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October 28, 2006
Week #43 (2006-10-28) in Review (FINAL)
In thinking about capital markets and this blog, "What's it all about, Alfie?" comes to mind. In the movie (Alfie, 1964), Michael Caine's character Alfie was the anti-hero who just didn't get it. He participated (let's say) and he messed up, but all the time he figured he was doing the right thing.
In "What's It All About, Blogger Bill", I'm trying to give the average person " let's call him Alfie " some insights and awareness of what the capital markets are all about " the good and the bad, the potential risks and rewards " as I see it, having been a professional player on both the sell-side and the buy-side, over many years.
What I'm doing is nothing more than grist for the mill. If you happen to be Alfie's boss, or his professional advisor, endulge me. We all came from the same place, and, sooner than we'd like, we're all going to the same place. In the interim, I mean no harm.
When I want to have some fun with this, I like to say I'm retired and that I don't take myself too seriously. When I'm challenged, I am what an old friend who used to work as a senior exec at GE headquarters would say about me " "Just like Jack Welch; an old hockey player who drops his gloves and swings his stick at the least provocation".
It's true; I can be a gentleman, and your worst enemy.
But at the end of the day, you are not coming to the blog because of me. You come seeking valuable insights and knowledge in return for your valuable time. And, that's what I try to do " what we should all try to do, which is to respect the other person, and try to find a way of giving.
A reader this week wrote to say that I have been giving a ton of info on the gold and silver miners, and that's my way of pointing you to value.
Last week I wrote:
I focused on gold and silver stocks this week (and will next week) because precious metals prices are breaking to the upside, leaving stock prices of the mid and large size producers significantly under-valued.Gold shares are typically priced at about 2.0 times Net Asset Value (NAV), running from a low of 1x to a high of 3x on average over the past 13 years. But NAV's are currently predicated on a $500 average long-term gold price, which I think is way too low considering the approx. average 10-pct growth of the world's money supply over the past couple years.
Based on my estimate of a sustainable $650 average gold price, the current Price/NAV would drop to below 1.50 for North American producers, and I think it ought to be trading at a 2.5x NAV, which translates to an upside of at least two-thirds higher than today's prices.
I think it's just a matter of time before the algo traders of Wall Street start plugging in these numbers, and producing higher price targets in their sell-side research.
This week, you can see the change I had been preparing you for.
A week ago, I laid out my hypothesis.
(Despite) the DJIA (Dow 30) setting an all-time record high, traders are starting to recognize that, due to fears that (what some call) the Credit Bubble may pop, leading to deflation, the central banks of the world are embarked on a policy of reflation.
As I see it, this situation is not much different than the Y2K situation where central bankers flooded liquidity into the marketplace, while moving rates higher in an attempt to contain the speculative use of that extra money.
The U.S. authorities have a problem raising rates (which is an inflation controller) without causing a collapse of housing prices, and new home building, which happens to generate about 30-pct of the U.S. GDP after those financial transactions work themselves through the system. That would surely put the U.S. into recession, and perhaps a severe one.
As it is, the U.S. GDP growth is weakening to a level below +2.0 pct annual growth, which is insufficient to meet trader's expectations for double digit earning's growth.
So while some people are calling for rates to go up and others for rates to be brought down, it's likely the Fed does nothing (only to be blamed later, whatever the result).
However, excessive money printing that does not lead to equivalent wealth creation is surely going to lead to inflation, and that's the biggest concern today of the international finance ministers and central bankers.
So, whenever this scenario arises " and the last time was in the 1970's " it's called Stagflation. It's a good term; there is nothing wrong with the terminology, but nobody likes the implications for stock or bond prices. Hence you hear the term used sparingly.
Precious metal prices tend to out-perform stocks and bonds during Stagflation, albeit with wild gyrations as the market gets hit by waves of rampant speculation followed by extreme (quick and to the point) repressive action by monetary authorities.
I believe that equity prices are 25-pct over-priced. I hear the sell-side tell us that earnings multiples are not very high. I disagree. When I see a DJIA with a 22 PE, yielding +2.3-pct, the S&P500 with an 18 PE, yielding +1.8 pct, and the NASDAQ-100 with a 36, yielding +0.3-pct, then I can see nothing wrong with a Bear that takes PE's and yields to 16.5/2.88-pct (Dow-30), 13.5/2.25-pct (S&P500), and 27/0.38-pct (NDQ-100).
When it comes to strategies of the largest U.S. companies that have changed the most in the recent past, I think the three that come to mind are: (i) outsourcing to low-cost nations, (ii) share buybacks, and (iii) increasing dividends faster than earnings and cash flow.
I don't see how outsourcing helps America other than put more dependence on a shrinking consumer base that has had to increasingly sell assets and dip into savings to maintain historical spending patterns. Only those people who want to be financial traders (and speculators) can be happy with that scenario.
The share buybacks and dividends also satisfy the wealthy and the financial traders in American society. The average Joe certainly doesn't see the help.
These are tough times for large segments of the U.S. economy, which is a short-run issue within a longer-term structural problem.
A week ago I wrote: "Maybe that's the high side, but so far we haven't yet seen the full stroke of a rapidly declining GDP in the U.S. " or in Canada as it turns out."
This week, the U.S. GDP was reported to be growing at a rate of +1.6-pct, which was about what I projected back in May-June. And, I expect the next quarter to be lower and that an economic recession will occur in 1H2007.
It is just a matter of time before we adjust, and part of that adjustment will be our ongoing sell-off of shares of companies that disappoint in the least with quarterly reporting of earnings and forward guidance.
The buy-side is fully aware that the sell-side has huge positions in these companies to protect, and that the sell-side is slow to ease their clients into the new reality that U.S. Stagflation is more than a dirty word.
Consequently, I have shifted my strategy from a focus on U.S. companies and the Emerging World to the Europeans, who never saw a central bank rate as low or as long at such low levels as the Fed Rate. The Fed and the Treasury pumped the U.S. consumer, and housing and purchasing (largely from emerging economies) for the past three years, but that cycle is over, and those markets will now start to decline relative to Europe and probably Russia.
So now you know my mind-set, let's see what happened in global capital markets this week.
Global Market Summary
International Equities: This was week where Monday through Thursday, most of the global markets were up. The Cdn markets was most impressive (+2.6 pct). But then came Friday. U.S. GDP Friday. It's not that this was unexpected; but as I say, "When it comes to money, people are funny".
U.S. Equities : All four major market indexes were up; but then came Friday. The final tally resulted in modest gains for the week.
Dow 30 : There were 19 Dow stocks up, 10 down, and 1 flat. There is likely a dip in the road ahead. But you never know about these things; it could be a sink-hole.
U.S. Sector ETFs: There were 7 ETF's up and 3 down, but Friday saw 9 or 10 down after GDP number posted. A week ago I wrote: "For a Bull market to exist, the semi-conductors (SMH) and the financial stocks (XLF) have to be among the top 3 or 4 of these ten, almost every week." A week ago, SMH was #10 and this week #9. XLF went from #9 to #6 " but it lost -2.6-pct on Friday. And consumer cyclicals lost -1.02-pct on Friday. Healthcare (IYH) was generally soft all week, probably due to prospects of a Democrat controlled Congress after November 7.
First segment: most influenced by global commodities, forex and capex spending
10: Energy (XLE): #1 (+2.7 pct); Solid three weeks
15: Basic Materials (XLB): #2 (+2.2 pct); Metals, golds, DD, were strong
20: Industrials (XLI): #8 (-0.0 pct); Dead CAT bounce (+3.9 pct)
Second segment: most influenced by U.S. consumer spending and economic growth
25: Cons. Discretionary (XLY): #3 (+1.7 pct); GDP turned a good story bad
30: Cons. Staples (XLP): #4 (+1.6 pct); MO was lit up (+2.8 pct)
35: Healthcare (IYH): #2 (-0.4 pct); PFE, JNJ, UNH lost; Dem's coming
Third segment: most influenced by U.S. interest rates and general economic health
40: Financial (XLF): #6 (+1.0 pct); Bonds up, but now GDP is a worry
45: Tech (SMH chips): #9 (-0.4 pct); Good week until Friday
50: Telecom Services (IYZ): #5 (+1.6 pct); VZ up +2.8 pct. Hmmm
55: Utilities (XLU): #7 (+0.5 pct); Needs stronger economy, lower costs.
Bonds: Major moves this week: bonds up sharply, but yield curve inverting more deeply, which indicates (i) weaker inflation outlook, (ii) stronger recession possibility.
Commodities: $CRB was up +2.2 pct W/W "thanks to oils and metals. $USD down and geopolitical issues up." Same as a week ago.
Oil & Gas: OPEC and Iran (nuke) are issues. But, $WTIC futures were down -0.6 pct W/W despite my charts from StockCharts that show Crude Oil was up this week.
Gold: $GOLD and $SILVER were down -0.3 pct and -1.4 pct W/W respectively despite StockCharts saying they were up +0.8 pct and 1.0 pct. I still believe: "The glitter is returning".
Goldminers: The miners were up sharply. A week ago I wrote: "The miners were down very minimally this week thanks to a crushing they took on Friday. Hang in there. $USD headed south." Ergo: miners north; Dollar south this week.
Forex: The $USD lost -0.9 pct W/W to close 85.53. Reversed after spike top at 87.30 two weeks ago Friday. A week ago I wrote: "Now going to test 85.74 on trip south." Ergo: 85.53 (new cycle low).
Sector ETF:
Seven of the ten sector ETF's I follow here were up this week, but I continue to warn: "Raise your stops. You'll need them."
One reader sent me this note today: "How about the new ProShares inverse ETFs that allow traders to short the market by going long? The costs are just 0.95-pct. Does it make sense to hedge the equity position in a portfolio with ETFs like SDS or QID (double inverse of SP500 and Nasdaq) or SH and PSQ (single inverse)?"
Yes, I think it might be the appropriate time to buy the inverse ETFs. That represents an effective hedge to an over-priced portfolio.
I am "fixed on the lofty RSI-7 values for the Weekly and Daily for each of these major market indexes. They are, like, inflated."
