Let Me Explain

For those of you who have read this website in the past few days, you know I came to you with an idea of essentially scalping profits from a trade in GOOG. Obviously that did not work out. I lost money, as did pretty much who owned GOOG heading into today. Now it is the stock market and I understand that there is plenty of risk present in the market. This however, was caused as a result of stupidity, panic and generally a lack of independent thought.

For those of you who were focused on GOOG today here is a rundown on what happened. Essentially CNBC broke a story about the Google CFO warning of slowing growth. What followed was probably the fastest drop in a stock I have ever seen. It went from $395 to $340 in a matter of I am going to guess 3 minutes. Now in pure dollar amounts that is a huge move. My portfolio was bleeding red.

Now what I believe happened was a disconnect between what I think is reality and perception. Now I don't feel like pasting the quote here but essentially the GOOG CFO explained how once your company gets so large, growth inevitably slows. He was essentially explaining a concept of basic math that when numbers get large they must grow even more in absolute dollar amounts to keep the same growth level percentage wise.

Here is an example:


86.4 439.5 1,465.9 3,189.2 6,138.6 9,200.0
408.7% 233.5% 117.6% 92.5% 49.9%

Thats right. You see as the numbers continue to get larger the percentage difference shrinks although the absolute level increases. I know it is an amazing comment. For those of us keeping score, those are the revenue numbers Google has reported from the year ended 12/31/01 to the estimates for the end of this year. As you can see, the revenue growth has slowed, and in fact is projected to post slower revenue growth this year. Yes, I know it is kind of amazing.


So basically we had a stock sell off because traders do not know how to do math. Ohh, yeah and then around 5:00 Pacific Google sent out this:


MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Feb. 28, 2006--George Reyes, Chief Financial Officer of Google Inc. (NASDAQ:GOOG - News), participated earlier today in the Merrill Lynch Internet, Advertising, Information, & Education conference. At this conference, Mr. Reyes made remarks regarding, among other things, revenue growth trends and expected sources of revenue growth.
We would like to clarify and provide further information on these statements. As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area.
Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels.




---Ohhh wow, whoops! Maybe we screwed up and sold this stock down because we panic, we get nervous, and sometimes fear causes us to want to protect ourselves. I went out on a limb todayand bought this stock. I bought alot. I am basically betting that in the end people will figure it out. If not, I will lose huge, but basically I view today as one of those academically non existent inefficient markets and I am betting in the end Google will go higher.

any thoughts: randommarketthoughts@gmail.com

CNBC

This jackass sitting out in front of GOOG's headquarters yelling about how this is "shocking" and "surprising" should be slapped. He is an idiot. Read the 10-Q, K, whatever and it is almost word for word identical. Why are people so dumb?

GOOG

The stock is down 40 right now. This is not news. There is no logical reason for the stock to be down like this right now. CNBC is taking a quote out of context. The stock will be much higher by week - end. The conference will set people straight if they don't announce something later today.

GOOG

It has already started to move, there may still be time to get in on it. Just with increased risk. I am beginning to think that if I traded commodities (which I don't) that there is no logical reason for oil to be up where it is at. None. People panic when they hear about the Middle East but oil has no reason to justify its current high prices. I just thought I would put that out there.

I think AAPL will introduce something extremely cool tomorrow.

I am really unhappy with my trading lately, I seem to be suffering from a lack of decision making ability. My problem is that I don't think the market should be bought up here but if I short stocks I will lose money. Quite the problem I must say.

I am adding a short to VLCM tomorrow to hedge against a bad report from PSUN. It is really the only prudent thing to do. If they screw up, people will panic and sell VLCM too protection is key.

AAPL

Look for the same sort of situation (as below) out of AAPL heading into Tuesday. Could get a pop!

Google Finance?

http://www.searchenginejournal.com/?p=2991


As much as I hate to report on rumors, I feel like this one could make you money. March 2nd is the Analyst Day, why not announce Google Finance on Analyst Day? It kind of makes sense, although Google typically likes to go against the grain so they may not do this, but I think money can be made buying GOOG either today or later this week and selling it prior to the meeting. If you are more aggressive you can hold it through although that opens you up to disappointment. Assuming the market stays as strong as it has been in recent weeks, this may well be the best opportunity to make a "low" risk profit. (By low risk I just mean you may have some wind at your back on this trade not necessarily lower risk of loss.)

I think we are going to have to make some money this week. I will keep you posted. I think I may get a little more aggressive this week.

