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MomentumOptionsTrading.com Weekly Wrap for 8/29/10

Sunday, August 29th, 2010

11:45pm (EST)

1. Market Summary

2. Mosaic Showing Strength     

3. VMWare Could Hit Par ($100)        

4. Earnings 

5. AutoTrade With Us 

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1. Market Summary

The bulls and bears put on quite a show Friday as both sides dug deep into their artillery and dropped a couple of huge bombs on each other.  Futures were pointing towards a slightly higher open before the bell but all eyes were focused on what Fed Chairman Ben Bernanke had to say.

The bears used the Intel (INTC, $18.37, up $0.19) news, which lowered revenue guidance for the current quarter, to drive the market to fresh lows for the week, about 30 minutes into the session.  However, moments later, the markets reversed course and surged higher after Big Ben Bernanke said the Fed was prepared to do whatever it takes to keep the economic recovery in place.

The Dow hit a low of 9,925 but rebounded and added 165 points, or 1.7%, to finish at 10,150.  Hewlett-Packard (HPQ, $38.00, down $0.22) was the Dow’s lonesome loser as the company got locked-up in a bidding with Dell (DELL, $11.89, up $0.14) over 3Par (PAR, $32.46, up $6.43) all week. 

Despite Friday’s triple-digit advance, the index finished the week on the south side as it lost 63 points, 0.6%.  We mentioned in our 9am update that resistance would come in at 10,100-10,200 and the bulls split the difference.  A break above 10,200 could lead to 10,400 and put is right back in a trading range. 

The S&P 500 gained 17 points, or 1.7%, to finish at 1,064 but touched a low of 1,039.  For the week, the index lost 7 points, or 0.7%.  Our near-term targets have been 1,050 and then a possible trip below 1,000 but the bulls will need to break through 1,070 and then 1,100 before we say they have the momentum back.

The Nasdaq advanced 35 points, or 1.7%, and settled at 2,153 which is right above our target or 2,150.  The index reached a low of 2,099 and fell 26 points, or 1.2%, for the week.  We were looking for a drop to the 2,050 region and resistance should come in at 2,200-2,250 if the bulls run Monday morning.

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2.  Mosaic Showing Strength

Mosaic (MOS, $58.27, up $0.48) had a good day as shares were up over 4% on Friday.  We mentioned last week in our Potash (POT, $147.73, up $2.91) article that the stock could be on the move but it is volatile and will probably remain that way as rumors and acquisition news circulate.

The company is a major potash and phosphates producer and recently closed the books on 2010 as they are currently in the first quarter for fiscal year 2011.  For 2010, Mosaic reported revenue of $6.8 billion, and earned a profit of $827 million, or $1.85 a share.  This was a considerable drop from their 2009 numbers of $10.3 billion in revenue and a profit of $2.35 billion, or $5.27 a share.

Wall Street is looking for the company to earn $3.57 for 2011 on revenue of $8.25 billion.  These numbers are a little conservative if you ask us because the industry is recovering which was evident when Mosaic topped estimates by 2 cents back in July. 

Going off the aforementioned numbers gets us a P/E ratio of 15.4 going forward for Mosaic.  When you compare that to the 19.9 times 2011 earnings Potash is currently trading at, you can see why we get excited about this stock.  If we apply the same multiple, we get Mosaic being valued at over $70+ a share.  However, Mosaic shares have reached an all-time high of $163 and Potash has traded  up to $241 in the past. 

Take out the acquisition talk and the long term growth of this company still looks good.  Remember, if major companies are bidding up a natural resource company, it is only because they expect the price of that commodity to go much higher.  We covered a few of the agricultural woes that are afflicting the world in our last Weekly Wrap and the factors increasing the demand and price of potash fertilizer.  Here are a few more.

Cotton prices have doubled over the last twelve months, and the crop in Pakistan is almost completely wiped out due to flooding.  Arabica coffee beans just hit an all time high on the spot market.  We have talked before how the price of sugar has gone up.  Beef prices are up 9% in the last three weeks and wholesale pork hit a record because companies are stocking up in the belief that major input costs to meat production, namely grains, are going higher.  Bacon prices are sizzling.

