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October 2, 2006

End Game for RIMM

Like most other trading days of the last 6 weeks, today's action in equities was characterized by a lack of character. At least the final numbers shone red instead of green for a change. This result was handed to bears by the weak showing in the latter half of the session. Even so, the selling lacked any force and once again seemed like consolidation rather than the start of a significant shorting opportunity.

Wal-Mart shares shed nearly 2% after September sales came in a little low. Traders have been soaking up retailer shares for weeks, believing that lower gas prices would bring shoppers back out. As readers know, I have been skeptical of this connection, but when stocks want to move one way or another the rationale of the excuse is of little concern. What I do know is that there is a large discrepancy between what is happening on Wall Street and what is happening on Main Street. I've been drawn into a couple of false starts to the downside, but still plan to get aggressive when things break down because I remain convinced that prices will break hard.

On Friday my commentary about the earnings release of Research in Motion was abbreviated due to the fact that I did not have the opportunity to review their statements before the weekend. As it turns out, there were no statements to review. RIMM just threw out some earnings figures and forward-looking statements without any corroborating evidence. Their excuse for withholding statements was the need to restate six years of earnings in order to account for options accounting issues. But why hold back the earnings statement when the cumulative error over options accounting is only $45 million? Also, why does their forward-looking statement entail higher quarterly revenue growth than the last five quarters?

The whole situation smells fishy, and reminds me of the games played with the timing of the lawsuit settlement. Back in early March, I wrote of how convenient it was that the settlement announcement occurred simultaneously with a poor earnings release. Naturally, the settlement news trumped poor earnings, and RIMM shares leaped 15%. They were then clipped by a third over the next 3 months. I suspect the same performance will follow this round of shenanigans. How can traders accept promises of accelerated revenue growth entering a recessionary environment and seeing competition coming online? After a bit of contemplation, I suspect they won't.

Isn't it also convenient that this seemingly blockbuster earnings release came right at the end of the quarter? Now management can unload shares this week, and we traders won't be privy to such sales until the middle of February at the earliest. One has to wonder if this is not the end game for RIMM shares.

Disclosure: Long RIMM Puts


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