Apple computer will be releasing its 3rd quarter earnings exactly three weeks from today, on the 21st of July, after the close of market. Traders should look into whether it pays to buy the stock now in the hopes that it rises in anticipation of good earnings. That way, if you are risk averse, you don’t have to be in the stock on the 21st and can hopefully lock in earnings beforehand .

Tags: apple, AAPL, earnings

It is being reported that Merrill Lynch will write down $5.4 billion in the second quarter, from the company’s exposure to monolines, according to analyst Roger Freeman at Lehman Brothers. This is an increase from prior estimates. The analyst is also predicting higher quarterly losses at the world’s largest brokerage.

Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Prior expected write-downs were in the range from $3.5 billion to $4.2 billion.

Besides the monoline related write-down, Roger Freeman said he is now incorporating a larger CDO/subprime write-down following a sharp decline in the ABX index over the past few days. ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of risky home loans.

As a result, Freeman is now widening his second-quarter loss estimate to $2.78 a share from 64 cents. For fiscal ‘08, he is forecasting higher losses of $2.99 a share, from his prior loss estimates of 53 cents.

Rumors are also now swirling around the firm about its capital needs and steps that CEO John Thain will take to raise cash, including selling Merrill’s stake in either Bloomberg or Blackrock. While these are very stellar investments that have and would continue to serve the firm in the long run, analysts are predicting Merrill Lynch will be forced to sell one of them, as its options for raising cash are limited. It can’t go the route other firms are taking by issuing new shares as this will dilute $12 billion of the firm’s common and preferred that investors bought earlier this year and the firm would have to basically guarantee the prices of those investments.

CEO John Thain announced back in April that Merrill Lynch does not need to raise any more capital. If the firm starts announcing otherwise, that might not be good for the stock.

Tags: Merrill Lynch, Lehman, MER, LEH, stocks, investments, subprime

RIMM obviously disappointed with their earnings and the stock took a beating yesterday. We had bought some Jul 145 calls into the earnings and hedged that trade with some puts buying as well. Our hedge ratio was 3 calls to one put, recommending a minimum trade of 6 Jul 145 calls and 3 135 puts.

With the downturn in the shares, the calls lost quite a bit of money. You could have sold yesterday at $70 per contract, if you are still holding, sell those now, current prices are about $35 per contract.

The puts are doing quite nicely, having gone from our entry price of $6.50, to $18. Put an order in to sell the calls at $20. We will watch RIMM shares all day and try to get out today.

With the Dow down about three percent yesterday and and a 65 point decline in early trading today, the stock market is flirting with grossly oversold territory. While there are obviously valid reasons for the downside bias and traders looking at long trades need to approach the markets with extreme caution, we should see a near term bounce next week. Below is some reasons we feel lends credence to our view. 

Monday will be the last day of the quarter, so money managers will need to tweak their portfolio. And while the more prudent managers will be highly mindful of recent market action, the fact is most mutual funds can only go long and we’re not yet at the point where most will configure their portfolios so they mostly contain cash related investments. In other words, they have to buy stocks (they will of course be selling the laggers).

Wall Street technicians and value investors will be looking at their charts and fundamentals and from the point of view of technicians, the market is oversold while value investors are seeing cheap stocks that they should be adding to their portfolio.

The stimulus package seemed to have had its hoped for impact as the Commerce Department is reporting that disposable incomes rose 5.7 percent last month. This was the biggest increase since May 1975. Further more, consumers actually spent the money, giving a nice boost to the economy. By method of inference, we could see some good news coming out of Dow components like Walmart (WMT) and maybe even McDonalds (MCD). If this happens and those stocks moved to the upside, we would then see some follow through in the Dow as a whole, since these companies can be seen as representing what’s happening in the economy.  We feel the economy is currently a mess and getting worse, but Wall Streeters seem to have a propensity to analyze things in a vacuum.

Finally, oil is still heading higher. It should take a breather soon and a decline in oil prices will send stocks higher.

Here are the trading ideas. These stocks have all taken a beating over the past two weeks and are in oversold territory. The charts look good, well actually they look horrible, but they portend a turnaround as most of them, while down, are sitting at support levels that they could bounce off. So with an upturn in the market, we should see a nice bounce in the shares.

SSO is not a Dow component and might be unfamiliar to some of our subscribers. If you are buying into our logic and believe stocks will soon turn around, then don’t leave this one out because you might not be familiar with it. They are designed to capture twice the move of the S&P 500, so any upside in the stock market is twice as good for traders in this security.

