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,

The Sage of Omaha

So I spend quite a bit of time on this blog talking about technical indicators that we should be aware of as Traders which I believe are very important when it comes to spread trading, particularly for short to medium term traders. But what about the Fundamentals of a company? Certainly they should not be ignored either. I’ve always tried to go down the route of first using the fundamentals of a company to help identify companies I might want to trade and then move onto the technicals to help identify specific entry and exit points. Fundamentals are even more important for longer term investors and there is arguably no greater long term investor than Warren Buffett, the Sage of Omaha.

Like most people interested in investing, stocks, companies, business in general, Buffett has a been a bit of a hero of mine over the years. From his amazing approach to identifying companies to invest in to his excellent Berkshire Hathaway Annual Shareholders Letter to his brilliant quotes, he has certainly made the world of business and investing much more interesting for me. Buffett is a true fundamentals investor, he believes in investing in great companies for the long term. And his investment strategy has certainly paid off with his success unparalled in the modern day business world. The share price of Berkshire Hathaway (the company which effectively manages Buffett’s investments) has risen from just over $20 a share back in 1967 to a high of over $141,000 a share in December 2007. It has dropped back recently like all investments but still sits at over $91,000 a share today. To consistently achieve an annualized return of over 20% a year for over 40 years is pretty incredible! If I can achieve anything like that in my spread trading career I’ll be a happy little spread trader indeed!

But back to the focus of this post, there are are litterally hundreds upon hundreds of Warren Buffett quotes out there, full of great advice, wit and wisdom. Everyone has their favourites and today I thought I’d share my Top 20 Warren Buffett Quotes with you. So starting at No. 20 and working up, here we go:

20.  The only time to buy these is on a day with no “y” in it.
19.  Time is the friend of the wonderful company, the enemy of the mediocre.
18.  The investor of today does not profit from yesterday’s growth.
17.  If past history was all there was to the game, the richest people would be librarians.
16.  You only have to do a few things right in your life so long as you don’t do too many things wrong.
15.  I don’t look to jump over 7-foot bars, I look around for 1-foot bars that I can step over.
14.  Investors making purchases in an overheated market need to recognise that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
13.  It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
12.  Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simple jerks with a billion dollars.
11.  Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
10.  Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive then energy devoted to patching leaks.
9.  I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abondonng my hope to give new meaning to the phrase “thinking outside the box”.
8.  There seems to be some perverse human characteristic that likes to make easy things difficult.
7.  Only when the tide goes out do you discover who’s been swimming naked.
6.  Risk comes from not knowing what you are doing.
5.  If a business does well, the stock eventually follows.
4.  A public opinion poll is no substitute for thought.
3.  Price is what you pay. Value is what you get.
2.  It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you will do things differently.
1.  We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

So there you go, that’s my 20 favourite Buffett quotes. If you have any others which you’d like to share use the Comments box below, that’s what it’s there for after all!

Until next week, have a great bank hol weekend!
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

Hi everyone,

It’s “Chart of the Week” time again and this week, following the announcement of the Stress Test results in the US last Friday I thought I’d take a look at one of the major US banking stocks which were under review as part of the Stress Tests. After take a look at the various candidates, most notably Citigroup, Bank of America, Wells Fargo and Goldman Sachs in the end I decided to take a more detailed look at Morgan Stanley.

Morgan Stanley Comes out of Tarp and Stress Tests Relatively Unscathed

As always we’ll start with the fundamentals, so where does Morgan Stanley now stand following all the turmoil in the financial markets we have had over the last 12 months? Well, following the collapse of Lehman Brothers, the acquisition of Bear Stearns by JP Morgan and the acquisition of Merill Lynch by Bank of America, probably not too bad a position…Along with Goldman Sachs, Morgan Stanley is now one of two major independent US investment banks left in the game. So assuming the recent financial crisis eventually blows over and we find ourselves back in a  more normal state of business (albeit a much more conservative and more tightly governed one) the likes of Goldman and Morgan Stanley should be able to reap the benefits of competiting for new business in a less crowded marketplace. As one of the world’s largest investment banks the company operates in three main segments, Institutional Securities, Global Wealth Management and Asset Management.

