Wednesday, November 28, 2007

I have a theory, only in extremes for higher oil/energy prices will a correlation between oil and gold will matter. In the creation of a new range, as many people are now saying oil is in a new range, in the extremes of new prices or the new beginning, there will be a correlation between oil and gold, the excuse being people are using gold as a hedge to inflation as oil defines its new range and makes higher highs. This may or may not be true, but the fact is, when there is an extreme or a new development of range, the media portrays bullish moves in gold as inflationary hedges in relation to oil. What really matters is that a correlation does exist. As we saw in the summer and a little before gold and oil were loosing its correlation. Gold had already made its highs in the 800's even further back, and any correlation between gold and oil was beginning to be less significant. But now, with oil entering new ranges, a relationship between oil and gold seems to have been revived.
To support this theory, economic conditions would also have to warrant a legitimate correlation. For example, currently the United States as an economic power is experiencing weakness. A weak dollar with a persistent need for Federal Funds rate cuts brings about perceived or apparent inflation. Apparent inflation being inflation that is actually occurring. Either way, if is not apparent or not, it will bring about sentimental fears which would cause a correlation between oil and gold or is what will be driving the prices of these commodities. The relationship being people buying gold as a hedge to whatever kind of inflation is there.
So in summation, in new ranges of oil or energy, you will find a correlation between oil and gold, if supported by economic fundamentals, where price in part, is ultimately driven by sentiment.

Fed Remarks:

Everything the Fed has said is pretty inline with my expectations. As usual the same slightly modified statement was made allowing Feds to remain on the fence to go either on hold or cut, as a protective measure for their reputations. Its kind of ironic how so many managers are always looking for accountability, and ultimately the Feds who are often perceived to be responsible for the performance of the economy, are never clear enough for full consensus on wall street of what the next decision of the Feds. Most interestingly, I believe there to be divergence in the equity index futures markets and the domestic equity markets. Yesterday and today the futures opened with negative fair values, and yesterday saw significant gains, and todays bullish sentiment seems to be showing the same upward price movement. I believe this to indicate that prices will not be able to sustain a break in resistance for a significant time period. Based off past federal funds trends and during times of crisis, more rate cuts will be seen. To support this idea is that the core cpi and ppi are relativity tame. And as i had naturally expected, they mentioned headline inflation stemming from commodity and energy prices during the speech, just to say it did pose "short term" problems, although commodities and energy may be stabilizing, which to me indicates further possible cuts.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York.

From what Kohn said,I feel there is room for further rate cuts, in fact I would not expect 75 basis point cuts (as some people are speculating) as the inflationary problems that would cause lots of volatility, which in part, the Feds job is to keep prices stable.

Looking back to times of crisis, 50 basis points were used as pre-emptive measures when the crisis first began, and then followed by a series of 25 basis point cuts as provided when necessary. As poor financial conditions still linger today, a series of smaller 25 basis points "should" follow as to maintain stability. Though not wholly unexpected to see pre-emptive measures since that is what Bernanke has done in the past, but as the effects of a larger cuts back in sept did not prove entirely useful as markets rallied and pullback to similar conditions previous to the cut.

This further supports my idea that the s&p 500 will remain within a range from now until the end of the year, as further cuts are due.

Tuesday, November 27, 2007

November 27, 2007

Today is going to be a key day. One can say this would be a good gauge of how much housing is priced in the markets already. Already you can have a bearish argument of support from aug 07 is broken with the close at 1407, but its very possible that longer term resistance will hold, at march of 1373. If there is a break through support, I would be bearish for the rest of the year. Though a bounce of support is significant in my opinion. Resistence from 2000 of 1498 has already been broken, and bounce would indicate further consolidation to form stronger support before continuing. Which would mean, a bounce of support would lead the s&p 500 to trade in 1390 and 1560. The question remains, are the fundamentals there to support such a price move. I would think not. In the short term, through November and December, there is too much weakness to warrant such a move. There are too many liquidity issues that the fed's need to address meaning further cuts, which means further weakening of the dollar. Overall though this will be bullish long term, by the end of 1st quarter next year, if labor markets can remain tight, the feds may go hawkish on inflation again, as the economy picks up.