A couple of years ago, the price of potash had gotten very high due to the increased crop demands of a growing world population and the addition of 400 million people to the middle class.  World food demands were rising back then, and despite this recession, the basic premise on potash as a fertilizer hasn’t changed.  No new production has come online in the last two years, and the recent destruction from Mother Nature has caused farmers who have under-fertilized to go into overdrive.

For all of these reasons, we believe shares of Mosaic have more room to run over the next few months and could easily break above $70 on fundamentals alone. 

The company will announce earnings again in October and will be worth a second look as far as an option trade at the end of the month.

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3.  VMWare Could Hit Par ($100)

VMware (VMW, $79.27, up $1.12) continues to trade near its 52-week high of $83+ and has nearly doubled from the low $40’s since the beginning of the year.  So why are shares hot and look headed to $100 over the next 6-12 months?

The company is the dominant player in the virtual computing space.  Its virtualization suite of solutions is used by over 900 companies to cut costs and improve efficiency.  That is music to the ears of corporate executives with $2 trillion in cash on the balance sheets and an economy that can’t decide which way it wants to go.  Executives are willing to shell out money to improve productivity without having to add to payroll and the company has benefitted from that trend.

VMware has projected revenue of $2.8 billion for 2010, a 40% increase over the $2 billion they had in 2009.  Some analysts are on record saying the firm will do $3.6 billion in revenue for 2011.  This kind of growth during a recession would be pretty amazing but the stock is pricey at current levels.  With projected 2010 earnings of $1.39, the P/E ratio is a little high at 56 times earnings, and a forward P/E of 46 in 2011. 

VMware has also been a rumored takeover target thanks to the ridiculous bidding war that has gone on over 3 Par, a company with somewhat similar products.  However, there would be some obstacles to overcome if another company decided to make a bid for VMware. 

VMware was spun out of EMC (EMC, $18.37, up $0.32) in August 2007 at a price of  $29, and it ended its first day of trading at $51.  EMC is a pretty well run company and they still own 85% of VMware. 

Despite the fact that we think shares are fairly valued, the future for this company is bright and there is a chance analyst’s raise their estimates down the road.  The stock can easily move 5% on any given day and we are watching for a possible option trade in the near future depending on the trend. 

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4. Earnings

MONDAY – Dollar General (DG, $28.09, down $0.41), Donaldson (DCI, $43.36, up $1.10), Jos. A. Bank Clothiers (JOSB, $38.11, up $0.27) and Partner Communications Company (PTNR, $16.25, up $0.09).
 
TUESDAY – ABM Industries (ABM, $20.24, up $0.64), Applied Signal Technology (APSG, $19.85, up $0.66) and DSW (DSW, $24.32, up $0.55)
 
WEDNESDAY – Brown-Forman (BF-B, $62.10, up $0.89), Express (EXPR, $13.97, up $0.14), Greif (GEF, $58.22, up $1.47), HJ Heinz (HNZ, $46.85, up $0.65), Joy Global, Inc. (JOYG, $56.83, up $2.94), Martek Biosciences (MATK, $21.50, up $0.30), Oxford Industries (OXM, $20.47, up $0.75) and SAIC (SAI, $15.31, up $0.15).
 
THURSDAY – ArcSight (ARST, $39.66, up $3.03), Blyth (BTH, $40.81, up $2.51), Cascade (CASC, $32.12, up $1.86), Calavo Growers (CVGW, $20.18, up $0.98), Del Monte Foods (DLM, $13.12, up $0.21), Esterline Technologies (ESL, $47.43, up $1.41), Finisar (FNSR, $12.73, up $0.15), Layne Christensen (LAYN, $25.32, up $0.57), Toronto-Dominion Bank (TD, $68.03, up $2.84) and UTi Worldwide (UTIW, $14.38, up $0.25).
 
