Bears expecting news of China's Christmas present, er, interest rate hike to cast a negative cloud over the market were probably disappointed today as it seemed having a couple of days to digest the news was enough to keep substantial loses at bay. Maybe the news was already ''priced in'' as so many pundits are fond of saying. The Dow Jones Industrial Average endured a minor loss on the day while the Nasdaq and S&P 500 both eked out small gains. The Russell 2000 was easily the most impressive of the bunch.
Give the Nasdaq some credit for even mustering a positive close because there were a few obstacles in its way on what was otherwise a pretty slow post-holiday Monday. First, there is the case of Tesla Motors (TSLA), the unprofitable electric carmaker. Tesla had been one of the 2010's high-flying initial public offerings, especially when considering that it is not a Chinese company and, as I just mentioned, the company makes no money.
Tesla made its debut as a public company in late June and hovered in the low 20s for much of September through November before starting a nice little climb that took the stock over $35. That was before Thursday when Capstone Investments came out with a ''sell'' rating on the stock and a $22 price target. That knocked more than $2 off the stock, but the real fun started today.
Tesla's lock-up period officially ended on Christmas, but since today was the first day the company's early investors could start selling their shares, the stock was hammered to the tune $4.54, or almost 15.1%, to close at $25.55. I am not sure if Tesla insiders were behind the bulk of the selling today, but the stock traded more than 10 times its average daily volume and Capstone's $22 price seems pretty realistic now.
The research firm actually makes a pretty valid point for selling the stock. Maybe it is two points. Capstone does not expect Tesla to be profitable or show a positive EBITDA until 2013. In this world of instant gratification, that is not going to be enough to keep investors excited.
Why is it going to take so long for Tesla to become profitable? As a car lover, my best educated guess is simple economics. Head on over to Teslamotors.com and you'll see the Roadster, the one Tesla model currently available, STARTS at $101,500. So the potential audience is already quite small for this car, but beyond that Tesla is banking on finding car enthusiasts that are also willing to make environmental responsibility a big part of their purchasing plans and that is a tough combination to find.
The truly big issue Tesla faces on its road to profitability is what else a car lover can get for roughly $100,000. A 2010 BMW M5 costs about $85,000, according to Motor Trend. Any number of Porsches can be had for less than $100,000. Spend a tad over $120,000 and you can have an Aston Martin V8. All these brands hold much more cache than Tesla and that is a big fundamental problem for the company.
Speaking of Nasdaq constituents with dubious business models, there is Netflix (NFLX). Had one bought shares of the movie rental firm in late July for around $95 and not sold them at them at the November peak of $209.24, no big deal. While a tad greedy, the trade would still be almost a double, but the chart may be saying ''get out NOW.''
Netflix slipped $4.57, or almost 2.5%, today to close just above $180. In fact, the stock briefly traded below its 50-day moving average, which now looks like support. How strong it is I am not so sure. The stock was done in today by a piece in the most recent issue of Barron's entitled ''Time to Hit the Eject Button?''
Barron's notes that while the stock has more than tripled this year, Netflix is facing soaring content acquisition costs and those costs could jump 120% in 2011. The option for Netflix to stem those costs? Buy fewer big hits, but as Barron's correctly points out, that would stifle subscriber growth.
Netflix bears have been pointing out recently that the company faces rising competition from other Nasdaq darlings such as Amazon (AMZN) and Apple (APPL) and that is true. I would also argue that Netflix faces plenty of competition from the local cable company. I have Time Warner Cable (TWC) where I live and the company has been running a series of ads for months now touting the virtues of its On Demand movie feature. Time Warner is not shy in these ads about saying they get the movies right away while Netflix has to wait 28 days. Plus, you do not have to mail anything back to cable company.
Noted value investor Whitney Tilson is one of the big names that has made public his short position in Netflix, arguing that the stock is overpriced and any bump in the road could result in a nasty sell-off and that the company's business model is going the way of the dodo bird, meaning the cost to streaming content could be too rich for Netflix to absorb and keep delivering the numbers investors have become accustomed to.
Obviously, every noted investor from Warren Buffett to George Soros is wrong from time to time and Tilson is no exception. Only time will tell if he is right about Netflix, but the guy is pretty smart. After all, he was snatching up shares of BP (BP) in June and that trade has worked out pretty well.
Yes, there was some good news on Monday and it came from what formerly would have been viewed as an unlikely place: American International Group (AIG). Booted from the Dow, posterboy for too big to fail and frequent object of my own attempts at humor in this space, AIG has been getting its act together and has been doing so for a while now.
On Monday the company announced it has obtained $4.3 billion in credit facilities and that it will be able to use those facilities once it is done paying its tab to Uncle Sam. The news sent AIG shares up $5.05, or 9.3%, $59.38 on volume that was better than triple the daily average. The stock touched a new 52-week high of $60.96.
AIG, whose tab from the Federal Reserve and the Treasury Department once amounted to $182 billion, said in a statement that it is close to seeing the finish line in its recapitalization plan. The loans to AIG were provided by more than 30 banks, according to Bloomberg News.
Looking at the charts, the S&P 500 did not move much from Thursday's close, but if resistance is viewed as anything over Thursday's close of 1256, then here we are. It is not officially a short week as U.S. markets will be open on New Years Eve, but saying volume will be light for much of this week is stating the obvious. Support for the S&P 500 is 1240, but I think we head into 2011 at 1250 or higher.
S&P 500 Chart
It was not the most exciting of days for the Dow, save for two add-on acquisitions in the agriculture space announced by DuPont (DD). The AIG news was enough to lift Bank of America (BAC) and JPMorgan Chase (JPM) to gains of 1.6% and 1.4%, respectively. While buyers of Dow stocks have been apprehensive and the index has been mired in a tight trading range over the past few weeks, if financials keep partying like its 2006, then resistance at 11,575 could be done away with by the end of this week, if not sooner.
Since the Nasdaq did not do much today, if it was overextended last week, it remains so, at least for now. The index is a long way from any marquee support, notably 2600 for starters and 2710 remains the next critical resistance hurdle to be cleared.
In addition to Netflix, another Nasdaq darling that might be worth keeping an eye on in the near-term is Priceline (PCLN). Expedia (EXPE) and Orbitz (OWW) are having quite the tiff with American Airlines (AMR) and on the sly, Delta (DAL) has pulled their fares from several lesser-known reservations Web sites. I am not saying Priceline is a short, but this is an issue worth keeping an eye on as it pertains to the company.
While the Russell 2000 did not set the world on fire on Monday, it was another solid day for the small-cap index that looks poised to reclaim its 2007 high at 856. Support looks firm at 760 though the index is a fair bit removed from that area.
Russell 2000 Chart
I am not expecting much in the way of excitement this week, but they say a picture is worth a thousand words, so I leave you with an interesting chart that illustrates the behavior of the S&P 500 in the days leading up to and immediately following Christmas. Happy New Year.
S&P 500 Holidays Performance
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