The movements of the dollar are quite natural, as the economy like any other living system is in dynamic equilibrium with its environment, whether it is perceived or not. Some see the bottoming of the dollar to have happened already, Although, i would not be too bullish on the dollar yet. Considering further rate cuts, and the dollar becoming more attractive for carry traders which will lead persistent weakness of the dollar may carry through into the first quarter of next year. Overall, as the economy is balancing itself out, this maybe good for the current account/trade deficit. The dollar will recover when the economy has more sound fundamentals, and is not moving of volatile sentiment.

Wednesday, November 14, 2007


If prices close above 30.4-30.5 i see it possible for further momentum upwards. Overall though the RSI is starting to trend sideways, indicating possible exhaustion from the bulls, although some people are just taking a break from the past two days of gains, if the prices manage to close above 30.5 today, CSCO may find renewed strength and continue up. Though, if prices remain within the first and second standard deviation of the bollinger bands, i would expect periods of conslidation more to the downside before a continued move up.

I would hold CSCO to the end of the day before deciding what to do, considering the bulls are struggling to get a footing. On the intraday, there is possible support at 29.9, but there may not be enough momentum to reach the 30.5 mark.

Entry for November 14, 2007

Bernakes interesting proposal.

This move to transparency is one thing that can eliminate considerable amount of volatility in the markets. In terms of stability and goals of the Fed in terms of monetary policy, this is a move that is strategically smart. Though for the investor who live off periods of volatilty may be dreading this descion. If Bernakes plans are indeed to work how he proposes, the there will be a convergence and direct correlation between markets and economy. Though in whole i do not see this possible in reality, though it may be a step closer if things go according to plan. If so weighin in sentiment maybe less important in future analysis, and possibly closing of avenues for behavioral finance specialist and economist.

Again whispers of more Fed cuts being necessary are being heard, as i presented at the Federal Reserve challenge, more cuts will be necessary to maintain growth, primarily on a liquidty basis, and a need for fundamentals in the financial and housing sector to improve over an exteneded period of time (possible a few years for full recovery but about 1 year for some stability).

As i also mentioned, apprent inflation, the ones that we as consumers are feeling now will show refect in short term slowed growth (into the year end, 4th quarter). Though as i always said the consumer is not as weak as appeared, as retail reports have been coming in positive, and with oil prices soon to decline from seasonality, we should see more strength from retail. Though inflation can primarily be stemming from the weak dollar, from higher import prices, despite a decrease in current account and trade deficiet, which as not found a bottom yet.

I believe due to inflation the feds will not be able to cut as much as they would like,

as stated by Bernake:
''Ultimately, households and businesses care about the overall, or headline, rate of inflation,'' Bernanke said.

the focus on overall inflation is an important factor as it does affect sentiment and short term growth, the consumer is one who feels the current effects of high energy and commodity prices. The Feds reportings are based of lagged information and should always be considered more of indicator of past trends, but necessary current trends.

My expectation of a series of Fed Fund rate cuts may appear as bearish, however, the economy is still strong in my opinion. My main arguement being a tight labor market, is what is helping the drive of consumption. As with housing, and now the financials these are problems that need to fix themselves over the long term, one can expect to see dragging affects through 2008.

If the Feds can clear away most of the bearish sentiment in the markets, i would expect a stronger 4th quarter in the markets overall. My only fear is that people will price in cuts now, and not expect further weakness from the financial sector or housing sector which in turn will create more volatilty in the 4th quarter, which is what we have seen in the 3rd quarter.

Based of Fundamentals, I have a bullish stance and expect better growth in the 4th quarter. My bullish stance only holds if people also price in weakness from housing and the financial sector, and maintain their own stance.

