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December 22, 2005

Duopoly

The market likes to have it both ways, and so far this week, it has delivered. After an ominous Monday, the major indices have delivered some light-volume gains for Tuesday through Thursday. The S&P 500 has managed to regain Monday's loss, but tech stocks still lag. Though I still believe we are on the verge of a greater sell-off, the action this week gives both bulls and bears fodder to trot into Christmas weekend feeling confident.

Research in Motion delivered what shareholders wanted to hear last night, and the stocked popped for a cool 10%. Despite competition coming to market from Microsoft, Palm, and Nokia, RIMM traders are still giddy. I have to admit that there is an allure to subscription-based income. Recurring revenue is gold to any business, and I can vouch for its benefit first-hand. Web hosting revenue propped up my business during the nasty years of 2001-2003. Recurring revenue is also a more salable type of revenue. On the other hand, recurring revenue services tend to be commoditized rather quickly in their life cycles, and that's where Microsoft and company come in to spoil the fun.

Calling tops is a difficult task, but I will stick my neck on the line and call RIMM's top at the point they resolve their dispute with NTP. Curiously, many tops coincide with strongly positive events for the underlying asset. Oil's 2005 run topped out just when the twin hurricanes were wreaking havoc in the gulf (a top that I called for that very reason). Gold's recent run ironically ended just when the dollar started tanking… as if gold had a mission to break the US currency's run and when it finally accomplished its goal, it took a breather. So, when RIMM finally appeases shareholders by retiring this thorn in their side, we will likely see a pop in its share price, followed by a long, torturous erosion of its share price.

Another retailer has been taken out and shot. Bed, Bath and Beyond was smacked for 12% after reporting disappointing sales in its third quarter report. It will be interesting to see how things shape up for the retailers as the holiday season closes. Most retailers have been revealing disappointing numbers thus far. A number of deep discount sales have hit the ads this week... another negative omen for the group... and I look forward to refreshing my wardrobe in some even deeper post-holiday discounting.

There will be no post tomorrow as I will be out doing my customary last-minute Christmas shopping (though I will post a Q&A this weekend). I am not too keen on holiday shopping since it is more fun to give people gifts when they are not expected. However, at times tradition must trump philosophy. Happy Holidays!

Disclosure: Long RIMM Puts

 

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