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August 28 is a Key Date for RIMM Fans

I hang out on StockTwits a lot.  It’s a great community for active traders.  A large majority of the people I follow are technicians – head and shoulders, wedges, gaps and all of that good stuff.  I love technicals, but I incorporate fundamentals into my analysis as well.  I am not really into the traditional stuff – like PEs, Price Sales, Book Value, but I am more of an market observer.  The old Peter Lynch stuff.  Is there a buzz when you walk into a store? Are people standing in line for days to buy a product?  Is a company’s parking lot packed after hours?

I realize that is “touchy feely” stuff, but incorporated with technicals it gives me an edge.  Research in Motion’s March earnings call was a great example.  The technicians were all pumped up as RIMM’s stock price moved into the gap.  Calls for $82 were very loud.  Thanks to Morgan Stanley’s internet report – I stood my bearish ground.  The report encouraged the use my observation skills as well as my experience from the transition of Mini-computers to Personal Computers.  I have written about this numerous times (My RIM Rant).

RIMM laid another earnings egg and was taken to the woodshed closing down nearly 11% on Friday.   I listened to the Company’s Conference Call and it was pitiful.  Here is how the CEO answered a question on how RIMM would respond to the competitive threat from Apple and Google:

Be careful about you implicit assumptions in your question, or shall I say your explicit assumptions in your question. Yes, I think you guys will just have to watch and see what the plans are. I think there’s a lot of implicit and explicit assumptions that maybe should be examined. Part of that is the question of how much does — how powerful is their innovation is a good question. What’s the timing of it is a good question.

What?  The Reformed Broker said that he was speaking in tongues.  The analyst agree.  I have never seen so many downgrades following a call.

Personally, I believe RIMM days as a high flying stock are over.  They missed the turn.  It happens.  It’s a part of business.  This remains a contrarian opinion which is fine by me.  The Bulls need a catalyst and the Microsoft buyout rumors are already floating this weekend.  Microsoft just went through a brutal failed takeover attempt with Yahoo.  Why try another?

The next two months are make or break for RIMM – their savior phone and OS are scheduled to be released this summer.  For their stock’s sake, both must come out before the last day of their current quarter August 28.  The earlier the better.  The market needs to see the phone and more importantly customer’s reaction to it.  Also their revenue and earnings guidance is based on percentage of sales from the new products.

If the phone slips schedule it will be time for the RIMM fans to start learning to live without their beloved keyboards.  It was cool in its day.

My Long Apple Short iKillers Strategy continues to work.  Since I began tracking it here on 5/6, it has out performed the NASDAQ by 14.1%.  LASiK  +10.0% vs. NASDAQ -4.1%.

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Jim Cramer’s Data Adds Meat to My iKiller Thesis Bones

A misguided notion that somehow more is always better.

The tech heads continue whining about missing features in Apple products. No Flash support. No multi-tasking. No this. No that.  I was an engineer.  I have a BSEE and MSEE.  Trust me – there has never been a product released, in history, where an engineer didn’t want to add one more thing.

Apple is one of the few tech companies that has mastered the current feature and future enhancement mix.  Its reward – the company sold 2 million iPads in 2 months.  Last week their servers were overwhelmed by the demand to pre-order the iPhone 4.

What’s the competition’s response?  This week Motorola will announce its next version of its Droid phone.  One of its big selling points will be Flash support – a perceived Apple weakness.   I am sure some one will be excited, but I guarantee their systems will have no problem handling the pre-orders.

As long as the competition continues attacking Apple using a “We have a missing feature” approach, my Long Apple Short iKillers thesis will continue to work (The Long Apple Short iKillers Trade is Working).

An iKiller is any company claiming to have a iPod, iPhone or iPad killer or has an Apple crippling service such as Adobe’s Flash or AT&T’s new Data Plan (AT&T Joins the List of iKillers).

I didn’t realize how powerful this thesis was until  CNBC’s Jim Cramer put some market cap data behind it (The Street):

  • Since Apple launched it’s iPad earlier this year,competitors Amazon.com, Adobe, Hewlett-Packard and Dell have lost $456 billion in market cap.
  • Since launching the iPhone, traditional phone makers Nokia and Motorola have been in a tailspin, losing $96 billion in market cap.
  • And even in the smartphone space, new and established competitors like Research in Motion, Palm and Google have lost $40 billion in their combined valuations.
  • These loses total $192 billion in lost market cap. During the same time, Apple has seen its market cap increase by $139 billion.

In other words, Long Apple ( +$139 billion market cap) and Short iKillers ( -$192 billion market cap).