Note the progression W/W for the RSI-7, which is making a turn (Daily will now start to affect Weekly):
This week, these values were:
$COMP Weekly RSI-7 (73.0) and Daily RSI-7 (54.7)
$SPX Weekly RSI-7 (80.3) and Daily RSI-7 (60.8)
$DJX Weekly RSI-7 (79.7) and Daily RSI-7 (63.9)
$RUT Weekly RSI-7 (70.5) and Daily RSI-7 (56.5)
A week ago, these values were:
$COMP Weekly RSI-7 (72.1) and Daily RSI-7 (64.2)
$SPX Weekly RSI-7 (78.2) and Daily RSI-7 (73.9)
$DJX Weekly RSI-7 (77.4) and Daily RSI-7 (76.1)
$RUT Weekly RSI-7 (69.2) and Daily RSI-7 (62.4)
Two weeks ago, these values were:
$COMP Weekly RSI-7 (76.2) and Daily RSI-7 (80.9)
$SPX Weekly RSI-7 (77.5) and Daily RSI-7 (78.9)
$DJX Weekly RSI-7 (76.3) and Daily RSI-7 (83.1)
$RUT Weekly RSI-7 (69.6) and Daily RSI-7 (77.3)
Three weeks ago, these values were:
$COMP Weekly RSI-7 (70.7) and Daily RSI-7 (69.8)
$SPX Weekly RSI-7 (73.6) and Daily RSI-7 (70.8)
$DJX Weekly RSI-7 (73.4) and Daily RSI-7 (77.0)
$RUT Weekly RSI-7 (62.2) and Daily RSI-7 (63.8)
What these numbers represent is the mathematical sequencing of the broad indexes reaching a peak and rolling over. As the Daily data momentum weakens, it will adversely affect the Weekly data. If that action continues, then prices will begin to challenge the technical support levels that technical analyst Colin Twiggs has laid out.
At the cross-over point, the primary Bull can be said to have turned into a Bear. As for me, I called it a Bear environment that started back on May 10. From that point on, I was advising only short-term long trades (except for precious metals and $USD). Some of the calls (tech in July and consumer staples) worked out well, but after May 10 I believe the market became a distributive environment.
Yes, as readers have pointed out, it was during the late-2005 rally that I went to cash " never 100-pct as someone said, but about 75-pct, and then a bit less (although never less than 50-pct) " because I believe in the 4.5-year Kitchin cycle thesis (which includes a 3 year Bull phase and a 1.5 year Bear phase) and the U.S. Bull started between 4Q02 and 1Q03 depending on the sector.
So there are times in market cycles when portfolios need to be protected more than other times when the owners and managers of capital ought to be more aggressive. This is the time to be defensive, and as the reader points out, the Inverse ETF's are tools to protect the value of a portfolio.
You can buy inverse ETF's, which is a short position, or you can buy a put option on the index, sector or sub-sector ETF. If you buy the put, the cost of the option is reduced from the value of your portfolio, but you have the insurance in hand that if the holding drops in value, you can sell it at a high fixed price called the strike price.
The other form of protection, which is what I have recommended, is to tighten the stop loss orders, and let the market come to you, if it does. If it continues to head north, your long positions are intact, and you didn't have to pay for insurance. It goes without saying that if the market heads north, your puts become less valuable, but your inverse ETFs become losers.
So, you have to make the decision.
I don't like to recommend shorting or buying puts because most of the time the market moves up. This is in part the natural inflation of financial assets. For example, we are looking at Dow=12,000, but some day it's going to be Dow = 22,000, and then 32,000.
It's only a matter of time. You remember those 6, 8 and 10 cent Coke drinks I had when I was a kid? They are now $1, 2 and 3 dollars (depending on the vending machine's location).
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.
I also go to Yahoo Finance to study ETF's, including the top ten holdings of each. When the RSI's for each start to top out (above 70) for all or most of the top 10, I say the longs should start thinking of selling that ETF.
Remember, you have to be ahead of the crowd. Being early means you miss the tops and the bottoms, but the objective here is to always try to stay on the right side of trend, and to rack up continuous gains without taking on too much risk.
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)
XLE was up strongly +2.69 pct to close at 56.17, which made it ETF performer #1 this week. But again, it took another hit in Friday (-0.81-pct). And again, the price of $WTIC (West Texas Intermediate Crude) closed Friday up +0.65-pct on the day " although there was a reason for the latter.
As I wrote a week ago: "OPEC and Russia are indicating that oil prices will rise here (at least stop from falling below say $55), which gives a sense of sustainability to the higher prices, which means that the algo traders are factoring in higher prices for their Net Asset Value (NAV) calculations. But, crude oil in the low 60's or mid-to-high 50's is probably mid-range for the foreseeable future. Economic recession in the U.S. will contain speculator enthusiasm for another run to record high levels. I think a slowing economy for the next year will eventually be followed by a faster paced one that will drive prices higher in the long run, and I also believe that the $USD will continuously weaken, which will push the prices higher. But, in the short to intermediate term however, I see economic storm clouds plus alternative fuels and lifestyle changes that will hold prices down " at least in the expectations of speculators. So I'm staying neutral."
As I see it, the oil stocks rallied from early October, including many this week (IMO +14.7-pct, PBR +4.0-pct, CVX +3.7-pct and XOM +2.8-pct). But the momentum in this sector broke down in early September when it appeared that maybe the economic ills of the U.S. could be serious.
So, I believe that for this sector, we're likely to see a ratcheting down of share prices, in brief spurts. It will be important to price these stocks on the basis of Price to Cash Flow that reflects rising inflation " say 6 and 7 times current year's cash flow.
For XOM, cash flow is estimated at $8.40 (2006) and $8.15 (2007), which means that the price today ($71.46) as a multiple of cash flow is 8.5x (06) and 8.8x (07). And the Daily-Weekly-Monthly RSI-7 values are 76.8, 73.4 and 75.1. So, fundamentally and technically, I think XOM (and the rest of these oils) are over-priced.
It could be that these oils topped out at the open Thursday. Although Crude Oil has popped back up into the 60's, it has been side-tracking since about Sept. 20, and in the last cycle there was a lower high and lower low.
Long-term picture:
The major suppliers (OPEC/Russia) are probably concerned today for a falling $USD as much as they are for lower demand in a slowing U.S. economy. Basically, they are like any supplier in wanting stable prices, but their business is being affected by forex traders.
While arguments persist about $30 oil on the one hand and "Peak Oil" with $100 price spikes on the other, I feel we're likely to see oil prices stay in the $50-70 range for several years. Therefore there will be no continuation of the secular up-trend for oil stocks.
Intermediate-term picture:
On a fundamental basis, if, due to a slowing economy and hurricane season being over, oil prices don't rise, and unit volume falls for the U.S. integrated oil companies, then share prices are not likely to rise above recent cycle highs.
So I don't think this stock sector looks promising, and the Friday GDP number (+1.6 pct growth) is an early negative sign.
Short-term picture:
On the other hand, there are reports today of warships from 23 nations in the Gulf of Hormuz preparing to intercept on Sunday or Monday a British-flagged ship apparently loaded with parts for a nuclear weapons program bound for Iran.
If this event plays out where Iran reacts by cutting off oil, then crude oil and share prices will rally " especially in Canada where the safest non-U.S. supply is " but that's not going to crank up demand/volume, and the higher price would only serve to push demand down, worsening the economic crisis in the U.S.
Because of the likelihood of a Democrat controlled Congress, I have my doubts that this issue will lead to a war with Iran, but if it did, the $USD would rally and so too would oil prices, and all bets are off.
It's impossible to play these geopolitical events hour by hour or day by day, but the price spurts will be quite obvious.
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 |
As I say, there were some good rallies in the sector this week, but I think they came to an end at the open on Thursday. The Canadian oils Imperial Oil and EnCana showed a lot of strength on Friday, but I think that was probably a final blow off rally due to yet another geopolitical "issue" in the Persian Gulf.
Oil & Gas Exploration & Production -Canada
Sector 15 (basic materials: IYM, XLB, IGE and VAW)
The Basic Materials ETF (XLB) gained +2.20 pct W/W to close at 33.39, which was good enough to be ETF performer #2 this week.
But, again, this sector my have topped out Friday at noon. I'm beginning to wonder whether the prior May 10 cycle is possible.
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 |
Many of the gold and metal stocks are still doing really well. Nucor (+8.0-pct), CVRD (+6.3-pct), Gerdau (+3.8-pct), Rio Tinto (+3.5-pct), Alcoa (+3.1-pct) looked good in the steels, iron ores, and base metals.
But look at this chart of U.S. Steel (X). I think even a Local 1005 steelworker can see that somebody goosed the stock at the open on both Tuesday and Friday, and sold it off the rest of the week.
These are the things you have to watch for when stocks are in distribution. Pump and Dump is the name of the game.
Glamis (+9.6-pct) and Goldcorp (+8.1-pct) also looked good this week after Ontario Judge Hughes paved the way forward. And, Agnico-Eagle (+9.4-pct) [after Cara said it was his favorite at this point in the cycle " (lol)], Newmont (+4.4-pct) and Kinross (+4.0-pct) were all strong, as I said last weekend they would be. (lol).
Actually, two of the top three majors, Barrick and Gold Fields, took big hits on Friday, which caused them to lose ground on the week.
Gold is still trading $2 below its 200-day Moving Average and the $XAU goldminer share index is still below both 50 and 200-day MA's, so all is not perfect in my gold camp. And the GDX goldminer shares ETF was up +3.0 pct W/W, but took a hit of -1.2-pct on Friday, so this sub-sector still hasn't gotten into 5th gear yet.
More on this later in the WIR, but although I can see the Daily data technical indicators are still undecided, the more important Weekly MACD, STO and RSI are looking pretty good.
I'm going to keep the Miners "Under the Microscope" again this week because, as I say, "you need to be focusing on the best quality ones that are starting to move back into their Bull phase."
Sector 20 (industrial: IYJ, XLI, VIS, and IYT)
The Industrials and Transport sector ETF (XLI), aka capital goods producers, was down -0.03 pct W/W to 34.25, which is a penny, so nothing's moved now for three or four weeks.
As I said, "All that transport, but no place to go."
The Dow Transport Index is still breaking out " up about +1-pct this week " "but still really isn't on fire. The 4550 index resistance level was a walk over, but can this index (presently at 4706 4748) test the May 10 cycle high (next technical resistance) of 5000? It couldn't do it when it almost got that high at the end of June."
"If $WTIC hangs in here (ie, the low 60's), and the economy boom that Kudlow speaks of is not really real (insert "+1.6-pct Larry"), I can't image new highs being set. In that event, I have to believe that Dow Theory traders aren't going to be happy. You see, they need transports to confirm industrials. But what you're getting is share buy-backs confirming industrials."
