Stubborn Bulls, Frustrated Bears - A Collection of Many Topics I Have Accumulated!

By Dr. Duru written for One-Twenty

September 12, 2006


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One day, the decline in oil prices provides evidence of a slowing global economy, another day declining oil prices provides hope that consumers will have more money (and willingness) to spend in the economy. Such is the seesaw of the bulls versus bears as the market tries to transition. Transition to what is anyone's guess. But I maintain that the rally of 2006, such as it is, is done, at least for now, and near-term rallies provide great selling opportunities. For those of you with longer-term perspectives, there is probably no need to care much...yet. Today's missive is a collection of many topics that have been on my mind lately, and I am trying to "dump" them all at once: an additional review of the post Labor Day trading action, Best Buy's (BBY) earnings, CAT and China's attempt to slow its economy, Bausch & Lomb (BOL), and another look at the options backdating scandal with a particular focus on Broadcom (BRCM). Read on if you dare...!

Post Labor Day trading - the summer rally is not yet done after all
Last night, I verified that the T2107 and T2108 indicators did their work with a clear warning that the August rally in the markets could not be sustained. The market dutifully sold off after Labor Day, but it did not make much of a dent in August's gains. On the S&P 500, today's rally was almost the exact mirror image of the sell-off last Thursday. The NASDAQ managed to clock in a new 3-month high. Trader Mike noted well that all the conditions were in place for a nifty little comeback rally. So, while I declared the rally was done as the market got close enough to important resistance, the true test is coming up. The NASDAQ is a mere 9 points away from the 200DMA which just so happens to coincide with the June high. And the S&P 500 is back to within 14 points (1%) of its 52-week and multi-year high. Even if we do not test these levels immediately or even for the rest of this week, the market has proven that there are enough eager buyers out there to continue the battle. The T2108 indicator has also pulled sharply away from the dangerzone for now. Finally, I think there are too many eager bears out there trying to time the top in the market in anticipation of their long-anticipated (for several years) collapse in the economy. They got squeezed bigtime today. The worst part about this recent rally is that it has not carried commodities with it - commodity-related stocks have been absolutely smashed and gold is now back below $600. Many bears, especially ones who do not want to short the market, play metals like silver and gold. Anyway, if Best Buy has anything to say about it, the consumer is still not dead, the economy still looks sound, and the bears may yet remain frustrated.

Best Buy (BBY)
Today, Best Buy reported better than expected earnings and revenue numbers for the last quarter, and it maintained guidance for the full fiscal year. BBY said nothing about an imminent collapse in consumer demand. In fact, it actually suggested that consumer demand for many electronic goods, especially flat panel TVs, remains quite robust. Unless the bears find a scrape or scratch somewhere in the financials, one leg of their thesis on economic collapse has been removed. Of course this does not mean the economy is perfectly healthy, but it does mean that the bears lost a potential catalyst to get a sustained market correction. BBY soared on today's news by 9%...and this was after opening down by 3%. Do you want to guess where bears were placing some major negative bets? Having said that, I think the rally in Best Buy was overdone. Just today, I noticed an interesting commercial from Wal-Mart (WMT). Wal-Mart is clearly making a major push into consumer electroncis with TV ads promoting the cheap prices on their flat panel, big screen televisions. The particular commercial I saw even parodied a Best Buy sales representative as he happily proclaimed that his store's higher prices were justified by its "rewards" program. For example, $50,000 in purchases gets you a cool little door prize. I think you get the point. Wal-Mart knows where the money is, and they intend to squeeze profit margins on this very important part of the consumer electronics segment. Best Buy even noted in its conference call that prices continue to come down on television components, so we know that Wal-Mart will be making a full court press. Stay tuned on this one. The consumer may yet "sruvive," but I do not think Best Buy's profit margins will.

CAT and China
Noticeably absent from today's euphoria was the stock of Caterpiller (CAT). This cyclical, economic bellweather sat out this one. In fact, it has sold off for four straight days. The 200DMA is now looking like serious resistance. Another machinery stock, Joy Global (JOYG) has almost completed a fade of its post earnings party at the end of August. Cummins (CMI) has followed CAT. Deere (DE) has stayed aloft. These machinery stocks are important because they indicate whether the market is truly ready to bet that economic growth can be sustained in the near-term. What has hurt CAT the most has been the steep sell-off in commodities. While there was some temporary excitement in CAT's news that product prices will increase in January, the looming issue is whether fewer machines will be needed to extract commodities. The sell-off in commodities will make it harder for related companies to justify the economics of adding equipment and projects. Add to this a growing reality that China is getting serious about slowing its economy down. When China hiked interest rates a tiny bit in April, the market took a quick tumble. When China announced further tightening in August (and other slowdown measures) the market barely blinked. Qiu Xiaohua, the director of China's National Bureau of Statistics, just announced that the government is finally seeing some slowdown in the economy with fixed-asset investment and money growth slowing (as reported in the Wall Street Journal). China's economy is still on fire, but the government has now made it abundantly clear that the future will not, in fact, cannot, remain as vigorous as the present. This means fewer CAT machines. This means lower sales for anyone dependent on China's runaway growth. Hmmm...this is starting to sound familiar. Haven't we also been caught holding the bag counting on runaway growth in the housing market...? It seems we just shuffle our booms (and bubbles) from one hot potato to the next.