For some stocks, we recommend the options - buy the calls -  but you can buy the stocks if you are not comfortable trading the options, for others we recommend the stocks, we don’t feel the move in the stock might be fast and furious enough to risk trading the options.

Good Luck and profitable trading.

Tags: stock market, stocks, dow, MMM, T, CAT, DD, HPW, IBM, SSO, WMT

GM shares are down $1.24 and the stock is trading at $11.57, which is the lowest the stock has traded in 30 years! Moreover, the company’s market capitalization is now only six and a half billion dollars. To put that in perspective, while yes the company is a money loser, they still rang up 181 billion dollars in sales last year.

Unlike Chrysler which was taken private by Cerberus Capital Management in a $7.4 billion deal, a deal that happened because Daimler was tired of the bleeding and was actually willing to pay Cerberus to take Chrysler of their hands, GM is another beast altogether. It is way too much larger and unwieldy. Also, funding for very large PE deals have all but dried up, making getting the financing to buy GM might be almost impossible.

So if things get worse and GM is not able to secure funding via the capital markets, the only option might be a government bailout. In 1979, Chrysler was able to secure a federal subsidy which, while much was made of it back then, was only about a billion dollars. Things were different back then in a number of ways. Of note is that Chrysler was also able to turn things around by bring aboard Lee Iacocca, putting out the K cars which were very successful and of course, introducing the mini-van. It will take a whole lot more to turn things around at GM even if they were able to improve their cash situation.

The financial markets are already treating GM paper as junk. It now costs about $3.175 million in upfront payments, plus $500,000 in annual premiums to insure $10 million of GM’s debt for five years. Why any one would pay half the value of the bonds to insure them is beyond us, but we digress. Additionally, GM bonds are selling for 61.5 cents on the dollar. This means it will become increasingly expensive for GM to raise money, assuming they can do it at all. That all adds up to make bankruptcy a strong possibility.

SIlicon Laboratories on Wednesday 06/25, raised second quarter revenue guidance to $102 to $104 million, up from $98 to $101 million, due to stronger than expected demand of its products. According to the company, based on increased revenue expectations, GAAP diluted earnings per share for the quarter are expected to increase to $0.23 to $0.25 compared to previous guidance of $0.20 to $0.22, and non-GAAP diluted earnings per share are expected to increase to $0.40 to $0.42 compared to previous guidance of $0.37 to $0.39. Non-GAAP earnings per share exclude anticipated non-cash charges of $0.17 for stock compensation expenses.

The company’s shares are being followed by 11 analysts and the mean earnings estimate for the second qtr is $0.38 with a high of $0.39 and a low of $0.37. So the new estimates will beat everything currently out there. It is possible we could see some upgrades of the shares.

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RIMM has done the unthinkable and missed by a penny. As a result the stock is getting punished after hours. We will listen in to the conference call to see where the company failed to meet Wall Streets aforementioned insatiable appetite, as a 107% change in revenues from the same period last year was not good enough. Hedging our trades with put options was a very good idea and if the street beats up the stock enough tomorrow, the trade will actually be net profitable.

As expected, the Federal Open Market Committee decided to take no action and left rates unchanged at 2 percent. Below is an excerpt of the press release issued by the FOMC.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.  The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Research In Motion has spent most of the day to the downside but since 2:30, has been flashing green on the monitors. We were hoping the stock would move up sufficiently enough for us to be able to sell one or two of the call contracts and lock in some profits, but that has not happened. We await the earnings.

Reasearch In Motion (RIMM) will be releasing its earnings after the close of the stock market today. The company has in the past, done a good job of beating Wall Street estimates and the stock subsequently rewards its holders well the next day.

We expect more of the same and are recommending traders buy Research In Motion (RIMM) call options. We are hedging the trade with some puts to offer some protection against a downside. Wall Street is sometimes insatiable and (RIMM) could come out with phenomal earnings and the street might still deem them to be inadequate, although with the launch of new products recently as well as continued wider adoption of the company’s products, we would be very suprised if the company puts out negative earnings related news.  

The Trade: Buy the Research In Motion July $145 calls. For every three contracts bought, buy 1 Research In Motion 135 puts. We are recommending a trade of at least 6 call contracts and 2 put contracts. This will be slighty over $5,500. For those that can’t swing this, but would like to enter the trade, if you have risk capital of $700-$1400, you can buy 1 or two call contracts. These will not be hedged for downside protection, but again, there is a bigger chance of the company beating than not.

Notes: Watch this space and or subscribe to this blog is you have not already done so, we will be tracking (RIMM) all day and if can adjust the position to take some profits even before the earnings, we post accordingly.

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