Monday Mop-Up

Wow, what a good day that was!

I was baffled by it.  We got ISM numbers that were at 56 vs. 55 last months and Prices Paid fell from 71 to 68 (estimates were 69) and, since both were within the margin of error, it didn't even occur to me to get excited about them.

But, despite oil rocketing back over $71 after lunch, the markets just went up and up and up and up all day seemingly oblivious to all the things that concerned us in the morning.  Bear (oops, don't say bear!) in mind that we were at 13,325 at 3:30 on Friday so we've gained a clean 200+ points in just 7 trading hours – a very impressive performance.

Was it the IPhone?  Was it Google over $530?  Was it gold jumping over $650 or oil jumping over $71 or was it the dollar falling off a cliff, all the way down to retest the 30-year lows of 81.25?  It might have been the rates that fell back down below 5% or that Bernanke got himself a faster printing press…  What would cause rates to go down, commodities to go up and a broad market rally???  I think the answer is (and this is a funny one!) – a flight to quality.  Believe it or not, US dollars and dollar denominated assets are still the best looking place to put your money when terrorists are blowing things up so a lot of European mattress money found it's way here today.

The question is whether or not this is a sustainable situation or just a knee-jerk reaction to the weekend's terror scare.  I got my own scare reading Barry Rhitholtz's column today as he points out that 66% of the Nasdaq's last 218 point advance (since March 5th) has been attributed to just 14 of the 100 stocks with Apple alone accounting for 22% of the gain.  Broad-based rally indeed!

Apple worked like a champ for us today, cashing in our puts and giving us some cheap new positions.  Anyone who thinks the IPhone isn't a game changer (and I am talking to you, $215 RIMM buyers!) is going to be in for a rude awakening as this product rolls across America.  ChangeWaves' Parl Carton tallied up the results of 3,881 surveyed members and found some stunning evidence of the "halo effect" as planned Mac purchases have skyrocketed between March and June:

28% moves them into a tie with Dell in laptop sales and, if these numbers hold up, Apple could be knocking it out of the park in their Q4 (July, Aug, Sept '07) with all this plus three full months of IPhone sales.  Unreliable sources indicate that Apple sold 500,000 IPhones in 3 days and was still going strong today.  Expect the IPhone to be the talk of July 4th gatherings and we should open the markets next Monday with the announcement of the 1,000,000th phone sold.

That's $550M of phone revenues plus 1M $20 per month (over the regular price) phone service contracts all in less than 10 days – hard to believe Apple is selling off but that's the power of a Barron's pan.  It wasn't much of a sell-off, the stock took a brief dip to $120 but bounced up and finished the day at $121.26, up 50% for the year and up 140% since last July.  While a run like that may seem extreme, it's nothing compared to RIMM, which is up not 100, not 200 but 250% during the same period.  Of course RIMM sells the Blackberry AND the Blackberry Pearl, pulling in $3Bn in sales and $631M in profits for FY '06 while poor Apple had to squeak by with 19Bn in sales, and $2Bn in profits, earning them a $104Bn market cap (p/e 52) to RIMM's $40Bn cap (p/e 63).  RIMM had a celebration today as "only" 6% of IPhone buyers were RIMM users but I think RIMM users would be the LEAST anxious to be the early adaptors and will likely wait for the Christmas version of the IPhone.

There are two things people don't realize about Apple that make it undervalued.  Thing one, is that they are making $300 on every $500 phone they sell, thing two, which is so amazing that you will forget thing one, is that they are rumored to be getting $10, perhaps $20 per month of AT&T's subscription revenues (possibly the reason for the surcharge).  If Apple hits their goal of 10M phones sold by Sept '08, that's $100M, possibly $200M PER MONTH in revenues that will come in the form of a check from AT&T.  This would be a nice addition to their bottom line of "just" $2Bn per year and should make Apple a $200 stock without much worry as beloved Google "only" made $3Bn last year and has a market cap of $165Bn.  Hmm, RIMM is a one-trick pony, Google is a one-trick pony while Apple sold last quarter $2.2Bn worth of Macs, $1.6Bn worth of IPods, $650M worth of ITunes, $300M in peripherals and $345M worth of software – that's a lot of tricks!

So I'm excited about our Apple positions.  I'm excited about our T positions too (and they did well today) and I'm excited about getting all bullish again but not until after the holiday.  We get welcomed back on Thursday with rate decisions from the EU and the BOE and a terror-free holiday may change everything (as would a terror-filled holiday) but Happy Trading points out that we may be gearing up for a very nice rally if we continue this trend:

While I should have just stayed out of the oil game today, ZMan was right on top of his with a perfect play on IOC that he tee'd up this morning with a special feature on the stock.  He called the play perfectly and put the members into it at the dead bottom this morning with a 9:55 play on the $22.50 calls at $2 and they made a nice double by lunchtime so Kudos to Zman for a brilliant pick and congrats to all who played this one today.

Tomorrow is a half trading day so we're not expecting too much out of it but we'll get another piece of the puzzle and every little bit helps!