2013 Week 4 Performance.....8 Days in a Row

Yes believe it or not, the equity markets have now been up 8 days in a row.  We have not seen this type of streak since 2004.  Also this week marked a return to a 5 year high in the S&P 500.

Unfortunately not everyone is participating in this rally.  You have a group of people that have

1. Sat on the sidelines
2. Bet against the market during this rally mode
3. Chosen specific stocks that for one reason or another have not participated in this upward momentum, especially within the last month

At TAMMA Capital we could fall into a 4th category if you will, touching points two and three but also participating in the increased gains as well.

We had an earlier post this week, Why does this bull market get no respect?  We discussed the upcoming four year anniversary of the Great Recession bottom in market terms as well as the fears people have in getting into the equity markets now fearing a new top.

At TAMMA we have always emphasized that being invested in the markets is not a all or nothing strategy.  There are times when caution is the best way to proceed while at other times, it is best to be more aggressive.

You are never going to be able to call every bottom or top so the best strategy to employ in our opinion is one of balance based upon our own analysis and conviction.  Right now that conviction is being put to the test in the form of Apple and Netflix.

These two stocks which we highlighted in this post, have completely changed spots as far as a stock that was the envy of the market to one that no one wants to own.  Apple was once hot and now it is not.  Netflix was once cold and now it is not.

The question that we posed is what strategy or analysis will come out on top?  The fundamental strategy that Apple is a much better company than Netflix?  Or the current technical trend that says Netflix is the one to own and Apple is the one to dump?

We have squarly made our decision and that is to continue to back our long position of Apple and add to our short of Netflix.  Yes, Apple could turn into a value trap but with a Fwd P/E of 7.4 vs. a 68.5 for Netflix, we like our chances with a proven winner like Apple vs. Netflix.

Our performance this week underscores the change in market prices between these two stocks.  We finished this week down while the rest of the markets were up.  To offset the unfavorable Apple/Netflix performance, we have had our other long-term strategies of agriculture and solid companies with good dividends continue to pay off.  This is where the balance that we spoke about earlier pays off and why it is never a good idea to bet the "farm" on one stock.

On the economic front this week we learned that the supply of exiting homes is getting tighter which is helping to increase home prices.  Good for those that own a house and are trying to sell.  On the flip side, new home sales are seeing continued strong momentum and price increases.  The median price of $248,900 is the highest in more than five years. This does not bode well for our short home builder position which we will be exiting next week.

Continued improvement in the labor markets showed again in the release of initial jobless claims.  The four-week average is nearly at a five-year low.  More people keeping their jobs could increase consumer confidence and thus spending.

The Week Ahead

This week is the bonanza of economic data releases.  The biggest event will be the jobs report at the end of the week but there is so much data to get through before Friday that could have major implications upon the equity markets.  A better than expected GDP number on Wednesday or jobs number on Friday could push equity markets towards all time highs.  Also pay attention to the auto sales numbers are Friday which could give further indication of how well the consumer is willing to spend.

• Mon - Durable Goods Orders, Pending Home Sales Index, Dallas Fed Mfg Survey
• Tue - FOMC Meeting Begins, S&P Case-Shiller HPI, Consumer Confidence
• Wed - ADP Employment Report, GDP, FOMC Meeting Announcement
• Thu - Challenger Job-Cut Report, Jobless Claims, Personal Income and Outlays, Employment Cost Index, Chicago PMI
• Fri - Motor Vehicle Sales, Employment Situation, PMI Manufacturing Index, Consumer Sentiment, ISM Mfg Index

Have a great week!

TAMMA Capital Management

If you are currently trying to develop your own investment plan or are seeking the help of a professional investment advisor we urge you to give us the opportunity to show you what TAMMA can do for you.  No matter what stage in life you are currently at, TAMMA can help you plan for your ever changing needs.

TAMMA can you help you with any of the steps in your wealth management journey including;

• Addressing emergency fund needs
• Developing a retirement plan
• Sending a child to college
• Looking at various investment options
• Determining how to involve philanthropic passions as apart of your planning process

With our "SMART Principles", we can help you develop your unique goals and create a focused customized plan to achieve your financial and lifestyle goals.

Who Cares About Debt if We're All Dead in the Long Run?

There is not much that I am going to add to this Randal Forsyth Barron's column except for that it makes for a very good discussion between those that are married and those that are single.

Mind Blowing Turn of Events

Apple and Netflix are certainly a tale of two different companies and two different stock prices right now.  Once the envy of the market, we have well documented the free fall that Apple's share price has been in since last fall.  On the other side of the equation, Netflix whose stock was being hammered for most of 2012 is now on a trajectory towards the moon.  The reason...one company reports an unbelievable quarter and misses expectations i.e. Apple, while Netflix beats expectations while turning in a decent quarter.

Full disclosure we are long Apple and short Netflix.  The stories between these two companies could not be more different.  In the Apple, you have a company setting all time records as far as revenue, profit and cash are concerned but there is fear of where the next big break through will occur and legitimate concern over margin compression.  With Netflix, you have decent but not great subscriber growth and an ever rising cost of content that is sure to eat into profits and cash.

The big winner in this surge in Netflix share price is billionaire investor Carl Icahn.  Icahn reported a 10% stake in the company in November, buying about 5.5 million shares at around $58 a share. He is now sitting on a nearly $500 million gain.

From a fundamental standpoint Apple and Netflix are on opposite ends of the spectrum.  From a technical standpoint Apple and Netflix are on opposite ends of the spectrum.  So which side wins?

We are betting that the fundamentals are going to eventually win out in this current dual between these two companies.  In fact, we will likely be adding to our short position of Netflix today and have already indicated that we would be buying Apple near the $425 mark.

Investors should be somewhat patient with this strategy as it could take come time to play out.

Morningstar piece on Nertflix

WSJ piece on Apple

Reconstructing Apple

As Apple’s stock price continues to decline, it becomes cheaper on a fundamental basis.  There are times within a stock’s price history that it relative value discounts from the actual market value.  Is this one of those times for Apple?

A key question investors are asking themselves is what will drive the stock higher?  This quarter’s earnings report shows the slowest growth in almost a decade and margins may be compressing due to pressure to serve lower price markets and a change in product mix.

Is Apple going the way of Microsoft where it is a huge generator of cash but cannot move the needle on growth because of its massive size?  Think...The Law of Large Numbers courtesy of the Kahn Academy and a partial definition below from  Investopedia

• If a large company continues to grow at 30-50% every year, it would eventually become bigger than the economy itself! Obviously, this can't happen and eventually growth has to slow down. As a result, investing in companies with very high market capitalization can dampen the potential for stock appreciation.

As you can see, there are more questions than answers.  What is clear is that Apple’s stock was heading to the moon up until it hit the $700 mark and then from there has been in a complete free fall.  It has blown through the key technical support of $500 and the next level of support looks to be around $425.  If the stock did reach back down to $425 per share, that would represent a drop from it's high of nearly 40%.

Full disclosure, we currently are long the stock and long an option position that doesn't expire until January 2014 in our TAMMA Fund.  We also hold Apple positions in our client managed accounts.  With that said, we are going to hold onto Apple for now and would look to be buyers around the $425 price.

While growth may be slowing we believe that other catalysts and opportunities will present themselves such as TV and delivering lower cost product to more of the mass market will certainly help to expand the massive brand.  Margins may not be as high as the last few years but cash flow will certainly grow.  This could lead to an increase in the dividend, special one time dividends, and/or future acquisitions.

Reuters article

Marketwatch article