Basuch & Lomb (BOL)
I am almost ashamed to admit it. I am not taking advantage of the recent pop in the stock price of Basuch & Lomb. As you faithful readers know, I have been a bull on BOL throughout its troubles this year. My most recent post on BOL was in June. I practically chided a Goldman analyst for being late to the scene. When BOL dipped hard (August 8, 2006) out of a growing consolidation/congestion pattern, I decided it was time to get out. I followed the market a little bit higher and then bailed. My bad. First of all, I did not bother to check the news more carefully. Nothing had really changed except that now we have to wait a while longer to get the official report on just how badly the company has been hurt by its product issues. Sure enough, after a small dip, the stock never looked back...and I never checked back in to complete my research or reconsider my (non) position. Then, in late August, I noticed a strong rally in BOL, a 4% move in one day. I found a headline reading "Bausch & Lomb licenses rPlasmin from Talecris Biotherapeutics for ophthalmic use" - and dismissed the move. This should have been my final confirmation that favorable sentiment had returned to BOL. Two more days of 3%+ moves, and I now find BOL a full 13% higher from where I bailed in early August! Of course now I will not touch it, but the point is that I never should have sold it. I merely followed the market for the day and ignored the larger picture. Again, my bad. Given this is still an active "despair" play, I never should have tossed the playbook out the window. So why the renewed excitement in BOL? It is hard to tell. There has been no material news that I can see. I am sure momentum players are all over this one now. When some news does come out, we will likely finally get a top for this move. I will try to do a better job on this going forward. One thing I did note was a September 6 announcement from J&J (JNJ) indicating a desire to make a move into the contact lens business either through acquisition or an internally developed product. I could not decide whether this was bullish or bearish for BOL, so I left it alone at the time. BOL barely budged on the news, Cooper Companies (COO) dipped, and ACL stayed its course. I assumed the market agreed with me that there was nothing yet to see there. Silly me...

Options Backdating Scandal - Broadcom (BRCM)
The on-going despair in technology related to options backdating has taken a backseat during the current technology "relief" rally. The NASDAQ has finally overtaken the price it had when I noted that the scandal was providing major overhang to the whole technology sector. I have already declared this area my biggest miss this year in terms of the "despair" play. Many other more intrepid souls have jumped all over the sell-offs related to options backdating as buying opportunities. BRCM has been one of the more interesting on-going sagas. The stock is still down from the moment in June when the news first broke about their potential options problems, but the stock has recently rallied after the release of related news updates. Check out this timeline over the past month:
  1. Aug 15: BRCM tops off a ncie relief rally by gapping up a total of 7% on news of a court delay in a dispute with Qualcomm (QCOM)
  2. Aug 16: UBS reaffirms its positive outlook on BRCM and Caris seals the deal by noting that the options backdating scandal is a "chimera." Wow! I have not seen that termed used on Wall Street before. Caris goes on to reinforce the positive business fundamentals surrounding BRCM. Stock closes up 9%.
  3. Aug 17 - Sept 1: BRCM's stock struggled to regain momentum and finally returned the gains from Aug 16 in a two-day sell-off. On Sept 1st, BRCM noted it will continue to pursue QCOM. I have no idea why this news was interpreted poorly given the rally on Aug 15!
  4. Sept 8: It turns out that BRCM's options troubles may be even bigger than feared, previous analyst hype notwithstanding. The U.S. attorney's office is now involved along with the SEC. This day capped three total days of selling which then returned BRCM back to the closing price on Aug 14th. Roundtrip complete.
Whew! What drama. Fortunately, BRCM has been able to join the NASDAQ in this week's rally. It has popped almost 10% in two days. BRCM even got an upgrade today. The story may not be over, but I daresay that the agita has finally been cleansed from the arteries of investors and traders. I cannot step forward and declare it an opportunity to buy the dip on the despair because the situation for technology seems so tenuous in general right now. I am tentative even despite a recent bullish report from the Semiconductor Industry Association (SIA) that the industry is on pace for record-setting annual revenues. And I must note a very interesting spin that Businessweek placed on the latest BRCM drama. Businessweek asked a very good question: "Are regulators overly focused on the options scandal?" The author's point is that most of the transgressions happened far in the past and impactresults long since come and gone. Sure, effected companies may owe more taxes and some criminal charges may be coming for current and former executives, but the SEC has applied so much of their time and energy to this scandal that Businessweek felt compelled to conclude their article by telling us:

"Alas, the provision of Sarbanes-Oxley that so effectively discouraged backdating wasn't put into the law to stop the practice. Congress added it for anther reason: to stop executives from secretly selling their personal holdings while promoting their stock to investors, as the late Ken Lay did at Enron. At the time, regulators at the SEC didn't even know that option backdating was a problem. That raises the all-important question: What are they missing now?"

Indeed! Given the non-stop headlines of corporate scandals since the veil burst on the technology bubble in 2000, regulators continue to be surprised by the lastest twists and turns. Many of these scandals have broken into the public eye by good research from hard-nosed reporters. The SEC is a public agency with limited funds and staff. So, assuming that human nature has not changed, noting that stocks remain at attractive selling levels, and given that interest rates remain relatively low, what new ways to fleece the public account await us? I am still bracing for some big scandals to break over the ballooning mortgage business now that the housing bubble has finally popped. Time will tell as always...

And there you have it. A massive brain dump. Whew...what a relief. Now I can get back to my fantasy football in good conscience. Be careful out there!

DrDuru, 2006