Thursday, January 18, 2007

Stocks Sharply Lower into Final Hour on Weakness in Commodities and Tech

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Telecom longs and Computer longs. I added (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, sector performance is mostly negative and volume is heavy. Last night, Apple Inc.(AAPL) shattered 1Q estimates. The company then gave its typical conservative forward guidance. Overall tech sector weakness and “disappointing” Mac sales are likely pressuring the stock today. I view any broad market weakness as temporary. As far as the Mac, I am still confident that sales will exceed estimates substantially for the year. Recently, above expectations sales of homes and flat-panel televisions likely left less time and money for shopping for another big-ticket item such as the Mac. I think worries over the iPhone substantially hurting near-term sales of iPods are overdone. I suspect many people, especially those in their 40s/50s, that have never owned an iPod will be interested in the iPhone. As well, the high price will lead many younger consumers to just stick with the iPod. I also expect the iTV will be a much bigger hit than is currently believed. The bottom line, in my opinion, is that the stock is meaningfully cheaper today than it was yesterday due to the stock price decline and significant earnings beat. I continue to believe earnings substantially above expectations for the year and p/e multiple expansion will boost the stock over 50% from current levels this year. The future of the company has never looked brighter. I continue to believe the dozens of negative stories and reports since the options investigation was announced are unwarranted and the result of the fact that Apple Inc. is perceived as a leading US “growth” stock. I still plan to add to my Apple Inc. long on any substantial weakness and it remains my second largest long position. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more economic optimism, lower long-term rates, declining energy prices and bargain-hunting.

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