Although it’s worth clarifying that technically speaking both Morgan Stanley and Goldman Sachs are, as of last September, now bank holding companies. The decision by both companies to change their status came at the height of the banking crisis and following what were no doubt intense discussions with the US Federal reserve. What the decision did mean at the time though was that the US government was not going to allow either company to fail and has since allowed them to take part in the now famous TARP (Troubled Assets Relief Program) scheme. Under TARP Morgan Stanley received a relatively modest $10 billion in capital support to help shore up it’s balance sheet at the height of the crisis. Furthermore it is eager to pay back this $10 billion in funding “as soon as possible”. Only last Friday the company announced that it had successfully sold $4 billion in stock at $24 a share (an 11% discount to the previous day’s closing price) and had raised another $4 billion in debt (split evenly between 5 and 10 yr notes). Both the stock and debt sale were over subscribed and were mainly taken up by institutional investors – all very positive indeed. As well as paying off its TARP loans no doubt a portion of this money will be used to cover the $1.8 billion the US government said it needed to raise in fresh capital as part of the Banking Stress Test results announced last week.

Quarterly Results Fail To Impress

In it’s most recent set of quarterly results announced at the end of April Morgan Stanley reported a $578 million loss and significantly cut its dividend from 27 cents a share to 5 cents a share. Unlike most of its peers in the US banking sector the results were much worse than the market was expecting. Wall Street had penciled in a loss of 9 cent a share, so needless to say they were less than impressed with Morgan Stanley’s 57 cent a share loss. Net revenues of $3 billion were 62% down on last year. Q1 last year saw Morgan Stanley earn profits of $1.3 billion or $1.26 per share. This resulted in Morgan Stanley shares falling 16% over the following 7 days. Interestingly though, the shares remained above the key $20 mark and since reaching a low of $20.70 on April 29th have risen a very impressive 35% in the last two weeks to Friday’s close of almost $28.

Weirdly one of the main reasons for Morgan Stanley’s loss this quarter was due to a dramatic improvement in its credit rating, thus allowing it to borrow money at tighter spreads then it was previously able to. This is a very positive development for the company but also one which has a short-term negative impact on their revenues, mainly due to the way such debt is reported from an accounting perspective. Because the broader market now has more confidence in Morgan Stanley  than it did say 6 months ago, Morgan Stanley would have to pay more to buy back its debt now than it would have had to at the end of last year. Although a positive development from the company’s perspective, US accounting rules say this change must be recorded as a loss!

Management Adopt a More Conservative Approach

There is no doubt that Morgan Stanley is a company in transition. Since becoming a bank holding company just over 6 months ago it is clear that it is now well on it’s way to becoming a much more conservative (if a tad boring) bank. During this time it has begun the process of reducing risks and strengthening it’s balance sheet by reducing it’s dependency on investment banking and building up the retail side of it’s business. A recent deal with Citigroup will see it double the number of retail brokerage outlets worldwide to 1,000. The deal with Citigroup basically sees Morgan Stanley control 51% of Citi’s brokerage arm Smith Barney. Another example of Morgan Stanley’s more prudent approach to “post financial meltdown” life is that over a quarter of it’s balance sheet was kept in cash last quarter, which while leaving it in a very strong liquidity position, does have a negative impact on it’s earnings. It’s main rival Goldman on the other hand has decided to continue running it’s business as it always has, taking on similar levels of risk with it’s investments and showing better returns in it’s most recent quarterly results. That said there are still areas of Morgan Stanley’s business that are doing very well, for example in the last quarter they completed more Merger and Acquisition deals than any other investment bank during this period.

From a valuation perspective Morgan Stanley is not exactly cheap trading at a P/E of almost 20, but what is probably of more significance is that it is trading at a Forward P/E just over 10. This keeps it in line with it’s main rival Goldman who is trading at a Forward of P/E of 11. Morgan Stanley’s current market cap is $31 billion and they employ almost 47,000 employees worldwide.

