Hi everyone,

For this weeks Chart of the Week I thought I’d take a look at one of the world’s best known companies, the company whose search engine most of use at least once a day, Google. Since its beginning as a Stanford research project by Larry Page and Sergey Brin in 1996 Google has gone on to concur the world of online search and advertising. 13 years on Google has a market cap of over $180 billion, annual revenues of over $20 billion, profits of over $8 billion and has almost 20,000 full time employees (1,500 of which are based in Dublin). Not bad going. In todays post I am going to look at some of the new areas Google is expanding into as it tries to maintain its amazing growth rate and I will also cover off some possible trading techniques for what is arguably one of the hardest stocks out there to trade successfully.

Microsoft targets Google - The Challenge of Bing

Launched earlier this summer, Bing is Microsoft’s latest attempt to move in on Google’s patch and try get it’s paws on some of the lucrative online search advertising revenue. To put it in context as to how important online advertising is to Google, over 95% of it’s revenues currently come from it’s search engine and Adsense program which places Google ads on millions of websites worldwide. Described by Microsoft as a “Decision Engine”, Bing aims to categorise search results and help users get to useful information and features quickly. In an effort to generate loyalty Bing also offers a Cashback scheme which gives people cash back for products bought through the Bing search engine. In a further effort to get Bing out there Microsoft signed a 10 year deal with Yahoo! at the end of July which would see Bing become the exclusive search engine for all Yahoo! sites in exchange for a complex revenue sharing agreement put in place.

So how is Bing doing so far? Well not too bad, after less than 6 months on the go Bing has gained 9.5% of the US online search market. It’s still a long way behind Google’s 65% share and even further behind the 81% of the global search market that Google has managed to build up over the years. To-date it looks like Bing’s success in gaining market share has largely come at the expense of Yahoo! rather than Microsoft’s primary target. As for how good the search engine itself is, well I haven’t really tried it out much so can’t say, I guess I’m a Google man at heart and while it continues to do the job for me I don’t see any reason to change. If any of you out there have become Bing fans then I’d be interested to hear why you think it works better than Google, use the comments box at the end of the post to share your thoughts.

Google targets Microsoft - The Chrome and Android Operating Systems

But far from being a one way war with Microsoft trying to take down Google, this one has a lot more spice to it, as Google is just as eager to take down Microsoft in any way it can. While getting under Bill Gates’ skill is a bonus for the Google team in truth it is not their primary motive. In fact what they are searching for is new revenue generating opportunities which will allow it to maintain it’s phenomenal growth rate and help justify the massive PE (currently 37) the stock is currently trading at. Google started it’s move into the online applications space a few years back, lead by the launch of Gmail and soon followed up with Google Calendar and Google Docs. Last year Google attempted to reduce Microsoft’s dominance of the browser market with the launch of Chrome. A year on Chrome is now the world’s 4th most popular web browser after IE, Firefox and Safari with 3.6% of the market. It has a long way to go to make a significant indent on IE’s 65% share but it’s off to a decent start. I just checked the starts for SpreadTrader.ie there now using Google analytics and Chrome actually accounts for 6% of all traffic.

And the logical extension for Google after the launch of Chrome was to develop it’s own operating system to directly go after Microsoft’s bread and butter, Windows. As it turns out Google has decided to develop not one, but two Operating Systems, and now we have the Chrome OS and the Android OS. While Google freely admits there will be some overlap between the two in short they see Chrome powering netbooks and desktops while Android will focus on the smartphone market. And the hype surrounding the recent launch of the Motorola Droid phone indicates that the Google’s Android OS could be a real alternative to Apple’s iPhone. Google expect that there will be least 18 different phone models worldwide using the Android OS by the end of 2009, not a bad start. The Chrome OS on the other hand appears to have a tougher challenge facing it as it goes head to head with Microsoft’s Windows 7. By all accounts Windows 7 appears to be a massive improvement on Vista and looks likely to go a long way to saving Microsoft’s market share. It will be interesting to see how the Chrome OS develops over the coming years and if it does become a real alternative to Windows. The fact that both Android and Chrome are open source does mean that it’s not just the Google engineers that Microsoft needs to worry about, but a whole new breed of developers out there, most of whom are bigger fans of Google than Microsoft.

A Look at the Technicals – Ways to Trade Google

Right so enough of the chat about the Google / Microsoft battle for supremacy and onto the stuff we are really interested in, trading Google. First up, Google is not one for the faint hearted and certainly not one for novice traders. The Google share prices moves up and down faster than the energizer bunny on steroids! It often moves 500 points or more in as little as 10 or 15 minutes. Also given the very high share price means it requires a pretty large balance in your spread trading account in order to open a trade in the first place. Most of the spread trading companies require you to have a 15% margin on account in order to open a trade, so while that’s not too much of an issue if you are trading Microsoft for example, where you’d only need €450 in your account to open a €1 a tick trade, it’s a different story when it comes to going long or short on Google, where you’ll need to stump up close to €9000 to open the trade at Google’s current share price of close to $600 a share. So I fully understand that many traders out there may not have the margin to trade Google or even if they do, just don’t want to take on such a volatile trade. For those who have built up larger trading accounts there are some benefits to trading a stock like Google, firstly the potential upside is significant, for example anyone who went long Google at the start of July with a €1 a tick trade and applied a loose stop would now be up over €18K in less than 5 months. Secondly the volatility in the stock gives day-traders and momentum traders some excellent opportunities for short term trades.

So to some of the approaches to trading Google. From experience the one approach that really does not work is applying your normal stoploss, lets say if Google is at $575 (57500) and you decide you want to go long and risk €500, so you put a stop 500 points below at 570000. I’ve tried this approach in the past and almost every time I was stopped out within a day or two, and sometimes within a few hours and left cursing a loss of a few hundred euro as Google reversed back in the direction of my original trade which was just stopped out. That’s just the nature of Google. If you take a look at the daily chart below you will see that Google has clearly being in an uptrend for the last 6 months as it climbed from $290 to over $580 today, effectively doubling in value. However during that 6 month rise there were many pullbacks along the way. I’ve highlighted just 5 of these in the chart below using the blue brackets to show the gap between the high point and the low point before the rise resumed. On the six month chart none of these look very significant pullbacks but when you analyse them they range in size from a pullback of $23 to a pullback of $33 with the other three coming in somewhere in between. From a points (ticks) perspective that’s five pullbacks ranging form 2300 points to 3300 points, scary stuff if you are going long and trying to figure out where to set your stop loss!

Google 1 Year Daily Chart (Click to Enlarge)

So if you really do want to trade Google for the longer term and trade the trend so to speak then you need to use a very wide stop unless you want to be continuously stopped out only to see Google rebound a few days later and carry on to new highs. When I have being trading Google over the last few months I have looked to go long on the pullbacks (e.g. when it hit $530 at the start of the month) and put quite a wide stop in place, usually a few hundred points below the 50 day moving average. This approach has served me well over the last few months but it does require nerve and a lot of patience. The other important point is that when Google does start to move up above your entry point you really need to resist the urge to close out your position too quickly and take your profit. This is an area I personally need to work on a bit more, too often in recent months I’ve panicked and rushed to close out positions, which while profitable, really should have being much more so had I just shown more discipline and patience with the trades in question.

The second approach is really one for the day traders out there. It’s not an approach I have used too often but I do know a few full time traders who use it regularly and very successfully. Because of its volatility, Google can be a great momentum trade. There are often days when the market either rallies strongly or falls back sharply (e.g. days when the DOW rises or falls 100+ points in a day) and it is these days that Google more often than not tends to trend in the direction of the overall market. This can see it gradually rise or fall 500 to 1000 points in the space of a few hrs. The 2 minute chart below is from Monday and serves as a good example of this. Monday was a strong up day for the market as a whole and Google followed the trend right from the off. Momentum traders would use a 1 or 2 minute chart to identify and follow these trends. The example highlighted in the chart below shows how a trader could have gone long Google 10 minutes after the market opened (giving it some time to find a clear direction) at around 57800 (see green arrow). They could have kept the trade open until such time as they saw the upward trend starting to fade and drop back, deciding to close once the 20 day moving average was crossed, at a price of 58500 (see blue arrow). Such a trade would see them close out with a €700 profit for a trade that lasted a little over 1 hour. This type of trading strategy requires you to be in a position to keep a close eye on your trade and being ready to act quickly to close out and lock in your profits. You also need to be ready to use a very tight stop (maybe 200 pts below) with this approach and be willing to take your loss if the trade does not work out as planned early on. Another tip for this type of short term trade on a volatile “Google” type stock is to always close out your position before the market closes, regardless of whether you are up or down at the time. These are not the types of trade you want to be holding over night because you have no way of knowing where the stock will open up the next morning. It can often gap up or down, leaving the short-term trader nursing much larger loses than originally planned for when they opened the trade the day before.