FRIDAY – Campbell Soup (CPB, $37.47, up $0.52)

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5.  AutoTrade With Us 

Here is an update on our AutoTrading program which has been a hit with subscribers who may be too busy to follow the market every day.  For those of you who have thought about using our services but may have been worried about opening and closing the trades we do, this program is a perfect fit.  We have chosen TWSF which has done a great job of getting our fill prices as soon as we send out our alerts or trade updates and here is their deal:      

Trade Wall Street Financial is a full service brokerage firm with a department dedicated to AutoTrading.  Our customer service is second to none.  At Trade Wall Street Financial, we know our customers by name, not by account number or account value. We offer competitive commission rates and years of experience in the financial field. The firm’s mission is to help individual investors build their investment strategy with focus and clarity. Trade Wall Street Financial offers self-directed investment accounts for retail investors in 50 countries around the world.

Our full range of benefits include:

- Access to global markets and all major exchanges
- One convenient banking and brokerage account
- Increased customer support hours (7 am – 6 pm)
- Friendly and knowledgeable service
- Multiple investing and trading platforms
- AutoTrading
- Financial planning and structured investing
- Life insurance and health insurance products
- The professional clearing services of Penson Worldwide (Nasdaq Symbol: PNSN)
  and Pershing LLC (a division of Bank of New York)
- Money market checking, debit card and asset management accounts
- Short-term, mid-term, and long-term research information
- Timely portfolio diversification strategies

For more information, please contact Trade Wall Street Financial at:

Toll Free: (800) 776-1018 (Monday to Friday 9 am to 5 pm)
Direct:     (704) 243-5201  anytime

Ask for Mark Wesley and he will be happy to answer any questions you may have.

We will be back in the morning with a fresh look at what the week will bring and an update all of our current trades and what to expect going forward.

MomentumOptionsTrading.com Weekly Wrap for 8/22/10

Sunday, August 22nd, 2010

10:30pm (EST)


1. Market Summary

2. Potash Gets Takeover Offer  

3. Figuring Out FedEx     

4. Earnings   

5. Week Ahead & Other Tidbits   

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1. Market Summary

The bears were looking to take the overall week and were doing a good job as they had the Dow reeling triple-digits at halftime on Friday.  We mentioned in our morning update there wouldn’t be any major economic news to trade and the bulls seemed a little nervous opening new positions over the weekend.  Although the bulls cut their losses in half by the closing bell, the major indexes finished mostly lower for the day and mixed for the week.

The Dow fell 58 points, or 0.6%, and finished at 10,213.  Hewlett-Packard (HPQ, $39.85, down $0.91), one of the Dow’s 30 blue-chips, fell 2% after lackluster earnings results and accounted for 7 of the 58 points.  For the week, the index fell 90 points, or 0.9%, and settled just above our 10,200 target.  There was a huge battle on Tuesday and Wednesday at the 10,400 level but the charts have been telling us a test to support was coming.  Resistance remains 10,400 and the bears will target 10,000 this week.  A break below 10K could lead to a little panic selling which would bring Dow 9,800 into play.

The S&P 500 slipped 4 points, or 0.4%, to finish at 1,071 and also closed right near our target of 1,070.   The index fell 8 points for the week and traded to a low of 1,063 on Friday.  The 1,100 level remains a brick wall for the fragile bulls and the latest drop should clear the way for a test of 1,050 and then 1,000.  The May 6 “flash crash” low was 1,065 and the July low was 1,010 for the S&P.  The writing is on the wall for a test lower unless the bulls hold.

The Nasdaq actually finished the day fractionally higher (0.81 points) and closed at 2,179.  For the week, the index added 6 points, or 0.3%, but continues find resistance at the 2,200 level.  Our near-term target has been 2,150 and the index touched a low of 2,155 on Monday and 2,159 on Friday.  A break below these levels should pave the way for a test to 2,050.

Although the momentum has favored the bears over the past few weeks, we must remember we could still stay stuck in this trading range.  Right now the major indexes are nearing their lower channels of this range so it will be important to watch to see if the bulls can hold these levels.

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2. Potash Gets Takeover Offer  

Potash (POT, $149.67, up $0.83) caught wind last Tuesday after BHP Billiton (BHP, $67.44, up $.09) submitted a bid for the company for $130 a share.  Potash closed at $110 on Monday and ran to $142.95 after the announcement.  Now, beyond the obvious fact that investors believe BHP’s bid is too low, this kind of stock movement far beyond the asking price of a proposed takeover is worth a little more research. 

