from davio redrock@peternavarro.com

Google's market cap today stands at $110 billion, or more than twice Yahoo!'s $53 billion. Amazing.

To put that into perspective, Google is now worth more than 17 of the 30 companies that make up the Dow Jones Industrial Average. Bigger than Coca-Cola ($101B), Home Depot ($89B), Disney ($51B) and McDonalds (a paltry $42B). And Google is closing in quickly on IBM ($132B), JP Morgan Chase ($132B), Intel ($148B) and Altria ($154B). According to Yahoo! Finance, as of the market close today there are 33 publicly traded companies with a market valuation of $100 billion or more. Google is #30 on that list, wedged between EDP ($102B) and Cisco ($112B).

Google is also more than a third the size of the competitor they spend the most time strategizing about - Microsoft. In the past 12 months, Microsoft's stock price has been basically flat. In that time, Google's has advanced more than 130%. It doesn't take a math genius to project that Google will surpass Microsoft within a few years if they keep knocking their numbers out of the park and the market keeps rewarding them.

from davio redrock@peternavarro.com

The financial media manipulates statistics unscrupulously. Recently they’ve been jumping on the housing bubble is bursting story. They’re reporting homes over $1 million are taking three times as long to sell as a year ago. But just before Katrina hit we got story after story about how the housing sector was booming, how people were flipping mansions, how everyone wanted in on the real estate.

from davio redrock@peternavarro.com

Things are deteriorating below the misleading statistics put out by the government. If we look at why things are happening it paints a very different picture than the “facts” put out by the BLS and supported by the broad media.

Forty-two percent of all spending is food and energy outlays. This is very high and shows that the consumer is cutting back sharply on discretionary spending by necessity. What discretionary spending there is comes mainly from luxury goods.

The middle class is in trouble. Consumers are on pace to draw $240 billion in income from real estate re-financing this year; to put that in perspective, that is over half of the total disposable income of $460 billion. There is little pressure now for companies to pass on profits to increased wages given this “source of income” as real interest rates are zero as indicated by the Japanese forward rates (the short position in the yen is a record by a large margin signifying that the world is borrowing from Japan). But this source may stop as the Japanese economy looks like it is recovering. With rates rising in Japan this will crimp the U.S. consumer’s source of borrowing just at the wrong time. What is good for Japan at this stage is not good for the U.S. over-extended consumer.

from davio redrock@peternavarro.com

I see inflation accelerating. One reason is that the central banks of the world continue to print paper, oceans of paper. The Fed appears to be doing the same. The Fed remains "accommodative." Over the past 23 weeks, M-3 has risen $452 billion or 10.4% annualized. This is a rate that is almost embarrassing. The Fed just announced that on March 23 it will stop publishing M-3 data. Their excuse -- the data isn't very useful. If you don't like the way the statistics look, why, just get rid of them. The Fed's purpose -- continue to inflate while issuing non-inflationary data.

from davio redrock@peternavarro.com

Regardless how high and how long the present rally in U.S. equity prices continues, my primary interest today is in trying to figure out why it is happening. The answer to that question will help me assess whether or not to change my strategy.

There are a few obvious answers.
1. Traders of U.S. stocks have been aware that many foreign equity markets (Russia, Japan, India, for instance, have had bullish break-outs earlier in the year, which has resulted in performance envy. This appears to be a circumstance that is similar to 1982, where the Canadian equity bear terminated in May, and the U.S. cycle terminated in August, when the Canadian market was starting its second bullish phase in the bull market that persisted from 1982 through to 1987.
2. Corporate earnings have remained strong in spite of considerable burdens such as higher raw material and shipping costs, and diminished consumer purchasing power.
3. Energy prices in USD have weakened to the point where traders believe there will be a turn in economic data related to price inflation, which many believe represents the most significant burden to producers and consumers.
4. The rhetoric of the sell-side is starting to break down the aversion to risk of a large segment of investors known as value style investors.

