Friday, December 7, 2012

Morning Update

This morning the NFP report for November came in well above expectations at +146K jobs which brought the unemployment rate down to 7.7%. This is the lowest unemployment rate seen in 4 years and is the result of 350,000 people leaving the labor force. The BLS said that there were no discernible impacts from Hurricane Sandy, contrary to expectations. Overall this appears to be a bullish report and contracts the poor ISM manufacturing, PPI, and durable goods orders for the month. The market is higher on the news but we expect traders to remain cautious about getting overly long before a fiscal cliff deal is announced.

Yesterday Nokia saw some of the highest call option trading volume of the whole market. The biggest trade of the day was the purchase of 22,260 January 7 calls for $0.38 with the stock at 3.69. This is a bullish bet that the stock will be above 7.38, a 100% gain, over the next 42 days.

Nokia’s stock has been beaten down in 2012 as the company continues to lose market share from Apple’s iPhone, and Google’s Android. However the stock is well off its 52 week low of 1.63 and is trading near six month highs. The stock’s recent momentum is due to a few things: the release of new apps, analyst upgrades, and the Lumina Windows phones.

Nokia’s biggest struggle has been against the structural decline of feature phones and rise of smart phones. Nokia currently generates 65% of sales from feature phones but analysts predict this market to shrink by 50% by 2014. Nokia is also struggling to sell Lumina phones when consumers can buy Android smart phones for less. Nokia’s hope for growth is tied to the success of Window’s phones. If Windows 8 can prove itself as a superior mobile operating system to Android and iOS, Nokia may be able to gain some of the smart phone market share. Unfortunately for Nokia, HTC also makes Windows phones. These companies will be in fierce competition for the Windows market share, which is likely to drive down prices and margins. Some analyst is optimistic that Nokia’s launch of the new Lumia phones in Asia and Europe will be enough to get the company back on track, which has led to a few upgrades in recent weeks.

Expecting a 100% move on top of the rally the stock has already seen this month seems to be asking for a lot in my opinion. Even if the Window’s phone is wildly successful, Nokia will still have to compete on price with HTC for that market, which will keep margins down. The biggest catalyst I see to rapid share appreciation is the short interest in the stock. Currently it would take over 10 days for all of the shorts to cover their positions based on the stock’s average trading volume. This means that if the stock’s upward momentum continues a short covering rally is likely to ensue.

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