Technical analyst Colin Twiggs provides a chart you need to follow. As I say, "Clearly the Transports kicked into high gear after oil prices started to fall, but isn't that just a reaction to lower costs (which might be temporary) rather than a reflection of the Transports growing on the back of a strengthening economy?"
"Yes, I think traders have to watch this picture, especially now that Crude Oil is back above 60."
The Dow Transports Average ETF is IYT. At the Amex.com website, you can see the list of holdings. Fedex is the key player at this point. I asked you to keep an eye on it.
Does it look to be drooping to you? (lol) Remember this is the leader.
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 |
It's surprising to me that on another good week in the market (well, all four U.S. major market indexes were up), GE and BA were down again (-0.7 pct and -2.5 pct respectively W/W), which means that BA and GE are down in two good market weeks -2.7 pct and -4.8 pct.
As I wrote last week, and the one before that: "This is Gnome country. Just what are those people thinking?"
CAT and HON were up this week (+3.9 and +1.4-pct respectively), although Friday didn't look good. So maybe that was a Dead CAT Bounce. Then again, if the miners are going to do well, as I expect, they will buy more equipment from Caterpillar, which means the CAT has another life.
Watch this one as another tell for the miners.
Sector 25 (consumer discretionary: XLY, IYC and VCR)
The Consumer Discretionary sector ETF (XLY) was up +1.70 pct W/W to close at 37.05. But on Friday XLY was down -1.0-pct.
The +1.6-pct growth for the GDP got consumers thinking that maybe they won't have tickee after all.
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 |
Two weeks ago I wrote: "Did you hear Cramer touting Whirlpool (a Cara 100)? The WHR stock is now at $89, up +16.0 pct in three months, and Cramer is telling you it's soon going to $100. Houses aren't being built (as fast), but The People are running out to buy dishwashers?.. I think the message here from CNBC is that there is no recession coming. (lol)"
Last week I wrote: "Well back up the truck Jimmy; you can haul those carcasses away. No new dishwashers for poor people. WHR dropped -1.31 pct this week, to close at $87.67."
And this week, WHR dropped again, down -1.63-pct W/W to $86.24. But look at the price chart.
If you plan on trading the ideas of Jimmy Booyah, or any guru that talks like that, you better have an idea when the word "sell" goes out.
A week ago I wrote: "I see that EBAY was up +2.5 pct W/W. I gather that PayPal is really working out. Maybe Skype will one day as well. I like EBAY management." This week, I see you agreed with me; EBAY jumped +5.04-pct.
Gee, I hope I don't become another Booyah Boy. The world doesn't need a second one.
Anyway a lot of gurus didn't like EBAY in July. Look at the stock since then. And ememver what I had to say back in those dog days of summer.
On Week #19, at the bottom of the current intermediate cycle for the tech stocks, I stepped up to the plate. A Wall Street VP said I was reading charts upside down, and telling everybody to sell when they ought to have been buying, and to be 100-pct in cash. I said he had his facts wrong. Read these words from my July 21 WIR:
Right now in the tech group, I think the stocks of good quality U.S.-based companies (CSCO, SNDK, YHOO, DELL, QCOM, EBAY, LLTC, MXIM, and GOOG) are well oversold and ready to rally -- briefly at least. I'll be watching for the Bears to trounce again to determine the timing of the next sell-off. I may be selling then, and later buying the dips of stocks of these good quality companies.At some point, I won't be selling " but rather holding for probably three years. This is a matter of chart watching to see if the Bear market pattern of lower lows and lower highs is broken. Then all of you can buy the dips with reasonable assurance the cycle bottom is past.
Other stocks in this over-sold group (but with a few more bids in the past week) include RIMM, ADBE, INTC, ADSK, CTSH, and GRMN.
You'll note that all these are in the Cara 100. Now I can't tell you the precise date when the new Bull market starts, but when it does, most (if not all) of these stocks will rally hard.
I also have in the Cara 100, two stocks that are presently under accumulation " one (ATI Tech: ATYT) for the rumor that AMD is going to make a bid to buy the company, and one (Oracle: ORCL) for goodness knows why. I'm getting leery the way Cara 100 company Oracle (ORCL) is trading though, so I'll have to look into it too.
I followed up that blog with more articles on the tech rally, pointing out the bottom-feeding prices of the 20 stocks I listed. The truth is I didn't think that rally would last more than a couple weeks in spite of the fact it had been vastly oversold, but the other side of that coin is that RSI analysis works wonders. After stocks hit an Accumulation Zone in such a large group as the techs, why would I sell until RSI analysis told me there was a Distribution Zone?
Do you really think I'm going to listen to a Wall Street VP or to the Booyah Boy? Hardly. When you happen to be the Rat Catcher, you don't think about following Pied Pipers.
Join the RC club.
Sector 30 (consumer staples: XLP, VDC, RTH and IYK)
This week the Consumer Staples sector ETF (XLP) gained +1.64 pct to close at 25.96.
Last week, I spent quite a bit of time discussing RSI and defensive sector plays, but you know, the RSI for the XLP (and some of the others) is getting out of hand. The RSI-7 for the Monthly and Weekly for XLP this week is 86.9 and 78.8 respectively.
Nosebleed.
This sector ETF has made a huge move since the afternoon on October 17th, but may have come to a close out at the end of the day Thursday. Careful here. Distribution Zone.
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 |
My favorite drinks were being consumed a lot this week I see. Diageo (DEO) was up +3.34-pct W/W, which means it's up YTD an astounding +25.8-pct. :-)
If you stay long these stocks, you may need a few of Diageo's products.
Sector 35 (healthcare: IYH, XLV, VHT, IXJ, and IBB)
The healthcare ETF (IYH) was down -0.43 pct W/W. Democrats coming.
Besides, the RSI is too high, and the sector looked like it topped out on Monday after being goosed from the 18th of the month. Need I say more?
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 |
A week ago I wrote: "When 5 of 10 stocks in any monitor are up over +4.0 pct in a single week, as they were a week ago, it pays to be attentive. These U.S. healthcare stocks (IYH) have enjoyed a +14.0 pct run in less than four months. Contrary to some of the Talking Heads, it has less to do with rapidly improving corporate metrics than with traders taking a defensive posture."
I did remark that JNJ looked over-bought, and it was down -0.66-pct this week.
Some of these stocks had very good moves, but Glaxo SmithKline sold off hard at the end of the week, dropping -5.2-pct W/W.
Sector 40 (financial: IYG, IYF, XLF, VFH, IXG, VNQ, RWR, IYR, and ICF)
The Financials ETF (XLF) gained +1.00-pct W/W to close at 35.47.
The Monthly RSI-7 is now at 79.6 after a 3½ month rally. Careful. Friday's losses in Goldman Sachs (-2.44-pct) and Lehman Bros (-2.36-pct) were serious.
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 |
On the week, Goldman Sachs was up +4.6-pct, Merrill Lynch +3.3-pct, and Credit Suisse +2.4-pct. That may have come from the huge rally in bonds this week, but there is a problem for lending commercial banks because the slope of the U.S. Treasury yield curve really inverted a lot this week.
Sector 45 (technology: IGM, IGV, IGW, XLK, VGT, IYW, IGN, IXN, MTK and SMH)
The semi-conductor ETF (SMH) got smashed on Friday (-2.6-pct), which created a small loss of -0.36-pct W/W to close at 33.50.
A week ago I wrote: "I like many of these Chip companies, but I have been warning: Now is not the right time to buy them. It's still Chip & Dip time, as we saw this week with SanDisk."
SMH looks to me some days like its hanging by a thread. After my warning of economic data that came out on the 17th/18th this ETF got killed, then rallied some before getting hammered again on Friday afternoon.
But it all looks selective. Take AutoDesk this week " up +3.2-pct W/W but it's only up +4.1-pct over 4 weeks and it's down -15.3-pct YTD.
As I look over the SMH Monthly chart, I see a three-year long base has formed, and the RSI is nowhere close to Distribution Zone levels yet, which means that there could be room to go higher presently, and that the next Bear ought not be a bad one for this sub-sector " maybe $33.50 (or 34 or 35) to say $30? " and then a very strong, early Bull move to lead the other sectors.
Just a thought.
Here's the SMH Monthly, Weekly, Daily and Hourly data charts:
SMH Monthly data:
SMH Weekly data:
SMH Daily data:
SMH Hourly data:
Table 9: Senior technology equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Five big U.S. tech companies were hurt this week: Intel, Qualcomm, SanDisk, Cisco and Oracle. What happened was the GDP number (+1.6-pct) that was released Friday morning.
If you are a sailor like Oracle's Larry Ellison, you didn't like that dirty air. But the problem is possibly more than that I think. On Friday afternoon, the price of the SMH dropped like an imitation of an Acapulco cliff diver, and if it doesn't recover on Monday, something's afoot.
Sector 50 (telecom: IYZ, VOX and IXP)
The U.S. telco sector ETF (IYZ) was up strongly +1.64-pct W/W to close at 29.07.
The Monthly RSI-7 is at 83.0. I could be wrong on this, but Thursday's close may have been the long-term cycle high.
I just feel that after a 3½-year Bull market, when I see an 83 RSI-7 on the Monthly, I'm not buying stock in a telco unless it's for dividend income and I'm darn sure the dividend is well protected. Even at that, I'd have to expect some capital loss in the next 12 months.
Here's the IYZ Monthly, Weekly, Daily and Hourly data charts:
IYZ Monthly data:
IYZ Weekly data:
IYZ Daily data:
IYZ Hourly data:
Sector 55 (utilities: IDU, XLU, and VPU)
The Utilities ETF (XLU) gained +0.45-pct W/W to close at 35.77.
The problem here is that the Daily RSI-7 was over 90 at the midday Wednesday top, and the Weekly RSI-7 closed at 78.0, so XLU is up in rarified air.
I have been pointing readers to the new Yahoo Finance site for ETF's like XLU where you will discover lots of useful information. I like Yahoo for advancing their product like this.
Here's the XLU Monthly, Weekly, Daily and Hourly data charts:
XLU Monthly data:
XLU Weekly data:
XLU Daily data:
XLU Hourly data:
I think everybody knows I like Exelon Corp (NYSE: EXC). It's a Cara 100 company.
Well late in August EXC (at $60-61) hit my Distribution Zone. It backed off in mid-September and then made a new run to even higher levels ($63) this week, where once again on Thursday it hit a Daily RSI-7 of almost 90 before pulling back sharply on Friday.
