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October 21, 2005

RIM in Motion

If you think the market action of late has been confusing, try figuring out today's action in Research in Motion. After an early drop of $3.50, trading was halted when it was revealed that RIMM's appeal in their patent dispute case with NTP was denied. The decision puts RIMM one step closer to an injunction barring it from selling Blackberries in the United States. So, what happened to RIMM's stock price when it began trading again? After an immediate $2 gain, the stock clawed its way all the way back to nearly even before selling off again in the last hour.

Realistically, RIMM will not stop selling Blackberries in the U.S. It is not in the best interest of either party in this lawsuit. NTP simply wants the royalties due for use of its patented technology. These courtroom defeats simply force RIMM back to the negotiating table with a weaker hand. But consider that RIMM will likely owe NTP a large portion of back profits and a large portion of future profits, combine it with burgeoning competition from Microsoft, Nokia, and Palm, and you have the recipe for a serious washout at RIMM.

All this begs the question: what is supporting RIMM's stock price? I have two suspicions. One is that RIMM itself is buying back shares. The second is that Fidelity management is supporting the stock. After all, Fidelity owns 13% of RIMM and certainly doesn't want to show it at half the price on its books. I put less credence on my latter suspicion only due to the fact that Fidelity would be playing a very dangerous game in trying to support a doomed stock in this manner, but money managers have done dumber things. Whatever is supporting the stock will eventually run out of power, and the bottom will fall out.

Overall, equities were mixed today. The Nasdaq enjoyed a bounce on the heels of Google's blowout numbers. The Dow fell a half percent as Caterpillar got hammered on earnings news and Pfizer continued it decline after yesterday's report (more on PFE next week). The S&P 500 gained a half percent due to a big rally in oil and energy stocks. I think today's energy rally was just a snap back in a continuing intermediate-term pull back. At some point in the near future, I plan to invest heavily in oil stocks, but that time is not now.

Disclosure: Short RIMM; Long PFE, RIMM Puts


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