Wednesday, November 11, 2009

Option Idea of the Week: Apple Inc. (AAPL)

Smartphones have quickly become the biggest thing since sliced bread for the wireless/handheld sector. Gone are the days when the slick clamshell design of the Motorola RAZR was enough to virtually guarantee success. Throughout this revolution, cell phones have practically become pocket PCs, and every manufacturer in the world is attempting to get in on the action. With the pool of rivals growing at a seemingly exponential rate, prospects for the three most revered smartphone makers are becoming increasingly grim. In fact, companies such as Apple Inc. and Research In Motion Limited have their work cut out for them if they wish to hold their crowns as the premier investment opportunities in the current market environment.

While Apple Inc. (AAPL) was far from first on the scene in the smartphone market, the arrival of the company's industry-defining iPhone, complete with a slick touch-screen user interface and an award-winning digital music player, quickly placed CEO Steve Jobs' firm at the top of the heap. Even industry leader Research In Motion Limited followed Apple's lead and created a touch-screen version of its extremely popular BlackBerry line of smartphones. Furthermore, Apple changed the game once again, beating smartphone makers to the punch by including 3G support in its second iteration of the iPhone.

But, smartphones are not cheap, and prospects for slackening consumer demand due to tightening budgets prompted selling pressure to sweep across the sector in late 2008. AAPL shares, once trading near $200, plunged more than 54% in 2008. And, while the shares eventually hit bottom in November 2008, the chilling effect of the recession has held the equity in check during the ensuing months, with AAPL trending sideways between support at the 80 level and resistance near the century mark.

Then, in early March, evidence that the economic downturn was slowing provided a much-needed boost for AAPL. The best stock for 2010 vaulted higher, logging a year-to-date gain of more than 51%, versus the S&P 500 Index's (SPX) gain of roughly 0.5%. What's more, AAPL has enjoyed the support of its 10-day and 20-day moving averages since March.

But the equity now faces another technical test before it can continue its recent turn of good fortune. AAPL was recently rejected by long-term resistance at the 135 level - a region that capped the equity in February and March 2008. Additionally, the stock's 20-month moving average is descending into the area, and could complicate matters further.

Monthly chart of AAPL since July 2007 with 20-month moving average

AAPL's sentiment backdrop is also a concern for the stock's bullish case. Currently, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.05 ranks above 93% of all those taken during the past year, but developments within the options pits point toward a spike in optimism just as AAPL is encountering technical resistance. According to the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE), approximately 1.7 calls have been bought to open for every put purchased during the prior two weeks. This ratio ranks above 67% of all those taken in the past year, pointing toward rising expectations.

On the other hand, short interest has jumped 13% since February, rising nearly 2% during the most recent reporting period. However, the short trade is far from crowded, as only 2.35% of AAPL's float is sold short. Should these bearish investors gain confidence following the stock's recent rejection at the 135 level, it could increase selling pressure on the shares.

Finally, expectations are running high on Wall Street. Currently, 16 of the 25 analysts following AAPL rate the shares a "buy" or better, with only one "sell" rating to be found. Furthermore, Thomson Reuters reports that the average 12-month price target for AAPL rests at $145.29 per share - a nearly 13% premium to the stock's current trading range below $130 per share. Any downgrades or price-target cuts could provide additional downward pressure for AAPL.

To take advantage of potential weakness in the best stock for 2010, traders should consider an in-the-money (135-strike) put option - the July put (premium is 9% of the stock price of 2010) or October put (premium is 13.1% of the stock price of 2010).

Research In Motion Limited (RIMM)

As the manufacturer of the infamous "CrackBerry," Research In Motion Limited (RIMM) once enjoyed near-total dominance over the smartphone market. That is, until Apple's iPhone threatened to break RIMM's hold on the sector. The BlackBerry is still arguably the top dog, but the sniper hits from Apple and the global economic recession have taken quite a toll on RIMM shares. In fact, RIMM plummeted more than 51% in 2008.

The security has made quite a comeback this year, soaring more than 81% so far in 2009. But RIMM is facing technical issues very similar to upstart smartphone maker AAPL. The best stock was recently rejected by resistance at the 78 level, site of its post-plunge peak set on Sept. 26, 2008. Furthermore, the equity is staring up at potential round-number resistance at the 80 level, as well as its declining 50-week moving average. The combined weight of these technical hurdles has forced RIMM to retreat nearly 8% during the prior three trading sessions.