The Irony of it All

H&R Block stated the following in its most recent earnings release:

As part of its ongoing work to remediate control weaknesses in its corporate tax function, the company said that it will restate its results for fiscal years 2005 and 2004, as well as previously reported quarterly results for fiscal 2006. The restatement pertains principally to errors in determining the company's state effective income tax rate, resulting in a cumulative understatement of its state income tax liability of approximately $32 million as of April 30, 2005. The company estimates that the restatement will result in a 7-cent decrease in earnings per share in fiscal 2005 and a 2-cent decrease in earnings per share in fiscal 2004. The company has not completed its analysis of the restatement adjustments, and, accordingly, the effects of the restatement on all prior periods are preliminary and subject to change. These adjustments are also being reviewed with the company's registered public accounting firm. The company will report in amended filings with the Securities and Exchange Commission the further restatement of results for fiscal years 2005 and 2004, and restatements for the first two quarters of fiscal 2006 for the income tax adjustments.


For those of you who need a translator for that here is the story in a nutshell: H&R Block screwed up its accounting from its TAXES!!!!!! Now I don't know if anyone else finds irony in this, but if you don't find it at least somewhat humorous you need to just give up on life. Sometimes truth is stranger than fiction.

MRVL

Marvell Technology Group (MRVL) reports today after the close. This stock has become a true market darling. Everyone and I mean everyone loves it. Now I would imagine that this stock is going to move pretty substantially to either side after it reports. If it misses, I feel like all hell will break loose with the markets. I don't know why, I just feel like so many people love this guy, if they screw up, people will turn pessimistic. It may not last for long but I think it may send us back below 11K. I wish I had done some work on these guys for their report tomorrow. Either way, pay attention to it, it will be a good market clue.


Ohh yeah and by the way for those of you who read the DELL post below and also get Citigroup research can you maybe put in a phone call to them tomorrow and just compliment them on their exceptional analytical abilities. Lets see from the time I put up my sarcastic post until the close yesterday DELL has returned a whopping -5.8%!!!!! Keep those picks coming Citigroup!

S&P 500

No GOOGLE, you can't be in the S&P 500. Instead we want to go with Barr Laboratories, because with its 7 billion market cap its alot more important than a company with a 107 billion mkt. cap. It just makes so much sense. What a great representative sample...

VLCM...again

Volcom, traded down all week after reporting guidance that was below estimates for 2006. Piled on that the company was downgraded by a few research companies. So now the stock sits at $31.8 down from $40.0 on week ago a substantial 20.5% loss for the week. Now I have to admit that I am not as excited about this stock as I was a week ago when I bought it into earnings (purchased a small position); however, having gone over everything I could find on this company in the past few days, I have to believe that the stock is not a sell around here and I will add to it again substantially around $30 if it gets there and here is why:

First off, working against the stock you have momentum buyers who are bailing like there is no tomorrow, which is understandable because that is what they do. Secondly, you have the appearance of a lack of earnings growth in 2006. Now, if VLCM was doing well and growing earnings and sales at 25% this year, I have to believe that the stock would be much higher than it is now. As it is, the earnings are projected to stay relatively flat compared to 2005 and sales should grow around 25%, again not exactly the ratio you are looking for when buying a growth company. So you are left in quite the quandary, you are holding a growth stock that doesn’t grow. Now this problem is compounded by the fact that the company is in a license agreement with its European business and therefore has a cap on the revenue growth from that channel.

So basically why would anyone hold this stock?

Well let me tell you why I am. First of all, I believe the company is in the right market and has an exceptional product. But that won’t drive the stock, so it really doesn’t matter. One of the major concerns with the research coming out on the company is that inventories are growing faster than sales. In my opinion that is a somewhat irrelevant concern at this point in the company’s life cycle, it just came public and it will take a while for inventory issues to settle out. Another significant bearish argument is that VLCM’s investment in Europe (which will reduce EPS by $0.06) is bad purely because it will lower EPS this year. While this is true I think that the main bullish argument I can make for this stock is that in 2007 the company should grow earnings by somewhere close to 30.0% leaving the slow growth in 2006 as more of an anomaly that anything else. Furthermore, I believe that the company will have a better than expected impact from its European business once it takes over. I would like to see revenue in Europe should contribute $40-45 in 2007 assuming that VLCM takes outright control and sales grow 25% annually for the next 2 years. This would force estimates to be ratcheted up and with them, the stock.

Another note I found to be interesting with some of the research was that many of the companies admitted to not accounting for stock option expense in their previous models. Now that implies that consensus forecast should have only been $1.14 for the year.