Google 2 Minute Chart From last Monday (Click to Enlarge)

So there are two approaches to trading Google which hopefully will help those brave enough to take this bad boy on. Longer term I’m definitely bullish on the stock, regular readers may remember that a couple of months ago as part of my Apple Chart of the Week post I said I thought Apple was going to $200 and Google was going to $500 before the year was out. Apple eventually got to it’s target and is holding on there just above the $200 mark. Google on the otherhand smashed through $500 within a few weeks of that post and I see it breaking $600 again before long. Only last week UBS upgraded it’s price target for Google to $700, so while there will be plenty of bumps along the way, the upside potential to this stock is huge!

Until next time,
Happy Trading!
SpreadTrader.ie :- )

P.S. Apologies for the lenght of this post, I wrote it over a few days this week and as a result it ended up a bit longer than planned…

Hi everyone,

Hope trading has been going well for you all over the last month or so. Haven’t had a chance to do a new post for a while as I’ve been very busy travelling for most of the last 6 weeks, mostly work but some holiday time thrown in aswell so not all bad! So while I’ve been trekking the globe (was in the States, Australia, Northern Europe and Russia) my blog posts had to take a back seat for a while. I did manage to trade a bit however and thought I’d use today’s post as a bit of a catch-up on some of the big moves that have taken place over the last 6 weeks.

The DOW Falters At 10,000

So lets start with the DOW, on the 19th October the major index closed above the 10,000 markfor the first time in over a year. In the 2 weeks since then the DOW has struggled to continue higher and over the last week we have seen a significant sell-off in equities resulting in a 4% fall in the DOW bringing it back to the 9700 level. So where to from here? Is this just another one of the minor blips we have seen along the way since the rally began back in March or are we at the start of a more serious pullback? After a 56% rise in the DOW since it’s March lows we should not be too surprised to see some sort of pullback due to profit taking at this significant 10K mark. From a fundamental perspective it’s hard to justify such a rapid recovery in equity markets in a little over 6 months, the unemployment rate in the US continues to tick upwards (hitting 9.8% in September), house prices continue to fall (although a slight rise in new-home sales offers comfort) and US consumer spending remains sluggish at best. That said figures released last week showed that the US economy did grow in Q3, officially bringing an end to one of the worst recessions for many years.

DOW Chart - Is Pullback Temporary? (Click to Enlarge)

So am I hedging my bets a bit here? Yeah pretty much, I’m struggling to call the next more for the DOW. Short term the chart is bearish with a falling 5 day moving average. However longer term we are still in a clear uptrend and the current pullback technically just represents another higher low, offering hope that another move higher may not be too far off. Things are still very nervous out there and my gut tells me a more significant pullback is not far off. But short-term I like the risk-reward offered by a small long position on the DOW. The last 3 trading sessions have produced some nice support at the 9630 level, providing the opportunity to go long at current levels with a tight stop just below, I’d suggest just below 9600. If the market moves higher from here it shouldn’t take too much to push us back above the 10,000 mark again.

Gold Hits Record Highs

Gold has also been hitting some significant levels recently and getting a lot of market coverage along the way. October was the month when Gold made its first decisive move above $1000 an ounce for the first time since March 2008. And the big difference with last months move is that since the breakout Gold has held firmly above the $1000 level. And today Gold move up another 2% to hit a new all time high of $1087 an ounce on news that the IMF had successfully sold 200 tonnes of gold to India for $6.7 billion. The IMF approved the sale of 400 tonnes of gold back in September, an amount that many commentators expected it to take several years to dispose of on the open market. So to have already reached an agreement for half the total so quickly, and with a single country which wasn’t even China came as a shock to the market. It confirms there is still a massive appetite out there for the precious metal among the world’s wealthiest economies.

Gold Hits New All Time Highs (Click to Enlarge)

From a technical perspective I have included a very long term weekly chart going back almost 5 years to help illustrate where gold prices have come from and the significance of this breakout above the $1000 per once mark. While I’m not a big fan of them personally I have also drawn in the often referred to “inverted head and shoulders” technical pattern on the weekly gold chart in blue. Many chartists see such breakouts as very significant and offer the potential for further moves higher. Certainly the trend is up but remember Gold is a volatile commodityand not the easist to trade, often requiring wide stops to be put in place….you’ve be warned!

Dollar Recovery Likely To Be Temporary

Finally for todays post a quick look at what the Dollar has been up to against the Euro. Again we can see a clear trend of a weakening Dollarsince the start of the year. Again no surprises here as to why, we have the US Fed keeping interest rates at all time lows, combined with a policy of printing money like it is confetti to buy up Treasury debt and new bond issues, billions spent on stimulus packages, cash for clunkers, bank bailouts…well you get the picture. On the other side of the Atlantic the European Commision annouced today that it sees the EU returning to growth next year while ECB President Mr Trichet continues to favour a conservative (well relative to most other developed economies) fiscal policy, one where interest rate rises appear to be only a matter of months away. So while the USD has found some support over the last week and recovered somewhat I think this will be a short-term move before the Dollar resumes it’s path and continues to fall further against the Euro and other major currencies.

Dollar Chart - Trend Suggest Further to Go? (Click to Enlarge)

From a technical perspective the chart supports this argument also, with a clear uptrend showing a series of higher highs and higher lows since last March. And unlike Gold, currencies tend not to move so wildly and can therefore offer easier trading opportunities.  I suggest keeping an eye on the EUR/USD from current levels and if further Euro strenght looks like kicking in, go long with a target of a move back above $1.50 in the not too distant future.

Until next time (promise it won’t be so long!),
Happy Trading!
SpreadTrader.ie :- )

Hi everyone,

I’ve being away travelling for the last few weeks so haven’t had a chance to

 post anything new. I’m back now and decided it would be best to start back with a new “Chart of the Week” post, or this time round perhaps calling it a “Chart of the Month” might be more accurate! Anyway I’m surprised it’s taken me this long to dedicate a post to my favourite company and one of my favourite stocks for trading but here is at last, this week’s “Chart of the Week” is Apple. Apple was one of the very first stocks I spread traded about 4 yrs ago and I’ve being trading it on a regular basis ever since and even have a small long position open right now. I used Monday’s over the top 4% fall in the share price to go long again just above the $161 mark. As of writing Apple’s share price has recovered all of Monday’s loses and some and is now trading above $169 :-).

Cash Rich Tech Giant Continue to Out-Perform

When it comes to results and guidance Apple is one of the easiest stocks out there to read. Every quarter as part of announcing exceptional results that blow away what Wall Street analysts were expecting Apple guides conservatively for the upcoming quarter. This has in the past (although not with it’s most recent quarterly results) lead to an initial sell-off post results as for some bizarre reason analysts appeared to be disappointed with guidance…I’m always left asking myself why? Do these analysts not know this is Apple? This is what Apple does, it takes what the Street is looking for, guides 10-20 cents per share lower and then proceeds to smash its own and the Streets expectations 3 months later. This has being the Apple way for many years now and provided a pretty decent trading strategy going into results. Wait for the results to be released, let the next days sell-off come the next day and once a base was formed during the day buy in and ride the stock higher over the coming days and weeks as the market forgot about the conservative guidance and instead focused on the excellent set of results just posted. This strategy did not materialise on Apple’s Q3 results announced a few weeks back when Apple opened up over $6 higher the next day. Perhaps at long last the Street has realised that Apple’s guidance should be taken with a pinch of salt.

As for the recent Q3 results themselves, well I won’t bore you too much with the details but here are some of the key numbers that caught my eye:

• Revenues of $8.34 billion (up from $7.46 billion in Q3 last year – 12% increase)
• Profit of $1.23 billion (up from $1.07 billion in Q3 last year – 15% increase)
• Earnings per share of $1.35 (up from $1.19 in Q3 last year – 13% increase)
• 5.2 million iPhones sold in the quarter
• 10.2 million iPods sold in the quarter
• 2.6 million Macs sold in the quarter
• 1.5 billion apps downloaded from the App Store

Global recession?? Doesn’t seem to be holding Apple back too much! And with $31 billion in cash in the bank (or approx $35 per share) and increasing quarter by quarter, in the current market that certainly helps ease some fears investors might have.