Meanwhile, sentiment is far from flattering for bullish investors. RIMM's SOIR currently resides at an extremely complacent 0.84, in the 54th percentile of its annual range. Elsewhere, call buyers are swamping the ISE and the CBOE, as the duo's 10-day call/put ratio of 1.78 reveals that nearly two calls have been bought to open for every put on these exchanges. This ratio also ranks above 73% of all those taken in the prior 52 weeks, underscoring rising bullish expectations despite weak short-term price action in RIMM shares.

There is also evidence that the stock's recent spurt higher might have been related to short-covering activity. During the most recent reporting period, the number of RIMM shares sold short plunged by more than 19%. That said, there is very little fuel left in the tank, as less than 4% of RIMM's float remains sold short. In fact, we could see these bearish investors return to the security, emboldened by the stock's failure to overcome technical resistance.

Downgrades could also be a concern for the equity. RIMM has garnered 18 "strong buys" and six "buys," versus 10 "holds" and just one "sell." Any downgrades from this bullish bunch could send the security sharply lower.

Palm Inc. (PALM)

Once the king of the handheld device market, Palm Inc. (PALM) has had to fight an uphill battle against both RIMM and AAPL to regain a foothold in the smartphone market. But, as the saying goes, "if you can't beat 'em, join 'em." Palm is slated to release its own entry into the touch-screen market later this year, along with a slick new mobile operating system. The move has prompted questions of legal action from Apple, as the new Palm Pre, with webOS, performs remarkably similar to Apple's iPhone. Still, the Pre revelation has inspired PALM investors, and the shares are making a comeback.

Technically speaking, PALM has rocketed more than 255% higher in 2009, enjoying near flawless support from its rising 10-week moving average. Furthermore, the equity has not closed a session below its 10-day and 20-day moving averages since March 9. The best stock met with a spot of technical resistance near the 12 level on May 7, but the pullback was halted by support at PALM's rising 10-day moving average. Additional support lies just below the shares at the 10.50 level - an area that recently provided short-term resistance. A rebound from this solid support should help propel PALM steadily higher.

Options traders have capitalized on PALM's strong price action, sending the stock's SOIR to a reading of 0.85, in the 40th percentile of its annual range. What's more, the ISE/CBOE 10-day call/put ratio has swelled to a hefty 5.71, as calls bought to open more than quintupled puts purchased during the prior two weeks. From a contrarian perspective, this wealth of bullish sentiment is par for the course for this outperforming equity.

Not everyone is quite so optimistic toward PALM, however. Short interest still accounts for a whopping 34% of the stock's total float, despite an 8.8% decline in the number of PALM shares sold short during the most recent reporting period. As the shares continue to defy gravity, more of these bears could be forced into buying back their positions, thus prolonging the stock's rally.

Finally, Wall Street analysts have yet to jump on the PALM bandwagon. According to Zacks, 13 of the 17 brokerage firms following the shares rate them a "hold" or worse. Any upgrades from this bearish bunch could provide additional buying support for the security.

Tuesday, November 10, 2009

The 401(k): Retirement Money Tar Pit

Looks like I started kicking myself too soon.

A few weeks ago I explained why I'm going to have to spend the next few years as an indentured servant to the feds to pay the taxes and penalty on my 401(k) withdrawal…but if I hadn't done it when I did, I may never have seen that money again.

The Wall Street Journal reports that 401(k) investors are finding that they can't get their money.

"When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn't withdraw $40,000 from his 401(k) retirement account…"

"I hate to be whiny," said Mr. Dursky, "but it is my money."

Turns out that the money you put into the 401(k) can be locked up a lot longer than you'd like. Most plans allow investors to borrow from their own accounts and some even allow outright withdrawal of matched funds ― with the requisite 10% penalty and income tax. The only way to get all of it, however, has been to terminate employment…but now even that's not good enough.

Of course if you're the kind who pays attention to things like history and human nature, you'd have noticed the funny smell around the defined benefits plan a long time ago. And you would have seen this coming.

Here at Whiskey Bar we never stop casting a suspicious eye at the government and we turn our noses at their offers for help. We regret that this time around the feds aren't the ones keeping voluntary and involuntary retirees from their cash. 

Still, if this entire mess hasn't filled you with fear and loathing, then I'll have what you're having.

General economic collapse means that fund managers are finding it in their best interests to limit reallocattion and withdrawal by 401(k) investors. It doesn't matter if you're a 69-year-old recent retiree or a laid-off schlimazel who was counting on the money you'd saved to see you through a few months of unemployment.

Folks are starting to catch on to how important it is to own gold. We harp about that every day in these pages. Not a one of you reading this doubts for a moment that the value of little green pieces of paper that so many others take for granted is only good as a politician's promise.

So what escapes me is why anyone smart enough to save in gold and silver would still tuck money away in a defined benefits plan. The circumstances concerning retrieval have always been extreme. We were assured this was for our own good. After all, this was supposed to be retirement money; the rules had to discourage us from getting at it ahead of time!