Clear Upward Channel Points The Way

So after looking at the fundamentals and getting a good understanding of what Morgan Stanley does and where it sits in the world of investment banking lets take a look at it’s chart and see what that tells us about what the share price might do over the coming months. Well first up, not unlike IBM last week,  we can see that since last October / November the stock is in a clear uptrend. We can see from the chart below (click to enlarge) that the stock has being trading in a channel, defined a by a series of higher highs and higher lows.

Chart 1 - Morgan Stanley

The concept of “higher highs and higher lows” is a commonly used technical trading term which I wanted to introduce this week, and one of the main reasons why I decided to pick Morgan Stanley for this week’s “Chart of the Week” post over the various other US banking stocks I looked at. Stocks whose charts are showing a series of higher highs (defined by the price reaching a new high each time it trades up - see red lines marked on chart) and higher lows (defined by the price staying above the previous low it made the last time it traded downwards - see blue lines marked on chart) are by default going to be in an uptrend. What technical traders like about these kind of trades is that:

• They can time their entry point using the channel, be that buying when the stock hits the bottom of the channel or shorting when it’s near the top. Note: Shorting stocks in an uptrend like this, even if they are in a trading channel and due a pullback, is risky as the over all direction of the stock is upwards.
• They can easily define their risk by putting their stop just below the previous higher low. If the stock falls below the previous higher low it has effectively broken out of the upward trend, at least temporarily and from a trading perspective you no longer want to be long the stock.
• Similar to defining their risk, they can also identify logical profit taking levels when the stock moves back up to the top of the range and use these levels to tighten up their stops.

Looking at some of the other technicals for the stock, it has a rising 20 and 50 day moving average and recently broke through it’s 200 day moving average. This 200 day moving average (approx 2330) may well act as support going forward. In it’s fall from over $90 a share in June 2007 the 200 day moving average acted as resistance on a number of occasions so if this breakout can hold it could turn out to be quite significant. Any pullback to the 200 day moving average holding would also see another “higher low” be put in place. Any long trades should have a stop just below this area. On the upward side, the next big area for the stock to clear would appear to be $30. A close above this point would see a new “higher high” and would keep the bullish upward trend intact.

Final Take-away on Morgan Stanley

Morgan Stanley has had a great run-up since hitting the $9 mark last November, and is now up over 200% in 6 months. It’s a huge rise but not out of line with the similar price increases seen in many of the US financial stocks over this period. Whether it can keep this upward trend going for much longer I am not so sure. As the market regains it’s appetite for risk will Morgan Stanley’s more conservative approach to its business be what the the market is looking for? Or will they be more attracted to the potentially higher earning power of a Goldman instead?

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

Something I wanted to try introduce as part of my regular blog posts is a “Chart of the Week” segment. Basically this would be a post which would (no prizes for guessing this one!) focus on a particular stock. I will attempt to analyse the stock in question from both a fundamental and technical perspective and give my overall take on where I think it might go from here. So when best to start our “Chart of the Week” than today. I had a bunch of different stocks which I was thinking of selecting as our first chart to analyse such as Apple (because it’s one of my favourite stocks to trade these days), GlaxoSmithKline because of the recent Swine flu breakout and a number of others. Anyway we will come back to some of the others in the weeks ahead but for today I decided to go with “Big Blue”, yep IBM. Why you ask? Well two reasons really, one, I just opened a long trade on IBM myself yesterday (at exactly $100 for those interested) and two, IBM’s chart has a couple of nice and relatively straightforward technical analysis techniques going on right now which I think are worth discussing.

So lets start with some of the key fundamentals on IBM. “Big Blue” is the world’s largest technology services company. Last year it had revenues of $103 Billion. Just how big is IBM, well they currently employ just over 400,000 people worldwide! Puts little old SpreadTrader.ie here in his place for sure!