Monday, November 12, 2007

Entry for Nov 12, 2007

It appears mainly from a sentimental standpoint that one has to be a bear in this environment. Though on a whole, it is my subjective interpretation, if the bulls today can main support above 1451, or even close above 1451, of the S&P 500, what we are seeing is a period of consolidation. Based of volume with the bollinger bands, it seems today that the price levels will break below support and search for stability around 1411. Overall I would say price support is necessary at 1400. If prices breach these levels within the week or into next week, I can not see bullish arguments holding up, unless we have surprise news of significant underlying strength of the fundamentals of the economy or we have more news of fed cuts, (which again, will only exacerbate the problem in the mid to longer term, although is necessary based on a liquidity standpoint). The mixed to neutral futures sentiment, will probably reflect a stale day of trading. This is most indicative of sudden volatile price swings, and in this environment, one can expect it more towards the downside.
Overall i feel that a stronger than perceived consumer is ever present only hurt by temporary high commodity and energy prices. As seasonality takes hold, and oil prices start to fall, this will alleviate pressures on the consumer. This will spur on holiday spending. Where will they get this money? One can argue the unwinding of a housing wealth affect, but i feel that a tight labor market since the summer offsets this. The mid to upper middle class have been resilient through this housing slump and has been maintain GDP levels. The current weakness in the technology is only perception. The announcment of the possible slow growth in CSCO was more of prediction and pre-emptive measure, and is not fundamental driven as the valuations of CSCO are still positive. But, does not neglect the fact that yes indeed credit problems will affect everyone, and should not have been a huge surprise in whole. In a sense, it is more postive that this happens, so that a bubble in tech does not form.
Possible inflationary pressures from the further weakening of the dollar, plus short term spikes in high energy and demand of an actual need for commodities will have short term slowed affects which we are feeling right now. At this point for the economy, it is vital to be moving inventory to avoid gluts so inflationary pressures do not come from the producer side. For you fundamentalist, being vigilant on cash flows especially in this tight credit environment is more important than ever...

Wednesday, November 7, 2007

Entry for Nov 7, 2007


Cisco Systems

Market Capitalization $203B

Close: 33:08

Growth Rates:

Current Quarter Growth Estimate: 16.1%
Next Quarter Growth Estimate: 15.2%
This Year Growth Estimate: 17.2%
Next Year Growth Estimate: 16.6%

Peg Ratio: 1.49

Current Year P/E ‘08: 20.89
Forward P/E ’09: 18.00

Bullish Fundamentals:
- Current and next quarter growth moderate to strong with 16.1% and 15.2% respectively, positive in short term due to stronger current quarter growth compared to its industry current quarter growth (13.5%).
- Positive for the longer term, this year’s overall growth at 17.2% is higher than its industry (8.1%), sector (17.0), and S&P 500 (6.1%) for the year.
- In terms of forward P/E cross comparison of competitors CSCO may appear to be under valued with forward P/E of 20.71, while ALU has a forward P/E of 37.87, NT 32.3 and JNPR 41.62
- Forward P/E of CSCO (18) in relation to Industry (24.88) and Sector (24) is relativity undervalued
- In a basic sense CSCO would be overvalued with a PEG of 1.49, but compared with its competitors it is much lower, ALU has a peg of 3.36, NT 4.02, and JNPR 2.02.
- 15% growth in total revenues from 05 to 06 and 18% increase from 06 to 07.
- 31% increase of net income from 06 to 07.
- Steady cash flow
- Softness from US segments can be offset by demand from emerging markets.
- SMB segment continues to be healthy
- SFA segment has shown strong demand with IPTV setup boxes

Neutral Fundamentals:
- Static EPS the past 60 days, showing hesitancy sentimentally (reflecting in technicals)

Bearish Fundamentals-
- Growth may not sustain
- Sustaining high growth and % of total revenues will be harder to attain as technology sector improves on whole, and bargain hunters will be searching for better buys.
- Estimates are easy to miss, with tight income statement, risk increases with stronger fundamentals
- 18% increase in total liabilities contrasting to a 22% increase in liabilities, watch to see that liabilities does not exceed assets.
- Disparity between high and low earnings estimates, 1.48 to 1.65 (hesitancy).