I think these are the reasons why the equity market is rallying. Is this enough of a reason (or reasons) to take on greater market risk at a time that risks related to price inflation, interest rates, growing debt, foreign currency imbalances, real estate bubbles, economic stagnation, war, and so forth, are growing?

from davio redrock@peternavarro.com

Two reasonably active desks tell me that they have not received one order to sell short today!

from davio redrock@peternavarro.com

With Bond markets closed and currencies drip drying, you can pretty much wrap up the week of nov 11th. I don't expect much movement today, rather consolidation which the bulls then can hang their hats on for another gap open run on monday. The game within the game. I still contend prior to Thanksgiving we will see some serious giveback. Time will tell, back to reading and research. Right now the best trade is to wait and listen in my book, not chase the post 5% move we have seen across the board as all boats have floated over the last two weeks.

From Davio -- redrock@peternavarro.com

The advance/decline ratios of these price data series show that just like early July and early September, the equity markets are getting too bullishly excited.

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From Davio -- redrock@peternavarro.com

As a speculator in markets, I always like to ask myself when establishing positions, who can get hurt the most on this trade? Or another way to put it, where are the herds leaning the hardest as to sink the ship?


What this means, is that people are herding/stampeding. They’ll do that for a short time and then tire out. This rally is a very bullish one. The reverse move will be likely be very bearish, especially since the rally has been set off by declining bond yields, which will not decline too far or else there will be a yield inversion, followed by recession.

So, my take is that this move is lose-lose, and has been set up by Wall Street in order to unload proprietary stock positions. It's kind of like a retailer dropping prices (interest rates) before the holiday season in order bring the customers flocking into the stores, where they'll unload as much inventory as possible. Then take a well-earned (i.e., bonus-paid) vacation down to the sun-sand-and-sea for the 1Q.

From Davio -- redrock@peternavarro.com

Does this sound at all familiar to anyone else?

A foreign investor, flush with cash thanks to recent economic shifts, begins buying up landmark "trophy" properties in Manhattan.

If you are old enough, that may remind you of the Japanese in the 1980s, who amongst other items, purchased Rockefeller Center.

Well, its time to update your calendar. This morning, the NYT reported that "the royal family of Dubai, the oil-rich Arab emirate on the Persian Gulf . . . plunked down more than $1.1 billion for [2] buildings: 230 Park Avenue, the gold-crowned, 34-story tower that sits astride the avenue between 45th and 46th Streets, and the Essex House, one of the grand Art Deco hotels on Central Park South."

These most recent acquisitions comes on top a 3 year billion dollar spree in U.S. real estate, including "nursing homes, office buildings, hotels and thousands of apartments in Dallas, Phoenix, Nashville and Atlanta."

The Times wonders aloud if "the emirate can . . . escape the fate that befell Japan15 years ago when it made too heavy a bet on real estate at the top of the market and lost. . . . "

From Davio -- redrock@peternavarro.com

Put/call ratios are by nature contrary indicators, with high call buying usually seen at tops and put buying at bottoms. For OEX options, it doesn't work that way. High levels of put buying have often marked tops in the market, not bottoms, and vice versa.

For example, at the September market top, two months ago, the OEX put/call ratio hit about 3.00: That's three puts traded for every one call, which is a lot of put trading. This took place right at the top and, a few days ago, this ratio got back up to 2 again after falling to readings near 0.75 in October. The current reading of 2 is high and it's bearish.
Another look at the OEX options is through a comparison of open interest in the calls vs. the puts. This is sometimes called the "Pal" ratio. In the past, when there have been many more OEX puts open then calls, such a condition has often corresponded to market peaks.

Presently there are 77% more open OEX puts than calls, the most since February 2004. December 2004 and March 2005 had similar readings and all appeared at good times to sell stocks.

From Davio -- redrock@peternavarro.com

Now that we have taken out the 1231 area on the SPoos, we can begin to test the old 1250 highs. I think the market has limited upside now that we have blasted up just over 5% in the past two weeks. I would suspect the rally may have another 1-2% upside reward before seeing a serious pullback and we have been up straight now since Oct 16th, with a slight end of October test of the October lows near 1170. Breadth continues to diverge as new lows actually outpace new highs. Generally, not a positive situation for a "real bull market". Oil has come in now about 20% and I still think 55$ per barrel is in the cards with in the next week. Winter is around the corner and if you don't think China's demand for the black gold would be huge if oil were to drift to 50, then I have some prime So Cal real esate you can purchase at top dollar. INTC buys back a bunch of shares, or at least announces they have the ability to do it at some time. They also add to their paltry dividend yield by 25%, but what is 25% of nothing? Right . . We continue to drive towards inverted yields yet banks lead the way to the next great bull market. When in doubt, get out. This market makes little sense to me and I am willing to stand aside and let the momentum bulls take it as high as they would like. There will be very good selling opportunities in the near future for US indices.