Technology Giant has Excellent Fundamentals

Early last week IBM announced their Q1 results for 2009 and while revenues fell 11% over Q1 2008 to just over $21 billion, their Earnings Per Share (EPS) of $1.70 still managed to beat the $1.66 per share the Wall Street Analysts were expecting. Profit for the quarter was $2.3 billion which will add to the company’s ever increasing cash pile which now stands at over $12 billion. While in some respects the Q1 results disappointed a bit the fact that the company reiterated it’s full year guidance of $9.20 per share appeared to keep the market happy enough. The stock trades at a P/E ratio of 11 times earnings which is not overly demanding for a tech stock.

These days IBM is far from just a hardware player, in-fact it may surprise some to know that the biggest component of IBM’s business is now services (Q1 revenues of $13.2 billion), followed by software ($4.5 billion in Q1) and the hardware side of the business coming in third with revenues of $3.2 billion in Q1. IBM has positioned itself as a full IT solution provider and last week announced it’s plans to start offering cloud computing services later this year, an offering that has proved very lucrative for early adopters such as Amazon and Salesforce.com and one I’d expect to further increase IBM’s bottom line going forward.

Only last week IBM missed out to Oracle on the purchase of Sun Microsystems which it now appears to be putting a brave face on…saying that Oracle and Sun were always closely aligned so it’s no big deal that Oracle now owns them. And given that Sun have just announced a Q1 loss of $200 million perhaps IBM are right!

Other news which should serve to underpin the company’s share price from a fundamental perspective is todays announcement that it is increasing it’s quarterly dividend by 10% to 55 cent per share and is also adding an extra $3 billion to its share buyback program.

Upward Trend Paints Impressive Technical Picture

Right so enough of the fundamentals, lets take a look at the technicals. Well we can’t really look at the technicals without having a chart to look at, now can we. Seeing as this is our first Chart of the Week I decided I’d spoil you with two charts!

The first chart below (click on the image to see bigger version) looks at couple of simple technicals which are often used by traders. First we can see that since it’s low last November IBM is clearly in an uptrend. And we all know how we should trade trends…if you don’t it might be worth having a read of one of my earlier posts on the “10 Golden Rules of Spread Trading”! Secondly if we look at some of the key moving averages we will see that the 20 (orange line on chart) and 50 (pink line on chart) day moving averages are in an uptrend, always a good thing. And we will also notice that the stock has just broken through the 200 day (black line on chart) moving average which currently stands at about 9890 or there abouts. As traders we would hope that the 200 day MA will now act as support for the stock. This was actually one of the key reasons behind me opening a trade on IBM yesterday, I was able to buy at 10000 and put a tight stop in place at 9850 (which I subsequently moved up to my breakeven of 10000 today).

IBM Chart 1

Chart number two looks at an interesting pattern that occurred a couple of months ago, when in mid to late February the stock formed what is referred to by chartists as a double bottom. When double bottoms complete themselves they form a “W” shape which I have highlighted on the chart below. Double bottoms such as this are considered to be bullish, mainly because the stock tested a price level twice but failed to fall through it, thus highlighting this as an area of support or an area where there are plenty of buyers of the stock. When a double bottom like this occurs and the “W” shape completes it can often lead to a stock rising higher on renewed buying pressure, as was the case in this IBM example.

IBM Chart 2

Final Take Away - Upward Trend Should Continue

So overall I’d continue to be bullish on IBM. From a fundamental position I think the company is well diversified to do well in these challenging times and the technicals don’t look too bad either. Any long trades on IBM should be framed around the 200 day moving with a tight stop just below this area. I’d expect the stock to possible hit some resistance at the $104 mark, but a break above this could see it continue to move higher.

Right that’s it from me for my first “Chart of the Week” post. I hope you found it useful. All feedback welcome and if there is any particular stock you’d like me to take a look at in a future “Chart of the Week” post use the Contact Us page to drop me a mail on it.

Happy Trading :-),

SpreadTrader.ie