QCOM, Short-Selling and Accounting:
THE TECHNICAL STRATEGIST SEMI-MONTHLY for Monday, February 11, 2002
Volume 5, # 5M
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The Technical Strategist Semi-Monthly is a newsletter that aims to
interpret and capitalize on the stock market's behavior through the use of
Technical Analysis.
In each issue we summarize and interpret current market conditions based
on an examination of index charts. Each issue also discusses what those
charts say about near-term market direction.
Our goal is to use the clues the market gives us to enter and exit
profitable trades, and to preserve capital and diminish risk by the
judicious timing of market volatility.
NOTE: If you are unfamiliar with any of the technical terms, indicators,
or formations we discuss, please see this link for explanations:
bullmarket.com
We continue to upgrade the information on this site. However, if you have
consulted the link and still have questions, please email us at
TechnicalStrategist@BullMarket.com.
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IN THIS ISSUE
1. FEATURE: QCOM, ACCOUNTING RUMORS, SHORT SELLERS, AND WHY WE NEED THE
CHARTS
2. PERFORMANCE REVIEW
3. CLOSING INDICES FOR FRIDAY, FEBRUARY 08, 2002
4. MARKET INTERNALS FOR FRIDAY
5. MARKET OVERVIEW
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1. FEATURE: QCOM, ACCOUNTING RUMORS, SHORT SELLERS, AND WHY WE NEED THE
CHARTS
On Friday, news hit the wire on Briefing.com and everywhere else that
Howard Schilit of CFRA, a private accounting firm, had looked into
Qualcomm's 10-K and 10-Q and found irregularities. In the frenzied and
fearful post-Enron world in which the stock market now finds itself, QCOM
immediately tanked hard on immense volume, and indeed broke to a
multi-year low.
The individual investor was left to wonder what the name of heaven was
going on. We ourselves were in the dark until we were able to conduct our
own research and discover what the issues were, and how they stacked up in
the overall fundamental picture.
After intense scrutiny of Qualcomm's filings, here are the issues CFRA
brought up. Keep in mind that they were reported in the media only in
part, and without quantification that would show the relative importance
(or lack of importance) of these issues within Qualcomm's business model:
1. The company has recorded revenue in exchange for non-cash
consideration and… has accepted non-cash consideration for receivables
removed from QCOM's balance sheet.
2. (There is a) potential conflict of interest between the Board of
Directors and the Company's auditor.
3. Familial relationships exist among the company's executive officers.
Before we delve into Qualcomm's response to these issues and how the
issues fit into context, it would behoove us to understand who Howard
Schilit is and what the mission of his firm, CFRA, is. CFRA sells its
research to institutional investors for thousands of dollars per month and
then, about a month later, makes that research available more publicly.
Financial Executives International writes about him at
fei.org "Howard is a
leading source of ammunition for the short-seller community." As to
whether CFRA's business model, and the use of the news media in it,
amounts to frontrunning for short positions, we'll have to leave that up
to the SEC to decide.
Now to the issues raised:
1. The revenue in question was $20 million. Although that sounds like a
lot of money, it represents just 0.7% of Qualcomm's $2.7 billion in
revenue in fiscal 2001. The practice was primarily part of Qualcomm's
policy to allow certain startups to pay up-front licensing fees to
Qualcomm in the form stock rather than cash. It was a way to grow the
CDMA market and help small companies get a leg up. Furthermore, the
revenue was recorded in strict accord with Generally Accepted Accounting
Principles (GAAP).
2. The potential conflict of interest for the Board of Directors was that
a couple of executives now at Qualcomm had worked for the firm which later
merged with the firm that now does Qualcomm’s auditing. In one case, the
current Qualcomm executive had quit that accounting firm 25 years ago.
(Pretty slim pickin's on the conflict of interest front.)
3. Two of Irwin Jacobs, the CEO of Qualcomm, sons are indeed executives
at Qualcomm. One of them holds a Ph.D. in Electrical Engineering from UC
Berkeley and has 25 patents registered in his own name. The other son was
named one of the most "influential individuals on the Internet" by
Interactive Week in 1996. So clearly the Jacobs boys, while in the family
business, are by no means slackers, nor are they dead weight being carried
by their father.
There are some other corollary issues raised by Schilit and CFRA, but none
of them are any larger than these, and these are the most prominent. The
point being?
The stock market is rife with folks who will do whatever it takes to drive
a stock's price in whichever direction they please (we’re not talking
about Howard here, but rather the folks who use his information for fuel),
even to the point of spreading unfounded fear and panic. For example, in
1999 Qualcomm's share price was driven to the moon significantly on the
jet fuel provided by certain hedge funds in George Soros' group. Yet most
of the time the individual investor won't know what's going on with the
fundamentals, or whom to believe, until it's too late.
If we look at the charts, though, we can see what the Smart Money (or more
accurately, the Big Money) is doing. Moreover, we can take advantage of
what they're doing without knowing what they know, or paying for what they
pay for (like the CFRA report).
TECHNICALS ON QCOM
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AOL users, please click here </a>
We can see here the elegance of this downtrend. Each time the stock has
moved down, penetrated the lower Bollinger Band (BB), and kissed the lower
trendline, it has then bounced up to either the 10-dma or 20-dma. The
stock has then failed each time, starting a new leg down and hitting new
lows.
Now Friday was a climax of one sort or another. We can't say yet WHICH
direction, but the move from here will likely be strong. The immense
volume and the long lower shadow on Friday's candlestick show us that the
move to a new bear market low was met by a lot of disagreement among
market participants. The new low will either be rejected quickly and the
stock will break the downtrend on the next up move, or else the stock is
now susceptible to heading down to at least the $28.00 area.
On intraday charts on Friday, we saw strong net accumulation. It remains
to be seen whether that was a short-covering rally, or whether longer-term
buyers were stepping in. If it's the former, then they (the shorts) will
likely attack again, emboldened by the release of the CFRA report on
Friday (despite the triviality of its complaints).
Whichever way the stock goes from here, there is a large opportunity for
profit. If it fails to break back over $38.46 convincingly (and
preferably back over $40.00), then there's a good chance to make 10 points
on the downside. Should the shorts begin to cover, a violent upsurge on
the short squeeze should also be intense.
Of interest, and something we'll continue to watch near-term, is how our
proprietary Accumulation/Distribution indicator, Candlestick Volume
Momentum (CVM), shows a weakening of the downtrend while the price has
recently accelerated to the downside. CVM positive divergence is visible
both short-term and long-term. |