First, let’s look at Potash itself.  If BHP decides they want this company, they will almost certainly have to pay more for it than where the stock sits now.  The rumor mill has put a price tag of $160 for a deal getting done but shareholders (and its CEO) will point to the fact that shares have reached a high of $241 (a “double top”) in June 2008.  Whisper numbers go as high as BHP paying up to $200/share to get Potash.  Other bids may come as the company has said it was open for a bidding war.  However, there are few companies that can do $35+ billion deals and there are some who say BHP should walk away.

So why does BHP want to buy a fertilizer company?  

Potash the fertilizer is used to increase crop yields and there aren’t many substitutes for it.  To dumb it down, there aren’t a lot of potash mines around the world and it takes 4-7 years to get a new one producing, so barriers to entry are high.  The price of potash has also been going higher, it tends to run in three year bull cycles, and we could be at the beginning of a huge pop in prices thanks to some crop issues we discuss below.

One of the major reasons for the increase in potash prices is the incredible 75% climb in the price of wheat since July. This is not just a commodity spike that will soon die. The wheat crops and many other crops have been devastated by droughts and floods this year to an extent not seen in decades. Fires in Russia have forced them to ban wheat exports, and the country is a major wheat exporter.

And there could be more trouble on the way.  Supplies are very tight and getting tighter, the winter wheat crop hasn’t gone into the ground yet and conditions are so bad there is a threat wheat might not get planted in Canada.  What this means is U.S. farmers will be planting a lot more wheat since the price is going to remain elevated for at least the next 6 months.  Farmers will need more potash to get the best yield but they should get great prices if supplies remain low and will continue to buy lots of potash.  

This also means less corn will be planted, which will drive the price of corn up, and cause the corn farmers to use even more fertilizer to get better corn yields since corn takes a lot more potash than wheat.  In addition, because grain prices have been low the last few years, many farmers have skipped putting down potash, and they now need to play catch up.

All of this distress in grain prices means that not only is there a play on potash, but there could be an across the board movement in the Agricultural sector as well.  Let’s take a look at a few stocks we have on our Watch List and our comments.

First, the other players with their fingers in the potash pie, include Mosiac (MOS, $56.64, up $0.08), which we will be profile next week, Agrium (AG, $68.71, up $.27), Intrepid Potash (IPI, $23.72, down $.33 ) CF Industries Holdings (CF, $90.01, up $1.16) and for those who want to invest way overseas, Sociedad Quimica Y Minera (SQM, $43.12, up $.16).

Other stocks that could be on the move:

Deere (DE, $65.13, down $0.58) is an obvious play.  If farmers are making more money, they are spending more money, and nothing boosts production like the latest big green machine from this company.

Monsanto (MON, $57.73, up $0.56) makes seeds designed to tolerate drought and increase yield.  Shares are well off their 52-week high of $87 and yields nearly a 2% dividend.   

Bunge (BG, $53.64, down $0.43) is a little more off the beaten path.  The company has some fertilizer, it does some storage, and it is tied to soybeans, another crop that may see a rise in prices.

Andersons (ANDE, $35.87, down $0.47) does a lot of wheat storage and is in the transportation business as well.  They are also involved with ethanol.  If corn prices go up, ethanol should go up.

Syngenta AG (SYT, $47.48, down $.52) is in the seed business too.

The Agricultural sector is heating up and could be entering a secular bull market.  This simply means a sector doesn’t always trade with the overall market and, given the current conditions, these stocks might continue to get second and third looks.

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3.  Figuring Out FedEx

FedEx (FDX, $81.23, down $0.35) is one of the largest package delivery holding companies in the world.  They operate 4 units:  FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services.  The company has already closed the books on 2010 with revenues of nearly $35 billion (their 2011 year began in June).

The 52-week range on the stock is $66.29-$97.75, which at current levels, represents a 17% discount from its high.  So, are shares attractive at $81 or are they going lower?  It’s hard to say because FedEx always confuses Wall Street with their earnings, the Dow Jones Transportation Index (DJTA) is looking weak, and, the economy is still sputtering. 