This stock has tripled in four years to where it has a market cap now of $42 billion. Solid company, but it was time to let the stock go.
Exelon Corp [GICS 55, Cara 100]
(EXC: Yahoo Finance file)
(EXC: StockChart chart)
(EXC: Investertech chart)
(EXC: ADVFN Financial Data)
(EXC: ADVFN Financial Data)
Bonds:
Well, a lot happened in the U.S. Treasury's this week!
The 30-year T-Bond yield plunged -11 basis points from 4.90 to 4.79 pct. The 10-year and 5-year also dropped -11 bp to 4.67 and 4.64 pct respectively. The yield on the 2-year dived -13 bp from 4.87 to 4.74 pct, while the 3-month T-Bill yield moved up +2 bp from 4.94 to 4.96 pct.
The reflation story has been making the rounds, but after that GDP number came out, bond traders started thinking less about inflation, so they jumped into bonds.
How they did it, with the yield curve inverting a lot shows me that traders are now afraid of recession.
It's going to take a few days for traders to let this data settle in. They must be getting somewhat concerned about the small and mid-sized banks, however.
Interest rates and bond yields.
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 3 Month | 4.96 | 4.97 | 4.94 | 4.74 |
| 6 Month | 4.93 | 4.96 | 4.93 | 4.80 |
| 2 Year | 4.74 | 4.79 | 4.87 | 4.68 |
| 3 Year | 4.68 | 4.73 | 4.80 | 4.58 |
| 5 Year | 4.64 | 4.68 | 4.75 | 4.55 |
| 10 Year | 4.67 | 4.71 | 4.78 | 4.59 |
| 30 Year | 4.79 | 4.83 | 4.90 | 4.73 |
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 2yr AA | 3.49 | 3.52 | 3.51 | 3.49 |
| 2yr AAA | 3.50 | 3.50 | 3.51 | 3.48 |
| 2yr A | 3.55 | 3.60 | 3.56 | 3.59 |
| 5yr AAA | 3.60 | 3.62 | 3.62 | 3.52 |
| 5yr AA | 3.61 | 3.63 | 3.62 | 3.56 |
| 5yr A | 3.63 | 3.68 | 3.66 | 3.55 |
| 10yr AAA | 3.74 | 3.79 | 3.77 | 3.63 |
| 10yr AA | 3.74 | 3.78 | 3.76 | 3.62 |
| 10yr A | 3.88 | 3.91 | 3.89 | 3.80 |
| 20yr AAA | 4.13 | 4.18 | 4.19 | 4.01 |
| 20yr AA | 4.11 | 4.17 | 4.18 | 4.02 |
| 20yr A | 4.20 | 4.24 | 4.23 | 4.17 |
| Maturity | Yield | Yesterday | Last Week | Last Month |
|---|---|---|---|---|
| 2yr AA | 5.17 | 5.20 | 5.26 | 5.08 |
| 2yr A | 5.22 | 5.24 | 5.32 | 5.13 |
| 5yr AAA | 5.23 | 5.24 | 5.29 | 5.10 |
| 5yr AA | 5.23 | 5.25 | 5.33 | 5.15 |
| 5yr A | 5.31 | 5.34 | 5.40 | 5.22 |
| 10yr AAA | 5.64 | 5.61 | 5.72 | 5.37 |
| 10yr AA | 5.45 | 5.49 | 5.58 | 5.39 |
| 10yr A | 5.55 | 5.58 | 5.65 | 5.48 |
| 20yr AAA | 5.89 | 5.87 | 5.92 | 5.79 |
| 20yr AA | 5.91 | 6.03 | 6.10 | 6.02 |
| 20yr A | 5.98 | 6.02 | 6.08 | 5.93 |
Interest rates and bond yields.
The Lehman TLT gained a lot +1.51-pct to close Friday at 88.87. The AGG was also up, +0.60-pct W/W to 100.04.
But these prices started to rock and roll at the open on Wednesday, not Friday after the GDP result came out, and after the FOMC meeting started on Tuesday, but well before the Wednesday 2:15pm decision/report was released.
Was this just a good guess?
Look at the Hourly data charts for the morning of the 25th to see what I refer to.
US Bond Funds -- Monthly Data Charts
SHY Monthly data series chart:
IEF Monthly data series chart:
TLT Monthly data series chart:
AGG Monthly data series chart:
LQD Monthly data series chart:
TIP Monthly data series chart:
US Bond Funds -- Weekly Data Charts
SHY Weekly data series chart:
IEF Weekly data series chart:
TLT Weekly data series chart:
AGG Weekly data series chart:
LQD Weekly data series chart:
TIP Weekly data series chart:
US Bond Funds -- Daily Data Charts
SHY Daily data series chart:
IEF Daily data series chart:
TLT Daily data series chart:
AGG Daily data series chart:
LQD Daily data series chart:
TIP Daily data series chart:
US Bond Funds -- Hourly Data Charts
SHY Hourly data series chart:
IEF Hourly data series chart:
TLT Hourly data series chart:
AGG Hourly data series chart:
LQD Hourly data series chart:
TIP Hourly data series chart:
Table 11: Interest-sensitive securities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Countrywide Financial (CFC) was up an astounding +8.8-pct W/W, but over 4-weeks it's only up +9.3-pct and over 3-months, it's just +9.4-pct. So CFC basically made its quarter this week.
I guess Countrywide doesn't hold the mortgages, so the income can be tracked to building permits. If that's the case, maybe an expert can let us know.
Consumer Finance -USA -- Weekly Data Charts
Consumer Finance -USA -- Daily Data Charts
Consumer Finance -USA -- Hourly Data Charts
Commodities:
The $CRB index gained +2.17 pct W/W to close at 312.37.
It gained the previous week too, but then on that Friday dropped -0.72 pct. I couldn't on the surface see where that happened because as I pointed out in last week's WIR: "The $CRB index weakness Friday did not come from oils ($WTIC was up +1.07 pct on the day and metals were flat). I didn't check the full CRB list to see where the loss came from on Friday."
Maybe I ought to have checked because whenever I see discrepancies worth noting here, something usually is going on, which is my way of saying that the market is not as transparent as advertised, and too often is not what some people make it appear to be.
Data should be accurate, and studied in sequence. That's what Time Series Analysis is all about. That way, through objective analysis, we can spot when certain parties change the factual data for their own purposes, and we can also spot the anomalies in correct data.
On Thursday, "MarkM" commented in the Blog: "Here are the headline figures from Commerce Department for New Home Sales for prior months. Wanna guess how many of these "positives" turned out to be true on our way to -14% MOM?"
You see, alert people watch this data, and after they see how it is presented in headlines and then changed in the fine print, they become skeptical.
Politicians want to know why people are more skeptical today. It's because people in authority change the data, rewrite history, to gain financial advantage over the rest of us. Civil servants want to keep their jobs so they often "help" the current Administration. CEO's want to help their key people in management and on the Board, so they often back-date stock options.
When money is on the line, and facts are altered for personal gain, the offenders ought to be prosecuted. A dollar gained this way is a dollar stolen from others. I thought prosecution of theft was the law!
And when civil service bias is so apparent, why do we permit it? We need an independent Auditor General who has investigative and prosecutorial powers.
Some of these commodity indexes are a joke, and we know who the perpetrators are, but the industry seems to have so little respect for the owner and manager of capital that nothing is done about it. Maybe the financial services industry ought not be allowed self-regulatory status? Do you think? :-)
Weekly CRB Commodities Index:
Oil:
Speaking of bad data, the following charts of StockCharts are wrong this week, as they often are. That frustrates me greatly.
The weekly chart gain/loss percentage of the $CRB, $XAU and the forex charts are correct, but the $WTIC and all the metals charts (the weekly calculations) I show here are seriously wrong and misleading.
$WTIC did not gain +2.41 pct this week to close at 60.75, as the chart shows, but $WTIC was down -0.654 pct W/W. I have confirmed from other sources that Friday's close was 60.75. but the close the prior Friday was 61.15 and it was definitely up +1.41-pct over the previous week's close of 60.30, all of which I confirmed and re-calculated.
So it's only (some of) this week's data that is wrong.
In addition to $WTIC being wrong, the (i) $GOLD is not up +0.77 pct W/W, but is down -0.315 pct, (ii) $SILVER is not +0.96 pct, but -0.576 pct, (iii) $PLAT is not -0.19 pct, but -1.35 pct, (iii) $PALL is not -2.13 pct, but -3.67 pct, (iii) $COPPER is not -1.65 pct, but -3.24 pct.
I'm going to presume (for no good reason) that the Daily calculations are correct.
So StockCharts is unreliable. They need to get their act together " similar to Investertech.com, which seems to have accurate calculations, but which refuses to correct the charts for splits in the stocks of non-U.S.-headquartered companies, for reasons I cannot understand (and have given up trying).
So when $WTIC this week dropped from 61.15 to 60.75, it was a loss of -0.654-pct and not the stated gain of +2.39-pct.
StockCharts.com is supposed to be a serious company, and they are using Thomson Financial data, which is a world leader, so why the problem?
There was (presumably) a gain on Friday of +0.65 pct, so Friday again made the week.
For $WTIC, the 50-Day Moving Average is (presumably) 64.15, while the 200-Day MA is 68.08. This is the technical support level to watch. If Crude Oil was to fall to the 50-day MA (64) on the near futures, traders would say that Crude has finally broken down without that necessarily being the case.
Just because oil prices might drop down a notch doesn't mean they would be collapsing, and that the housing bubble would still not be popping.
I am sticking to my Stagflation/Reflation perspective until the econ data tells me otherwise. That means I expect to see Crude Oil stay in the 55-65 trading range.
Gold:
Today, the 50-day MA for $GOLD is 598.03 and the 200-day MA is at 602.97. And the current price ($601.00) is sitting right between these technically important levels.
A week ago it was on top. ABOVE both " but only for a couple days.
But, if I'm right, the secular and cyclical Bull phase will soon extend and push prices further north. While the bullion/futures battle goes on, I "continue to believe that the next Bull phase in the gold market will be on the back of a sliding $USD, and that $GOLD will move back over $700, and probably (as I see it) over $800. I also see that happening sooner than later " say within 12 months."
That's because of demand-supply economics, as I have explained in previous WIR's.
Weekly Gold EOD Continuous Contract Index:
Daily Gold EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Gold Bullion index.
$SILVER had a soft week, falling from 12.15 to 12.08, which was a loss of -0.58 pct.
