Liking Apple (AAPL) and Research In Motion (RIMM) here

Both are at the lower end of their uptrend bands. Both have pretty solid product stories going into the second half. I paid $130.6 for RIMM and $176.5 for AAPL. I feel pretty good about the fundamentals with each.

The troubling thing about them has nothing to do with fundamentals and therefore bears mentioning. They're widely held, liquid, I'm reading about hedge fund redemptions and we're heading into the summertime when interest in technology tends to wane.

My guess is if they chop too hard lower I'll get shaken out and have to come back again lower. This is not a market where you get paid to be stubborn.

Notebooks on the move

IDC and Gartner both raised their forecasts for PC growth based on strength in notebooks. IDC predicts notebooks will grow 35% this year and that desktops will grow 2%. They expect notebooks to outsell desktops for the first time in 2008.

Yep, PC market pretty stable so far. Not much to add here.

Potash (POT) showing some hubris

-- POTASH CORP CEO SAYS NEXT FIVE YEARS TO BE "GREATEST PERIOD OF GROWTH" IN COMPANY'S HISTORY --

That sounds great, doesn't it? But do you really want to bake a 5 year forecast into investor's minds? Ever?

Case in point, this choice quote:

"These dynamics have put us on track for our 13th consecutive year of record earnings in fiscal year '05 and assuming continued healthy demand, we believe approximately 20% net income growth in both fiscal year '06 and '07."

- Robert Toll, Toll Brothers CEO, August, 2005.



That didn't work out so well.

I can't find the Corning quote, but in mid 2000 they gave a multi-year forecast. The stock was $300. Two years later it traded at $1.

I don't follow Potash. I don't really know what they do. I do know the kiss of death when I see it.

Out Sigma Designs (SIGM)

Too risky. Looks like it can just drop into free fall. I'm out.

Some other thoughts

I bought some SIGM @ 15.60 -- I think it's worth a shot there. Lot of bad news in it. Kind of a last stand... if it doesn't hold I'll puke it.

I'm looking to cover some INTC at 21.90 if it trades there.

I added to STEC at 12.60.

Panic sets in

I hate to write about the market. It's an irrational beast and I've come to the point in my career where I don't like to try to call it. As a good friend of mine says, its hard enough to get 1 stock right, why bother trying to call a hundred (there's 100 in the NDX which tends to be the index I watch as it's tech heavy.)

I'm going to get more bullish when the SOX gets to 370. I was negative when the SOX was 420. I think for the most part things are holding together better than valuations suggest.

I've started to get more aggressive on my longs. I bought NSM at 22.90 (new position), MRVL at 15.90 (re-entering), a lot of STX at 20.20 (adding).

There's a rumor out there that Goldman is going to have to do a big write off and people are horrified. Really? Wouldn't that just fit into the matrix? Frankly I'm shocked they haven't had one -- everyone else has.

Quality Systems (QSII) earnings lacking quality

QSII reported $51.2mm in revenues. The street was modeling a mean of $53.4mm. The shortfall came entirely from the systems division, maintenance was essentially in-line. The tax rate came in at 36% -- the street was looking for 40%. That pushed EPS a penny above the consensus -- if they'd used a 40% rate they'd have reported 38 cents, below analyst consensus of 40 cents. There's no guidance. At all.

Accounts receivable jumped to 136 days. They have some gobbledy-gook explanation of it -- that if you back out the deferred revenue tied to the accounts receivable increase yoou'll get to 85 days. This certainly seems dubious. The company attributes the increase in receivables to their relationship with Siemens. Possible. It could also be questionable revenue recognition practices.

Management was asked about employee compensation on the call -- how they arrive at their targets (which they missed last year). Here's what they had to say:

I think it's fair to say that thematically the areas of focus have been top line and bottom line for revenue and earnings per share growth, and at least historically there's been input in terms of where the management team feels like the business is going to go or where it's going to be, and that gets mixed in with some of the board and comp committee thoughts and ideas in terms of what they would like to see and somewhere within those sets of numbers, M&A from those sets of numbers, the plan for the year, that's how it's worked historically.

