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Market Wrap

An Apple For Investors

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With no economic reports of note today it was up to Apple to make the headlines. They did it with a bang with the announcement of the iPhone by Steve Jobs at the MacWorld exposition. The announcement had been rumored for many months if not years and it still had an instant impact on Apple's stock price. AAPL soared +$7.10 (+8.3%) on the midday announcement to a new closing high at $92.57.

The iPhone with 4gb of memory will retail for $499 and the 8gb model will sell for $599. This is seen as somewhat expensive but Steve Jobs is not concerned and is targeting sales of 14 million units, 10 million in 2007, and the phone will not even be available until June. The phone combines the features of an iPod, cellphone and 2 megapixel camera. There are no keyboards with those functions being replaced by a massive 3.5 inch touch screen. The operating system is Mac OS X and Cingular will be the mobile network of choice. The ultra thin iPhone has 16 hours of battery life for audio or 5 hours of talk time. It is also Wi-Fi and Bluetooth capable. Because it will also function as a mini Internet device there is email, Internet browsing, etc.

Apple said it has sold 40 million iPods and over two billion songs. While that is extremely significant the future is going to be video according to Jobs. Over the last four months since they started offering video over the iPod they have sold 50 million TV shows and 1.3 million feature films. I cannot conceive watching a feature film on an iPod but with the new Apple TV device those video numbers should rocket higher offering an entirely new burst of continuing post sale profits. Expect those videos to hit the billion mark over the next couple years.

Unfortunately the term iPhone does not belong to Apple but to Cisco. Cisco released an Internet Voip phone three weeks ago under the name iPhone. The name was acquired in 2000 when Cisco bought Infogear Technology Corp. According to Apple they have been in heated negotiations to acquire the name and you can bet Cisco will get more than a pound of flesh out of Apple for the rights. That was a good strategy move by Cisco to announce a phone under the iPhone name only three weeks before Apple's expected announcement. Apple also announced their expected iTV device but that name has been changed to Apple TV. The TV device will allow content to be downloaded by computer, iPod or iPhone and transmitted wirelessly to the Apple TV device for viewing on the customers TV. Apple Computer also announced it was changing its name to Apple Inc to better reflect their expanding business segments.

The other major smart phone makers all fell sharply once the features of the iPhone were released. RIMM fell -7.9%, Palm -5.9%, Motorola -1.8% and Nokia -1.3%.

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The Apple announcement is a game changer for the cell phone market according to Steve Jobs and it was a direction changer for the broader markets. Earnings warnings, falling oil prices and index implosions from numerous emerging markets all contributed to a sharp downdraft this morning. The Dow had slipped to a -54 loss early in the day and Nasdaq -15 before Apple triggered a Nasdaq rebound leading the major indexes back to either positive or only fractionally negative for the day.

Leading the morning drop was a profit warning from Sprint (S) that knocked -2.19 off its stock price. Sprint said income would fall from $12.6-$12.9 billion in 2006 to $11-$11.5 billion in 2007. The company said profits would fall as it spent more money on marketing, handset subsidies and network improvements. Spring also said it would lay off 5,000 employees in 2007. There was a barrage of analyst downgrades following the warning.

Celgene (CELG) fell -2.45 (-4.3%) on triple their average volume to $54.85 after they warned that 2007 revenues would be below prior forecasts. They said earnings per share would only amount to $1 per share compared to analyst's estimates of $1.09. Natus Medical (BABY) also forecast earnings and revenue below analyst estimates.

AES Corp, a global power company listed on the NYSE, saw a sharp drop to $20 after Venezuelan President Hugo Chavez announced he will nationalize the nations power and telecommunications industries. AES owns 86% of Eletricidad de Caracas, the largest privately owned electric utility in Venezuela.