When the company reported earnings in mid-June of $1.33 a share, they matched analysts’ expectations, but, the stock got clobbered because they projected 1Q earnings that were deemed too low.  Over the next two weeks, FedEx dropped from $83 to just under $70 which was strong support.   

We often say you can learn a lot from listening to conference calls or reading transcripts but what tripped us up at the time was this.  In their update, FedEx said it was pulling planes out of storage to keep up with demand.  This is not a cheap process and the very savvy executives at FedEx would not be doing that unless they were seeing good growth and they were confident of that growth going forward.

When you combine that with their earnings beat, it is easy to surmise that they may have been sandbagging their numbers. Sure enough, in late July, FedEx came out and raised both their 1Q and yearly revenue numbers as well as reinstating their 401k match.  Shares jumped 6% that day and moved back into the $80’s before “double topping” at $87 earlier this month.

So, why did FedEx adjust its numbers again a month later?  They got jealous. 

A week before FedEx raised its numbers, United Parcel Services (UPS, $65.10, down $0.32) came out with their earnings.  UPS also beat the Street but they raised their guidance.  FedEx got a lift that day as these companies are virtually identical from an investor perspective.  Both companies are very well run, give a good snapshot on the health of the economy, and they generally move in tandem.

At current levels, FedEx shares are right near the levels they were at when they raised guidance and they will report earnings in mid-September.  The missing piece of this puzzle will be the August numbers.  If they are good, or better-than expected, then FedEx should match or beat expectations.

However, the DJTA and FedEx are showing bearish charts so be careful if you are thinking of going long and strong in a sector that could be weakening.


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4. Earnings


MONDAY - Cninsure (CISG, $23.79, up $0.14), Focus Media Holding (FMCN, $18.11, up $0.28), Kensey Nash (KNSY, $22.86, up $0.37) and Sanderson Farms (SAFM, $43.16, up $0.13).

TUESDAY – Avago Technologies (AVGO, $20.43, down $0.08), Big Lots (BIG, $31.80, up $0.72), Burger King Holdings (BKC, $16.45, down $0.27), Bank of Montreal (BMO, $55.78, down $0.35), DSW (DSW, $25.74, up $0.73), Medtronic (MDT, $34.77, down $0.71), VeriFone Systems (PAY, $22.6, up $0.26) and Trina Solar (TSL, $23.01, up $0.16).

WEDNESDAY – American Eagle Outfitters (AEO, $13.05, down $0.05), BHP Billiton (BHP, $67.44, up $0.09), Brown Shoe (BWS, $12.84, down $0.16), Canadian Imperial Bank of Commerce (CM, $65.12, down $1.20), Cyberonics (CYBX, $22.81, up $0.25), Guess (GES, $39.31, up $0.63), JDS Uniphase (JDSU, $10.42, up $0.05), Jo-Ann Stores (JAS, $38.03, down $0.27), OSI Systems (OSIS, $27.56, down $0.11), Raven Industries (RAVN, $30.97, down $0.55), rue21 (RUE, $22.12, up $0.37) and Shoe Carnival (SCVL, $17.71, up $0.47).

THURSDAY – Aruba Networks (ARUN, $16.67, up $0.10), Bio-Reference Laboratories (BRLI, $19.10, down $0.02), Dollar Financial (DLLR, $15.67, down $0.53), J. Crew Group (JCG, $34.41, up $0.62), OmniVision Technologies (OVTI, $21.23, up $0.24), Patterson Companies (PDCO, $26.93, down $0.13), Regis (RGS, $16.98, down $0.05), Royal Bank of Canada (RY, $49.05, down $0.46) and Signet Jewelers (SIG, $27.95, up $0.14).

FRIDAY – Frontline (FRO, $28.72, down $0.55) and Tiffany (TIF, $43.30, up $0.09).


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5. Week Ahead & Other Tidbits 

Economic News:

None on Monday.

The National Association of Realtors will release existing homes sales for July on Tuesday.  The figures are likely to show a decline of 4.3% from June.  The Commerce Department will follow that report with new homes sales for July on Wednesday.  Wall Street is looking for a rise of 2.4%.  Durable goods orders for July will also be out on Wednesday.

