SQNM Jumps on Earnings

Yesterday, the bio-tech firm Sequenom reported their quarterly earnings, which saw a boost to revenue and operating margins. While the firm is still reporting a loss of .18 per share, and the CEO was cautious regarding future earnings, he maintained outlook on yearly revenue. Their balance sheet is still relatively strong, with a positive cash flow. These earnings reports also came in the wake of a newly announced pre-natal RNA study, which will involve 10,000 pregnant women, and the acquisition of pre-natal technology patents from Xenomics, another bio-tech firm.

The stock had traded somewhat uneasily between earnings, drifting below 50% of the high it made a little more than a month ago, from $29 to below $14.50. Nevertheless, it has recovered, and is currently trading above $18 at the moment. Will that hold? That, of course, is an impossible question to answer.



Between September 29 and today, you can see that the $20 price has become a strong source of resistance. I wouldn't buy any more of this stock until it breaks that line. The fundamentals are there for this stock to go up considerably, but you have to respect technical indicators in these market conditions.

Disclosure: Long SQNM

At some point last week, it began to look more and more likely that the Federal Reserve would yet again cut interest rates, for the purpose of making it easier for banks to borrow and lend. At this point, with Wall Street keeping a close eye on the Fed's action, we would probably see another huge 1-day decline to make up for yesterday's massive rally if the rate cut did not come.

Of course, none of the Federal Reserve or Treasury's previous measures have encouraged banks to start lending again, so what's to say that this will? Sure, LIBOR rates will continue to come down (remember those?). And banks will likely continue to shore up their balance sheets, which is always a good thing, and a responsible course of action to take in these times. So while the market is looking for a short-term kick to restart the flow of money, banks are (for once) looking at the longer term picture. When I say longer term, of course, that is an entirely relative term. Banks are probably looking at the picture three-four months down the roads, while Wall Street is looking a week at most into the future.

That short-term tunnel vision is one of the crucial factors that put the financial system into the dire straits it is currently wading through. After all, how would you act if you could earn hundreds of thousands of extra dollars in bonuses and performance incentives for taking enormous risks? If your first risky trade doesn't pay off, the next one will. Or the one after that. Either way, you'll make up the difference in the long run, since all of your mathematical models tell you that you're in a positive-sum game. Your bosses are all doing the same thing, and since the market is liquid, it doesn't matter what kind of investment products you're buying, because you can always unload them when you need to.

At least, that's the way things were. Now, that short-term mindset has become utterly useless, as liquidity has become more and more scarce. An interesting suggestion was made by a commentator on NPR the other evening. His idea was to mandate that bonuses be awarded based on a three-year performance period, rather than one year. Of course, the red tape and cries of injured investment bankers would make this an extremely difficult measure to implement. Nevertheless, it seems reasonable to assume that if our government can regulate the use of illegal substances in sports, they are more than capable of regulating the compensation standards of executives.

These measures will likely never see the light of day, but they are interesting nonetheless, and very much worth considering.

AIG: A Play For Value

AIG has become a whipping boy for the deleterious financial sector. Each day seems to bring some new scandal, some new insight into just how much greed and corruption has dominated the upper echelons in our free market economy for such a long period of time. Here are some of their less-than-meritorious headlines:

• They first entered the news when the government announced that they were going to bail them out with an enormous amount of money, on the grounds that they were too big to fail.
  
• Shortly thereafter, we heard that they had burned through the vast majority of the funds, for lord knows what reasons, and were going to require another loan.
• Next, it was announced that executives had decided to pamper themselves in grand fashion immediately following the bailout, taking a weeklong retreat in California.
• Last week, the insurance giant began to auction off divisions of its company in an effort to raise money against the credit default swaps and mortgage-backed securities it owns
  
• This morning, the headlines read that AIG is taking on another loan, the third it has taken including the initial bailout.

All of these facts, of course, are accompanied by the fact that the government now has an 80% stake in the company. Naturally, it is difficult for the Treasury/Federal Reserve to rationalize against additional loans/bailouts. After all, if you have an 80% stake in a company, you would probably want it to succeed too.