I think compensation tied to "revenue and earnings per share growth" creates an incentive to jack those at the expense of balance sheet metrics... and that's what I believe I see. I could certainly be incorrect but I continue to see the balance sheet get weaker and management reveals less and less information as time goes on.

This company was first brought to my attention because of the balance sheet weakness, which continues to deteriorate. The CFO was investigated for insider trading, a case the SEC has subsequently dropped. A 16% shareholder has filed a 13D/A suggesting management runs a shadow board of affiliated parties that doesn't report to the board of directors. He suggests the shadow board is making decisions on things like acquisitions without board approval. There are a number of red flags here and I don't see anything to make me rethink my theory that quality of earnings here is poor.

In case you haven't figured it out by now, I'm short the stock.

Maybe buy some Seagate (STX) against Western Digital (WDC) short?

The historical spread is at an overwhelming disparity. I still think Western Digital is ahead of itself... but I'm adding some Seagate on the long side as I think their channel inventory situation is much improved versus a few weeks ago.

Apple (AAPL) numbers go higher around the street

Target prices and estimates going up all around for the most part. Piper backs out AT&T's reduced guidance and arrives at an estimate that AT&T will be paying $466 per iPhone. That obviously implies a higher ASP than a $200 subsidy. Details will likely become clearer over the coming weeks. I think $399 for the 8gb phone and perhaps $499 for the 16gb. I would also point out that the company guidance of 10mm units is likely ridiculously low assuming Apple doesn't hit further production snags. They're at 6mm units and its June. The back half of the year is consumer electronics heavy. I would think we're going to be looking at a number far in excess of 16mm units -- maybe even 20? -- before the year is out.

On the surface, iPods look a little expensive relative to the iPhone functionality available for the same price point. iPhones on the other hand have a much higher total cost of ownership for a consumer with the ongoing monthly payments of $70+ even at the minimum plan.

Expectations are low for the June quarter after the company's tepid gross margin guidance. The only datapoint I have to add here is that the company got a lot of flash memory in at the lows at the beginning of the quarter and that will help the comparisons greatly with the prior couple of quarters where they were working off much higher priced memory in their cost of goods -- hopefully this indicates their margin guidance was overly conservative. Macs are typically strong in September for back to school and have more momentum this year than in years past. Expect a lot of excitement about the Apple product line heading into December.

I'm compelled to continue to like it here.

AT&T comments on 3G iPhone

Some pretty revelatory stuff in the AT&T release.

The new agreement between Apple and AT&T eliminates the revenue-sharing model
under which AT&T shared a portion of monthly service revenue with Apple. Under
the revised agreement, which is consistent with traditional equipment
manufacturer-carrier arrangements, there is no revenue sharing and both iPhone
3G models will be offered at attractive prices to broaden the market potential
and accelerate subscriber volumes. The phones will be offered with a two-year
contract and attractive data plans that are similar to those offered for other
smartphones and PDAs. AT&T anticipates that these offers will drive increased
sales volumes and revenues among high-quality, data-centric customers.

-- So the Apple model is changing. No more deferred subscriber revenue. It's all going to be up front. Concerning if you consider the $199 tag.

In the near term, AT&T anticipates that the new agreement will likely result
in some pressure on margins and earnings, reflecting the costs of subsidized
device pricing, which, in turn, is expected to drive increased subscriber
volumes.

-- Hold on a sec! They're saying it's a subsidized model. So they'll be paying a subsidy to Apple. I'd speculate thats a $200 subsidy. So we're talking about Apple getting probably more like $399 a phone and being able to recognize all the revenue up front. The negative here is that the amount they collect going forward is nil. Furthermore, if they were getting $20 a month from AT&T as had been the speculation, they're only going to be getting somewhere in the neighborhood of $8.25 a month (if you amortize $200 over 24 months). Of course, they'll also be selling many many many more units at $199. Apple is also figuring out how to stick users with additional fees -- case in point, mobileme, which does over the air sync for iPhones for $99 a year. They'll probably be able to do a good recoup on some lost revenue like that.

The good news for consumers is $199 for a 3G iPhone is going to create some very affordable situations in non-iPhone models.