Venezuelan Telecom giant CANTV (NYSE:VNT) fell -27% after Chavez said he would nationalize the company. Verizon is the biggest shareholder in VNT but that does not appear to be reflected in their stock price as yet. Verizon had sold its Latin American interests to Carlos Slim, the worlds 3rd richest man, for $3.7 billion including its 28.5% stake in CANTV. The contract had an "out" clause in the case of a nationalism before the deal closed and it appears Verizon could be significantly at risk.

VNT Chart - Daily

The Venezuelan stock market fell -19% after the nationalism announcement was made as investors ran for the exits in fear their companies would be the next Chavez target. The VZ currency also took a sharp drop with the Bolivar, officially pegged at 2,150 Bolivars to the dollar, was trading at 4,100 to the dollar. Chavez may have finally gone too far in his nationalism efforts with outside investment in almost any sector now nearly impossible. The country will eventually stagnate and begin to shrink as systems in place begin to fail for lack of maintenance and lack of upgrades. The plunge in the Caracas market took other Latin American markets down with it as investors fled anything related to Venezuela.

The global sell off in emerging markets and commodities is continuing and analysts are still confused as to why. Since economies don't implode conveniently when new tax years begin I still believe the answer is obvious. This is simply profit taking on some very healthy 2006 gains. Since most emerging markets are commodity related this profit taking is carried over into commodities. Copper is the one commodity where an excess of supply is actually impacting the price. That would also apply to oil with the price dropping to an 18 month low of $53.88 overnight. There were multiple reasons given including the approaching futures expiration, contract rotation in a major commodities index basket and additional reporting that 2006 was the warmest year since record keeping began 112 years ago. The National Oceanic and Atmospheric Administration (NOAA) said December qualified as the 3rd warmest on record. No states were colder than their averages and five states had their warmest December on record. For all of 2006 the average temperature was +2.2 degrees above the averages recorded from 1901 through 2000. NOAA began keeping records in 1895. This record warmth has driven the use of heating oil and natural gas to multiyear lows allowing supplies to rise to multiyear highs. This would not be a problem if OPEC had really cut production back in November as promised. In reality people paid to track OPEC shipments said November and December shipments were only -100,000 bpd below pre November levels. This is only a fraction of the stated -1.2 mbpd cut. Another company, tanker tracker Petrologistics, now says production actually increased in December by +200,000 bpd. Had they actually cut as promised there would be nearly 83 million bbls less oil in inventory today and this price drop would never have occurred.

OPEC members have begun complaining internally about the lack of follow through by most member nations to the planned cuts. The president of OPEC called each member nation already this week outlining the urgent need to follow through with the planned cuts. They have to keep prices high to fund the many projects they have to increase output over the next several years. Kuwait is planning to spend $2 billion a year to rehabilitate facilities and boost output to 4 mbpd by 2020. This is only a drop in the bucket to the $100 billion currently being spent by other OPEC countries for the same reasons. They cannot continue to fund the improvements if oil prices continue to slide. For this reason I believe the production cuts will eventually be made. They are scheduled to cut another 500,000 bpd on Feb 1st if oil prices are still under $60.

Crude Oil Chart - Weekly

Crude oil has strong support at $55 dating back to March-2005 and that would be followed by even stronger support at $50. The IEA, which typically errs on the optimistic side, said prices would return to an average of $65 for all of 2007 as eventual OPEC production cuts were carried out. I would have expected the IEA to be predicting $40 rather than $65 so this is a surprising prediction but one I agree with. Goldman Sachs cut its forecast for 2007 by -3.50 but they are still higher at $69 per bbl. 34 analysts polled by Reuters averaged $63.48 as an average oil price prediction for all of 2007. Accuweather also changed their prediction to one for colder weather across the US over the next month as a mass of artic air begins to descend and cover most of the country with very low temperatures. That cold front will probably be too late to help with oil prices and OPEC's fate is entirely in their own hands.