The 50-day MA $SILVER is 11.74 and the 200-day MA is 11.38. So the current price (12.08) is ABOVE both the 50/200-day MA, but not by much.
Two weeks ago, I pointed out it had moved above the 200-day MA, which I said was clearly important.
Weekly Silver EOD Continuous Contract Index:
Daily Silver EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Silver Bullion index.
$PLAT dropped from 1094.40 to 1079.60 this week, which is a loss of -1.35-pct W/W.
The 50-Day MA is now 1160.58 and the 200-Day MA is 1150.52, so $PLAT still has work to do to rise above technical resistance.
As I say, PM traders ought not feel comfortable until all four of the major precious metal groups are above their 200-Day MA. Until then, trades should be short-term oriented.
Weekly Platinum EOD Continuous Contract Index:
Daily Platinum EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Platinum metal index.
This week, $PALL lost -3.67 pct, falling from 337.00 to 324.62.
The 50-day and 200-day Moving Averages are 325.81 and 325.75 respectively, so $PALL has fallen this week from what I call the blue sky. It's at a precarious point, and like $SILVER is a bellweather for the precious metals complex.
$SILVER (12.08) does sit above the 50/200-day MA's, but not by much. I will be watching these on Monday.
Weekly Palladium EOD Continuous Contract Index:
Daily Palladium EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Palladium metal index.
This week, $COPPER lost -3.24 pct, falling from 351.90 to 340.50 on the near contracts.
The 50-day MA is 343.40, and the 200-Day MA is 307.73, so $COPPER (340.50) is no longer clearly in a technical Bull phase.
But, as I say, "Generally, I think the enormous growth in the emerging markets will continue to place more demand on the copper market than the miners can meet with supply. So I am a long-term Bull on copper."
I'm also a Bull on Nickel and Uranium. However, the slowing economy (U.S. GDP at +1.6 pct growth rate, and maybe going recessive) is clearly affecting these metals prices in the short-run.
Weekly Copper EOD Continuous Contract Index:
Daily Copper EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Copper metal index.
Table 12: Senior gold equities
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Interestngly, as metals prices softened a bit, and are right at technical support levels, the share prices of metals producers had another very good week. It's quite possible that money will come out of the techs and commercial banks and go into the metal stocks, where the producers are producing less than demand, and profits are rising quickly.
To watch the moves in precious metal miners, you will have to monitor the individual stock charts, preferably in real-time, as follows:
NEM ABX AU GFI GG HMY GLG KGC BVN
15-minute data
60-minute data
Daily data
Weekly data
MDG LIHRY AEM BGO IAG EGO PAAS GOLD CDE GRS
15-minute data
60-minute data
Daily data
Weekly data
CBJ SSRI RGLD SIL NG KRY HL TSE_HRG TSE_GUY TSE_AGI
15-minute data
60-minute data
Daily data
Weekly data
NXG GSS MNG DROOY MFN RNO RANGY MRB CLG GRZ
15-minute data
60-minute data
Daily data
Weekly data
Here are the key Silver miners and the SLV ETF:
SLV SIL CDE HL PAAS SSRI SLW WTZ MGN
15-minute data
60-minute data
Daily data
Weekly data
Here are the Weekly and Daily Data charts of the indexes:
The U.S. goldminer share trust ETF trades under the ticker symbol GDX.
Here are the U.S. Goldminer ETF (GDX) index Weekly, Daily and Hourly data charts:
GDX Weekly data:
GDX Daily data:
GDX Hourly data:
The Toronto Exchange-listed goldminer iUnits S&P/TSX Capped Gold Index ETF trades under the ticker symbol TSE:XGD.
Here are the Weekly and Daily data charts for the TSX Goldshares (XGD) index:
I have been spending a lot of time in the Blog on the metal miners (especially precious metals) because this is the sub-sector to be positioned for when the $USD runs into serious "issues". The $USD had its clock cleaned again this week, and it will likely continue that way as the Fed is wrestling with a slowing economy and a credit bubble whereas the other major central banks (Japan, China, UK, Europe, and Canada) do not seem at all likely to drop their rates, and may even raise them.
This week, $XAU popped from 128.79 to 133.02, which is a gain of +3.28 pct W/W. The low of the week was on Monday, and then the week went well until Friday, when the U.S. GDP hit the fan, and $XAU dropped -0.84 pct on the day.
The 50/200-day MA's are 133.25 and 139.67, so the shares are marginally below their longer-term averages, and almost in line with the current metals prices.
GDX was up +3.0 pct W/W, despite being down -1.2 pct on Friday.
XGD was up +3.1 pct W/W, while dropping -0.6 pct on Friday.
I mentioned something a week ago about not being scared. While it worked out this week for companies like Glamis, Goldcorp, Kinross, Ivanhoe Mining, Agnico-Eagle and Newmont, this is still a trading market with sharp moves up and down.
Experienced traders can do well, but there will be days;
Forex:
The PM complex is going to hold up well as long as the $USD doesn't.
The $USD had another terrible week, going down -0.90 pct to close at 85.53. Friday had a loss of -0.43 pct.
The 50-Day MA is 85.84 and the 200-Day MA is 87.01. So, the $USD did cross down through the 50-day MA technical support after failing on several attempts to get up through the technical resistance of the 200-day MA.
The Euro (priced in USD) gained +0.94 pct W/W to close at 127.33.
As I say each week from the beginning of this rally against the $USD, "I still think the Euro will get to 130 and beyond".
The British Pound was up again, gaining +0.67 pct to close at 189.65.
All these currencies, including the CAD and the JPY are making major moves against the $USD. At some point, the precious metals have to start rallying above technical resistance.
Weekly Euro Dollar Index, priced in USD:
Daily Euro Dollar Index, priced in USD:
Weekly British Pound Index:
Daily British Pound Index:
Weekly Japanese Yen Index:
Daily Japanese Yen Index:
After gaining +0.78 pct the previous week against the $USD, the Japanese Yen gained a further +0.94 pct to close at 85.02. This is a major move, reflecting a global move away from the U.S. Dollar.
Weekly Canadian Dollar Index:
After gaining +1.10 pct the previous week against the $USD, the Canadian Dollar was strong again, gaining +0.54 pct W/W to close at 89.38. It's very possible we could see a 91 cent CAD this cycle. That's only +1.8 pct away.
Daily Canadian Dollar Index:
International Equities:
It is extremely important for traders to see the critical long-term Moving Average (MA) support levels because I feel that when they are violated on the downside, there is going to be a lot of pain in the average (bullish, long-oriented) portfolio.
Similar to 2000-2002. Maybe even like 1987, heaven forbid.
As I wrote previously, "Traders can take a Bullish action with a Bearish attitude, you know. At times, it is needed, so you don't become complacent. This is one of those times."
The international markets are the key to your confidence level. If, as and when they fall through technical support, along with the U.S. equity markets, then you are going to have to face some serious decisions: Hold or Sell.
Most people cannot bring themselves to sell, so I'm trying to build a case for helping all traders to get over the psychological hump.
I have also been pointing readers to the Weekly International Perspective at Econoday, which is a good read " just not as good after the excellent Evelina Tainer departed.
Table 13: International equities perspective
| Symbol | Close | 1Day Change |
1Day %Change |
1W %Change |
2W %Change |
4W %Change |
YTD %Change |
3M %Change |
6M %Change |
12M %Change |
Most of the global equity markets had a fairly good week, but they also had a terrible Friday. Russia Templeton Fund (TRF) was down -0.2 pct; the FXI of China was down -0.6 pct; and the India Fund (IFN) was up +0.8 pct W/W.
But, just like the U.S. and European equity markets fell sharply after the U.S. GDP number was published, so too did all the Asia-Pacific markets, which I have been tracking here as U.S. traded (in $USD) ETF's.
FXI, TRF and IFN hit the skids on Friday (-2.03 pct, -1.80 pct and -1.03 pct respectively on the day).
Japanese equity market ETF: EWJ
The Japanese equity market ETF (EWJ, priced in USD), closed at 13.92, up +0.94 pct W/W, but dropped -1.14 pct on Friday.
Here is the Japanese (EWJ) equity market ETF Monthly, Weekly, Daily and Hourly data charts:
U.K. equity market ETF: EWU
EWU (priced in USD) was up +0.22 pct on the week to 22.83, but it was bent like Beckham (down -1.0 pct) on Friday.
Here is the United Kingdom (EWU) equity market ETF Monthly, Weekly, Daily and Hourly data charts:
EWU Daily data:
Canadian equity market ETF: EWC
The EWC of Canada had a strong week, gaining +2.59 pct W/W to close at 24.95, after being up +2.23 pct the prior week. That's what happens when metal and oil stocks are up.
But Friday, EWC was down -0.60 pct on the day.
Here is the Canadian (EWC) equity market ETF Monthly, Weekly, Daily and Hourly data charts:
(Japan, Taiwan, Hong Kong, Singapore)
(U.K., Germany, France, Italy)
(Canada, Mexico, Brazil, Australia).
U.S. Equities:
The S&P500, DJIA, NASDAQ and Russell 2000 were all up, +0.64 pct, +0.73 pct, +0.36 pct, and +0.49 pct respectively.
But on Friday they were down (respectively) "0.85 pct, -0.61 pct, -1.20 pct and -1.31 pct.
Once again, when danger hits the fan, it's the higher-beta Nasdaq and Small Cap issues that take most of the heat " at least in the beginning until traders see if there might be a sustainable trend forming.
We always have to keep our eye on where the most solid ground is. In technical trading jargon, that happens o be the support lines. Maybe they are the 50 and 200-day Moving Average lines, and maybe they are patterns like those used by Aussie technical analyst Colin Twiggs.
I like Twiggs' work in setting up the technical support levels that you need to respect. In this Blog, I'm writing for me (and hopefully giving you insights into how I think and act).
But if, as and when the major MA lines and chart pattern lines get violated, you have to seriously consider selling out of pre-selected long positions that are most vulnerable to a major market pullback, or at least hedging those positions.
As I wrote a couple weeks ago: "You buy this market higher at your peril. If you are intent on buying, then try to find stocks that haven't much participated in the recent rally; Remember, we trade prices. Watch the tape. Watch the technical support."
Here is the Monthly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Weekly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Daily data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Here is the Hourly data chart of the Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.
Table 14: Dow 30 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 Summaries window at www.investertech.com and then clicking on the link for Performance.