Fundamental conclusion:
Overall CSCO presents average to fair valuations not significantly under valued or highly overvalued. The income statement remains strong, while there maybe questions for future growth as the technology sector improves, and with bargain hunters looking for better buys with less large companies.

Technical Analysis:

- CSCO presents a nice chart over all from 1990, After peaking out at 77 and bottoming around 10 CSCO has been working its way back up to resistance, with new long term support levels at 20-25 (between 2004 and 2006).
- Current sentiment in technology will allow it to reach support levels
- RSI alone indicators higher prices
- 3 white soldiers with increasing volume
- Price support with prices above the 50, 100, and 200 SMA (useful as a measure of non institutional investor decisions).
- 50 SMA is close the median of the prices, every time there is divergence of the price going above CSCO has rallied, early may 2005 prices went above the 50 SMA and trended into late June with (about 16% gain), February 2006 into early late march when prices went above there was about a 22% gain, Early August 2006 into early January 2007 about a 52% gain. Mid June to Early October 2007, when prices went above the 50 SMA, 19% gain (the low that pierces the 50 SMA in mid August can be accounted for by the significant bearish sentiment as indicated by the 3 black crows that preceded it, thus only account for as a whipsaw as the fundamentals warranted the continued overall uptrend).
- Evening star formation over the past 4 days
- Price channel from June 2007 till now is still legitimate if one considers early the price pierce in early august to be a whipsaw.

- Though with strength in technology declining volume may not be able to push through with the slowing momentum.
- RSI is getting closer to top standard deviation (depending on sentiment, CSCO trends sideways to down as RSI approaches the top limit, it is possible the extreme bullishness may push it above further)
- Price piercing of upper standard deviation in Bollinger band (20, 2), significant indication of prices trading in the bands today.

Technical’s point to stronger growth in the longer term. Significant back testing confirms this though along with above average volume ahead of earnings. Though on the short term the RSI and Bollinger band points to short term downside pressures. Once these pressures are overcome, a continued uptrend will hold, as confirmed by the trading channel from June till present.

Sentiment: one can ignore sentiment on buy rating analysis as, there are many buy ratings when CSCO trended downwards.

- This extreme bullishness sets up extreme fragileness giving no room for slight miss on expectations even if positive regardless on earnings report.
- Market Volatility following media driven fundamentals opposed to underlying fundamentals
- Credit liquidity issues, though on a whole technology sectors has been resilient to this. Though interest rate risk is significant with volatility, though if interest rates are on the downside, this can alleviate some debt with refinancing. Though if economic conditions are significant with inflationary pressures, debt can be more straining.
- Using buy/sell sentiment as an indicator, as the majority of the buy sell ratings are all neutral to strong buy with very few sells. All the buy ratings were still in place despite poor the intermittent poor performances.
- Possible overvaluation, recent buybacks artificially inflations P/E, as reflected in a .71 LT debt to equity ratio. Buyback can be seen to give more power to insiders. Possible candidate for window dressing based off recent sentiments.

Overall Fundamentals and technical’s are in agreement. I do not however like the overly bullish tone coming from analyst on this security. The sound fundamentals should be inline with estimates, though some of the fundamentals maybe inflated as indicated in the risk section. This inflation may be indicated by the price piercing of the Bollinger band indication short term volatility more to the downside. Indicating, one should buy on a pullback. Overall fundamentals and technical’s warrant a long term buy. Short term volume has picked up, but not be enough in the short term to continue the upward trend. A temporary dip to the downside would not be surprising and is expected by my opinion. Though if earnings do come out stronger than expected, there is no doubt the upward trend will continue.

Overall: long term buy, suggested to buy on a pullback.

If one owns securities already, writing a covered call of a Nov 17 at .90 is suggested. A straddle is not suggested as earnings are expected to be inline according to sentiment. If earnings do miss a covered call should absorb some of the losses.

Analyst: Alexander LĂȘ

Sunday, November 4, 2007

Hello and welcome to the Federal Reserve meeting Nov 5th 2007.

