Hanging Up on Telecoms

06/28/2010 2:47 pm EST

Focus: STOCKS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, says the weakness of AT&T echoes recent economic disappointments.

The latest cell-phone innovations and the expanding number of applications available to users are gaining my attention as an investor. What also is on my mind is that the telecommunications company that appears best positioned to profit handsomely from such inventions does not seem to be winning the hearts, minds, and financial backing of investors.

With Apple (Nasdaq: AAPL) having trouble keeping up with orders for its new iPhone 4, AT&T (NYSE: T) seems to be missing out on a great opportunity to add to its customer base. Another cautionary red flag is that AT&T’s stock price has been languishing in recent days. AT&T’s share-price recovery during March and April seems to have run out of steam. A big reason could be that AT&T is fumbling its opportunity to take advantage of its status of exclusively offering the iPhone to US cell-phone users.

News stories in mid June reported that Apple and AT&T encountered major problems in taking orders for the newest iPhone model. First, buyers reported trouble registering their orders. Second, an apparent glitch in AT&T's Web site reportedly gave certain customers access to the accounts of others. It is the continuation of a pattern of problems that AT&T has incurred in trying to keep up with demand for new iPhones. To use a World Cup analogy, AT&T appears to be misfiring on a great scoring opportunity. In the investment arena, it might be the right time to consider shorting the telecommunications sector with the UltraShort Telecommunications ProShares (NYSE: TLL).

When a bellwether company that should be excelling is faltering, it is a bad sign. The Dow Jones US Select Telecommunications Index that TLL is designed to mirror tracks providers of fixed-line and mobile telephone services. For each $2 that the index falls, TLL is designed to gain $4.

Yet another concern that heightens my interest in short positions such as TLL is that the economy is not picking up the way that many observers had hoped. The US Department of Commerce reported that US home sales sank 33% in May from April to hit a seasonally adjusted annual sales pace of 300,000. It marks the lowest level of home sales on record since the government started keeping track in 1963. It also is the largest monthly drop on record. Home sales now have plunged 78% from their July 2005 peak. With the expiration of the April 30 deadline for homebuyers to qualify for a federal tax credit, the housing crisis appears far from over. The artificial stimulation of tax credit on the housing market may have hidden the sector’s weakness and lulled investors into a false sense of security.

I also have concerns about the impact on the corporate profits of multi-national companies due to the weak euro and warnings of slackening consumer demand from McDonald's (NYSE: MCD), Best Buy (NYSE: BBY), Federal Express (NYSE: FDX) and Nokia (NYSE: NOK). In addition, potential losses for BP (NYSE: BP) are mounting as its Gulf coast oil spill remains uncapped. And Spain may need to tap the Europe bailout fund. With each piece of negative news, it points to further risk in the stock market.

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