But the whole set up smacked of the sort of paternalism that really should have raised our hackles.

And now we discover that fund managers can keep our retirement funds...even after we've retired...or been separated from the payroll under less pleasant circumstances. Looks like in some cases, some folks may never see that retirement money. The value of their locked investments may dwindle to nothing or they may die of old age before things are sorted out in the courts.

I remember years ago when I began my working life and didn't know enough to be wary of the state's siren songs about financial security. I thought the 401(k) such a wonderful idea. As suspicion toward leviathan grew I still harbored a child's hope that at least this whole "invest pre-tax and get a company match" thing wasn't a trap. Of course, turns out it was...

The federal government itself hasn't yet taken a turn at freezing 401(k) accounts, but this sudden if inevitable betrayal by fund managers should serve as a warning.

Please don't let this happen to you. No matter how the feds try to lure you with tax-deferrals, no matter how tempting the company match is, don't fall for it.

Granted, money you deposit anywhere besides your mattress can be nationalized or misappropriated, but putting funds into something like a 401(k) is akin to forcing your head into the mouth of the lion.

So what can you do?

Well, you don't have to bind your retirement money with government red tape.

Fellow editor Jim Nelson sits just a few feet from the Whiskey Bar and in response to my outraged cussing over this news about 401(k) freezes he's offered to share his own strategy for building retirement wealth.

And this is money that can't be penalized by the feds for early withdrawal, or kept from you by callous fund managers…

Be sure to be reading when Jim Nelson stops by tomorrow to tend the bar.


Here's an amusing little missive from someone who objects to James Howard Kunstler's strong language…and who surmises from it that I'm a low down darkie…

"Sir," and I use the term loosely, I was somewhat surprised by your response, I expressed an opinion that his language was CRUDE to say the least. Civilized human beings do not speak in that manner. You said that you "shoot straight and sometimes a little hard." But it seems that when others also shoot straight and sometimes hard, it is unacceptable as far as you are concerned. "You unsubscribed me". I was puzzled until I saw a picture of you, I then understood. You were probably raised in a neighborhood where foul language and criminal behavior was accepted as the norm. I was born and raised in Irvington, New Jersey, in the 1940's and the 1950's. Irvington bordered Newark, New Jersey. Newark had a high percentage of blacks. Irvington was 95 % white.  We could walk the streets at midnight and not have to worry about crime. Now Irvington is the most violent city in New Jersey, with their drugs and high murder rate. 

We should have picked our own cotton!  I also shoot straight and a little hard. By the way if I really wanted to, I can easily check out your website, but I could care less, I already have much too much to read on a daily basis. Happy Hanukah.

James Howard Kunstler used the term "pissed off"…plus he has a naughty word in the title of his Gary Gibson is add it up and this obviously makes Gary Gibson a low class darkie from a low class darkie neighborhood.

Thanks for clearing that one up.

I'm not going to apologize for the language that appears in Whiskey. If you don't like it, you don't have to read it. I'll even give you your money back.

I do take exception to his assumptions about my upbringing, but I try my best to remember what my father taught me about people who say this sort of thing. What they say has nothing to do with the truth about me, just the truth about them.

Here's a bit of encouragement from a happy Shooter who sees things in a very different light:

Gary, I am almost 58 years of age and in the process of evolving (and at times, revolving) into my 4th career. Although educated in the formal sciences, two of the four career paths I took in those tender years did not yield the kind of financial security I had hoped. This fourth (and God willing, the last) occupation involves finance and trading and I need to tell you that reading your articles and others, endorsed by yourself, has helped me immensely. Understanding the world of economics as impacted by geography and politics is not easy for someone with my background. You guys are truly gifted, ALL of you, and the ability for you to see the BIG PICTURE, and the language conveyed to best explain it to us readers, is an endeavor that I, for one, truly appreciate.
Thanks for all your great work, good Sir!

Thank you very, very much. We take our mission very seriously and it does me good to hear that all the shots we send your way are doing some good.

If you'd like to meet me along with some of our most frequent contributors, then join us in Vancouver at the Whiskey Bar Top Stocks For 2010.

Yep. Economics, geography, politics…we know they meet up somewhere. Central banks, fiat currency, credit bubbles, bank bailouts, major industry nationalization…those of us who've paid any attention to history saw all these things coming a country mile away.

Now begins the outright theft of the citizenry's funds in the low-hanging fruit that is the 401(k). I expect the contents will eventually be nationalized and at some point private gold ownership will be outlawed.

We all know what's coming. Stick with us as we try to keep one step ahead.