Thursday (as usual) the market gets another look at the weekly new jobless claims, which was terrible last time out.

As for other economic data, there are a couple of big ones on Friday.  The Commerce Department will provide an update on 2Q gross domestic product (GDP), and the University of Michigan will update its consumer sentiment index for August.  Wall Street is looking for GDP numbers to show 1.4% growth, down from 2.4%.

Crude oil closed at $73.46 per barrel and fell 2.6% for the week.

Gold ended at $1,228 per ounce after adding 1% for the week.

We expect a pivotal week so make sure you stay updated by reading our daily 9am and 1pm (EST) updates.  On that note, we will be back Monday morning with a fresh outlook on the market and all of our current trades.

MomentumOptionsTrading.com Weekly Wrap for 8/8/10

Sunday, August 8th, 2010

9:45pm (EST)

1. Market Summary

2. Baidu Continues To Set New Highs

3. Arena Pharmaceuticals On Deck

4. Gold Back Over $1,200    

5. Week Ahead

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1. Market Summary

The bears were looking for a big payday on Friday after the market got the latest unemployment data.  As far as the specifics, July non-farm payrolls fell 131,000, versus estimates of a dip to 70,000.  Private payrolls also came in light as they increased by 71,000, compared with expectations of 100,000.  The unemployment rate came in unchanged at 9.5%.  The good news was the average hourly earnings increased by 0.2% and the average work week was 34.2 hours versus a forecast of 34.1 hours.

The news led to a nasty open as the market plunged 1% right off the bat.  However, the bulls held down the fort and immediately started defending the attack while nearly pushing the bears back to breakeven within the next half hour.  It didn’t end there.  The bears pushed even harder and took the market to new lows over the next hour and the bulls spent the rest of the session getting back on their feet. 

They did a pretty good job as the market basically ended flat for the day.  We mentioned last Thursday that the unemployment numbers could end up being a non-event as far as where the market closes on Friday but the volatility was intense both ways. 

The Dow ended Friday with a loss of 21 points and finished at 10,653 after being over 150 points down at one point.  The index traded to a low of 10,515 for the day but ended the week with a gain of 187 points, or 1.8%.  Resistance remains at 10,800 for the Dow and the high was 10,738 last week.  Short-term support will come in at 10,400-10,200. 

The S&P 500 slipped 4 points and finished at 1,121 after touching a low of 1,107.  For the week, the index added 20 points, or 1.8%, and reached a high of 1,128.  The S&P continues to battle the 1,125 level and there is still a chance 1,150 comes into play.  Support is at 1,100, then 1,070.  

The Nasdaq finished Friday with a 5 point loss to settle at 2,288 but tested it 200-day moving average when it kissed a low of 2,253.  Tech lagged as far as the weekly gain compared to the other indexes but still managed to tack on 34 points, or 1.5%.  Resistance remains 2,300 with an outside shot at 2,350 while support is at 2,250.

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2.  Baidu Continues To Set New Highs

Baidu (BIDU, $86.53, up $.96) has been roll recently and in a choppy market its performance hasn’t gone unnoticed.  The company is the leading Chinese search engine and its growth has been breathtaking to say the least.

The company recently projected 2010 revenues of $1.1 billion and in their most recently reported quarter they came in at $0.35 a share, compared with estimates for $0.31, on average.  Profit more than doubled from $56 million last year to over $123 million this year while revenue jumped from $161 million to $282 million. 

The 52-week range on the stock (split adjusted 10-1) is $31.65-$86.91 so times that by 10 to get a better picture.  The stock is up 110% so far this year and is trading at 63 times this year’s earnings and 40 times next year’s projected earnings.

The incredible performance of this stock has made it a favorite playground for the bulls and bears.  The bears hang their hat on a lofty P/E ratio and overvaluation while the bulls’ case revolves around a few key facts.

Google (GOOG, $500.22, down $7.88) is slowly being forced out of the largest potential internet market in the world as they try to “stare down” the Chinese government over censorship.  This has meant a huge opportunity for Baidu to solidify its dominance.

