Sunday, January 10, 2010

A Big Unknown

The death spiral continues as the Ithaca Experiment portfolio got kneecapped a few more percentage points to the downside last week. I'm still all in although it's been a nail-biter as the market valuations have gone from the the ridiculous to the sublime. Things are really out of whack when truly negative employment numbers were released on Friday and the market surged straight ahead, albeit by only a few points, but still it keeps going up or is consolidating. The unemployment rate is now 10.2% with total underemployment even higher at 17.3%. That's a lot of people out of work. Those statistics coupled with the fact consumer credit is contracting can only bode for a lower GDP in the coming months, but I've been singing that tune since the inception of this blog so as I have stated in previous posts, follow my advice at your own peril. The far more thornier question is how long can I stay leveraged and short? That I just don't know because I'll be quite frank, it's tough right now. For the time being, it's damn the torpedoes.

One of the reasons I write these missives on a regular basis is for accountability. Although I do back of the envelope analysis, I'm still in the ballpark with any profits and losses incurred and as the gravy train on Wall Street begins to slow, I will be gaining ground. Earnings season for the 4th quarter of 2009 begins this week and although year-over-year comparisons will be relatively easy, it is the P/E ratio of the S&P 500 that will be important. With a flick of the switch the negative trajectory of my portfolio could be reversed. Sure, there will be some technology companies in the smartphone arena with good earnings, but even companies like Google (GOOG) and Apple (AAPL) have gotten ahead of themselves on a P/E basis. The market reeks of 1999 all over again as a handful of big-cap technology companies lead the NASDAQ.

A good portion of the news this week on the blogs, in the financial press and on CNBC was about the battle brewing between Google and Apple in the smartphone wars. There was little mention of Research In Motion (RIMM) with their Blackberry phones, but they too are in the mix with a stranglehold on the corporate market. However, in the consumer market it appears to be Apple's iPhone vs. Google's Android operating system and consumer adaption is where the growth will be in the upcoming decade. There is rampant speculation about who will be crushing whom like MS-DOS destroying the old CP/M operating system in the PC space or VHS trouncing Betamax in the video cassette wars of yesteryear. My bet is on Apple because of the iPod and the iTunes store. They've already got the cool factor built in and an established base of millions of happy iPod and iTunes users in place. Like Steve Jobs says: "Do you know anyone who has a Zune?".

I'm like the majority of Americans and don't want to leap through burning hoops to use my technology. I prefer plug and play and Apple has made it very easy with the intuitive nature of their products for even a technophobe to use their offerings. Sure, there will be a place for Android, but I don't think they will dethrone Apple in the convergence of the cell phone and the MP3 Player and the computer. I rarely make comments about the weekly business stories because they blow hot and cold - one week's treasure is the next week's trash. But the smartphone saga is the overall theme for the next 3-5 years in not only technology, but in our day-to-day lives. Smartphones are currently a luxury, but they are productivity tools and not just expensive toys. Just like the PC and cell phone, eventually the majority of the population will own a smartphone or be trampled under foot. Does that mean I think you should buy Apple? Not necessarily at $212/share with a forward P/E ratio of 25.5 and a growth rate of 25% which translates into a PEG ratio of 1. However, when the market corrects, it would be a very nice technology holding in any portfolio.