Even though I hate to admit it I feel that this stock will be dead money until late Q2 or possibly later in the year, and I would not aggressively pursue a sizeable position at this time. But I have to believe that the $1.12, high end of guidance is way too conservative for this company. I don’t believe that they will not be able to leverage SG&A at all during the year, it simply won’t happen that way. If I were an analyst modeling this company I would peg year end EPS to be over $1.16. Will that extra $0.04 make a difference, I don’t know, the only thing I am concerned with is that once people figure out the full impact of the 2007 growth the stock should shoot up like wildfire. Because the you see, it will meet the buying criteria for the growth guys and they will find an attractively priced stock selling at its growth rate (compared to PE) and then “say you know what that seems like a good idea buy VLCM”

Unfortunately for me I am early to the party, but willing to wait for the other guests to arrive. But this can’t help but remind me of a quote I have up in my office from the Financial Analysts Journal: “Being too far ahead of your time is indistinguishable from being wrong.”

Exercise patience and good luck to all.

Key dates to watch out for because they will effect VLCM: 2-28 PSUN reports, 3-15 ZUMZ reports, around march 10th ZQK reports (people might try to exrapolate what happens there to VLCM, although I feel ZQK is not a good company and in fact losing share to VLCM)

Hmmm...

Well I don't feel like I have been 'right' a lot lately with the market. I don't know what it is but I just cant seem to get a good handle on things right now. Maybe its because the market keeps going higher and I don't feel like it should be. Or maybe I should just buy more stocks because that is what the market keeps telling me I should do. It is getting more and more difficult to not buy more stocks as the market proceeds higher. In some strange way I feel like I am my own contrary indicator. I really want to go short the market right now, I just can't quite do it yet. I am eying some attractive shorts though. One in particular is AQNT. They guided lower today, I don't think they will sell off too sharply but I feel like the stock is set - up to go lower over the next few months. We shall see.

I left my VLCM notes in the office or I would post the rest of my thoughts on them today, we shall save that for a later time now. Either way my biggest concern with the company is GPM contraction. The more I read into the lines in the conference call the less positive it seems. Am I a seller here? - NO. But I am more cautiously optimistic about the stock today as opposed to yesterday.

Volcom (VLCM) Earnings

For the essentials look up the press release here is where I think investors will be focusing.

Notes after the Q4 Earnings Release:

Fourth quarter gross profit as a percentage of total revenues increased to 100 basis points to 48.8% from 47.8% in the same period last year. Although gross margin improved for the fourth quarter, it was slightly affected by a generally soft retail environment in the first two weeks of December which affected our at ones re-order business of holiday clothing. The lower level of re-order business increased our year end inventory clearance.

-This is a very bad sign, it indicates that there wasn’t enough demand and they were forced to sacrifice GPM to the benefit of sales.

SG&A expenses as a percentage of sales declined 50 basis points to 26.3% of total revenues compared with 26.8% of total revenues in last years comparable quarter.

-This is a positive.

Operating income for the fourth quarter increased 45.7% and 9.3 million compared with 6.4 million for the same period in 2004. Operating income as a percentage of total revenues increased to 160 basis points to 22.5% for the quarter from 20.9% in the fourth quarter of 2004.

-The company did meet its annual goal of 24% operating profit margins-mark one to the positives.

Here is where things get tricky:

In 2006 we will begin to incur significant costs to set up new European headquarters in the Southwest of France. During the year we will also invest in building infrastructure and will hire additional personnel in preparation of sampling, selling and shipping the fall '07 season. As part of our European strategy we will set up an additional corporation in Switzerland which will hold the license for the Volcom trademarks in the European territory.

In 2006 we anticipate that we will incur approximately 2.5 million in expenses related to our European strategy which will not generate any additional revenue this year however this is an investment for potentially large revenue and earnings growth in the second half of 2007 and beyond. In addition we anticipate the corporation in Switzerland will allow us a reduction in future worldwide income tax expense.

-That 2.5 million will account for essentially $0.06 per share

Guidance:

For 2006 we are forecasting an increase in revenue of 24% to 26% over last year resulting in sales of approximately 198 million to 201 million. Taking into account the costs associated with our investment in Europe of approximately 2.5 million which will reduce EPS by $0.06 for the year we anticipate EPS on a fully diluted basis of $1.10 to $1.12 for the year. Additionally it should be noted that this EPS guidance includes non-cash stock-based compensation expense of approximately $900,000 which equals $0.02 per share.


--Now here is where I believe people are making a mistake. Consensus estimates called for $1.16 per share. Now if you add back both of these items to the low end of guidance, the full year amounts to $1.18. So in fact VLCM raised guidance in the call. For this reason I don’t believe the stock should have been hammered so badly.