The Coolest Company and the Coolest Products

So how does Apple do it, well for me it’s by making cool products that people love. Apple has always positioned itself as a “cool” company, aligning itself more to your local neighbourhood coffee shop than your local Starbucks (aka Microsoft). It’s funny really when you think about it, Apple is just as interested in making money, increasing its share price and gobbling up market share as Microsoft, Google or IBM but it somehow manages to do all that without getting on people’s nerves. Hackers don’t create viruses for Macs, now that might have something to do with that fact that most of them probably use Macs! But still, you get the picture, when people think Apple they think of a company as far removed from a Microsoft as can be.

A lot of Apple’s image has to do with how practical, intuitive and user friendly it’s products are. It blew the MP3 market wide open which it launched the first iPods. Rather than sit on its laurels it continued to innovate and soon brought us the iTouch and most recently the game changing iPhone. So what’s next? Well rumours around Silicon Valley that an iTablet will be launched early next year will be eagerly watched to see if they materialise. Up to now Apple have always said they have no interest in entering the Tablet market, they don’t think tablet PCs are user friendly and insist they won’t enter a market unless they can actually bring a product that offers an outstanding user experience to the table. So if the tablet rumours (it’s expected to be a cross between the iTouch and the Air Macbook) turn out to be true I for one will be looking forward to see what this next device can do. While other companies sit back and ponder about what might be possible Apple is already far ahead doing it.

The Steve Jobs Effect

How much of this innovative culture is down to Steve Jobs? There’s no

Steve Jobs

doubt that Job’s return to the Apple helm in back in 1997 signalled the rebirth of a sleeping giant. It wasn’t long before Apple had launched the iPod and iTunes to the market and well the rest is history. The ongoing story of Jobs’s health have weighted heavily on the stock in recent years with internet rumours regularly leading to dramatic falls in Apple’s share price. Jobs has being on “leave” from Apple for almost 12 months now as he recovers from a liver transplant but during this time Tim Cook has steered the ship nicely and slowly but surely the market has come to accept that Jobs may not return at all (or perhaps just in a consultancy role or remain as a board member). Should this turn out to be the case there appears to be more to Apple’s R&D department than just the Jobs’s influence. If Jobs does come back to work expect the share price to pop on the news. If on the other hand Apple announce that Cook is taking over permanently as CEO use the inevitable pullback in the share price as an opportunity to go long.

The Game-Changer: Apple’s iPhone 3GS

Before I move onto taking a look at Apple’s chart a quick word on the

iPhone

iPhone. For me this device is without doubt the jewel in the Apple crown. It’s got off to a phenomenal start and I think it will continue to gain market share over the coming years. It truly is an exceptional Phone, Camera, MP3 player, PDA, Gaming Device, Web Brower and Personal Organiser all in one. For anyone who hasn’t tried one out yet I recommend calling into your local O2 store and giving it a whirl. Not that you’ll be able to buy one there and then, nope, unless you are very lucky they’ll be all sold out and you’ll have to try again later when the “next batch of phones are due in”. If ever you wanted an indicator as to what Apple’s Q4 results will be like there it is. Apple literally can’t manufacture enough iPhones to keep up with the demand. Out of curiosity I called into several Apple stores in different cities in the US during my recent travels and all were jammed out the door with people.

Oh and Apple is expected to announce an exclusive deal with one of China’s major mobile phone network providers (word on the street is that China Unicom has beaten mobile giant China Mobile to the exclusivity deal) in the coming weeks which will see it get in the region of $439 for every device sold there! China Unicom has approx 130 million subscribers and as part of the 3 yr deal with Apple it guarantees sales of between 1 and 2 million units per year. I could go on about just how well thought out the iPhone is with its inbuilt GPS, seamless integration to iTunes to make buying songs so much easier and of course the App Store with it’s continues stream of new apps waiting to be purchased by iPhone owners with Apple clearing 30% of the price of each app purchased but I’ll wrap it up here. Let’s just say that the heads of Nokia, Motorola and most other mobile phone manufacturers (except perhaps Blackberry maker Research in Motion) must be struggling to sleep at night at the thought of what the future holds for their companies.

Chart Continues to Trend Higher – Next Stop $200

Right so enough of me singing Apple’s praises, let’s take a look at what really matters – the Chart. Well no surprises here either, the chart has being trending higher since early March and aside from a few small pullbacks of a few percent along the way it has being making new highs on an almost weekly basis. All the main moving averages (20, 50 and 200 day) are all trending higher, all indicating a continuation in the current move.

Apple Chart - Moving Averages Continue to Trend Higher (Click to Enlarge)

As mentioned at the start of this post Monday’s pullback presented a great opportunity to go long. For those that missed it don’t worry, the market is fairly toppy these days and with that there is quite a bit of nervousness out there. I’d expect there will be more red days like Monday’s washout and these are the days that you should look to get long solid, cash rich companies like Apple, IBM or CAT. As discussed many times in the past the market likes to work to certain target prices. For example I can see Google hitting $500 before long now that it has broken through the $450 mark and similarly I see Apple getting back to $200 before the year is out.

Until next time,
Happy Trading :-),
SpreadTrader.ie

Hi everyone,

Last month we looked at how the DOW was getting close to the key 9,000 mark and wondered whether it could break through this level and make new highs for 2009. Last time round it failed just short of this level and slowly fell back towards 8,000. Over the last 2 weeks the DOW has surged back up to this level and after almost 7 months the it finally broke back above the 9,000 mark late last week. This recent rally has seen the DOW rise 1,000 points in the last 2 weeks. So today we take a look at what’s behind this recent market rally and ask if it is likely to continue.

Q2 Earnings Catalyst For DOW Rally

To put a bit of context around this 2 week rally, the DOW rose 12% which is it’s best 2 week performance since 2000! And it’s not just the DOW that’s benefited, the S&P and Nasdaq have also surged upwards by similar percentages. This sharp run-up in the major US Indices has been mainly driven by some strong Q2 results from a lot of the blue chips. Of the S&P 500 companies who have reported Q2 earnings so far 77% have beat analysts estimates, albeit these are greatly reduced estimates, by an average of about 15%. The continued stream of earnings beats has given the market the incentive it needed to drive higher after its mini-pullback earlier in July. No earnings pleased the market more than those of bellwether Caterpillar’s whose excellent results, which beat the street by $0.12 per share and reaffirmed it’s full year guidance of 5-10% revenue growth, helped drive it’s share price up over 10% last week. As a company with probably one of the greatest global reaches in terms of the markets it operates in, the construction and heavy moving equipment manufacturer’s results are always closely watched as providing a very good indicator of the current temperature of the global economy.

Tech Still Leading The Way Higher

Not to be outdone by the DOW the Nasdaq has been setting records of it’s own…Prior to it’s small 0.4% pullback last Friday the Nasdaq had just completed a 12 day winning streak, it’s longest winning streak since 1992. I was a bit surprised when I read that the tech index hadn’t gone on such a winning run in so long and that even right throughout the tech bubble of 2000/2001 it never achieved such a feat. It was disappointing results from Microsoft that ultimately lead the Nassy lower on Friday, one of the few big tech companies to miss estimates. Prior to Big Blue’s results it was all bright and rosy in the world of tech with excellent results from Apple, Google, Intel and Amazon to name a few driving the Nasdaq onwards and upwards on a daily basis.

Apple once again did it’s usual party trick of blowing away it’s own very conservative guidance and the Street’s slightly less so conservative expectations. After an almost $20 run-up in it’s share price in the couple of weeks prior to announcing it’s results to $150 a share I wondered could Apple continue higher, well there was no need to fear, it’s added another $10 a share since last Wednesday’s results. The results themselves were very impressive, Apple just can’t ship it’s products quick enough, particularly it’s iPhones where it sold 5.2 million of those bad boys last quarter and is “currently experiencing some supply issues”. While in most cases supply issues would be a cause for concern, like when Boeing can’t get it’s new airbus out in time to meet contracted delivery dates, in Apple’s case it’s a very positive sign. With Apple it’s simply a case that they can’t manufacture enough iPhones quick enough. We shouldn’t really be surprised, with stories of 15 minute delays to just get to talk to an employee in Apple’s stores in the US and if anyone here in Dublin has tried get their hands on a new iPhone 3GS recently I’m sure you too have being met with the response that sorry but they are currently not in stock….

Should We Be Concerned?

