzi's Blog: Zero Rate-Cut Odds Sign of Economic Strength
Originally published on 10/18/2006 at 12:29 p.m.
A very favorable backdrop to the stock market lately has been the ending ofthe
rate hikes and the elimination of expectations for furtherinterest rate hikes.
Although the odds of a rate cut also have beeneliminated, the cause of the elimination has been an increase in optimism overthe economy, not a bad thing at all.
To underscore the placid environment,it is notable that the market is priced for zero percent odds of a ratechange in either direction at both the Oct. 25 and Dec. 12 FOMCmeetings.
For the January meeting, the market is priced for 6% odds of ahike, but the odds are too low to be of consequence for stocks. Only ifthose odds move materially higher would the equity market begin to feel apinch.
Stock Talk Blog: AMR's Potential to Fly Higher
Originally published on 10/19/2006 at 9:57 a.m.
Oil prices have fallen 25% from their peak, stabilizing around $60 a barrel. If oil prices remain below $65 over the next six to 12 months -- which may be difficult considering that OPEC is widely expected to cut production at its meeting today -- I believe
is a great buy.
The airline sector has been battered and beaten in the past, but shares of AMR have quietly risen 100% over the past year. Most of these gains happened between October 2005 and this April, suggesting that lower oil prices may not be factored into shares. The rise can be attributed to a favorable revenue environment and cost controls that were initiated over 12 months ago.
This morning, AMR
reported a third-quarter profit that was ahead of consensus estimates -- its second consecutive profitable quarter after six straight years of losses. The quarter included a write-down of $100 million to reduce the value of fuel-hedging contracts, which management says "will largely reverse itself in subsequent quarters."
Fuel accounts for about 30% of AMR's operating costs, based on 2006 estimates. According to
The Wall Street Journal
, for each $1 drop in oil prices, AMR saves about $80 million in annual operating costs. Because oil prices were near record highs at the beginning of the reporting period, I don't believe these cost savings were fully realized or reflected in the stock price.
This has prompted a wave of upward estimate revisions by almost every investment firm that covers the stock. But despite the revisions and optimistic outlooks, AMR shares are not without risk. It has a huge $14 billion debt position and a severely underfunded pension plan, which could drain the company's $5 billion in cash.
However, I believe that AMR has price-appreciation potential at this level based on lower oil prices combined with restructuring initiatives that are just beginning to hit the bottom line.
In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Steven Smith was on vacation this week.
David Morrow is editor-in-chief of TheStreet.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. He appreciates your feedback;
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