All of these facts aside, nearly every analyst has said that the core of AIG's actual business remains as strong as could be expected. While each day has seen the share price drift lower, in my opinion this drift has been caused by the vitriolic anger of shareholders as they have watched this companies flaws become magnified by media scrutiny. This is a company with a tremendous amount of value on its books, hence the title of this post.

Value investing, as articulated by Benjamin Graham, prescribes the purchase of stock of companies that have been beaten down by negative publicity, sector weakness, or cyclical downturns. These companies, in spite of the swirling negativity, still have a tremendous amount of residual value on their books, even if their quarterly profits are not necessarily stellar. AIG matches these requirements to the letter. Of course, it still has a long way to go before the stock begins to recover. Nevertheless, for the patient investor, it seems almost to good to pass up at this price.

Disclosure: Long AIG

Out of Chaos Comes Order

Several interesting and constructive ideas have been proposed by non-policymaking economists, most involving the redistribution of wealth that Republicans have begun to demonize as socialism. Frankly, I think that what the American people should be demanding are clawbacks. They should calling for clawbacks as forcefully as they were demanding that their representatives not pass the bailout. Will that happen? Probably not. That moment of urgency has passed, replaced by the general state of apathy and complacency as the masses have accepted their lots. Clawbacks, of course, involves compelling CEO's and other executives to repay the massive compensation packages they have received, which may or may not include bonuses, salary, and stock options. These funds should be used for any potential tax rebate, an idea has been bandied about in the circles of power ever since Bernanke brought it up earlier this week.

I am in such strong support of clawbacks because I personally think that it's a terrible idea to use taxpayer money for more short-term economic relief. After all, much of what the executives have in their bank account can be shown to be, by the transitive property, taxpayer money. Hmmmm...and that doesn't irk anyone just a little bit?

Nevertheless, the fact is that the we the people have been worn down by the constant, numbing news about the impending doom about to shake our society from its foundations. Indeed, there are some terrible things happening in the real economy. Chrysler has announced that it will be cutting 25% of salaried its workforce. One can only assume that other automakers will be following suit, perhaps more or perhaps less drastically. The sheer depression that this news causes is not going to stir anyone to action, save the poor souls who have the misfortune of being laid off. The rest of us continue to consume, albeit at a reduced rate, even as those around us undisputably become victims.

Take for the housing market. Ironically, as the subprime mess has rippled through the financial sector, in the real economy has begun to show some signs of life. The areas hit hardest by subprime foreclosures have begun to become hotspots for the bargain seekers who waited out the inflated prices of the boom to buy low, in some cases very low. I believe, along with other, more astute observers, that housing will be what leads us out of the mire. Make no mistake, I'm not calling a buy on REIT's or homebuilders. What I am saying is that the consumer market, the real economy, could be on the road to recovery, with Christmas as my timeline for the consumer to begin to show true leadership. Time will tell.

Capitalism and its Discontents, Part I

Think you're playing the market? Nope! In America, the market plays you!

Just a weird couple of trading sessions that we've now put behind us. Rumors of more hedge funds blowing up, a decline in LIBOR rates coupled with cash-hoarding by banks, job losses, wild intra-day swings...oh, and pleasantly surprising earnings from quite a few companies, including Apple (AAPL), Yahoo (YHOO), Potash Corp. (POT), and Alan Greenspan backhandedly admitting failure.

President Bush has said he will make an effort the stem the ever-growing tide of foreclosures with a $40 billion aid package. Greenspan, while speaking on Capitol Hill implied that the biggest mistake the economy made was in underestimating systemic risk. Really? Really? See the funny thing about capitalism is that it assumes that greed will induce an organic distribution of wealth throughout the markets. That is the ultimate argument for capitalism that you will hear from hard-liners, yet it ignores the fact that unchecked greed never, ever, holds itself to any greater responsibility than its own self-interest. Greenspan can make as many rationalizations for deregulation as he wants, but he, and the entire rationale for capitalism, are on a very slippery slope. The irony is that all the talk about wealth distribution through competition is exactly what the design of socialism is meant to do. That was never the design for capitalism, it was just a convenient out whenever someone asked a question about ethics and conflicts of interest.