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Are You a Discretionary Trader?

Dr.Van K. Tharp is a widely recognized trading coach and author.  Several years ago, I read two of his books Trade Your way to Financial Freedom and Safe Strategies for Financial Freedom.   To this very day I still employ his strategy of combining risk management and position sizing.

I received the email below from him this week.  I found it quite interesting.   You can sign up for the email on his web site.  The price is right – it’s free.

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Are you a discretionary trader? How would you be able to tell?  Here is a quiz that will help you decide.  Answer Yes or No to the following questions.

  1. Do you sometimes buy newsletter recommendations without having a real plan for how you’ll get out of the trade?
  2. Do you occasionally (or often) take trades based upon some interesting indicator that you learned in a workshop (i.e., when you see that indicator go, you usually get into a trade, but again you have no real plan about how you’ll get out of the trade)?
  3. Do you trade three or more different systems in the same account?
  4. Do you trade more than ten different systems?
  5. Do you sometimes enter a trade and later not remember why?
  6. Are you unsure of how many systems you have?
  7. Do most of your systems lack a complete set of rules to guide your behavior?
  8. Are your systems equivalent to the setups used to get into the trades and nothing more?
  9. Are you unable to list the rules for the last trade you made?
  10. Are you able to list the rules for any of the last five trades you made?

If you answered Yes to as many as two of the questions above, you have some elements of a no-rules discretionary trader. However, if you answered Yes to 6 or more questions above, you definitely are a no-rules discretionary trader.

Chances are you seldom make money in the market because you are not playing a winning game. You probably make many mistakes. In fact, since you don’t have rules, I would consider everything you do to be a mistake until you have a set of rules in place.  How can you effectively learn from any of your trading experiences if you do not know which ones are mistakes?

If it is any consolation, most traders fall into the no-rules discretionary category. The best among this group might be dedicated to following the trades of a single newsletter.  If that applies to you, do you even know the rules of the newsletter? Does the newsletter writer have rules to guide his trading? Chances are, if he must come out with a specific recommendation once every month on a specific date, he doesn’t have such rules. And chances are also good that you don’t follow the recommendations of the newsletter writer exactly: you don’t take some trades, you may miss some others, you buy at a price other than that recommended, and you probably don’t sell when you are told to. Again, these are all signs of a no-rules discretionary trader.

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The Long Apple Short iKillers Trade is Working

To the dismay of Google and Research in Motion fans, my “Long Apple Short iKillers” trade is working.  If you are not familiar with this trade read “How I am Playing the Smartphone Craze” to understand its origins.  The thesis of the trade is derived from a quote from the Morgan Stanley Internet Report “New Companies often Win Big in New Cycles while Incumbents Often Falter.”  “Long Apple Short iKillers” is a literal implementation of that statement.

The trade is composed of two components.  First, “new companies often win big in new cycles.”   Although Apple is not a new company – most analyst agree that mobile computing began with the release of the iPhone in June 2007.  The company’s fresh perspective has simply caught the Nokias of the world flat footed.  “Long Apple” is my metaphor for new companies in mobile computing.

Apple is currently the sole member of “Long Apple”.  I expect to add other companies over time.  However, as an individual investor I don’t need a ton of stocks to express a view.  I don’t anticipate this trade (long and short side) to ever having more than eight stocks in play at one time.

At some point in this cycle another disruptive mobile device maker will emerge.  Many people believe Google is that company.  I choose to disagree (“Will Google be a Major Player in Mobile”). I expect other components of the “Long Apple” part of the trade to come  from the mobile infrastructure development and applications space (reference my article “For Investors the Smartphone War is Over”).  As I become more comfortable with these companies, I will add them to the trade.   Some potential companies are highlighted in the data below.

The second part of the Morgan Stanley statement, “while incumbents often falter,” was my Eureka moment.  I live in Massachusetts and saw Digital Equipment Corporation, a powerhouse in mini-computers, die.  Their CEO couldn’t imagine a world where people would want PCs in their home.  Since I lived through that era and saw many friends lose jobs – the Morgan Stanley statement had a profound impact on my thinking.

Interestingly, we are watching the statement play out each day.  Once dominant companies are announcing new management structures and product plans.  It is unlikely that an announcement can make up for their lack of vision and lost time.   Unforunately, some beloved companies will pay the ultimate price.  A few weeks ago we saw Palm bite the dust.  I plan to profit from this natural course of business and have dubbed this part of the trade “Short iKillers.”  Read “The Four Mules of Mobile” for more insight.  The charter members of the “Short iKillers” are Adobe, Motorola, Nokia and Research in Motion.