But should we be concerned about all this bullish talk, bottoming out became green shoots which  have now become talk of a proper recovery. What would concern me about this recent results driven rally is that the earnings beats have all come from an EPS perspective. In a lot of cases however when we look at the underlying results revenues continued to fall but it was the results of aggressive cost cutting programmes that meant profits held up and EPS looked good when compared side by side with what the Street’s analysts were expecting (analysts who had already slashed earnings expectations drastically in the face of the global economic environment these company’s were now operating in). So while I appreciate it is all about the bottom line, surely part of it must be about how that bottom line is achieved? And if chief executives are delivering that bottom line by cutting back staff numbers, reducing production levels and slashing spending rather than growing revenues, the question has to be, how long can they continue to do that for before they run out of costs to cut??

Certainly there are some positives out there, the global credit markets are at last starting to thaw and the US housing market is starting to pick up also with the number of housing starts announced yesterday up 11% month on month. But with US unemployment figures contining to rise (although at a lower rate) do the US public really have money in their pockets to spend? It will certainly be interesting to see if the US companies can continue to beat the street’s expectations in Q3 and Q4, especially as Wall Street’s analysts are likely to increase their expectations in light of what has happened in Q2.

So Where To Next?

The DOW chart below helps highlight the steepness of this recent run-up. Breaking above the 8850 mark on Thursday was key as this was a level that it failed at last time round. Once that hurdle was cleared it quickly jumped another 200 points.

DOW Breaks 9000 - Click to Enlarge

The market is clearly in overbought condition right now and a pullback, at least short-term, is probably on the cards. If we do get a short term pullback we would hope that this previous resistance level at around 8800 will now act as support. For now though it’s best to stick with the trend rather then trying to call the top of this current rally. Last night, after a  lackluster day when the markets traded mostly down we saw a late end of day rally which lead to the markets closing slightly up once more at 9,100. This end of day rally would be seen by many as a sign that the bulls are still in control of things right now. Keep your stops tight and be ready to go short if this run-up eventually runs out of steam.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

I’ve been away for a while so haven’t had a chance to post anything new but am back now and decided it’s Chart of the Week time. Lots of interesting stuff going on in the US which I was going to cover like AIG and Boeing taking a hammering recently and Goldman getting upgraded late last week but I decided to go for one of our own guys today, and sure who better to pick than the country’s largest publicly quoted company, CRH. I knew CRH had a large market cap but was a little surprised to read last week that it now accounts for over 30% of the total value of the ISEQ Index! I wonder what percentage all our banks together now account for??
Founded in 1970, CRH has grown consistently over the last 30 years to a position where today it has operations in 35 countries, over 93,000 staff and with a market cap of over €11 billion it has a firm grip on it’s position as Ireland’s one and only true global company.

H1 Results Disappoint But Some Room For Optimism

On Tuesday CRH provided a trading update on it’s H1 (or first half) results which was a lot more downbeat than analysts were expecting. Following a very tough first half of the year CRH is now guiding profits of €100m, down from approx €600m for the same period last year. As global construction markets remain weak (particularly residential and non-residential sectors in the US) and the various stimulus packages on the go struggle to give ailing markets the boost they need it should come as no surprise that CRH’s profits are going to be down over 80% in the first half of the year on the same period last year. On going restructuring costs are also hitting the bottom line but at least these will deliver significant savings going forward so the hits will more than pay for themselves. On the restructuring front, presumably in an effort to soften the blow of the disappointing guidance, CEO Myles Lee did announced a second round of cost cutting measures which the company expect will contribute an extra €555m in cost savings to the almost €900m in savings announced in January.

While the trading update was certainly worse than analysts and investors had hoped for there are a few positives which should form the basis of a silver lining for H2 and into 2010. First up is the fact that H2 is traditionally CRH’s stronger half of the year. That combined with the news last week that of the proportion of the $787 billion US Stimulus Package earmarked for infrastructure, almost 50% will be spent on repaving existing roads. As the largest supplier of asphalt in the US this is great news for CRH and should see the company get more than it’s fair share of Barack’s Billions over the coming 12 to 18 months. Other good news for CRH comes in the form of lower energy prices as oil continues to trade well below last years $147 a barrel high. In fact over the last week or so we have seen a steady fall in the price of crude from over $70 a barrel back to around $60 in line with the pull-back in equity markets and fears the it might take longer than first thought for the US to pull itself out of this recession. Investors seem to be thinking the green shoots might need a bit more than a dart of miracle-gro before they start flowering! And going hand in hand with lower oil prices and jittery equity markets is of course a stronger dollar, as the greenback’s safe haven qualities kick-in once more. A strong dollar is more good news for CRH as about 40% of it’s revenue’s come from the US.

War Chest Ready To Be Spent

One of the other positives for CRH going forward is that it is not burdened with massive debt that is currently weighing on many of it’s competitors. While several of it’s rivals are struggling to negotiate debt refinancing deals with their bankers or are being forced to see off assets in order to pay down their debt, CRH on the other is sitting back on a very sizable war chest. Following on from an impressive (if more than a tad complex for existing shareholders to figure out…) round of funding earlier this year it is now estimated than CRH is sitting on a cash pile in the region of €4 billion. That’s a tidy sum to have on hand to spend on expansion and moves into new markets.

And there is no better firm at getting value on the acquisition front than CRH. Over the last few years spending on acquisitions have being running at close to €2 billion a year! Lots of things impress me with how CRH conduct their business but none more so than how they manage their acquisitions, from identification to valuation to negotiation and deal closure there is in my view no better company than CRH. I remember reading a few years back about how rather than engaging the major investment banks and finance houses to complete acquisitions on it’s behalf CRH instead decided to setup it’s own Mergers and Acquisitions team. This group now completes the purchases of dozens of companies each year and saves the company millions every year in professional fees it doesn’t have to pay. And they are very good at their jobs also, basing all their new deals on valuation and always willing to walk away from the table if they feel the price being asked for is too steep. They never like to pay more than 12 times earnings for any company they buy and regularly make purchases at single digit multiples. As Cemex and Lafarge are forced into asset sales over the coming months expect CRH to be there with cheque book open and ready to benefit, but only on their terms…

Dollar, Energy Prices, Weather and Peers All Impact CRH’s Share Price

CRH is a share I have followed for years and it is a company I admire a lot even if at times it’s share price has struggled to perform as well as one might have expected. In watching the company’s share price closely over the last few years I have learned that it certainly is a volatile stock. I have found that it’s often not news coming directly from CRH itself that can cause the share price to rise or fall 5% on any given day but any number of other factors, many completely outside the company’s control:

• As mentioned above the strength of weakness of the dollar can directly impact the share price as investors worry about the impact on the approx 40% of revenues that come from the US. In H1 last year for example, CRH took a €80m hit due to the weak dollar. Already easily Ireland’s most global and diversified company CRH continue to look for new markets to expand into. In the last couple of years a big push was made into Eastern Europe as the company hoped to capitalise on the construction booms hitting those countries. More recently China is on the radar with the first stakes taken in Chinese firms last year and more expected throughout this year and next. These moves into new markets will help reduce the company’s dependency on dollar revenue.
• Given the nature of CRH’s business energy prices also directly impact profitability and were one of the big factors in the share price taking a battering last summer as it fell from approx €24 a share in April to €14 a share in July. It was during this period last year that oil prices really started flying up, moving from $100 a barrel to almost $150 a barrel by mid July (see oil chart below).
• Then there is the weather, a nasty hurricane season in the States can result in construction projects being put on hold or delayed and reduced spending on construction materials. This is particularly magnified in Texas and Florida, two of CRH’s biggest markets in the US, but also two of the States hit hardest when hurricane season comes along…
• And of course there are CRH’s competitors, nothing like a disappointing set of results or trading update from Lafarge, Heidelberg or Cemex to know 7 or 8% off CRH’s share price in one fowl swoop. Of course the opposite is also true, an unexpected upgrade to earnings will also see CRH benefit. The scale and global nature of CRH’s business means it is playing with some really big fish out there, and investors clearly watch all of these big boys very closely for signs of how the others are performing.

High Oil Prices Hit CRH’s Profits - Click to Enlarge

Chart A Difficult One To Call

I wanted to mention the above factors that can impact CRH’s share price so that you were aware of them because from personal experience I have found CRH a tricky share to trade at times, especially in comparison to some of the other Irish shares. It seems to me there is always something going on out there which is having either a positive or negative effect on the share price, and unless you are fully up-to-date on all these factors it can lead to some nasty surprises on the share price front. And while volatility can be great for spread trading, sometimes having a fairly clear idea on how that volatility is going to play out can be a good thing.