For the first quarter we anticipate revenues will increase by approximately 25% to 26% over Q1 of 2005. As you know, Q1 has historic – has historically lower sales volumes than our other three quarters and a lower operating margin. This year Q1 will have disproportionately higher operating expenses which include the rollout of in-store display program which at the beginning of the year that Richard previously discussed. With these factors considered as well as the investment in Europe and non-cash stock base compensation we anticipate fully diluted EPS of $0.13 to $0.14 for Q1.

-This is where the company screwed up. This number is well below estimates but the problem with this is, it is the first quarter of the year for a retailer! Who gives a S#^T? They don’t make any money during this time anyway. The first quarter is the most inconsequential quarter for a retailer and a 15% sell off is unwarranted on this news.

BOTTOM LINE: VLCM earnings for Q4 were spectacular. VLCM projections for the year were good. VLCM projections for the first quarter were bad! So now I am stuck in a tough spot. I like this company and I think that the stock will go higher, but right now I think it is going to do a whole lot of nothing. I don’t anticipate the market being all that great and this stock could struggle until the Q1 earnings announcement, then I think the stock will get back on track. As for now I may start to add to my position as I don’t think there were any glaring negatives in this announcement. The biggest negative was that the company is spending now to build for the future. Not what Wall-St wants but in the end I think shareholders will be rewarded.

By the way on a full year basis this company will beat $1.12 unless SG&A just gets out of control. More on this later. For now I’m done.

DELL

Breaking news everyone! Citigroup came out with their best idea for 2006! Brace yourself for this: DELL. Yeah thats right, Dell, is what they came up with. I would hate for them to have done research and attempted to come up with a new idea as opposed to a stock that has done nothing for 3 years and can't generate enough growth to drive the stock any longer, but apparently I am all wrong with my way of thinking. Yes, maybe if this was 1998 Citigroup would be brilliant, but its not and this type of outdated thinking is essentially a waste of everyone's time. The price at the begining of the year was $29.95, my money is that the price at the end of the year is +/- 5% of that and that at some point in time Citigroup does a deal with Dell. Thanks for your insight guys!

Bloomberg says it all.

http://www.bloomberg.com/markets/rates/index.html

Look at that! Yeah I rarely if ever have talked about an inverted yield curve, and I don't plan on talking about it very often, but this demands a least a quick note on the subject. From what I am seeing there, you can get 4.69% on a 6 Month T-Bill and 4.55% on a 30 Year Bond. Now personally I don't have any idea why anyone would buy a 30 year bond, nor why it rallied so impressively on Friday. What I can tell you though is that this is probably not the most positive graph you will ever look at in your life.

Essentially what it is telling people is that something is wrong with the current rate environment and that the FED should stop tightening. Well that's fine with the exception that the FED is not going to stop tightening. Now there in lies the problem. This is going to either through psychology or actual economic events cause problems for the market. Buying stock just became increasingly more dangerous. I would feel quite comfortable sitting on 100% cash at this moment. Here is something else that will scare you:

http://www.stockcharts.com/charts/YieldCurve.html

Use that graph and go back to the peak of the market in the year 2000. It seems oddly identical doesn't it. So now what do you do to make money because of this?

I would say to short companies that need the economy to do well in order to prosper. Industrial companies, manufacturing, stocks that once the economy turns down will do poorly. But wait the economy is still doing well right? That's true but the market discounts future events and a future recession does not bode well for these companies. If I have any specifics I will post them. I am initially looking at SGR.

Volcom (VLCM)

I have finished my research on VLCM, finally. Tommorow, ideally I will initate 1/3-1/2 of my position in the stock. I am doing it because the company reports earnings on Feb. 14.

First this is my main concern with the company:


The United States and some of the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Under the provisions of the World Trade Organization, or WTO, Agreement on Textiles and Clothing, effective as of January 1, 2005, the United States and other WTO member countries eliminated quotas on textiles and apparel-related products from WTO member countries, including China.
As a result of the eliminated quotas, we experienced lower costs on our imports of finished goods for the first nine months of 2005, which increased our gross margin as a percentage of revenues and our profitability. On May 23, 2005, however, the United States Department of Commerce imposed temporary quotas on imports of three product categories (cotton knit shirts and blouses, cotton trousers and cotton manmade fiber underwear) from China that impact our business. These categories are now subject to quantity limitations. On May 27, 2005, the United States imposed temporary quotas on imports of four additional categories of textile and apparel goods from China (combed cotton yarn, men’s and boys’ cotton and man-made fiber shirts, not knit, man-made fiber knit shirts and blouses, and fiber trousers) that impact our business. These categories are also now subject to quantity limitations. These quotas expire on December 31, 2005. However, on November 8, 2005, the United States and China announced an
agreement to continue quotas on imports of certain of these and other categories of textile and apparel goods that impact our business through December 31, 2008, with slight increases in quantities each successive year. In response to these quotas, we are currently manufacturing less than our recent historical percentage of products in China and we anticipate that these quotas, so long as they remain in effect, will continue to force us to reduce the amount of these products we import from China. If we are unable to obtain sufficient product from countries not affected by the United States’ restrictions or tariffs or from domestic sources, or if the products we obtain from these other countries or domestic sources are of insufficient quality, it could materially adversely affect our gross margin and financial performance.