AA AIG AXP BA C CAT DD DIS GE GM HD HON HPQ IBM INTC JNJ JPM KO MCD MMM MO MRK MSFT PFE PG T UTX VZ WMT XOM
Here are the links to interactive Dow charts from Investertech.com that I broke into groups of ten, which you can add technical indicators for as well. (list one) (list two) (list three)
This week, Value Line reported on three companies: Caterpillar, Honeywell and United Technologies. The last one is a Cara 100 company " not that it's presently on my Buy list, which it is not.
(CAT: Value Line Report Oct. 27: next one is due Jan. 26)
(HON: Value Line Report Oct. 27: next one is due Jan. 26)
(UTX: Value Line Report Oct. 27: next one is due Jan. 26)
About Honeywell, Value Line analyst Erik Antonson opines: "This blue chip is on the top of our recommended list for relative price performance in the year ahead (Timeliness: 1). We think this equity may prove to be a good choice for momentum-oriented investors in the coming six to 12 months. Income-oriented shareholders ought to favor the above-average dividend yield. Finally, more-conservative investors should take note of Honeywell's solid Financial Strength rating and relatively low debt-to-capital ratio. These shares offer worthwhile total return potential, as well, owing to the likelihood of healthy share-net gains and dividend hikes over the next 3 to 5 years."
I don't agree, which is why there is a market. Here are some points: the financial strength/safety rating of Honeywell is actually rated lower by VL than the other two stocks they report on this week, but those other VL analysts did not refer to financial strength. Moreover, the Honeywell long-term debt to capital ratio is nowhere close to (Cara 100) United Technologies. And you can ignore the analyst's 12-month Total Return potential because the stock ($42.30) has almost zero chance of reaching Mr. Antonson's $70 Price Target, which would be a price gain of +65.5 pct from here.
Here's where Mr. Antonson is coming from: he's in love (apparently) with share buybacks and dividend increases.
What share buybacks mean is that the company cannot redeploy funds at its Internal Rate of Return (IRR) requirement (usually a relatively low +10-pct for a conglomerate of this size), so the Honeywell Directors want shareholders (read their tax-advantaged friends) to receive that capital at cycle-topping prices. I can do better than +10-pct returns (often quarterly), so why would I care? To me, the share buyback represents a failure on the part of management.
The dividends at Honeywell are growing quickly: $0.70 (2004), $0.83 (2005) and $0.91e (2006), which is an increase this year of +9.6-pct. But the earnings growth VL projects for 2007 over 2006 ($2.75e vs $2.52e) is just +9.1-pct.
As to dividend payouts that are growing faster than earnings, where is the logic in that " unless of course the company wants to put more share capital back to their friends. So doing so is a failure of management, and saying you like it is a failure of the analyst.
As to matching the business Honeywell is in vs the economic and political times, I am not certain HON is a great play. Honeywell "is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services (38.0% of '05 sales); control, sensing and security technologies for buildings, homes, and industry (34.0%); turbochargers and automotive products (16.3%); and specialty chemicals, electronic and advanced materials, and process technology for refining and petrochemicals (11.7%)."
Let's be fair: aerospace has benefited greatly by the U.S. war machine that the Democrats after Nov 7 are going to put the reins on and the home-building and auto industries are in a state of chaos. Moreover in a rapidly receding economy, specialty chemicals and petrochemicals have less demand and lower margins.
And when I look at the RSI-7 technical indicators of the Daily-Weekly-Monthly data series for a big picture trading perspective, I can see the stock is fully priced and likely to see $35 long before reaching Mr. Antonson's PT of $70.
Now, if the HON stock does reach $35 in a Bear market, a +2.6-pct dividend yield ($0.91 on $35), plus some put write premium I'd take in at the same time, and a PT in the subsequent 12 months (encouraged "lol- by VL's forecast and the marketing clout of their #1 Timeliness Rating) of $70, then I'd have a TR > 100-pct. Now we're talking. I might even settle for that kind of return over two, possibly three, subsequent years.
Do you understand where I'm coming from? I think highly of Value Line, but we must do our own analysis and decision-making. That's all.
If we can't, then simply buy the DJIA or S&P 500 index and a couple major ETF's when they reach a point every couple years when everybody hates them, and sell when they make the cover stories of magazines like Fortune, Forbes, Time etc. Spend the rest of the time with family, friends, at your real career, or on the golf course, voyaging on a sailboat, or whatever gives you pleasure.
If you do that, I can almost guarantee that you'll out-perform 80 to 90-pct of the mutual funds, hedge funds, broker-dealer sales recommendations, and private advisor model or custom-tailored portfolios. You won't screw up, and you won't be screwed with.
That's what it's all about, Alfie. Trust me.
Dow 30 list:
Alcoa [GICS 15, Dow 30]
(AA: Yahoo Finance file)
(AA: StockChart chart)
(AA: Investertech chart)
(AA: ADVFN Financial Data)
(AA: ADVFN Financial Data)
(AA: Value Line Report Oct. 20: next one is due Jan. 19)
Altria Group Inc [GICS 30, Dow 30]
(MO: Yahoo Finance file)
(MO: StockChart chart)
(MO: Investertech chart)
(MO: ADVFN Financial Data)
(MO: ADVFN Financial Data)
(MO: Value Line Report Aug. 4: next one is due Nov. 3)
American International Group [GICS 40, Dow 30]
(AIG: Yahoo Finance file)
(AIG: StockChart chart)
(AIG: Investertech chart)
(AIG: ADVFN Financial Data)
(AIG: ADVFN Financial Data)
(AIG: Value Line Report Aug. 25: next one is due Nov. 24)
American Express [GICS 40, Dow 30]
(AXP: Yahoo Finance file)
(AXP: StockChart chart)
(AXP: Investertech chart)
(AXP: ADVFN Financial Data)(AXP: ADVFN Financial Data)
(AXP: Value Line Report Aug. 25: next one is due Nov. 24)
AT&T [GICS 50, Dow 30]
(T: Yahoo Finance file)
(T: StockChart chart)
(T: Investertech chart)
(T: ADVFN Financial Data)
(T: ADVFN Financial Data)
(T: Value Line Report Sep. 29: next one is due Dec. 29)
Boeing Co [GICS 20, Dow 30. Cara 100]
(BA: Yahoo Finance file)
(BA: StockChart chart)
(BA: Investertech chart)
(BA: ADVFN Financial Data)(BA: ADVFN Financial Data)
(BA: Value Line Report Sep. 22: next one is due Dec. 22)
Caterpillar [GICS 20, Dow 30]
(CAT: Yahoo Finance file)
(CAT: StockChart chart)
(CAT: Investertech chart)
(CAT: ADVFN Financial Data)(CAT: ADVFN Financial Data)
(CAT: Value Line Report Oct. 27: next one is due Jan. 26)
Citigroup [GICS 40, Dow 30, Cara 100]
(C: Yahoo Finance file)
(C: StockChart chart)
(C: Investertech chart)
(C: ADVFN Financial Data)(C: ADVFN Financial Data)
(C: Value Line Report Aug. 25: next one is due Nov. 24)
Coca Cola [GICS 30, Dow 30]
(KO: Yahoo Finance file)
(KO: StockChart chart)
(KO: Investertech chart)
(KO: ADVFN Financial Data)
(KO: ADVFN Financial Data)
(KO: Value Line Report Aug. 4: next one is due Nov. 3)
Disney [GICS 25, Dow 30, Cara 100]
(DIS: Yahoo Finance file)
(DIS: StockChart chart)
(DIS: Investertech chart)
(DIS: ADVFN Financial Data)(DIS: ADVFN Financial Data)
(DIS: Value Line Report May 19: next one is due Aug. 18)
Dupont [GICS 15, Dow 30]
(DD: Yahoo Finance file)
(DD: StockChart chart)
(DD: Investertech chart)
(DD: ADVFN Financial Data)(DD: ADVFN Financial Data)
(DD: Value Line Report Oct. 20: next one is due Jan. 19)
ExxonMobil [GICS 10, Dow 30, Cara 100]
(XOM: Yahoo Finance file)
(XOM: StockChart chart)
(XOM: Investertech chart)
(XOM: ADVFN Financial Data)
(XOM: ADVFN Financial Data)
(XOM: Value Line Report Sep. 15: next one is due Dec. 15)
General Electric [GICS 20, Dow 30, Cara 100]
(GE: Yahoo Finance file)
(GE: StockChart chart)
(GE: Investertech chart)
(GE: ADVFN Financial Data)(GE: ADVFN Financial Data)
(GE: Value Line Report Oct. 13: next one is due Jan. 12)
General Motors [GICS 25, Dow 30]
(GM: Yahoo Finance file)
(GM: StockChart chart)
(GM: Investertech chart)
(GM: ADVFN Financial Data)(GM: ADVFN Financial Data)
(GM: Value Line Report Sep. 1: next one is due Dec. 1)
Hewlett-Packard [GICS 45, Dow 30]
(HPQ: Yahoo Finance file)
(HPQ: StockChart chart)
(HPQ: Investertech chart)
(HPQ: ADVFN Financial Data)(HPQ: ADVFN Financial Data)
(HPQ: Value Line Report Oct. 13: next one is due Jan. 12)
Home Depot [GICS 25, Dow 30]
(HD: Yahoo Finance file)
(HD: StockChart chart)
(HD: Investertech chart)
(HD: ADVFN Financial Data) (HD: ADVFN Financial Data)
(HD: Value Line Report Oct. 6: next one is due Jan. 5)
Honeywell [GICS 20, Dow 30]
(HON: Yahoo Finance file)
(HON: StockChart chart)
(HON: Investertech chart)
(HON: ADVFN Financial Data)(HON: ADVFN Financial Data)
(HON: Value Line Report Oct. 27: next one is due Jan. 26)
IBM [GICS 45, Dow 30]
(IBM: Yahoo Finance file)
(IBM: StockChart chart)
(IBM: Investertech chart)
(IBM: ADVFN Financial Data)(IBM: ADVFN Financial Data)
(IBM: Value Line Report Oct. 13: next one is due Jan. 12)
Intel [GICS 45, Dow 30, Cara 100]
(INTC: Yahoo Finance file)
(INTC: StockChart chart)
(INTC: Investertech chart)
(INTC: ADVFN Financial Data)
(INTC: ADVFN Financial Data)
(INTC: Value Line Report Oct. 13: next one is due Jan. 12)
Johnson & Johnson [GICS 35, Dow 30, Cara 100]
(JNJ: Yahoo Finance file)
(JNJ: StockChart chart)
(JNJ: Investertech chart)
(JNJ: ADVFN Financial Data)
(JNJ: ADVFN Financial Data)
(JNJ: Value Line Report Sep. 1: next one is due Dec. 1)
JP Morgan [GICS 40, Dow 30]
(JPM: Yahoo Finance file)
(JPM: StockChart chart)
(JPM: Investertech chart)
(JPM: ADVFN Financial Data)
(JPM: ADVFN Financial Data)
(JPM: Value Line Report Aug. 25: next one is due Nov. 24)
McDonalds [GICS 30, Dow 30]
(MCD: Yahoo Finance file)
(MCD: StockChart chart)
(MCD: Investertech chart)
(MCD: ADVFN Financial Data)
(MCD: ADVFN Financial Data)
(MCD: Value Line Report Sep. 8: next one is due Dec. 8)
3M Company [GICS 20, Dow 30, Cara 250 June 25-06]