CRH Chart - Click to Enlarge

If we take a look at CRH’s chart over the last 12 months this volatility becomes fairly apparent. It has traded as high as €20.50 and as low as €13 and at pretty much every price in between….I suppose one could argue that it is in a bit of a trading range with €14 or there abouts acting as support and €20 acting as resistance. At either of these extremes a trade might be worth considering but when it’s in the middle of the range, say €16-18, then I think it’s a very hard one to call and you are really taking on a risky trade should you decide to go either long or short at these levels. CRH is a share that tends to move quite a bit on any given day, and regularly sees it’s price either up 70 or 80 cent or down that amount. It’s currently not that far off the bottom of the range, closing at €16.00 today and might be worth a small long trade (€1/2 a tick) with a stop 200 points below and a target profit level of €18.00. It’s not a great risk / reward ratio really and given the way this one moves about traders might be best to leave this one be for now and look at something that offers a clearer idea of where it’s going next…

Until next time,
Happy Trading,
SpreadTrader.ie : -)

Hi everyone,

In response to two recent emails from readers asking about approaches to setting stop-loss orders today I am going to cover off a couple of different strategies often used by traders when deciding where abouts to set their stop loss. I’m guessing the recent market reversal (the DOW is down over 600 pts in the last week and a bit) may have led to a fair few people getting stopped out of long positions and has left many wondering if they set their stop correctly, should they have had it tighter, perhaps allowed a bit more room for movement, maybe considered moving it so as not to get stopped out…
Nobody wants to ever see their stop get triggered, especially when the market (as it loves to do) reverses sharply, after minutes after hitting your stop to leave you nursing a nasty loss on your trade. But losing trades are part and parcel of spread trading, you are never going to call every trade correctly. So that’s way it is important that you plan for trades going against you by putting in place a stop-loss order that gives your trade time to work while still limiting your losses to an acceptable level should it go wrong. Here are some approaches to consider when setting your stop-loss.

Adopt a Tight Stop but be Prepared for Regular Stop-outs

Ok first up we have the approach of putting a very tight stop in place. When adopting this approach what you are basically doing is hoping you have called a bottom or a turn in the stock. You are going to put a stop in place just under the most recent level of established support, often based on a short term timeframe (10 or 30 mins). With this type of trade you should be looking for any of the following before opening the trade:

• A significant reversal on large volume, increasing the likelihood that you have caught the bottom.
• A bounce off previous support (if going long) or resistance (if going short). See last weeks Dollar Tree example.
• Stock is very close to a moving average or trend line that has acted as support of resistance in the past.

In each of these scenarios you will be putting your stop as close as possible to the key decision point which in turn keeps any potential losses, should the trade not hold up as expected, to a minimum.
Traders who go with these types of tight stops tend to have many losing trades (often a lot more than the number of winning trades they have) but each loss is only a very small fraction of their trading portfolio. When the trades go as planned they often result in significant winning returns and thus provide the trader with an excellent risk / reward ratio. E.g. Having a stop-loss set at a level where the risk is maybe only €100 but the their target profit is 5 times that.

A Loose Stop Gives Your Trade Time to Work

The opposite approach can also be taken where you apply a much looser stop-loss, thus giving your trade more room and time to work in your favour. In today’s volatile markets where 100 point swings are not uncommon this strategy can often pay-off. Many traders refer to “noise” in the market and how you should discount this and focus on the overall trend when making your trading decisions. Putting wide or loose stops in place helps off-set the risk of market noise leading to your position getting stopped out despite the fact that in the longer run you called it right. Have a look at the Morgan Stanley chart since the start of the year below. The trend has certainly been up but not without plenty of volatility and short-term pullbacks along the way. A loose stop here would have paid off where as a tight stop would have seen you stopped out of the trade very quickly.

Morgan Stanley Stop-Loss Example (Click to Enlarge)

The downsides of this approach to setting your stops are fairly obvious:

1. If you are stopped out you are going to be hit for a bigger loss than in the first approach we discussed above. And those bigger losses are going to be a bigger percentage of your trading portfolio, meaning you’ll be able to sustain less trades going against you over time.
2. Your risk / reward ratio on these types of trades is not going to be great. You could be getting into trades where you are risking a €300 loss for perhaps a targeted profit of €400, a little over 1 to 1 which is not what we typically look for.

A Percentage Stop Can Lack Flexibility

Another approach often used is to set your stop based on a percentage of your portfolio you are willing to risk on each trade, let’s say 3% of your portfolio. So if you had a €10K trading account you would risk no more than €300 on any trade and you would set your stop-loss accordingly. A variation on this approach is to set your stop-loss based on a percentage of the current price of the stock, currency or commodity you are trading. So lets say you are trading Microsoft at $20.00 want to go short. You decide to deploy a stop 10% above the current price, so you put your stop at $22.00. If the stock hits that well it is 10% off where you traded so it is pretty clear you called the trade wrong and it’s time to get out.

While I like the idea of quantifying your potential loss as a percentage of your overall portfolio (it’s good to know if you are risking 2, 5 or potentially 10% of your portfolio on a single trade…it might make you think twice about putting it on), having such a rigid approach to setting your stop-loss mean you don’t get the flexibility you need when choosing where to put your stop. It could result in you putting too wide a stop in place or not a large enough one in other cases. Likewise while knowing the percentage a stock needs to move to hit your stop is very useful (e.g. are we talking a mere 1% move and you are out…not a lot of room for error there), again using a set rule of X% from the current price to set you stop may not give you the flexibility you need. Also, because you will most likely be trading stocks of various prices and volatility, a 10% move can mean vastly different amounts of risk, e.g. A 10% move on a €1 a tick trade on Microsoft at 2000 would see you risk a max of €200, however the same 10% move on a €1 a tick trade on Apple trading at 14000 would see you risking €1,400!

Using Gaps to Set Your Stop

One less common approach to setting your stop is specific to stocks that either gap significantly lower or higher on a given day. These scenarios don’t happen that often but when they do it’s worth adopting a strategy specific to them if you are going to join the action. Stocks that gap significantly tend to do one of two things, either fill (close) the gap or carry on moving in the direction of the gap. If you think the latter is more likely and decide to open a trade on a stock that has gapped, then the logical place to put you stock is just below the gap up or above the gap down as the case may be. The RIMM chart below is a classic example of such a trade. Back at the start of April the Blackberry maker gapped up significantly (over 20%) on the open after they announced results that blew the market away after the market close the previous day. From there the stock rallied another 50% to peak at $85 a share last week. The thing to notice is that if you went long on the gap up you could have put a stop just below the day’s low and stayed in that trade for a long time, resulting in a very successful trade. In this example the gap held. Of course in many cases gaps like these are filled because that’s what the market likes to do. In such a scenario you would have had your stop perfectly placed to limit your loss as far as possible.

RIMM’s Gap-up in April Held (Click to Enlarge)

No Stop-Loss is Not A Strategy

I’m not going to dwell on this one as I don’t really consider it a viable trading strategy but I am aware of traders who have tried to adopt this “strategy” so I thought I’d throw it in for completeness… The idea behind not setting a stop-loss is that well you can never get stopped out and therefore can wait as long as it takes for your trade to be proven right (unless of course you were long Anglo and it suddenly got Nationalised!). I’ve mentioned many times in various posts that becoming a successful spread trader is all about managing your risk, keeping your losses to a minimum and letting your winners run. I’ve also spoken about knowing when you are wrong, never catching a falling knife, risk / reward ratios, etc, etc..the 10 Golden Rules sums up most of these. Not having a stop-loss in place on a trade goes completely against all of these well known trading rules. No one can make you use a stop-loss but if you don’t you are asking for trouble.

Some Final Thoughts On Stop-Losses

Whatever strategy you decide to adopt when it comes to setting your stop-loss, be it one of the above or some other approach I believe you should always set some sort of stop-loss. As mentioned above it’s not a good feeling when your stop-loss is triggered but trust me, more often than not it is for the better. Yes there will be the nasty reversals which serve to multiply the pain of the loss you have just taken but if you have set your stop loss at a particular level for a particular reason you are better off accepting the loss if the stock ends up reaching that level. Moving your stop order is very tempting, and can on occasion pay off (just like averaging down works the odd time too) but in most cases moving your stop order means one thing and one thing only, accepting a bigger loss. It may take a few hrs longer, a few days or even a week or more, but moving your stop-loss generally only puts off the inevitable.