From Davio -- redrock@peternavarro.com


I said yesterday that the S&P 500 was one big day away from clenching a breakout over 1220 and signaling a new swing high for the year. For a while, it looked like Wednesday would be that big day.

The S&P traded briefly and marginally in the red Wednesday morning, making a first-hour low before towering higher convincingly above 1220 to 1226.60. However, the level could not be held as the index tailed off once again, closing around the 1220 level at 1220.55.

The S&P has been oscillating around this 1220 magnet for five days. A week ago, the S&P closed at 1219.95. Last Friday, the S&P closed at 1220.15. On Monday, the S&P closed at 1222.80. On Tuesday, the S&P closed at 1218.60. And then, of course, on Wednesday, the S&P closed at 1220.65.

The magnetism of this level is undeniable. As I have shown in the past, the 1220 level represents a downtrend line from September as well as a Live Angle up from the August/September low. I suspect that the S&P will resolve to the upside and through 1220, turning up the Monthly Swing Chart on trade over the October high of 1233.35. The behavior at that point will give us additional information as to the market's agenda. But the momentum and internals are too compelling here to suggest that a monthly turn up, being so close, will not be snagged.

From Davio -- redrock@peternavarro.com


Cisco Systems will report its results after the close tonight for the first quarter of fiscal 2006 (which ends July 31, 2006).

There is a conference call at 4:30 pm EST. Current consensus is for pro-forma EPS of 24 cents and revenue of $6.58 billion (+10% year-over-year; flat quarter-over-quarter).

What Do I Expect?

At this juncture, I think it's safe to say the quarter will be in line with management's expectations. No more, no less. Most communications-equipment companies have seen steady and solid growth, but nothing suggesting any dramatic acceleration from the current pace. If there is one area of concern, it will be on the competitive front as Huawei continues to leverage its advantage in China and penetrate North American and European markets with aggressive pricing.
Last Quarter

In Cisco's last quarter, revenue was $6.58 billion (+11% year-on-year; +6% quarter-on-quarter). Pro forma EPS were 25 cents (GAAP EPS = 24 cents). The company's gross margins increased 110 basis points sequentially at both the product and corporate levels. Operating margins rose 80 basis points quarter over quarter due to headcount additions.
Finances
CSCO's balance sheet is one of the best among technology companies. It generated a very strong $2.4 billion in cash from operations; accounts/receivable days' sales declined to 30 from 33; and inventory turns increased to 5.4 times from 5.3 times last quarter. While the cash position was essentially flat, the company repurchased approximately 130 million shares of its stock.
Growth by Product Line
From a product perspective, routers increased 3% year over year, switches +8% year over year, advanced technologies +27% year over year and services +15%. The book-bill ratio exceeded one for the second consecutive quarter and product orders increased 7% sequentially vs. 6.5% for product revenue. Orders were particularly strong for advanced technologies, up in the low-30% range year over year and high single-digits quarter over quarter. Orders for its commercial business grew in the low-20% range year over year and midteens sequentially. Enterprise orders were characterized as "solid," with midteens-type growth both YY and QQ.
Growth by Region
Geographically, orders from North America were very balanced with 23% growth on both a year-over-year and quarter-over-quarter basis. Europe, Middle East and Asia experienced high-teens order growth year over year and midsingle digits sequentially. While Asia Pacific was characterized as "solid," the company indicated China was down on a year-over-year basis as CSCO continues to play on what management described as an "un-level playing field." Japan continues to be a struggle with orders down to the low-double digits year over year and midsingle digits quarter over quarter. The company will be implementing a new geographic alignment when it reports results for Q1/06.
Guidance for the First Quarter
As an experiment, management provided guidance for Q1/F06 and for the entire fiscal year. For Q1/F06, revenue should be up approximately 10% year over year, with orders up in the 11%-15% range. Gross margins will be about 67% with operating margins in the 30% range. Other Income should be about $140 million; the tax rate will be about 28% and investors should plan for about 50 million fewer shares outstanding. The company will implement FAS123 in Q1 (expensing of stock options) and at this time anticipates it will reduce GAAP EPS by an additional $0.03-$0.04/share.
Guidance for Fiscal 2006
For the fiscal year, CSCO anticipates product revenue to increase in the 10%-12% range and orders to grow 10%-15%. GMs should be in the 66%-67% range and, while operating expenses will trend up in the first half, full-year operating expenses should run about 36% of revenue. The company expects other income to be approximately $500 million to $600 million with a tax rate of 28% and a quarterly decline of 50 million in shares outstanding.
Last Quarter's Disappointment
Prior to the last conference call, investors were anticipating an upside surprise. Not only did the company fail to provide such, but the guidance for Q1 and the fiscal year was below expectations. Management also admonished investors that its guidance was realistic and was obviously being ignored by the Street

