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September 30, 2006
Week #39 (2006-09-30) in Review (FINAL)
This was the final week of 3Q06, which seems appropriate for Value Line to be reporting on AT&T and Verizon since the telephony stocks have been the high flyers this year and Main Street is beginning to wonder if pigs can fly.
I'll discuss these two companies in the ETF GICS Sector 50 section below.
A week ago I pointed readers to what I see as the possible tipping point to the 2002-2006 Bull market. That day is coming.
I wrote: "Circle your calendar for October 17-18 this year because that is a 24-hour period when the U.S. Industrial Production, Housing Starts, National Association of Home Builders housing market index, International Capital inflow-outflow data, PPI, CPI, and Crude oil inventory data is reported. Canada's version of the FOMC report is also issued at that time. It strikes me that perhaps this coalition of economic forces hitting the market from all angles on October 17-18 may terminate the stock market cycle. And, reverse the trend from Bull to Bear."
Maybe I have it wrong. Many of you think so.
You are looking at the upcoming 3Q Earnings Season that is about to begin, and you are thinking that double digit earnings growth and continued Bull markets go hand in hand. I hear that a lot.
Often they do, but oh my, how things have changed during a political season. It was just a week ago that I wrote: "Seriously, the important events in the market this week centered on (i) extreme volatility of commodities (ii) the future of hedge funds (iii) the rapidity of the U.S. economic slowdown, and (iv) the dubious stability of the U.S. housing market."
This week, the powers to be have suppressed all such talk.
That too happens often. Do you recall right after Hurricane Katrina, how the U.S. news media stopped all reportage of shut-in oil? It was as if Cinderella had waved her sparkling wand.
Maybe he did " from the Rose Garden.
As I noted a week ago, Talking Heads for vested interests will tell you that (i) commodity market volatility is normal " it isn't (ii) hedge fund investors get what they deserve " that's not the issue (iii) the U.S. economy is somewhere between Goldilocks and soft landing " it's not, and (iv) because of lower mortgage rates, the U.S. housing market will quickly overcome its problems " it won't.
It's almost that whenever we say "this", the Administration parries with "that".
Pigs can't fly. Oh yes they can.
Something happened on Monday morning this week after the weak opening. The existing home sales data, published at 10:00am ET, was weak, which by itself was not surprising to any of us, but combined with falling mortgage rates, there seemed to be new stories floating about (politically inspired?) that the problem was not that bad and help would be on the way, and that home-owners shouldn't fear the predicament of the housing market.
You know, it's one thing for politicians to put their best foot forward and quite another to not discuss issues because they refuse to admit the problems or the risks involved in not resolving them.
How long can "the elite Few" carry on this fiction in the face of facts before "the Many" just cash their chips and leave the game in disgust?
In any case that's the back-drop " the reason I continue to fear that one day soon we'll wake up from dream-land (George's Rose Garden) to an absolute calamity in the capital markets.