Here’s an example from close to home… I got stopped out of a long position on Yahoo trade myself late last week. Yahoo was in what I considered to be a nice trading range for over two weeks, moving between 1610 and 1670. It had also received a number of analyst upgrades with price targets of $20 plus on the back of an improved online advertising market and a new CEO who has impressed so far. So when it came back down towards 1620 two weeks ago I decided to go long for €5 a tick, putting my stop 50 pts below (risking €250 on the trade). I considered going even tighter with my stop, just under 1600 but decided to give a little more room for movement plus at 1570 I was just below the gap up on 1st June. After an initial rise back up towards 1650 the stock price started to reverse and soon I was in negative territory. Three days after opening my trade I was stopped out at 1570 as planned (well not really but you know what I mean!). 2 days later it jumped up 3% and I was going “Oh here we go…back up to 1670 within a few days I bet…should have moved my stop…”. However if I now look back at the price action since then my stop-loss was a blessing in disguise. As you will see from the chart below the very next trading day (Monday of this week) Yahoo fell almost 7% (about 100 pts), followed by another 20 point drop at one point yesterday to hit 1450, that’s 120 pts (€600 at 5 a tick) below my stop that was only hit last week. While I was disappointed with how the trade went I’m happy enough with the approach I took, both from an entry point and from a stop-loss setting point of view.

Yahoo Stop-Loss Example (Click to Enlarge)

All trades are different and you should set your stop-loss based on the particular set-up you are considering but hopefully the approaches discussed above will give you some options to consider.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

For this week’s Chart of the Week I thought I’d go back to the US and take

Dollar Tree

a look at a company called Dollar Tree (DLTR). Probably not one of the better known companies out there, Dollar Tree are a discount store chain, similar to Pound World or Euro Saver in Ireland. The reason I choose them for this week’s Chart of the Week was mainly down to the fact that I think their chart provides us with a great example of a stock in a trading range and how it has bounced off a key support level on numerous occasions. But I’ll come back to the chart later, lets start with a look at the company’s fundamentals.

A Big Player in the Cheap Stuff World

While perhaps not well known over here in the US Dollar Tree is a very big player in the discount store game. Trading under the names Dollar Tree, Deal$ and Dollar Bills, the company has over 3,600 stores across 48 States in the US and has a market cap of almost $4 billion. Its main rival is Family Dollar Stores (ticker FDO) which operates over 6,500 stores and also has a market cap of about $4 billion. Of the two big players in the discount store market, Dollar Tree has being growing the faster in recent years with its most recent quarterly revenue growth of 14.2% well ahead of Family Dollar’s 8.7% growth. Dollar Tree’s operating margins are also significantly higher at 8.2% compared to 5.7% for Family Dollar. Both companies trade at an almost identical P/E of 15.5 but Dollar Tree’s higher growth rate means its Forward PE is slightly more compelling.

Recessionary Times Open the Door to New Customers

Just like here in Ireland, the US is smack bang in the middle of its own recession and just like here consumers are looking at ways to cut back their spending. So while us Irish shoppers become more familiar with our local Aldi or Lidl, Americans are nipping down to their local Dollar Tree for their groceries. It’s this shift in consumer spending that has seen Dollar Tree’s share price double since January 2008 from $21 a share to last night’s close of just over $42. While most businesses are coming under increased pressure to meet their profit targets companies like Dollar Tree are actually beating analyst’s expectations. When we have major equity sell-off’s such as what we saw last year and earlier this year not all the money moves into cash, a lot goes into what analysts see as safe havens or recession proof stocks, the likes of McDonalds, Wal-Mart and companies in the healthcare space such as Johnson and Johnson. It is this move towards more defensive plays that has seen Dollar Tree experience its huge share price increase at a time when most markets were falling.

Lower Cost Base Helps Increase Profitability

One of the other knock-on impacts of the current economic climate that is working in favour of rapidly expanding companies like Dollar Tree is falling rents. On the one side we have stores (particularly those selling luxury items) closing all over the place as they move into liquidation. But on the other as vacancy rates continue to rise in the US, most recently hitting 9% in Q1 of this year and expected to rise as high as 15% next year, landlords have no option but to drastically cut rents in the hope of finding new tenants. This plays into the hands of strong retail chains such as Family Dollar and Dollar Tree who have the cash to finance expansion. Not only are they benefiting from lower rents but they are also in a position to take up new store rentals in better locations to what they could have afforded in the past. Reports suggest that dollar chains are now negotiating rental agreements at prices in the $2-$5 a square foot range compared with paying over $10 a square foot when times were good.

Stock Is Range Bound for Last 3 Months

So now to the Dollar Tree chart, the real reason why I wanted to talk about this stock this week. Early in the year the chart was choppy, with the share price falling almost 25% at over a few days in early February. Following that fall, the stock recovered steadily to make its way back to the $43 mark by early April. But it is the price action since then that I want to focus on. Since then the share has traded in a range from approx $41 on the low side to $45 on the high side (with the odd exception on the high side along the way). This has offered traders some excellent trading opportunities, with traders going long anywhere between $41.50 and $42.00 and then quickly changing their disposition to go short as soon as the stock reaches $45 again.

What is even more significant is the strong support developing on the low end of this range. As you will see from the chart below on no less than 4 occasions over the last few months DLTR has bounced off the $41.20 mark (4116, 4116, 4120 and 4120 to be exact). This has turned out to be a level where on each pull-back in the stock the buyers come in again. What is great about this type of setup is that it allows you to easily frame your trade without having to put too much thought into it. Wait for the stock to fall towards $41.20 and as soon as you see a reversal in the price jump in to go long. Because you know where your support level is you can use a very tight stop on your trade, you need to give a little room for error (it won’t always be as well behaved as it has being to-date) but you can still deploy a stop lets say just below 4100. If the stock does break below the current support level well then you don’t want to be involved any longer. Or if you are you want to be short if anything!

Dollar Tree Chart - Click to Enlarge

I love trades like this, I know it won’t last forever and sooner or later the stock is going to make up it’s mind and make a more decisive move one way or the other, but in the mean time I can go long again at around 4140 or there abouts for a couple of euro per tick and when the stock moves back to 4400-4500 I take my profits and potentially look for a shorting opportunity.

Until next time,
Happy Trading,
SpreadTrader.ie  : -)

Hi everyone,

A short post today which takes a look at the three key US Indices – the DOW, S&P 500 and the Nasdaq. In particular I wanted to highlight some key levels that the DOW and S&P are approaching. I’ll also touch on the Nasdaq which has gone off on a bit of a run on it’s own recently.

DOW and S&P Threatening Positive Territory for the Year

First up we have the DOW which is edging ever closer to moving into positive territory for the year. It’s a sign of the times when we are almost half way through the year before we reach the point where one of the World’s leading Indices is about to move into the green for the first time since the first week of January! But that’s where we are at with the DOW, if you look at the chart below you will see that it peaked at just over 9,000 on January 6th and then preceded to plummet steadily week in week out until it hit it’s lows of 6,400 in early March. Since then we have seen a very impressive recovery with the DOW rising over 35% to bring us to it’s current levels at approx 8,750. It will still needs to rise another couple of percent to break through the 9,000 mark again and if we look at the chart we can see how over the last week or so it’s trading range has being tightening. Will it have the legs to continue it’s upward move to 9,000? And more importantly, if it gets there (as is looking likely), will it have the momentum to break through and hold above this key level of resistance?

DOW - Click to Enlarge

Next up if we take a look at the S&P 500 chart for this year we see an almost identical picture. January 6th saw the S&P peak at 943. Lows were hit on March 6th at 667. And so as not to be out done by the DOW it too has risen strongly over the last 3 months, by over 40%, to now stand at 940 and once again within striking distance of positive territory for the year. Interestingly the S&P did go positive last Friday when it hit an intra-day high of 957. However there wasn’t enough momentum behind this move to new highs for the year and ultimately the S&P closed flat at 940.

S&P 500 - Click to Enlarge

The next week or so is going to be key for both these markets. Unless we get some big news to drive the markets onwards (and I’m not aware of any right now) I think the DOW is likely to be met with some selling and profit taking at around the 9,000 mark, so those on the long side should be cautious and keep their stops tight. Longer term the market does appear to want to go higher with the US financials all happy out again and eager to give back their TARP money as fast as they can and “green shoots” appearing all over President Obama’s speeches. If the 9K hurdle can be breached and the market holds steady above if for a few days well then like all things a new target will be found – and there is none better than the DOW back above 10,000… The S&P looks to be a bit stronger right now and the more likely of the these two to get properly into positive territory for the year. It too has a major target in it’s sights with the 1,000 mark not too far off at all now.