I believe that we are 3 years into a 10 year cycle.  So, Apple haters – this will not be a 7 year love fest.  Its doubtful that Apple will remain a favorable investment over that entire time span.  The same is true with the iKillers.  The initial charter members will not be perpetual shorts.  My plan is to be flexible and open minded.  When the data changes I will change.  The ultimate goal is to make money.  Lots of it.

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Below are model portfolios designed to help communicate my thinking and measure the success of the strategy.  I use May 6, 2010 as the inception date for tracking purposes.  It is the date that I published the post “The Four Mules of Mobile.”  It’s also same date that I discussed this trade on StockTwits TV show “Talk Your Book.”   Interestingly, it is also one day after Investors Business Daily confirmed that the market was in correction.  So, the strategy has performed well even in a down market.  Finally, the year to date results are consistent with the results from 5/6.  So, for the conspiracy theorist, May 6 is not a convenient date to support my point.

Long Apple Short iKillers A (LASiK A)

Notes:

1) Results are Since 5/6/10, the date “Four Mules of Mobile” was published.

2) The portfolio is 50% “Long Apple” and 50% “Short iKillers.”  Thus, each iKiller constitutes 12.5% of the trade.

3) Short iKillers – Shorting stocks is a challenge and even more so with the stocks in this portfolio.  These stocks are extremely volatile and are subject to buyout rumors and analyst upgrades.   Although my intent is to stay short during this entire trade – it is not that simple.  There will be times when entire market is rallying and I may not wan’t to be short.   In my real trading account, I am using Put options to clearly define my risk.  Also, since options expire –  I am using short holding horizons ( a couple of days to a couple of weeks) to stay short.  This week I made another subtle tweak – the idea is to short when a stock becomes overbought and then cover when it becomes oversold.  Then re-short when it becomes overbought again. That’s much simpler to say than to do.  As time progresses, I hope to find an easier way to express this part of the trade.

Long Apple Short iKillers B (LASiK B)

Notes:

1) Results are Since 5/6/10, the date Four Mules of Mobile was published.

2) The portfolio is 50% “Long Apple” and 50% “Short iKillers.”  Thus, each iKiller constitutes 12.5% of the trade.

3) This portfolio is to measure the effectiveness of shorting larger stocks that are not subject to buyout rumors.  This is purely a tracking portfolio at this point.  Hopefully, it will prove to be a better approach than playing with options and trying to time the trade.  I may switch to this approach at a later date.

4) Ericsson:  Over the next 5-10 years the telecom industry will be undergoing a massive infrastructure overall to 4G technology.  This will provide the ubiquitous high-speed wireless connectivity necessary to make mobile computing a reality.  There are only a handful of companies in the world that have the technology to provide an end to end solution.  The big three are Ericsson, Alcatel-Lucent and Nokia-Siemens.  All three have significant problems ranging from merger integration problems to recovering from the Telecom spending slow down due to the 2008 recession.  Alcatel-Lucent would be the ideal short in the group, but the stock is current trading for a little over 2 bucks.  If they ever do a reverse-split – they will be added to the iKillers in a nanosecond.

5) QualComm: I have added QCOM to the iKillers list mainly to watch them.  I don’t know them as well as the others, so this is a way to keep them on my radar screen.  I do know that they had a dominant patent portfolio in 3G technology, but I am not certain how well positioned they are in 4G.  Also, QCOM is a large company.  I have a feeling the best shorts will be company that are free from the buyout chatter.

Watch List:

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The Thinking Behind My Helca Mining & Silver Wheaton Trades

I was back on Stock Twits TV again last night talking my book.  This time discussing  Helca Mining and Silver Wheaton.  I make my pitch around the 9:00 mark.

Notes:

I had to cram alot of stuff in three minutes.  It looks like I made a mistake and would also I like to clarify a couple of points.  To calculate EPS you need operating margins not gross margins.  So, leverage  may not be as large (example used: 10% increase in gold price generates 20% increase in profits).  However, the concept is correct.

I also made an assumption that expenses were mostly fixed once a mine is built.  For the most part they are.   However, if oil gets out of control variable costs become more of a factor.  That’s exactly what happened in 2008 – when oil shot up to $140/barrel. If oil prices go up significantly faster than gold prices the leverage doesn’t materialize.

Finally, to clarify the GDX:GLD ratio; if GLD declines or out performs the miners the indicator goes lower.  If GDX out performs GLD the indicator goes higher.  If the big boyz think gold is going higher they pile into the miners for the leverage.  That’s exactly what is happening right now.