As of the previous meeting October 31, we, the Federal Reserve System decided on a 25 BP cut, to allow much needed liquidity in the ailing financial markets. Though on a whole, the fundamentals did not warrant this, but was done as a pre-emptive measure.

As noted in Purpose and Functions of the Fed Reserve, or job here today will be to use Monetary Policy in pursuit of maximum employment, stable prices, and moderating long term interest rates for the assurance of the US economy’s health.

Our analyst is of a global perspective, which does not focus on either the micro or macro fundamentals as more important but both as dependent on each other. We’ll further strengthen our fundamental analyst with technicals and sentiment.

The over all structure of the presentation and each individual topic presented will include the following structure:
1. Bullish Aspects of the economy and or topic
2. A contrasting Bearish view
- saying why which side is more important
3. Tying and relating the topics to the current state of the economy
4. How we, the fed’s, should implement monetary policy according to our data.
5. Lastly, we factor in the team sentiment and current sentiment of the media, markets, and economist (as they have significant potential influence on monetary policy indirectly).

Stemming from the summer the lag affect is finally being felt from the series of holds on the Feds Funds rate, as reflected in continued poor performs in retail and recently expected slow growth in high end soft good stores. This is significant in that the mid to upper middle class has been driving consumption a GDP numbers through the housing slump. The wealth affect maybe said to be unwinding; this maybe only temporary with the volatility in the energy markets, as the weather has not fully settled, and seasonality not in trend, and weak financial conditions, which will slow consumption. With volatile food and commodity prices as also reflected in the CPI and PPI, short term inflationary pressures are greater as perceived, and will not allow us further cuts for a speedier recovery. On the positive side this will allow for the necessary restructuring of fundamentals in weak sectors of the economy, instead of poor practices being spurred on by more cuts which are better for long term recovery. As current sentiment shows, a weaker high end consumer maybe slowing down, this is only on the soft good side of retail, as if one were to look at big box there has been significant strength. Technology on a whole has been buoying the markets, instead of buying more clothe or hand bags, people won’t be driving as much but will instead spend it on new gadgets such as the iphone, or plasma TVs etc... Another thing I see is that the consumer on a whole will be resilient even with high energy prices, due to a tight labor market. The Labor markets wages as steady to increasing, which indicates people are still getting their paychecks and will still be spending, which will reflect more positively than expected in the upcoming holiday season. Adding to the inflation picture a weaker dollar may seem like a problem. But this is mitigated by the improved trade deficient. If anything a weaker dollar is more bullish for GDP. As fundamentals will point to the stronger side of the economy, the dollar will find support, and foreign bargain hunters will rally to help stabilize the dollar. Also due the weak dollar tourism will significantly increase consumption, which also negates weaker soft goods in retails and reflects positively in GDP. The fundamentals of the economy are overall strong with current weak volatile problems that will need to sort itself out over a few years. We will see slower growth in the 4th quarter as seen from shifts of spending of the consumer and inflationary pressures with high oil prices affecting gas prices taking its toll on consumer. Slow growth in the short term is also shown with less output from the service sector a major component of output. We can count housing as negligent as many people will be pricing in further defaults and a continued drag in the economy, though with current low interest rates refinancing and bottoming of dollar may start to form the first level of support for a bottom in housing, which may reflect in late 2008.

In my opinion, another 25 BP is necessary as financial markets are still facing lots of pressure and further defaults on mortgages. To not act in the face of this problem is to ignore our job as stated in the Federal Reserve Act, which is the job to manage systemic risk that may arise from the financial markets. My only concern is inflationary pressures from a weaker dollar, with high energy prices, and from producers passing on higher cost to the consumers. Under normal circumstances, a hold would be warranted, but as the US economy is still trying to pull itself out more than 1 crisis, another cut is necessary. Though do not expect more cuts as financials will improve…

Before the vote:
Is there enough room to cuts or are inflationary pressures too prevalent currently?

Is the current condition in the financials more of a media driven problem, or do actual fundamentals warrant this cut?

Does anyone see the bottoming of dollar within the next few quarter and why and why not? How will this affect housing?

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