From Davio -- redrock@peternavarro.com

So Gates comes out and states the obvious, people will use web based services over software services as time goes forward. Ah yeah, Bill, duh. Not really news, he is just letting GOOG know that he knows that GOOG has the leg up. But Bill has never been an innovator but rather the king of making the mass market think they need the services/products. Should be interesting over the next few years. Let's see how Big GOOG gets and how small MSFT becomes. Good think MSFT has not paid out real dividends compared to their cash position. They will need to start burning it to even get in the game GOOG is leading.

From Davio -- redrock@peternavarro.com

We continue 4 days of tightening in the market with the opening in futures showing no movement again this am. We need to get above 1231 to get to 1250 and below 1218 to test 1200 on the SPX, that should be your game plan. But please Mr. Market, move!!

From Davio -- redrock@peternavarro.com

So "housing" took down the market is what the talking heads say. I say, more sellers over buyers, but in all reality we did nothing on the indices today but grind in place in same spot we have been for 4 days. Let's see what tomorrow brings, no economic news of consequence so we may be stuck here for a while.

From Davio -- redrock@peternavarro.com

Old Axiom, but cliches become such because of their truthfullness. Sometimes the best ideas are just to sit and wait for the market to come to you. It will move again, and when it doesn't move sit on your hands, conserve energy and do some research. That way when the market is ready to roll you will have your ideas ready to go with it.


Until then Patience is the paying trade!!

From Davio -- redrock@peternavarro.com

We we are selling off on low volume, going up on low volume. I think its a dangerous spot in the market. I don't think the reward to the upside is much more than another %5 but the downside could be large. To me its not if, but still when, and what takes this market lower is the question. I don't see it soon on the horizon, but with TOL warning today and Homies falling with the warning, Retail names should be hit soon. The same thing happened in England when housing hit the wall, retail hit an even larger wall post the slowdown. Take profits on retail stocks. They should head lower as the consumer buckles down.
TOL Toll Brothers falls 4.56 pts, or 11.5%, after reducing outlook.. see 06:22 story (39.41 ) -Update-

Other homebuilders lower in sympathy with TOL include: KBH -3.45, LEN -2.40, CTX -2.30, RYL -1.00.

From Davio -- redrock@peternavarro.com

A slow day, the market is not coming in at all and its not going up. The SPX stays between 1220-1225, so that's the range we are tightening within. No news environment, I think the play will be movement one way or another, the million dollar question is which way? A grinder of a day so far. Don't expect much fireworks today. Get out that research and reading material and firm up.

From Davio -- redrock@peternavarro.com

I dial up the stations this am after spending the later part of last week on the east coast. There isn't alot of major economic news this week nor Fed speakers scheduled. Earnings for the most part are over and we are in the slow season, one that usually leads to higher prices just as we saw last week as there is a "sweet spot" for inevestors where there is a vacuum of news, weather good or bad and the market was oversold three weeks ago. In reality, we stay stuck in the range we have been in for two and a half years. Will we go higher or lower, remains the questions? Place your bets and set your risk.

On an anecdotal level, while back east in an old guard neighborhood, I noticed high levels of Real Estate on the market in neighborhoods that in the past never have homes go up for sale. Prices are also being reduced as signage was telling me. So many houses and no buyers, again, this is what I think we will start to see. Hasn't everyone who could buy a house bought one with low interest rates the past 5 years. I think so . This coupled with higher interest rates will force more ARM buyers to the market as they will realize their purchases aren't going to go up 50% in a year as they had hoped over the recent times.However, their ARM notes will be going up possibly 100% as those low rates expire. Time will tell, but the switch is on from a sellers markets in Real Estate to a buyers market and its just beginning.