Homage to the Aged (MSFT, CSCO, INTC, ORCL)

We’re not so big on popular culture as we once were. Movies and music used to be our lifeblood back in high school and college. Today, we’re more apt to agree with that highbrow critic who opined nearly twenty-five years ago that the “movies are just dog-sh*t.

Can’t be bothered to go.

As for music, we don’t listen anymore, though we still hold a soft spot for some of the older balladeers, among who we count Bob Dylan and Gordon Lightfoot to be among the cream.

And it’s precisely to these two songsters that we make reference today, as we turn our attention back to our current market predicament.

Why these two? Because Bob Dylan’s Hard Rain is the destiny that we believe awaits us all at the end of the current synchronized round of global central bank meddling (listen here). And Lightfoot’s Early Morning Rain, aside from being an all-time popular folk classic, also indicates where we currently sit vis-à-vis the ultimate flood that portends.

dylan

That is, the Dylanic washout will eventually come, will be brutal and will provide the world with the necessary financial (and moral?) reset to correct the system’s current excesses. While Lightfoot’s ditty, for its part, hints to us that we’re now only at the beginning of that inevitable Noahide drenching that awaits.

Lend your ear…

The Language of Water

We speak a lot in this space about ‘liquidity’, the driving force behind the current bull market in stocks that’s been provided by that same cohort of congenial central bankers that we mentioned above. We don’t believe anything good will ultimately come of their intentions or the money with which they’ve flooded the banking system – and we’ve referenced Bob Dylan’s biblically inspired Hard Rain as the most likely outcome of that madness. But at the same time, we have to admit the short- and medium-term reality of their actions, namely asset inflation – particularly in equities – will be the inevitable result.

And with that in mind, we’ve no option but to continue offering the same solid investment advice that we’ve provided to you for the last six years under the Normandy banner. There are difficult times coming, to be sure. But for those who maximize their investments before then, and prepare themselves appropriately for the trial that awaits, a better day will come. And we at Normandy Research feel a genuine duty to successfully guide our fast growing readership through that period.

Settling Up – To the Tune of 100%!

We’re going to look first at a trade that we opened on April 4th of this year as a shining example of the type of service with which we always hope to provide you.

It was a long/short play on Facebook (NASDAQ:FB), the world’s greatest time-waster, and the iShares Global Telecom ETF (NYSE:IXP), a sector that had been among the hottest performers in the market when we set the trade.

The letter was called Prying Profits from a Return to Risk and we outlined our thinking on the matter thus –

“Reason dictates that we play Facebook’s weakness of late against the strongest sector of the market, the telecoms. The thinking is that the defensive telecoms will fall out of favor as the market begins to gyrate higher, and a rotation toward growth and risk (Facebook) replaces the worry that’s prevailed over the last month.”

The actual trade recommended was to buy Facebook at the market, then at $56.75, and sell the iShares Global Telecom ETF, then trading for $66.94 in equal amounts. Your credit was $1019 for each board lot traded, and here’s what happened since.

Facebook shares flew to $64.50, and IXP shares ascended marginally, to $69.54.

The distance between the two is now precisely $504 per board lot traded.

And we’re recommending you close.

Buy back your IXP shares and sell off your Facebook shares at the market and you pocket $515 for your efforts. That’s a profit of 102% in ten weeks and it damn well beats a bucket of the Colonel’s best and a side of fries.

sanders

The return to risk has not only benefited the social networking stocks and other high fliers like the biotechs, however. We’ve also seen some excitement in the old-line tech names. Companies like Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL) have been on the move of late, and we believe the trend will continue.

Dot Com Bubble Redux?

At some point in the last three quarters, the excitement surrounding these geriatric techs has been strong enough to generate big gaps higher in price for all of them, from Microsoft’s big move back in October of last year to Intel’s massive leap just last Friday (see chart below).

And yet none of these ‘old-world’ companies possess the outsize earnings multiples found on their sexier, more socially oriented tech sisters like Facebook (P/E 83.8) or SINA Corp (P/E 119.3). They all boast reasonable P/E ratios (none above 17.4) and except for Oracle, also possess strong dividend yields (at least 2.72%).

That’s reason enough for investors to buy them. But a look at the charts for the last six months may provide further incentive.

intc

On the Intel chart we see some interesting moves.

In the first place, the company’s nearly seven percent leap (in red) on four times her average daily volume last Friday (120 million shares traded, in blue) was a g-force inducing head-splitter of a move that also pushed her Relative Strength Index above the dangerous 80 line (on black). And that should be cause for concern over the short term, despite the company’s projections of higher Q2 earnings.

Cisco’s gap higher of a month ago was a gentler affair; though welcome news for stockholders precisely because it failed to set off any obvious technical alarm bells.

Look here –

csco
Both RSI and MACD readings are well within an acceptable range.

Goldilocks Stock

Microsoft’s chart is still more sedate. Here we see a company that hasn’t gapped recently, but looks ready to do so. At least three times she’s tried to ascend above ten-week resistance at $41.66, only to be rebuffed (in red), while all the while RSI and MACD indicators remained afloat above their respective waterlines. And that’s good news.

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Have a look –

msft
We expect a pop higher from Microsoft and a sideways to downward drift for Intel, despite her good news.

With that in mind, we’re pairing the two in a (near) zero premium trade that will profit should MSFT outperform INTC over the summer.

Wall Street Elite recommends 1.) closing your long/short Facebook/IXP trade as outlined above, and 2.) buying the MSFT September 44 CALLs for $0.54 and selling the INTC September 31 CALLs for $0.58 in equal numbers. The trade will credit you $0.04 per pair traded.
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Have a look –

msft
We expect a pop higher from Microsoft and a sideways to downward drift for Intel, despite her good news.

With that in mind, we’re pairing the two in a (near) zero premium trade that will profit should MSFT outperform INTC over the summer.

Wall Street Elite recommends 1.) closing your long/short Facebook/IXP trade as outlined above, and 2.) buying the MSFT September 44 CALLs for $0.54 and selling the INTC September 31 CALLs for $0.58 in equal numbers. The trade will credit you $0.04 per pair traded.
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With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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