At the beginning of August, Google’s search had a global market share of 85% while Yahoo (YHOO, $14.34, up $0.18) is currently second at 6%.  Baidu and Microsoft’s (MSFT, $25.55, up $0.18) Bing are a little under 4% each. 

In the U.S., Google gets about 64% of the searches while Yahoo controls 18% and Microsoft 12%.  As you can see, Goog’s is still the dominate leader but Baidu’s share of Chinese search jumped to 70% last quarter while Google’s fell nearly 25%.  It’s something to keep an eye on going forward.

If we further compare the two companies, Baidu has a market cap of $30 billion.  Google’s is $160 billion but has hit an all-time high market cap of $185 billion.  Bulls use the argument that if you believe Baidu can be just half as valuable as Google is now, the stock doubles.

Bulls also point to the P/E ratio of 40 times next year’s earnings as not being all that unreasonable when the company is increasing revenues at a projected 55% rate (a PEG ratio of less than 1).  The past growth rate has been higher at 70%.

Analysts were caught off base when earnings came out and there have been a slew of upgrades.  Goldman Sachs (GS, $155.18, down $0.74) admitted they were wrong on Baidu’s earnings and raised their price target from $76 to $90.  Other analysts have piled on as well and the stock is rapidly approaching many of their price targets already.  As they are hit, we could easily see another round of upgrades or price target hikes if shares continue higher.

Although we are leery of Baidu’s lofty share price, we will go on record and say that shares have a shot at $100 if the Nasdaq sets new highs this year.

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3.  Arena Pharmaceuticals On Deck  

Arena Pharmaceuticals (ARNA, $7.16, up $.11) has been a volatile stock in the biotech space with a 52-week range of $2.70-$8.00.  The company has a lot riding on its obesity drug, Lorcaserin, and will look for it to capture real growth going forward. 

In its most recent quarter, the company reported a loss $29 million, or $0.28 a share, versus a loss of $38 million, or $0.48 a share, in the year ago period.  Through the first six months of 2010, the company is showing a loss of $60 million, or $0.60 a share.  They just sold $60 million worth of stock to Deerfield Management to shore up the balance sheet.

Arena faces a key decision on this drug on September 16, 2010 as a FDA Advisory Committee will vote on whether to approve Lorcaserin or not.

Vivus (VVUS, $5.30, up $.04) is the one stock we have followed closely when it comes to obesity drugs and the recent news for its Qnexa obesity drug was a huge disappointment.  Here is our excerpt from mid-July after the company got an unfavorable ruling (quotes from that day):

“Turning to Biotech, Vivus (VVUS, $12.11, flat) was halted all of yesterday as it awaited word on a panel’s recommendation concerning its drug Qnexa.  The news wasn’t good. The FDA’s advisory panel board voted 10-6 to reject the company’s obesity drug on safety concerns.  This was a bit of a shock to most experts because the drug does work.  However, the risks of depression, memory-loss and potential birth defects outweighed the rewards of getting people down to size.

This was tough for us to watch because we sat this one out although we are glad we did.  We brought you coverage on this stock at the beginning of 2009 when shares were around $5 and we have slowly watched them double for 18 months now.  We have also played call options on Vivus in the past but we decided to hang on the sidelines for this event due to the expensive nature of the options.

The news concerning Qnexa isn’t an official slam-dunk “no” because the FDA will still decide the drug’s fate sometime in October.  Vivus also said it expects to have more data from a longer study that could help its case for getting Qnexa approved but they are now probably losing the weight-loss race as two other companies also have obesity drugs waiting approval.

The talk was that Qnexa would gain approval but that there would be some negative votes.  In fact, one FDA official said he was surprised by the outcome.  Either way, shares are getting walloped as they are down $6.76, or 56%, to $5.35, in early action.” (END)

Shares of Vivus had climbed precipitously before the panel made its decision and were trading near $13 before the review.  Arena’s stock has done the same, rising from a recent low of $4 to a high of $8.  Analysts and investors believe Lorcaserin will have better luck than Qnexa because it has been shown to have a far better safety profile.