As an aside, can anybody tell me who is princess number six? Let's see, there is Cinderella, Bell, Aurora, Laura and Condi;
For now though, we must all look at the reality, which is that markets are in rally mode " a condition I alerted you to about seven weeks ago, even if many of you didn't want to hear it. And that alert followed by a couple weeks my "buy" recommendation on 20 U.S. high-tech stocks.
However, in terms of the bigger picture, I haven't changed my view that someday soon, those with the cash will be king and queen; which is not a fairy tale.
Back to the view from George's Rose Garden, did you all catch the final ticks for the 3rd quarter? If not, have a look below at the final hour of the Hourly data charts of the four major U.S. equity indexes. Does that not tell you we're not playing with a full deck here?
You do that, or I do that, and the Feds come calling.
Global Market Summary
International Equities: International markets were strong this week. I continue to believe that the bellwethers outside North America appear to be Japan in Asia-Pacific and Germany in Europe.
U.S. Equities : I warned the Bears a week ago: "Following a moonshot week, the U.S. stock indexes were down a bit this week, but actually the losses came mostly from Friday. There is fight in the old Bull yet." This week the Bull roared. Well, Monday and Tuesday anyway.
Dow 30 : There were 27 Dow stocks up and 3 down. Six were up more than +3.0 pct W/W, but these were mostly dubious movers, ie, GM (+8.6 pct), HPQ (+4.5 pct) and XOM (+3.4 pct). The biggest losers a week ago were the biggest winners this week, so money is just sloshing about.
U.S. Sector ETFs: There were 8 ETF's up and 2 down. On Friday though it was almost (not quite) a reverse of that. The big winner from a week ago, IYZ (Telco services), was this week's big loser, and the big loser a week ago, SMH (Chip & Dip), rallied to #3 winner (and could have made it to #1 except for the sell-off on Friday). Traders are wondering where, other than from computer-generated hedge fund orders, has the public gone. The People are back from summer vacation, but not too impressed with this rally.
First segment: most influenced by global commodities, forex and capex spending
10: Energy (XLE): #1 (+4.1 pct); Energy prices are holding
15: Basic Materials (XLB): #4 (+1.8 pct); Friday was a big loser
20: Industrials (XLI): #2 (+3.0 pct); CAT (+4.8 pct) reversed last week's big loss
Second segment: most influenced by U.S. consumer spending and economic growth
25: Cons. Discretionary (XLY): #5 (+1.7 pct); Cheaper gas, more spending
30: Cons. Staples (XLP): #9 (-0.3 pct); Altria down -7.0 pct W/W
35: Healthcare (IYH): #8 (+0.8 pct); reversed last week's loss
Third segment: most influenced by U.S. interest rates and general economic health
40: Financial (XLF): #7 (+1.2 pct); Big banks ok, but time to watch the little ones
45: Tech (SMH chips): #3 (+2.8 pct); From +3.1 to -2.9 pct to +2.8 pct. Tick tock
50: Telecom Services (IYZ): #10 (-0.5 pct); From first to last this week
55: Utilities (XLU): #6 (+1.3 pct); Friday was a big loser though.
Bonds: Bonds getting a little over-bought here with Weekly data RSI 7 up into the mid-70's-low 80's range. The opening on Monday (25th) may have been the peak for this cycle.
Commodities: A week ago, the media was asking: "Commodities: How low do they go? Is the Commodity Bull dead?" Apparently not. Well, possibly not at least.
Oil & Gas: $WTIC futures were jumped +3.9 pct W/W to 62.91 after OPEC said they wouldn't let anybody kick sand in their face.
Gold: $GOLD and $SILVER followed $WTIC back up, but $PALL and $PLAT did not. Volatile $PALL still shows weakness.
Goldminers: The miners were up on the week an average of +2.2 pct, but they sure did weaken quickly from mid-day Friday.
Forex: A week ago I wrote: "The $USD lost almost a full pct, while the Euro gained more than a full pct." This week, the trade was reversed.
Sector ETF:
Eight of the ten sector ETF's I follow here were up this week, which was a reverse of a week ago. So a week ago when I wrote: "I still smell smoke", it was a good call.
Congress has hit the road in their quest for re-election. In addition to smoke, now there will be mirrors, and magic wands.
For the U.S. equity market, as you know, I study it top down by sector. Here is the weekly performance of my favorite ten Sector Index Funds (ETF's). The following table is sorted by price performance Week over Week (W/W), i.e. 1W%N.
Table 1: Cara ETF List
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
You can do this table yourself by entering the following string into the Summary window at Investertech.com and then clicking on the link for Performance. XLE XLB XLI XLY XLP IYH XLF SMH IYZ XLU . You can also add more ETF's " up to 30 in total.
For a list of components to any ETF, simply go to the AMEX.com web site, and click on ETF's. I do that frequently.
Also, Yahoo Finance has an ETF info service in beta testing right now that looks interesting. At Yahoo Finance, key in the ETF ticker symbol of your choice and explore on the left nav bar all the stuff that's available today or coming, including the top ten holdings.
10 (energy: XLE)

15 (basic materials: XLB)
20 (industrial: XLI)

25 (consumer discretionary: XLY)

30 (consumer staples: XLP)

35 (healthcare: IYH)

40 (financial: XLF)

45 (technology, semiconductor: SMH)

50 (telecom: IYZ)

55 (utilities: XLU)

Sector 10 (energy: XLE, IYE, VDE, OIH, PBW and IXC)
This week, XLE regained top spot in my ETF's. Last to first.
XLE was up +4.13 pct. The price of $WTIC (West Texas Intermediate Crude) closed Friday at 62.91 (up +3.90 pct W/W), so the two keep correlating.
Here's the XLE Monthly, Weekly, Daily and Hourly data charts:
XLE Monthly data:

XLE Weekly data:

XLE Daily data:

XLE Hourly data:

Table 2: Senior oil & gas equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Big Oil (Exxon Mobil and Chevron Texaco) were up +3.4 and +4.7 pct respectively, which is a good campaign fundraiser kick-off. And as long as fuel pump prices stay down this week, the voters will be happy campers too.
That's called having your cake and eating it too " something that is permitted in George's Rose Garden.
Oil & Gas Exploration & Production -Canada
Sector 15 (basic materials: IYM, XLB, IGE and VAW)
The Basic Materials ETF (XLB) gained +1.80 pct W/W to close at 31.64 " but take note that the whole gain was Monday and Tuesday.
Do you think that gave HB&B sufficient time from Wed-Fri to take their profits they'll now report for Quarter number 3.
Bingo.
Here's the XLB Monthly, Weekly, Daily and Hourly data charts:
XLB Monthly data:

XLB Weekly data:

XLB Daily data:

XLB Hourly data:

Table 3: Senior metals and steel equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Except for China Aluminum (ACH) " that was a neat MS report I gave you this week " and Inco, where staff is departing, the rest of the group did rather well.
Download Morgan Stanley Sept 25 report on Aluminum.
Do you think that's because the economy is doing so well, or because a "soft" landing is now plausible?
The steel market showed a lot of life this week. The iron ore from CVRD must have been hot rolled in a lot of places because RIO was up +7.6 pct W/W. And Nucor (+5.4 pct) and Gerdau (+4.6 pct), wow! That's a lot of hot rolling.
Do you think the economy is for real or do we only imagine that the U.S. housing market decline will hurt this industry for many months to come?
Let's keep our eye on the global steel market. Then again, maybe it's already the playground of too many gnomes.
Sector 20 (industrial: IYJ, XLI, VIS, and IYT)
The Industrials and Transport sector ETF (XLI), aka capital goods producers, was up +2.96 pct W/W to 33.34, which puts XLI into the #2 slot of my ETF's.
As I wrote a week or two ago: "The key to the health of the global and U.S. economy is the Dow Transport Index." Let's have a look.
Can the 4550 index level hold and see this index test the May 10 cycle high (now technical resistance) of 5000?
But, hang on. Let's not try to speak out of both sides of our mouth as do many Talking Heads on CNBC.
If Transports are moving because the economy has been kick-started by lower fuel costs, that's a potentially sustainable move. But if these oil prices don't continue to fall " like Natural Gas prices " then I'm going to pay less heed to this move.
On the other hand, if NG prices start to rise because the economy is strengthening, and oil prices can stay contained in the 55 range, then yes I would agree to move some cash back into equities.
Then again, maybe now that HB&B has screwed over Amaranth, and taken their multi-billion profit on the NG trades, maybe we'll see NG prices rise for no other reason than a reversion to the mean based on a now honest market?
The Dow Transports Average ETF is IYT. At the Amex.com website, you can see the list of holdings, as follows, which I recommend you pay closer attention to here. If the economy weakens, the rally in these stocks is likely to falter.
I think the probability of these Transportation stocks rolling over is better than 50 pct if Crude Oil ($WTIC) does not stay below $60. The economy is simply not strong enough for these companies to pass costs through to customers. In addition to the high cost of fuel, there are too many other problems in the economy to ignore, not the least of which is the housing market and the credit system.
Here's the XLI Monthly, Weekly, Daily and Hourly data charts:
XLI Monthly data:

XLI Weekly data:

XLI Daily data:

XLI Hourly data:

Table 4: Senior capital goods makers and transportation
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
The group's big loser from a week ago, Caterpillar (CAT -2.7 pct), was its big winner this week (+4.8 pct). So CAT over two weeks has gained +0.6 pct, but over four weeks has lost -0.8 pct.
This group generally had a tough day Friday though.
Can't you just feel the money sloshing around?
Sector 25 (consumer discretionary: XLY, IYC and VCR)
The Consumer Discretionary sector ETF (XLY) was up +1.66 pct W/W, so last week's small loss was exactly what I said: "merely a rest stop on a long campaign trail."
I can't get too enthused about this sector until I see the Earnings/Guidance this month, as well as the econ data. I'm not anticipating improvements, but then again I'm not calculating and reporting the data.
Here's the XLY Monthly, Weekly, Daily and Hourly data charts:
XLY Monthly data:

XLY Weekly data:

XLY Daily data:

XLY Hourly data:

Table 5: Senior consumer discretionary equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Now here's a good example of how computer trading has taken control of markets. Look at EBAY.
Do you recall my words: "A week ago I wrote: "My EBAY took a hit of -2.3 pct this week after being up +14.8 pct in the previous 4-weeks." This week EBAY plunged -6.3 pct. Seems like media advertising revenues have fallen off the cliff " Yahoo, New York Times, whatever."
I guess there was no problem after all " this week EBAY was up +8.6 pct. Surprise, surprise, EBAY is now up +1.8 pct in the past four weeks. I guess that saved a few jobs among the professional money managers.
And Disney's ABC must have got back all that lost advertising revenue because the stock was up this week +2.8 pct.
And despite Crude Oil that was rising +3.9 pct this week, nothing was going to stop the Carnival Cruise ships from ringing up a weekly gain of +5.2 pct.
Maybe it's a campaign promise: vote for me and I'll send you on a Disney or Carnival ship cruise that terminates at Port Canaveral, followed by a trip to Cinderella Castle in George's Magic Kingdom.
Now let's see; by saving $10/week at the fuel pump, that ought to pay for one-third of one person to go on one of those Fun trips.
Sector 30 (consumer staples: XLP, VDC, RTH and IYK)
This week the Consumer Staples sector ETF (XLP) lost -0.31 pct to close at 25.38, which all happened on Friday. They have been losers the past couple weeks, but, as you know, I'm not down on Staples. Time to stock up.
Here's the XLP Monthly, Weekly, Daily and Hourly data charts:
XLP Monthly data:

XLP Weekly data:

XLP Daily data:

XLP Hourly data:

Table 6: Senior consumer staples equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Many of this group had a tough day on Friday, especially the Wallies " WMT and WAG.
Do you think maybe if the Wallies are going to outperform in a Bear market, you might want to sell the stocks and (at the lower prices) load up on long-dated call options? Do you think?
Sector 35 (healthcare: IYH, XLV, VHT, IXJ, and IBB)
The healthcare ETF (IYH) was up +0.75 pct W/W to close at 65.52, so we're back to where we were two weeks ago.
Flat on our back " on a hospital bed, waiting for the surgeon.
Oh do you think Biovail has a legitimate concern about market manipulating syndicates that affect their share prices? Or how about Fairfax Financial or Overstock.com? Is it all smoke and no fire?
It's pretty hard to fight the Club you know. That's why I'm proud of Eliot Spitzer's efforts against Richard Grasso. Grasso was head of the Club.
Right or wrong, Spitzer's office has the power to open the boardroom drapes and let the sunlight in. The public needs to see what's really going on, which is the last thing the Club wants to happen. Those people have a one-track mantra: self-regulation.
It optimizes profits.
Here's the IYH Monthly, Weekly, Daily and Hourly data charts:
IYH Monthly data:

IYH Weekly data:

IYH Daily data:

IYH Hourly data:

Table 7: Senior healthcare equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Aetna (AET) had a big day Friday, in a sloppy market. Since the stock had been down -16 pct year-to-date, maybe there were some embarrassed traders who wanted to paint lipstick on what has turned out to be a pig.
I've been disappointed in Aetna because it's in the Cara 100, and the stock is down -22 pct in the past six months.
Glaxo Smith Kline (GSK) is another, dropping -1.4 pct this week, and -6.3 pct in the past four. That usually doesn't happen to solid companies in a terrific Bull run.
Sector 40 (financial: IYG, IYF, XLF, VFH, IXG, VNQ, RWR, IYR, and ICF)
The Financials ETF (XLF) gained +1.17 pct W/W to close at 34.62. Traders must be thinking ahead to the gazillion dollar profits HB&B has made this Quarter from over-reaching hedge funds.
Here's the XLF Monthly, Weekly, Daily and Hourly data charts:
XLF Monthly data:

XLF Weekly data:

XLF Daily data:

XLF Hourly data:

Table 8: Senior financial company equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
