Sunday, January 27, 2013

Not a good week for rational market behavior

A few interesting things in the markets later this week
  • "Big time investors" Ackman and Ichan got in a “cat fight” on CNBC Friday afternoon. Some of it about Herbalife (HLF), and some of it about some ten year old deals which with they were both involved. However, most of it was about ego, perceptions, and emotion. While it can be entertaining to watch, what struck me was that these guys represent  the “smart money” that allegedly reacts rationally and unemotionally to market events to create an efficient rational market. To me the dialog is a great exhibit of one of the ways markets and their participants are not rationale.
  • Netflix (NFLX) reported a profit of $.13/share instead of an expected loss of $.13/share. That drove 2013 earnings estimates for the company for 2013 to somewhere around $1.00. The markets reaction to that was for Netflix stock to go up 70% in 2 days to $168. I'll let the reader figure out the p/e of a $168 stock with earnings of $1. (hint: 168/1 Of course, this likely has nothing to do with valuations and rationale. Probably more to do with a huge amount of shorts being “squeezed”.
  • Apple (aapl) exceeded published earnings expectations. The market  responded by driving the stock price down some $50 (10%) in a day. The stock is trading below $450, down over $250 (35%) from its high a few months ago. Of course Apple will probably earn something like $45 in 2013. Once again I'll let the reader figure the p/e ( hint $450/45 =10)

This type of data points sure make me "glad"  that the most  investments are based on rationale, efficient markets and participants.

CCI will end this post here, but is pondering ways to capitalize on the Apple situation.  I'd be looking for the stock to stabilize and be range bound for awhile at some level just above here.  I'm considering buying the Jan 14 or Jan 15 $300 call. Then start to roll covered calls against this position.  For better/worse, this would create some leverage and hedging for the trade. This approach would be similar to the trades CCI did against CSCO last year as described here.  Stay tuned.

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