(MMM: Yahoo Finance file)
(MMM: StockChart chart)
(MMM: Investertech chart)
(MMM: ADVFN Financial Data)
(MMM: ADVFN Financial Data)
(MMM: Value Line Report May 19: next one is due Aug. 18)
Merck [GICS 35, Dow 30]
(MRK: Yahoo Finance file)
(MRK: StockChart chart)
(MRK: Investertech chart)
(MRK: ADVFN Financial Data)
(MRK: ADVFN Financial Data)
(MRK: Value Line Report Oct. 20: next one is due Jan. 19)
Microsoft [GICS 45, Dow 30]
(MSFT: Yahoo Finance file)
(MSFT: StockChart chart)
(MSFT: Investertech chart)
(MSFT: ADVFN Financial Data)
(MSFT: ADVFN Financial Data)
(MSFT: Value Line Report Aug. 25: next one is due Nov. 24) >
Pfizer [GICS 35, Dow 30]
(PFE: Yahoo Finance file)
(PFE: StockChart chart)
(PFE: Investertech chart)
(PFE: ADVFN Financial Data)
(PFE: ADVFN Financial Data)
(PFE: Value Line Report Oct. 20: next one is due Jan. 19)
Procter & Gamble Co. [GICS 30, Dow 30, Cara 100]
(PG: Yahoo Finance file)
(PG: StockChart chart)
(PG: Investertech chart)
(PG: ADVFN Financial Data)
(PG: ADVFN Financial Data)
(PG: Value Line Report Oct. 6: next one is due Jan. 5)
United Technologies [GICS 20, Dow 30, Cara 100]
(UTX: Yahoo Finance file)
(UTX: StockChart chart)
(UTX: Investertech chart)
(UTX: ADVFN Financial Data)
(UTX: ADVFN Financial Data)
(UTX: Value Line Report Oct. 27: next one is due Jan. 26)
Verizon [GICS 50, Dow 30]
(VZ: Yahoo Finance file)
(VZ: StockChart chart)
(VZ: Investertech chart)
(VZ: ADVFN Financial Data)
(VZ: ADVFN Financial Data)
(VZ: Value Line Report Sep. 29: next one is due Dec. 29)
Wal-Mart [GICS 30, Dow 30, Cara 100]
(WMT: Yahoo Finance file)
(WMT: StockChart chart)
(WMT: Investertech chart)
(WMT: ADVFN Financial Data)
(WMT: ADVFN Financial Data)
(WMT: Value Line Report Aug. 11: next one is due Nov. 10)
Wrap up:
It is a beautiful but cool and blustery Sunday here in Toronto. It was also quite clear on Thursday night when seven of us (including son and fiancé and her parents and my daughter who joined the party later) travelled to the 360 restaurant atop the CN Tower.
Going up the elevator to the 115th floor, I thought, "Gee, I hate heights, and can't even get away from the market." You see I have this fear of heights.
The glass-fronted elevator was packed and, being last person on (you see I was considering walking the stairs), my face was pressed to the glass (forced to look out; too embarrassed to close them) and for 72 seconds (I counted); I tried to stop from up-chucking.
You see I stopped going on thrill rides about 40 years ago, as I came to understand the meaning of the term "altophobia", which I once called vertigo, until I got that particular anxiety attack when sitting in bed.
That was the time, in Florida, after arriving at the Ft. Lauderdale Bahia Mar marina after being in my sailboat at sea for a couple days voyaging from north Florida; I decided to get a hotel room and plenty of hot water. I then had to call the hotel desk to ask if we were having an earthquake because my head was spinning so hard. That never happened more than once or twice in my life, but my fear of looking out from very tall buildings will never go away. It's a different problem.
I need to be in motion, like an airplane, to overcome it " even hanging out of a helicopter doesn't bother me " but being stationary in high places is not so easy for me and I don't consider elevators (or Distribution Zones) to be stationary or safe ground.
Then again, maybe I just need to be in The Bahamas.
Have a wonderful day. Keep safe.
Posted by Posted by Bill Cara on October 28, 2006 08:10:26 AM | Category: Cara Week in Review
Discourse
"Dilbert and the Way of the Weasels." The formula:
#1 Make a will
#2 Pay off your credit cards
#3 Get term life insurance if you have a family to support
#4 Fund your 401k to the maximum
#5 Fund your IRA to the maximum
#6 Buy a house if you want to live in a house and can afford it
#7 Put six months worth of expenses in a money-market account
#8 Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
#9 If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio.
Looks like Bill and Dilbert agree
Posted by: TcolemanUF ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
October 28, 2006 1:23 PM [link]
Tcoleman-
Not really. Big difference b/t what Bill advocates and the Buy Any Time and Hold Dilbert approach. Read carefully as to what Bill is saying here:
"If we can't, then simply buy the DJIA or S&P 500 index and a couple major ETF's when they reach a point every couple years when everybody hates them, and sell when they make the cover stories of magazines like Fortune, Forbes, Time etc."
Boiled to its essence it's buy equities (even indices)when they are cheap ('everyone hates them") and sell when they are rich ("everyone loves them"). I guarantee you that if you have the mental strength to do this, and most don't, you will significantly outperform 99% of the money managers out there, over time of course.
Posted by: MarkM at
October 28, 2006 1:51 PM [link]
Excellent analysis (updated my watchlist) and free too! Damn!
Oops...I hope the latter isn't classified as profanity but exuberance.
Posted by: oratier at
October 28, 2006 3:22 PM [link]
We had a brief conversation in this space regarding the US economy and Asia. The Economist did a special report on it is in this week's issue. (Subscription required. If you don't have a subscription consider getting one, it's a terrific magazine at least from this poster's POV): http://economist.com/business/displaystory.cfm?story_id=E1_RDQJGVN
Here was the article's conclusion.
"In sum, if America suffers a slump, the economies of China and the rest of Asia would slow, but they are unlikely to be derailed. However, a slowdown in America could affect Asia indirectly through other channels. Most important and least certain of all would be the impact of an American recession on financial markets. Even if economies can decouple, global financial markets tend to be more tightly linked through the investment strategies of hedge funds and the like. If America's economy hits the buffers, this will surely trigger a rise in risk premiums and a drying up of market liquidity, pushing share prices lower in Asia as well as in America. When America sneezes, the rest of the world's economies may no longer catch a cold; but if Wall Street shivers, global tremors will still be widely felt."
Posted by: Leisa at
October 29, 2006 7:33 AM [link]
http://biz.yahoo.com/ap/061028/america_the_bankrupt.html?.v=4
David Walker, US Comptroller General, who brings credit to my profession so sullied by the mischief of CFO's of Enron, WorldCom (and others), is doing a fiscal wake up tour. This is worth a read for any who wish to have an overview of some important issues.
I started getting excited because I spent a few years of my professional life working with chronic disease costs. It sounded like I was on a soap box so I x-ed it out. But with just one foot on the soap box, I'll say this--each of us can do our part in relieving our country's (whatever your nation) health care burden (thereby ensuring that folks who are at the greatest risk get the services they need) by eating right, getting adequate exercise and getting age-appropriate preventative screenings.
It sounds so simple you're probably think I'm stupid for writing it. But the behavior-driven demographics are stupefying...and small changes mean big $$'s.
Posted by: Leisa at
October 29, 2006 8:20 AM [link]
Leisa:
"David Walker, US Comptroller General, who brings credit to my profession so sullied by the mischief of CFO's of Enron, WorldCom (and others), is doing a fiscal wake up tour. This is worth a read for any who wish to have an overview of some important issues."
A picture is worth a thousand words:
http://www.gao.gov/cghome/d061138cg.pdf
Posted by: JIM at
October 29, 2006 9:01 AM [link]
Sometimes I feel skeptical when Bill writes about how the 'fix is in' in favor or "humongous banker and broker" or the Bush Administration and its friends. Then again, I end up feeling naive when I see articles that the Treasury Secretary is assembling a group of what appear to be like minded powerful people who favor rule changes which would prevent shareholders from filing fraud suits against companies they own or third parties and leaving that work to the SEC. The new regulations whould also strip attorneys general or federal and state prosecutors of the power to bring civil or criminal cases as well. Here is the article:
Once again, I have to admit, as depressed as it makes me feel, Bill is right.
Don't worry, like many other Americans, I feel confident that the American people will hear Bill's comments or read this article, communicate to their representatives that this isn't a good idea, and take action at the ballot box to vote out Senators and Representatives who favor corporate executives or humungous banker and broker over investors. They'll also insist that the head of the SEC is a real regulator, not a schill. Now I have this bridge in Brooklyn to sell to all of you. Any takers?
Posted by: Simon A at
October 29, 2006 10:40 AM [link]
Simon A....let's remember that the the most well-financed candidates typically win in our stupid system of who can sling the most mud and have it stick. And the financiers are.....Not the average Mom & Pop. (heavy sigh)
Posted by: Leisa at
October 29, 2006 12:38 PM [link]
Anyone else out there frustrated with the search facility on Bill's site? Here's a solution, pilfered from Barry Ritholtz's "The Big Picture".
Go to Google and enter (minus the quotes):
"site:www.billcara.com" then enter a space and then the search term(s) you're interested in. It also allows you to search on the name of commenters. It works like charm.
Toby
Posted by: bdtobias at
October 29, 2006 1:27 PM [link]
Bill and Friends,
Bill states: "Countrywide Financial (CFC) was up an astounding +8.8-pct W/W, but over 4-weeks it's only up +9.3-pct and over 3-months, it's just +9.4-pct. So CFC basically made its quarter this week.
I guess Countrywide doesn't hold the mortgages, so the income can be tracked to building permits. If that's the case, maybe an expert can let us know."