I know its alot to read but basically, quota's can screw with margins, and that would be a pretty big negative for the company.

One other concern I have is with PSUN (approximately 25% of VLCM's revenue). PSUN has been building inventory and may be forced to mark it down or delay order from VLCM, this worries me. This could hurt VLCM revenue in future periods.

My last concern lies with VLCM guidance. They are normally quite conservative. If we don't get 30% revenue growth projections, the stock could take a hit.

Other than that, this company seems pretty good all around. Inventory growth is outpacing sales but you can't read too much into that yet as the company is very young. Inventory turns remained flat Q over Q. I do not believe that they have a significant amount of markdown risk. Revenue and earnings growth is impecable, 37.6% and 52.5% respecitvely (based on net income growth as opposed to EPS).

As for the fourth quarter I see the company beating both revenue and EPS estimates. At the very least making $0.22 per share.

I am only initiating with a 33 - 50% position as earnings releases are very dangerous and I have only been exposed to VLCM for about a week.

Good luck out there, and lets hope for a VLCM pullback on Friday so I can BUY!

Rotation

I am seeing signs of a rotation into big stocks. Big Pharma, Big Tech, Big whatever. Keep that in mind as your portfolio may need to get bigger.

VLCM, I started looking at them today. They are looking pretty good so far just by the numbers. I still need to read through the Q's and CC's but they may be tagged for a buy soon.

Other than that, GOOG had an interesting day today, down almost $15 then rallied to finish up. Could it be a short term bottom?

UNH really needs to turn it around. I figure it will get hammered again tomorrow as AET reports, after that the carnage should be over and it should go HIGHER!

Can't find shares to short REDF. Probably better that way so I don't get hit by the train, but that stock will be below 20 in a few months.

Harken Back to the Old Days

"When the market leaders begin to lose relative strength even though the news is still very good, and buying strength and selling weakness no longer works, get out of stocks in general because the game is over.

It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for it to say "Get out!" and not wait for it to submit a legal brief for his approval."

This is a quote from Reminiscences of a Stock Operator, a book about possibly the greatest trader who ever lived Jesse Livermore. When I came across this saying the other day, a light came on. Look at this list of stocks: AAPL, GOOG, NTRI, ISRG, HANS. This list goes on. These stocks have led the market for years and are now getting slammed. Now I don't know if it is temporary but I must say that it is a good enough warning for me, and that I have to say I listened to it. Right now I am basically holding some in healthcare and a telecom and some international exposure. I can always move back in quickly, but right now the sidelines are fine.

An Idea

Now I hate to admit it but I was reading Lenny Dykstra's work on thestreet.com and I actually came across an idea of his I liked. Now he recomended the July - 17.5 - call options on Intel (INTC). I don't particularly like INTC nor do I like to buy stocks that report so - so quarters and sell off like crazy for the near month afterward. But as strange as it seems, this idea makes sense to me. The calls are very cheap at 3.70 and the stock selling at $20.6, you essentially have $0.60 left of IV. I hate myself for actually commenting on a Lenny Dykstra play but for once this idea makes sense. INTC should get a bounce, this is not a very aggressive strategy, I can see this idea making people money. As for me I am at my highest levels of cash in quite some time. The stocks I am looking to buy have been getting away from me. I need a bit of a pullback before I can pull the trigger on them. And please don't ever let me comment on a Lenny idea again.

New Stocks

I have narrowed down my research to a few stocks: PRAA, GFIG, VLCM.

I am also looking to short REDF. The stock is up way too high off of Cramer's comments. Bound to fall.

Check out FOSL today, wow they are slammed, I wouldn't touch that stock with a 10 foot pole.

AMZN guided down, I hope that brings GOOG down a little tomorrow, I would like to pick up some shares.

GYI is not doing well at all.