RIMM’s new smartphone Storm has sold out quickly after its release. The bad news is that the inventory won’t be replenished until mid-December. Doubts about its ability to execute and weakness in corporate spending is pushing the stock to retest its 52 week low of $38.55. The stock is currently in the $42.50 range. The momentum is towards the downside. If the current low is broken, the next targets are $27 and $20. RIMM along with Apple are well positioned to dominate the smartphone market. Technically, the stock looks vulnerable. Patience is needed before acting on this stock. If the 52 week low holds, start nipping at it. If not, short the stock.
Cerberus Capital Management is accusing Daimler AG of falsely inflating Chrysler’s business outlook when it acquired the struggling automaker. They are now in talks where the private equity firm is to acquire the final 19.9 percent stake in Chrysler. Cerberus is finally admitting indirectly that it screwed up with this transaction. Fed by ego and cheap credit, they thought that they can turnaround the car company. Even back then, there were no secrets about the troubles Chrysler were having. They included huge legacy costs from buying off the unions, over reliance on trucks and quality problems. To make matters worst, Cerberus made matters worse by appointing Bob Nardelli, an executive with no automotive experience who mismanaged Home Depot. The private equity firm should just suck it up.
The market volatility over the last few months. It was almost common to see swings of 600 points during the day in the Dow. The defining of the day was the last hour of trading. This single hour will determine whether the markets close up or down. Since late last week, the signs are encouraging that much of the selling is exhausted. During the final hours, buyers were taking control of the markets. The last two months were dominated by sellers. Driven by fund redemptions and margin calls, investors would be selling into strength. It seems that much of this selling have occurred since the markets have been going up on bad economic data.
With the global economy expected to be weak going into next year, major brokerages are coming out with forecasts of oil being in the $50 range for 2009. As the economic recovery takes hold in 2010, oil will then average $70. Going out 2 to 5 years, oil could go back into the triple digits as demand outstrips supply. If these projections hold true, the transport industry, particularly the airlines, will greatly benefit. For the astute investor, it is a good time to start nibbling at large cap oil companies. They are poised to take advantage of the slumping share prices of small to mid sized oil and gas companies.
During tough times, only the strong survive. Before the economy turns around, there will be many corporate casualties. Those with weak offerings and high debt loads are likely not to survive the difficult conditions. The stock markets are in the process of bottoming. Once the recovery begins to take hold, it will be blue chip stocks that will rally first. The most likely candidates are well financed companies that are in the top tier of their respective industries. These high quality blue chip stocks include U.S. Bancorp, GE, Exxon and Honda.
Since July, the US dollar staged a powerful rally as the financial crisis spread to the rest of the world and the commodity bubble popped. That ride is now running out of steam. To prop up the financial system, the Federal Reserve is printing money. They are bailing out the banks that are too large to fail. They are also involved in buying up mortgage securities from Freddie and Fannie. Furthermore, the US government will introduce further stimulus programs and bail-out packages for certain industries. Once the flight to the safety of US treasuries slows down, investors will move their money elsewhere. Without the strong demand, it will be harder to absorb the additional US dollars.
The great stock market sell-off is making Apple shares look like a tempting value play. It has $27 per share in cash. Its operations are generating positive cash flow thanks to its popular products. The stock is bouncing off its 52 week low currently around $89. The 52 week high low range is $79.14 - $202.96. The Price to Earnings Growth is just 0.75 if the earnings estimates actually holds. The stock is way down from the 50 day moving average. It could retest this level around the $112 area.
Despite Citigroup getting $306 billion in U.S. government guarantees for its troubled assets, it still faces more credit losses and share dilution. In addition to its troubles in the U.S., the bank also has huge exposure to the emerging markets. As a condition for getting government help, they have drastically slashed its dividends. Even if the bank survives, they are not likely to generate good returns for their shareholders. If the shares rally back to its old support level of $12, sell the stock. Other banks such as Bank of America and Wells Fargo are better bets.
The wild west days where free-wheeling financial institutions are devising new, creative ways to make money are over. Leveraging one’s balance sheets, selling complex financial products and catering to the once lucrative hedge funds are over. The over extension and the disregard for risk management took down many once well respected institutions such as Bear Stearns and Lehman Brothers. Once the new industry emerges, it will be much more regulated and operated like a more traditional and more risk averse bank holding company. Likely players to prosper in this environment are Bank of America, U.S. Bancorp, Wells Fargo and JP Morgan.
Yesterday’s sell-off saw the S&P 500 broke through its October low, a negative technical development. The S&P 500 closed at 752.44, which is below the index’s October 2002 low of 768.63 and the lowest level for the index since April 1997. Even though stock valuations are cheap, investors are in no mood to buy. There is simply too much damage and uncertainty out there. Corporate earnings are being revised down and nobody knows where the bottom is. Investor sentiment will likely improve as the new administration takes over. The market at this point is seeking new direction and leadership.