And the Gold Star goes to the Nasdaq

Unlike it’s two big brothers, the Nasdaq has decided to go off on a bit of a run of it’s own over the last 2 months. It was first to break into positive territory for the year back on April 2nd and since then has rallied a further 15% and now stands at the 1,500 mark. Clearly the “smart money” believes that tech is good once again. The recent Nasdaq rally has being lead by stunning rises in tech giants such as Apple, Google, Microsoft, IBM, Cisco and Research In Motion to name a few, all of which are up over 30% in recent months.

Nasdaq - Click to Enlarge

Can the Nasdaq sustain a rally that has seen it rise by almost 50% since it’s early March lows? I think it’s likely to slow down a bit to draw breathe before the next set of quarterly results from the major tech companies, at which point the market will decide if the recent rises were justified and if in fact they have further to go.

Until next time,
Happy Trading :-),
SpreadTrader.ie

Hi everyone,

Staying at home for our “Chart of the Week” post up this week is good ole Ryanair, the airline we all love to hate! It’s amazing how one company can frustrate so many people just at the mere mention of it’s name, how within seconds it can lead to story after story of different experiences  relayed covering everything from cancelled flights to excessive baggage fees to online charges for paying with your laser card! But that’s Ryanair for you, in many ways that is what Michael O’Leary has spent the last 15 plus years at the helm building up and that’s the image he wants us to have, but more of that later. Ryanair announced their annual results on Tuesday of this week so I have decided now is probably as good a time as any to take a closer look at what Europe’s Largest Airline has to offer.

The Man Behind The Airline

So just like you can’t mention Manchester United without talking about Alex Ferguson or American politics without Barrack Obama’s name cropping up, it’s very hard to have a conversation about Ryanair without Mickey

Michael O'Leary

O’Leary’s name making an appearance. Few companies have a CEO whose reputation is larger than that of the company itself, perhaps Steve Jobs at Apple or Bill Gates back in the day when he was the main man at Microsoft. We all know that O’Leary courts controversy, from his continuous swipes at government policy to the controversial ad campaigns and publicity stunts he gets involved in to his regular use of foul language. But I think deep down most people sort of have to respect O’Leary for who he is and what he has achieved. He has taken what was effectively a loss making regional airline and turned it into one of the most famous brands globally. Ryanair is now the largest airline in Europe in terms of passenger numbers with over 58m people carried last year. We may not always agree with everything he says but from an ability to run (and grow) a business and manage to keep that business continuously in the public spotlight then there are few better than O’Leary. Only last Tuesday morning I saw him interviewed on the BBC’s Breakfast show following their results announcement and he was brilliant in how he controlled the interview. He got the message across on how Ryanair would continue to drive down average fares, glossed over the fact that they were ditching check-in desks and you’d now have to pay for the pleasure of checking in online and of course got in his bit of controversy in saying that while they would like to charge fat people more it probably wasn’t practical but they would be seriously looking at charging passengers to use the toilet! The interview was probably no more than 6 or 7 minutes long but that’s all O’Leary needs to get his message across. The big question of course is what do Ryanair do when O’Leary finally decides to call it a day and hand the reins over to some other poor sod….just like whoever takes over at United when Ferguson eventually decides he has won enough trophies, whoever takes over at Ryanair will have big boots to fill!

Driving Lower Fares Means Driving Down Costs

We all know Ryanair is all about driving down costs right across the airline. One of the main reasons for getting rid of all it’s check-in desks from later this year is to further reduce it’s cost base. Analysts estimate that no more check-in desks could save the airline as much as €30m a year. Of course the additional €5 online check-in charge won’t do it’s revenues any harm either, potentially increasing them by up to €300 mil… Fuel continues to be Ryanair’s biggest cost and after a couple of years of poor calls when not hedging when prices were low in 2007 to then hedging at very high prices last year just before oil crashed back down to earth, it looks like Ryanair has got it right this time round and is now 90% hedged on it’s fuel requirements for Q1-3 this year at pretty good prices. Given the current environment that all companies are operating in one of the amazing things on Ryanair is that it has no intention of slowing down it’s expansion plans. And in fact this is not the first time that Ryanair has used a tough market for the airline industry to it’s advantage in recently completing the purchase of 45 new plans for delivery later this year and throughout 2010 at very competitive prices. Ryanair did something similar after 911 in 2001 when it was effectively the only airline in the market looking to purchase new aircraft.

Low costs and efficiency is what Ryanair is all about and will continue to be about. Fast turn-around times ensure it’s planes spend more hours in the air than any other airline, no pockets on the back of it’s seats mean the planes can be cleaned faster, deals with regional airlines for the lowest possible landing charges, new wing design to ensure maximum fuel efficiency (and not to be cynical here but it’s not out of concern for the environment…), the list goes on and on.

Ancillary Revenues Continue to Point the Way

Reducing costs is obviously massively important for Ryanair but you can only reduce them so far and ultimately it is new revenue streams that Ryanair need if it is to continue to grow profits. It started with the baggage fees, soon followed by the check-in fees, then there was paying for priority boarding, the selling of lottery tickets, the Ryanair credit card, etc, etc… and most recently Mickey has introduced onboard mobile phone service on 40 of his planes. And it won’t stop there, already there is plenty of talk of what might be the next charge to be added to Ryanair’s ancillary revenue streams, will it be the obesity charge or the “pay to pee” charge that have being getting plenty of press coverage recently?? Whatever it is Ryanair have come to the conclusion that ancillary revenues along with increased passenger numbers and cutting costs wherever possible is the way to go. It’s easy to charge a Euro or whatever for a flight when all the extra bits and pieces are going to bring it up to 20 or 30 quid and load factors of average 80% or there abouts ensure that’s enough to make each flight profitable.

In it’s most recent results ancillary revenues were up 23% year on year to almost €600m and now account for 20% of Ryanair’s total revenues. One thing I spotted recently which I thought was a great idea was that Ryanair were running a competition a couple of months back for people to suggest their “best new charge” that Ryanair could introduce, with the winner for the best idea getting €1,000. Brilliant, aside from the usual free publicity that this brought they also get hundreds if not thousands of ideas for potential new revenue streams. Now many may be rubbish and many more Ryanair may already have thought of themselves and either have already planned to introduce or discarded for whatever reasons but there has to be at least a few great ideas that will come in that Michael and his buddies hadn’t thought of yet. And the total cost to our low fares airline, a thousand quid, shouldn’t take too long for that investment to cover itself!

What’s to Become of Aer Lingus?

The main reason Ryanair announced it’s first ever annual loss this week was due to the right down of it’s stake in Aer Lingus, a €222.5 million charge. If this was excluded Ryanair actually made a profit of €50 mil. After two failed takeover attempts over the last few years, the first at €2.80 a share and the second last year at €1.40 a share, the question is what will Ryanair decide to do with it’s Aer Lingus stake in the end. It can’t make another takeover attempt for about 18 months or so but don’t be surprised if it still has it’s 30% stake around that time if it does come back for a 3rd bite, and looking at how Aer Lingus are burning through their cash pile these days expect the bid to be under a €1 next time round. Whether we get to a 3rd Ryanair bid or not I’m not sure, something will have to happen to our national carrier and perhaps a merger or takeover from the likes of a BA or Air France might be a more likely outcome. At least that way the airline can survive in some guise without the Aer Lingus management and the Government having to accept O’Leary’s overtures.

The Challenges that Lie Ahead

Obviously it’s not all up, up and away for Ryanair, it is operating in one of the toughest and most competitive industries in the world and there are plenty of headwinds facing it in the months and years ahead. Oil prices, which these days account for 45% of Ryanair’s total operating costs, look set to continue to rise. Competition is fierce as airlines reduce fares in a desperate effort to increase load factors and stave off the threat of going into liquidation. While we may be coming towards the end of a global recession consumers are certainly still cutting back on the number of trips they are making and businesses in particular are looking for cheaper alternatives to flying their staff all over the world for training, meetings, etc with many having a ban on all non-essential travel.