The long-term outlook remains unchanged. ConocoPhillips warned last week that flat production and shrinking margins would hurt Q4 earnings. They are also taking a $90 million after tax impairment charge for declining well performance. That dang depletion virus is still spreading. Today BP reported that declining production, weather delays and unexpected events would impact Q4 performance. Production in Q4 fell to 3.82 mbpd compared to 4.022 mbpd in Q4-2005. The majors continue to be self-liquidating companies because they cannot find and produce as much oil as they did in the past. This will eventually make the OPEC puppet show less important but these warnings are lost on the general public. Most consumers expect oil to continue to flow forever as long as oil companies continue throwing more money at the discovery process. Unfortunately the major oils are electing to buy back shares rather than spend additional sums on exploration. There are simply very few places left to drill and most of them are in hostile hands or not commercially viable. Nothing in the long-term outlook has changed despite the temporary dip to $55.

After the bell today Alcoa was the first Dow component to release earnings for Q4. Their 74-cent EPS easily beat estimates for 65 cents and represented a +60% jump over Q4-2005. CEO Alain Belda said their current growth strategy could boost returns by +15 to +20 cents in 2007. AA jumped +6% to just under $30 in after hours trading.

First Call said today that there have been 86 warnings from S&P-500 companies and only 35 positive pre-announcements. This is slightly more negative than usual. Profits for Q4 are now estimated to be +9.4% for the S&P and it would be the first quarter in 4.5 years for earnings in single digits rather than the strong double digits we are used to having. The drop to single digits comes after a monster wave of buybacks, which shrank outstanding shares and should have produced a monster benefit to earnings. If we fail to hit double digits after the massive posturing it could be even more negative. Energy stocks which make up 9.8% of the S&P generate 15% of its earnings and that sector is expected to show an earnings drop of -2.7% mainly because Q4-2005 was so strong. Materials are expected to be up +37% and telecommunications +64% but both of those contribute little to the overall S&P. Financial companies comprise 22.3% of the S&P and contribute 27% of the profits are expected to post results up +24% over 2005.

Dow Chart - 180 min

The Alcoa news may have been good for AA but it appears to have not helped the markets with futures down sharply in after hours. The Dow continues to exhibit increased volatility with the pattern of lower highs continuing. Initial support at 12350 is holding but there appears to be a problem building. We are five trading days into 2007 and year-end retirement contributions do not appear to be having any impact on the indexes. The Dow was the recipient of boatloads of blue chip cash late in 2006 and it is possible that cash is now leaving. The reason we have not seen any big declines is the offset of the new retirement cash being put to work.

However, the Nasdaq-100 and Nasdaq Composite are the only indexes with anything resembling a positive trend. The Dow, Russell-2000, OEX, SPX, NYSE Composite, and Wilshire-5000 are all trading very near their 2007 lows. The Nasdaq-100 or NDX actually hit a new three-week high today just over 1800. This is remarkable given the chip weakness over the last month. Evidently money coming out of emerging market ETFs, oil and blue chips is being put to work in the large techs.

Nasdaq-100 Chart - 30 min

Nasdaq-100 Chart - Daily

Of course we all know it takes more than one index to make a market. Eventually the year-end cash will run out and those who have been moving to the sidelines will have to make a decision about future direction. There are no economic reports this week that will give us a clue as to the economy or the Fed. The Fed funds futures are not showing any changes in the current status through July so that presents traders with a directional challenge.

S&P-500 Chart - Daily

Since I have no crystal ball I will have to let the market continue to direct my trades. My bias has been bearish since the failure of the S&P at 1429 last week and nothing has changed. We have seen resistance slowly decline to 1420 and now 1415 with initial support holding at 1405. Eventually something has got to give. It would be easy to suggest going long over 1415 but until the rest of the indexes confirm I think it would just be a head fake and lead to another failure below 1430. Personally that would be a good trade, long over 1415 and short a failure under 1430, but only for those nimble enough to pull it off. I prefer to maintain my current bearish status and continue to remain short and target 1385 for a dip buy. Frankly we could go either way or both ways several times given the current market indecision and increasing volatility. Trying to trade this chop will cost you money unless you are psychic. Let's wait for a direction to appear and then follow it.
 

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