In other news, Argentina, once thought to be a model of economic stability in South America, has nationalized its citizens pension funds. Russia's credit was downgraded, and Hungary's economy is on the verge of total collapse, thanks to a banking system that could become completely insolvent within a very short amount of time. The IMF is going to have a busy month ahead of it, what with trying to restore activity and confidence in the world economy while simultaneously capitalizing off of the vulnerability of those very same economies. For insight into how the IMF works, I suggest Joseph Stiglitz "Globalism and its Discontents." Though it might as well be called "Capitalism and its Discontents." How fitting it would be.

AAPL, INFN, CAT Send Mixed Signals on Earnings

But what else is new?

Apple (AAPL) posted great earnings this afternoon, on better than expected sales of iPhones and iPods. Mac sales were down, which Steve Jobs hinted he would aggressively pursue during the earnings conference call. Even so, that could only be counted as a mild disappointment, as profit was up 26% over last year, and Jobs made it clear that one of his emphases would on ensuring that Apple has a large cash reserve, which currently stands at $26 billion in assets. Not bad at all. I suspect, as many have also suggested, that the tremendous boost in iPhones sales can be attributed both to the aggressive advertising for the Apps Store, and the loss in market share that RIMM, maker of the Blackberry, has been forced to deal with.

They issued low guidance for next quarter, between $1 and $2 billion below Wall Street's estimates. This is a tradition at Apple, as it purposefully prices in the influence of any negativity that could foreseeably occur between now and Christmas. During after hours trading, AAPL shares were up more than $12 from their closing price. If they tack on any gains after that which hold in three or four days, I will take that as an extremely bullish sign. Keep in mind that no revenue from either the Apps store or Apple TV has been figured into revenue. This could come into next quarter.

My other pick, Infinera (INFN) also reported favorable earnings, breaking even for the quarter. They also issued extremely conservative guidance for next quarter, due to increased spending levels on projects they are currently developing. In my opinion, this is not a bad thing, especially for a stock that can still be considered an aggressive growth play.

It has to be noted that all of these are mixed signals about the broader economy. The CEO of Caterpillar (CAT) was on CNBC this afternoon, discussing his view of the likelihood of a long, painful period in industry and manufacturing. Caterpillar's earnings were below estimates, a trend Mr. Owens, the CEO, expected to continue. Credit is beginning to loosen, but not enough to stimulate any meaningful kind of activity in the most damaged sectors. But as I suspected, the sky has not fallen, and the world is still standing and functioning in much the same way as it has.

Disclosure: No position in AAPL, INFN, or CAT

Earnings in a Bear Market...Hold on Tight

This afternoon will have a host of companies reporting quarterly earnings, with the most significant probably being Apple (AAPL). Interestingly, the majority of notable companies reporting earnings are trading down today, especially those strongly tied to consumer goods. As previously noted, while the obituary for the American consumer has been prematurely issued, there is definitely a siesta in consumer activity at the moment, which could potentially last through the holiday season.

The strong stocks at the moment remain the regional banks, along with the emerging healthcare and biotech sectors. Apple will provide an interesting bellwether on both the consumer front and the tech front, since they have broad exposure and influence over both arenas. They are a rare organization, a long-established player in the market which still acts as a growth company. Investors will be looking for something positive from Apple to go along with Google's earnings. If earnings are in line with or ahead of expectations, expect a major run from Apple stock over the next week or so. The positive implications of good earnings are just too numerous to count off.

Buying or shorting any companies going into earnings is highly speculative. Volatility in the market is still extreme, as the DOW has made a few more 2+ percentage point swings. Stocks are crazily unpredictable for the time being, though a degree of normalcy has been returning over the past week. That normalcy, however, is entirely relative to the batshit craziness of two-three weeks ago.

An interesting purchase idea (aside from Apple): Infinera (INFN), which reports earnings after the bell today. They have a very positive balance sheet, with a favorable cash-flow. They are a tech company focused on developing innovative networking strategies, and is trading in the green prior to earnings. This is a stock that could explode after earnings. Of course, they could be crushed just as easily if earnings are poor.

Disclosure: No position in AAPL or INFN.