I am no expert but I want to take a crack at this one as I have spent a good deal of time analyzing the US mortgage and housing market.
First - the Countrywide specific information. Countrywide ramped not because of a great quarter (they missed the consensus EPS estimate by 5% while not as big as the 20% WAMU miss the week before this should not send the stock skyrocketing. ) The reason for gravity defiance, was the announcement of an ambitious (smoke and mirrors?) stock buyback plan.
The buyback plan will not come from full coffers of cash but instead by issuing $2 billion in hybrid debt securities yielding 6.5-7% with a conversion option into the common stock. While I am not sure of the common stock conversion terms (I do not think they have been published yet) - it would not surprise me if they implied an ultimate dilution of equity shareholders GREATER than the planned stock buyback, not to mention the 7% carrying costs in the meantime.
So why is the buyback being heralded as a great call? It could boost EPS in the short term by as much as 3-4% annually even after including the interest charges on the bond issue.
Plus this should provide some great liquidity for Countrywide officers and directors to dump their holdings into (that is my personal opinion obviously.)
That was Countrywide specific - now onto the bigger issue of who holds the default risk on all of these trillions of creative financing mortgages.
I think it is correct to call Countrywide a loan generator at this point in the game and not a lender because like many of the prime and not so prime mortgage companies their big game is to just generate as much volume as possible and then package it up into the much sought after MBS securities and dump them onto the secondary market. They are not planning on directly retaining the credit risk themselves although they may service it for the MBS holders. Ideally they will reap a 10-30% premium on the sale as the MBS market may accept a package that yields 5-6% vs. the 6-7% rates that Countrywide loaned the money at originally.
So what is the problem with this plan? Nothing currently - unless the MBS market tightens up and stop purchasing mortgages. You can track how healthy this market is by looking at the inventory of loans held for sale on the lenders balance sheets. Already some of the major sub-prime lenders (re: LEND - Accredited Home Lenders) are having some trouble unloading the MBS at a premium and the share prices reflect this difficulty.
Still we always have good old Fannie (FNM) and Freddie (FRE) ready to purchase these MBS if the primary market cannot handle the supply. Thats why these stocks are at 52-week highs right? Actually that is something that I cannot explain........at all. Any takers? They still have not filed SEC required quarterly reports EVER - and remain listed by the good graces of the greater powers at the NYSE.
The internal destruction of the MBS market is something I expect based on either much higher interest rates or quickly deteriorating credit quality. This is ultimately the biggest fish to fry of the whole housing bubble - but I do not think that we will see this development until we are deep into the down cycle - re: 2008-2009. And everyone and their mother on Wallstreet will try to prevent this from happening including the FED so it is not worth trying to time it - I think.
The biggest potential story currently re: Countrywide and the other lenders is not really the earnings themselves but the qualiy of the earnings. WAMU reported net income in the most recent quarter of ~$700 M. $278M of that was negative amortization that was booked as earning on the quarter. This negative amortization is the extra interest which was due that month by the borrower but they instead checked the minimum payment box and instead of it arriving in the lender's coffers it was instead added to the princpal balance of the loan. Countrywide's earnings quality is slightly worse - of the $648M "earned" in the moost recent quarter $266M was negative amortization. I will let readers do the math on that one.
So anyways - we are seeing every trick in the book pulled out here. Phony share buybacks, questionable accounting, and false prophets (re: NAR economists - David Lereah). All we can do at this point is either a) take a position or b) sit back and watch the entertainment. Only one thing folks - this one is a tragedy not a comedy.
All those MBS that are getting packaged up and sold are not held by the gnomes, they are held by A) the same mortgage lenders and banks as part of their long term securities holdings and B) by your and my pension funds. There's no risk anymore remember?
Best regards,
BG
PS pardon the monotonous post - had to get this off my chest
Posted by: Soulek1 at
October 29, 2006 5:22 PM [link]
Terrific rewiew; Bill, and useful advice on hedging a porfolio.
Looking over the comments and entries of the last 2 days only, it's amazing what kind of «alternative« view of the markets and the state of the union you get.
Leisa mentioned the Economist earlier; and I agree that this one of the best sources of information worldwide. Look at this article about a possible, fundamental slowdown:
http://www.economist.com/business/displaystory.cfm?story_id=8079134
In short it says, that America's potential rate is falling. By some estimates, it could drop to 2.5% over the next few years, which would be the slowest pace in over a century.
If that happens, the consequences will be serious. Tax revenues will grow more slowly than expected. Monetary policy will become harder to manage: as the 1970s showed, inflation can get out of control if central bankers do not realise that an economy's speed limit has fallen. Financial markets will be disturbed as conventional wisdom adjusts from an assumption of 3-3.5% potential output growth, and investors downgrade their expectations.
Does that sound familiar?
Posted by: tinman at
October 29, 2006 5:32 PM [link]
Just a footnote on Countrywide Financial, over the past year insiders have sold $313,366,517. worth of CFC stock. Total purchases: $00.00.
Of course there are many reasons for insiders to sell, not the least of which is simple greed, but the hawsers do seem to be rather heavily weighted with rats.
If you want to check this out (or any other company's insider activity, just go to www.secform4.com and type in the CFC symbol.
Good luck to all this week.
Posted by: Rigdon at
October 29, 2006 6:00 PM [link]
Apparently, the recent GDP number was way off. Because of a statistical fluke that will be reversed, the economy grew at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported.
http://www.rgemonitor.com/blog/roubini/154588
That's getting pretty close to stall speed. Not good news. Some are speculating that the error was intentional because of the elections (see article).
Posted by: Simon A at
October 29, 2006 8:01 PM [link]
Spot gold is popping out here in Asia this morning. Perhaps the HB&B's getting a jump on their US Equities into commodities rotation after limp GDP figure?
I'm looking forward to a nice ride!
Posted by: cb at
October 29, 2006 8:03 PM [link]
Bill
Once again, the information in your WIR - as well as all of the information provided throughout the week - are a fantastic learning site for me. I am learning so incredibly much following your blog (and from the many commentators adding to it). Having an open blog makes it amazingly powerful resource. Talk about transparency! :-)
I make sure I take time every weekday and weekend to read the information you provide in your blog; links, research documents, comments, et al. The financial market fundamentals you go over/provide, along with the technical notes, are helping me build a solid financial growth engine foundation. As you say “You come seeking valuable insights and knowledge in return for your valuable time. And, that's what I try to do – what we should all try to do, which is to respect the other person, and try to find a way of giving.� If there is anything this market novice reader can do to help you, please let me know.
I am getting smarter every week. I not only can feel it, I know it!
I'll be reading throughout ... Talk to you soon.
Thanks!
Matt
Posted by: SoccerMatt at
October 29, 2006 11:47 PM [link]
BG,
I have heard that Democratic congress is generally favorable for FNM and FRE. Could that be the reason those are up? Also, I understand lot of those packaged loans are being sold to international (unsuspecting?)investors. Democracy is good...why not for default pain ?
Posted by: ghosalb at
October 30, 2006 1:24 AM [link]
Soulek1,
Please, that wasn't monotonous. Thank you for enlightening me (and I'm sure others feel the same way).
I'd like to second SoccerMatt's comments. Agree completely. Thank you to the regular posters (and not so regular ones). Of course, thanks to Bill for doing what you do.
Rigdon, a question: I've used secform4.com a few times (it's the only free Insider Buying site I know of). Do you have any experience with the pay sites? Some charge upwards of $99/month (and offer detailed reports). Is there any difference in quality/access to information?
Thanks to all.
Peter
Posted by: just_observing at
October 30, 2006 1:26 AM [link]
Credit-Default Swap Traders Anticipated Announcements of LBOs
http://bloomberg.com/apps/news?pid=20601109&sid=aqmJW3Bshrq4&refer=home
"Derivatives traders may be profiting from inside information on leveraged buyouts and other takeovers, a study by Credit Derivatives Research LLC suggests.
Credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest LBOs of 2006, rose before deals were announced or news reports said transactions were likely, according to the New York-based independent research firm."
"Credit-default swaps are financial instruments based on about $350 billion of bonds and loans that are used to speculate on a company's ability to repay debt.
The total face amount of contracts outstanding worldwide more than doubled in the past year to $26 trillion, outpacing the growth of all other derivatives markets since their creation less than a decade ago, according to the International Swaps and Derivatives Association, or ISDA."
Posted by: just_observing at
October 30, 2006 2:30 AM [link]
Soulek-
Thought your post was excellent. Didn't bore me a smidge. keep posting.
Leisa- Kotlikoff and Burn's The Coming Generational Storm is a must read on your topic.Kotlikoff is a frequent input into the fed and must be taken seriously.
tinman-
Fed economists have noted this as well and it's covered I believe in the Merrill Lynch reports Bill linked. Staff thinks 3.5% is no longer achievable ex inflation. Below 3, yes. That has enormous implications for earnings I believe and may lead to them reverting from record levels/record margins. I hope everyone caight the David Levy interview ar weeling@weeden on earnings. His model (and Shiller's for that matter) say that the reported earnings do not match up to what is able to be produced in aggregate by the math. Well, if you can report the less LABOR as one company did, or less "one-time" charges like they all seem to be doing, you can see how earnings can remain mysteriously robust.
Posted by: MarkM at
October 30, 2006 5:39 AM [link]
MarkM...thanks for the book suggestion. I think that I'll recommend it to my book club. I might as well drag others through mire of dire predictions! Currently we are reading The Cruelist Miles about the Alaskan diptheria epidemic.
Posted by: Leisa at
October 30, 2006 6:18 AM [link]
Peter
I can't speak to the value of using a "paid for" service as I only use the free service offered by secform4. I suppose it would depend upon how much weight one gives to this information. I, for one, only use it as additional input when considerning an investment. Obviously strong inside buying is a more powerful indicator than selling, but I have tracked companies where the selling has been broad and particularly when mid management is selling their holdings down to zero. No suprise that a high percentage of these companies are trading lower in 2-3 months. At some point I might use this as a screen for possible short candidates, but I haven't done so up to now.
Posted by: Rigdon at
October 30, 2006 9:08 AM [link]
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Whoa, Bill. Just when I least expect it you come up with a post that just screams "The Old Days" to me. These are usually your analysis (fundamental and technical) of a stock or a market that is so well written it leaves me muttering to myself "I wish I could do that". Your take on HON/UTX is one of those.
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October 28, 2006 11:51 AM [link]