Jumpy Chart Not for the Faint-hearted

So what does Ryanair’s chart tell us. Well first off, it’s certainly not one for the faint hearted with several big rises and falls over the past 12 months (click on the chart below to see larger version). That said looking at a shorter 3 month timeframe there stock has being working it’s way upwards, going from around €2.80 in March to close to €3.80 today. A 35% increase is not to be sneezed at. However it’s worth noting that the rise throughout April and May came on very low volume in comparison to what was the norm over the previous 10 months, potentially highlighting that there may not be a lot of weight behind this recent 35% rise.

But where might it go from here. Well personally Ryanair wouldn’t be the kind of share I’d like to trade, it’s just an industry and a stock that’s a bit too all over the place for me. Trends and support levels can often count for very little and leaving you scratching your head when you get stopped out of a trade from nowhere. For me there are just too many other “better behaved” stocks out there to be trading these days. But plenty of people do trade it and probably do very well on it. If I was going to trade Ryanair I’d be looking at how things have panned out since Tuesday’s results. At the open on Tuesday the markets initial reaction was to sell off on the news of Ryanair’s first ever loss, with the stock down over 7% within minutes at around €3.40 a share. But since then it has recovered nicely as the market has had more time to digest the results and as mentioned earlier is now at a 52 week high of €3.72 after breaking through resistance at €3.60 earlier in the week. Obviously the market has come around to the thinking that despite last years loss Ryanair is still best of breed in the airline industry and from here should continue to take market share from it’s rivals, increase passenger numbers and of course grow it’s ancillary revenues. While higher oil prices may hold the share price back somewhat I never believe in fighting the trend, so a long position would seem the best approach with a tight stop just below the low hit following Tuesday’s results announcement.

Ryanair’s Chart is a Choppy One (Click to Enlarge)

Final thoughts on Ryanair

So that brings another “Chart of the Week” to an end. As mentioned the Airline industry is one of the more high risk sectors to be trading but assuming at least a couple of airlines come out of the current recession in-tact and assuming people will continue to fly, then expect Ryanair to stay in the limelight and continue to expand it’s reach as Europe’s largest airline.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

It’s “Chart of the Week” time again and this week I thought I’d take a look

Bulmers Irish Cider

at a stock a bit closer to home, this is an Irish blog after all! So after the fab weather we had this weekend I’ve decided to that a look at drinks group C&C. Back in the day C&C used to have a lot more strings to it’s bow when it also owned premium brands such as Tayto, Ballygowan and Club Orange among others. However a shift in corporate strategy in 2006 saw the company sell off a number of it’s brands to pay down the company’s debt and allow it to focus it’s resources on the Long Alcoholic Drinks (LAD) market instead, and one drink in particular, cider. Tayto was sold off in the summer of 2006 to Largo for over €60 million. That sale was followed up in the summer of 2007 by the sale of it’s soft drinks business, which included the famous bottled water brand Ballygowan, to Britvic for a whopping €250 mil, and to think back to the days when you wouldn’t dream of paying for a bottle of water!

What’s in a name?

Today C&C is left with a product stable that includes Tullamore Dew, Carolans Irish Cream and Ritz but it is it’s cider business that forms the key to the company’s performance and value. Growing the Bulmers brand in Ireland and the Magners brand in the UK and the rest of the world are now C&C’s priority as they contribute the vast majority of the groups profits. Recent results for FY09 show that the C&C had sales of almost €515m of which cider sales contributed €387m, or approx 75% of the group’s turnover. What has baffled a lot of Irish people over the years is how come it’s Bulmers in Ireland but Magners in the North and in the UK? Well a company called HP Bulmer, or better known as Bulmers cider already existed in the UK, since 1887 actually, and they owned the rights to the Bulmers brand in the UK. In 2003 the company was bought by drinks giant Scottish and Newcastle for £278m who were subsequently taken over by Heineken and Carlsberg in 2008 as part of a wave of consolidation in the drinks industry in recent years. This hasn’t worked out too well for C&C who, despite doing a great job building up the Magners brand in the UK in recent years, has seen it’s market share come under stiff competition from Bulmers who have pumped a lot of money into branding their cider, particularly at the “served over ice” market. So all this results in C&C having what must be a frustration and obvious extra expense where it has to brand it’s main product under two different names. Will we see a consolidation of the brands at some stage, similar to Jif becoming Cif and Bounty becoming Plenty, where C&C bite the apple (sorry another pun that just couldn’t be resisted!) and decide to do away with the Bulmers brand in Ireland and just go with Magners globally? Although it would no doubt be met with resistance and some negative publicity from it’s loyal customer base in Ireland it is probably not that big a step for them to make at this stage given that the Magners brand is fairly well know in Ireland at this stage anyway…

New Product Launch to Drive Profits Higher?

So what else is going on in C&C these days? Well unless you don’t have a TV you cannot have failed to miss the recent launch of Bulmers Pear Cider. The company is obviously pumping a lot of money into the launch of it’s new cider brand in Ireland and the UK but should it take off then it can expect to see it add substantially to the group’s bottom line. I have to say that I think the campaign is class, I love the way they are taking the piss out of themselves for being so slow in coming up with this initiative, with the tv ads around the lads trying to come to terms with dealing with pears instead of apples particularly humorous. With the launch of Bulmers Pear Cider C&C will be hoping to eat into the impressive market share already built up by Kopparberg over the last couple of years. I haven’t had a chance to do a taste test between the two brands yet, anyone any thoughts on how this new Bulmers Pear Cider is going down??

Promised Good Summer will be Key for C&C

Regardless of the success of it’s Pear cider one factor which will have a massive impact on C&C’s profits this year is whether or not we get a good summer. Now I am no long-term weather forecaster but by all accounts in the media we are actually supposed to have one of our better summers this year, something about the rise in ocean temperature in the Pacific, the fact that we got a harsher winter and that March and April have been significantly wetter than normal! Your guess is as a good as mine but so far so good…Anyway, why do these rising temperatures matter so much to C&C? Well it’s being proven over the years that warmer, sunnier summers have seen an increase in the amount of outdoor drinking done and in particular an increase in people’s preference for a nice pint bottle of Bulmers over ice…ah yeah, in fairness I am not a cider drinker myself, give me a pint of Guinness any day, but there is something very refreshing about Bulmers over ice on a sunny Saturday afternoon when you are out watching the rugby, the gaa or whatever. Interestingly, when announcing their recent results C&C have said that sales of Bulmers in Ireland are up 10% in the first couple of months of the year, due to the timing of Easter, good weather and the rugby success achieved by Ireland and Leinster. So the upcoming Loins tour should only serve to add to that impressive start to the year.

Director Purchases A Positive Sign

One thing a lot of analysts and investors look for as an indicator of a company’s future performance is whether or not company directors are buying or selling shares in the company or if they are exercising share options. Only last week C&C non-executive director Liam Fitzgerald spent almost   €50,000 buying 21,900 shares in C&C at €2.28 per share. So while we can’t read too much into the purchase it’s always nice to see that some of the key players in a company putting their money where their mouth is so to speak.

So with C&C announcing adjusted EPS for FY09 of 25.5 cents per share recently that leaves it  trading on a PE of about 10 which is comparable with other larger players in the industry. The company also announced a final dividend of 3 cents per share bringing it’s full year dividend to 9 cents, representing a yield of around 4%. Overall these results were in line with expectations and importantly full year guidance for the coming year was maintained with profits expected to come in in between €77-88m.

C&C Chart Also Paints a Pretty Picture

So that brings us to C&C’s chart and what does that tell us about where the company’s share price might go in the coming months? Well a quick look shows us that since bottoming in late January at a around the 75 cent a share mark C&C has been in a very nice upward slope indeed. The last four months has seen the share price triple to now stand at €2.25 a share. That’s a massive run-up in a very short period of time but still sees the share price at less than half what it peaked at last summer when the share price traded at over €5.50 during the summer months.

C&C - Click to Enlarge

Talking a closer look at the chart the 20 day moving average seems to be acting as support in recent months, with the share price steading climbing just above this level. Some resistance may be hit at the €3 mark but after that a run-up to €4 is not inconceivable. Any trades to the long side should have a stop just below the 20 day moving average. Ideally any pullback to closer to the 20 day moving average would seem a good entry point.

Final thoughts on C&C’s Prospects

Overall C&C, like a number of Irish shares, is making a bit of a recovery recently. Given it’s more recent slimmed down focus on a smaller number of brands, and on Bulmers and Magners in particular, it has certainly become a more seasonal stock. Continued improvement in the share price will largely depend on whether we do get this much talked about “Good Summer” and on how successful the recent launch of it’s Pear Cider range turns out to be.

Happy Trading :-),
SpreadTrader.ie