by Barry Ritholtz
July 12, 2001
4 Key drivers (Yahoo, Motorola, Microsoft and GE), will be pushing the
market higher today. The timing couldn't be better. The markets have pulled
back to lowest their lowest levels in 12 weeks, and were in danger of breaking
down.
The present spate of good news should propel two of the three major
indexes -- the Dow, the Nasdaq Comp -- above their "danger levels."
The market had become very tightly coiled, and was ready to break out
-- in either direction.
All the good news -- outlined below -- will quickly move the Dow back
over 10,300, and catapult the Nazz over 2000. The key level I'd like to see
the S&P rise above 1240 (in less than a month) to maintain our bullish
stance, and then make a successful run at 1310. The S&P failing at that 1310
level would cause a shift in our posture back to the negative.
But all this positive news makes it very likely that July 11's intraday
lows (Dow, Nasdaq Comp and S&P500) will not be penetrated for the
foreseeable future. That's important for two reasons: 1st, we made a "higher low" versus the April 4th bottom. Uptrends are defined by higher lows and higher highs -- and with the higher low in place, the next targets on the upside become the recent highs of Nazz 2300 and Dow 11,500. Second, it suggests that we have now "successfully retested the lows," a key technical indicator
necessary for a sustainable rally.
Here's what happened, and how we are playing this move:
DRIVER 1: Yahoo's upside surprise
Yahoo's earnings were released last night, and they beat the lowered
expectations of breakeven, coming in a 1 cent a shares profit. That was
the good news -- the bad news was a 33% decrease in revenues, reflecting
the generally weak banner ad market, and re-emphasizing the need for Yahoo
to reduce its dependence on that one revenue line.
Yahoo's news again demonstrated the advantages of the subscription
business model of AOL. YHOO's 192 million subscribers generates $182 million
dollars this quarter -- less than $1 per head. Compare that with AOL's 30
million subscribers, who throw off $1.7 billion dollars in revs per quarter --
that's over $50 per head; Add to that the revs generated by the cable, film,
television, music and publishing businesses -- another billion or so
each quarter -- and its not a great surprise that AOL's market cap is 18
times that of Yahoo's.
Relatively speaking, either Yahoo is expensive, or AOL is very cheap.
Since AOL is so widely held -- and has one of the largest short
interest on the NYSE, the Yahoo news should spill over even more positively to AOL, which would contribute to the S&P moving upwards.
We continue to accumulate AOL, with an 12 month $90 price target.
DRIVER 2: Microsoft's raised guidance
The mack daddy of tech: Mister Softee raised rev guidance after the
closing bell Wednesday; fiscal fourth-quarter revs are raised to $6.5 to $6.6
billion, up from previous guidance of $6.3 billion to $6.5 billion.
Oh, and by the way, Bill casually mentioned that "we are writing down a
$2.6 billion net investment loss." (Whoops!) MSFT blamed the weak cable and
telecom areas. This was no surprise, given their 1999, $5 billion
investment into AT&T -- off 56% since that time.
Here's the funny part of it. 2.6 billion is, well, kinda chump change
to MSFT. As of the end of Q3, they had over $30 billion in cash and $17
billion in equity investments. AND, they are piling up cash at the rate of over
a billion a month! By Xmas 2002, they could be sitting on almost $50
billion dollars. That's simply frightening.
Some other MSFT stats:
34% margins, the highest in the tech world -- pretty much the highest
in the solar system. A new product cycle beginning -- Windows XP, new Office XP, and X-box. Apparently, X marks the spot for Microsoft.
Although I am not anticipating a very significant PC upgrade cycle,
Windows XP -- combined with the upcoming 2G mHz Intel CPU, may drive some
marginal increase in PC demand. That only adds to the bottom line at MSFT.
We continue to accumulate MSFT, with a 12 month target of $120.
DRIVERs 3 & 4: Motorola's upside surprise, and GE meets expectations
Lack of negative news from GE is a positive.
And, though not as significant as Yahoo's surprise, MOT "only" lost 11
cents a share, instead of the expected 12 on sales which dropped 12%.
The good news was a decrease in inventories, and an increase in the
book to bill ratio (a forecast of sales) in their handset business. The
company's comments that "the beleaguered wireless telecom business is already
beginning to show signs of recovery" were a huge slave on a worried market.
That's good news for Nokia, which we have successfully bought and sold
several times.
We continue to accumulate NOK, with a $30 price target.
So that's the good news. Tomorrow's economic releases include the
Producer Price Index, (PPI), and retail sales for June -- both of which can roil the markets. So we remain vigilant, and pick our spots.
Have a good weekend!
Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May
not be copied, stored or redistributed without prior, written permission.
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