The reason these stocks are so volatile is the huge potential of a drug to combat obesity.  With 34% of Americans being classified as obese, and obesity related diseases such as diabetes on the rise, the market potential is huge.  We hate to say it, but lazy Americans don’t want to exercise, they want to take a pill and lose weight, and the company that gives them that opportunity is going to reap a huge reward.

We will keep you updated on the developments but it is looking like a strangle option trade might be in this works as we get closer to September.

= = = = = = = = = = = = = = = 

4.  Gold Back Over $1,200

Gold is a commodity metal that also serves as a store of value as it has few industrial uses. Over the last ten years gold has moved from $250 an ounce to a high of $1,257 in mid-June with the current price being $1,205 an ounce.  This represents roughly a 380% return over that time frame which has greatly outperformed all of the major U.S. equity indexes.  However, the inflation adjusted high for gold was actually $2,175 in 1980 when inflation was rampant.  What this means in theory is that if we return to a high inflation environment, gold has a lot more room to run.  Demand for gold comes in two forms basically, retail demand and investor demand, so let’s take a look at them.

Retail demand is really about jewelry and decorative uses, and the emerging middle classes in India and China have contributed to the rise in demand for gold over the last ten years.  This trend seems unlikely to abate as both of these economies continue to bring more people into the middle class and they choose to spend their affluence on gold items.

Investor demand is driven by how countries and banks view gold as a store of value and their views on inflation.  It is interesting to note that for the majority of the last ten years, as gold has risen in price, central banks have been net sellers of gold yet the price continued to climb.  This validates the rising retail demand we mentioned above.  However, this trend has reversed recently as currency instability, notably in the Euro, has caused central banks to begin buying gold.

This is important because banks typically would be buying gold if they felt that we were headed for serious inflation, yet, right now inflation is non-existent in the mature economies.  This means they are buying it as a currency hedge or replacement, which is a trend that bears watching.  If the Chinese or Saudis decide that they are less inclined to hold their foreign reserves in Euros or the dollar, the only other real viable alternative is gold at this point, and that seems to be where they are headed.

You can see why the combination of all these trends have many people believing a super spike in gold could happen within the next few years, particularly since the price is denominated in dollars.  With increasing retail demand, increasing investor demand, and an eventual fall in the dollar seemingly inevitable, they may be right.  As we noted above, we are well off the inflation adjusted high in gold, which only strengthens this argument.

The counter argument is that gold really has no value other than what we place on it since it really isn’t used in anything, and inflation is nowhere to be found.  Once this fear of financial instability recedes, investors will start selling gold and the price will go down but for now, the trend is still up.

The biggest holders of gold are believed to control about 20% of the gold supply, and these are central banks, international entities, and governments. The U.S. is far and away number one, with 8,965 tons in reserve.  The next five in order are Germany (3,754 tons), the International Monetary Fund (3,311 tons), Italy (2,701 tons), France (2,683 tons), and China (1,161 tons).  You can see why many people feel China will continue to add gold to its reserves since it represents such a small portion of their investments compared to other countries.

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5. Week Ahead

Second-quarter earnings reports will take center stage once again this week but the bulk of companies announcing are mostly done.  All of last week’s market gains came on Monday when the Dow surged over 200 points.  The indexes backpedaled for the remainder of the week but the bulls have been relentless on testing major resistance levels.

As earnings trickle in over the next few weeks, there are sure to be some surprises and disappointments but keep an eye on the weekly chain-store reports going forward.  These retail sales numbers will give clear signals about the health of the back-to-school season and the price wars have already begun.  This is the second busiest time of the year for retailers, besides Christmas, and they are counting on the consumer to spend as much as they can.

Another big event to watch for early in the week will be the Federal Reserve meeting.  The Fed meets Tuesday on interest-rate policy and there are reports that it is considering additional ways to pump cash into the financial system.

Another ”stimulus package” could be around the corner but Americans will use it to pay bills or buy necessities.  The U.S. is just not creating jobs fast enough and we feel unemployment will get worse before it gets better.

Expect another busy, volatile week and we will be back in the morning at with a look at the companies reporting earnings and a fresh update on all of our current trades.

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