Saturday, July 19, 2008

equityletter.com 7/21/08

Thank you in advance for all comments and criticisms.....

                                  

 

 7/21/08

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Market Overview

 

In hockey terms it would be considered a “kick save”.  After a week that saw the collapse of Indymac, a U.S. bank, and the talk of receivership for Government Sponsored Entities (GSE’s) Fannie Mae and Freddie Mac, who stepped in to save the markets from complete meltdown?  The Securities and Exchange Commission (SEC).  In a move that reeks of the very same market manipulation that the SEC is supposedly mandated to police, the SEC has for a thirty day period made it virtually impossible to sell-short approximately 30% of the components of the XLF (Financial Select Sector Index).  For thirty days the shorting of Financial equities such as Citibank, Lehman, Wells Fargo, Morgan Stanley, Fannie Mae, Freddie Mac, and of course Goldman Sachs, just to name a few, will be made virtually impossible as the borrowing of said shares will be limited to the select few.  The borrowing of shares is a prerequisite to any short sale for those of you who don’t remember the rules.  In typical political fashion, the SEC is attempting to place the blame of the sharp decline in U.S. equities on the short-sellers.  Yes folks, it is all the fault of the short sellers.  The SEC has failed to investigate misleading (bullish) statements by financial company executives, failed to investigate the massive fraudulent behavior of the bond rating agencies (S&P, Moody’s, Fitch), failed to investigate the unscrupulous activities of mortgage lenders, failed to investigate the collusive behavior of hedge funds in the manipulation of energy markets, but has deemed it appropriate to lay the blame of the U.S. stock market squarely on the shoulder of the short sellers.  I guess free market capitalism is fine and dandy when the markets are going northward but we must revert to socialism when the outright fraud that exposes the flaws of free market capitalism turn markets south.  I find it quite interesting that the one firm that so astutely avoided the losses that all of their competitors are currently suffering from, Goldman Sachs, was also graciously included on the SEC’s list of shares the would be hard to borrow for the next thirty days.  Political connections and influence are essential to flourish in a free market system.  The actions of the SEC are similar to currency intervention.  Over the short term they will act as short term relief, but in the longer term perspective they will be viewed as “urinating in the wind”.  In the longer term the limitations placed on short seller will reduce already limited market liquidity.  Apparently market manipulation is allowed as long as it contributes to markets moving to the upside. Free market capitalists beware; I wonder what Milton Friedman would say about these actions?

 

 

II.               Sector Analysis

                                             

The IEF-87.22 (I-share 7-10 year Treasury bond) declined 0.84% as the yield on the 10- year treasury increased from 3.94% to 4.08%.  After spending three weeks in what we categorize as weekly “buy” mode, the price action of the past week has generated a weekly “sell” signal for the IEF.  While we shall respect this technical sell signal we do not believe that interest rates are destined to move dramatically higher at this point in time.  It is much more likely that the IEF will now vacillate in a trading range.  The range will be defined as 89.00 on the upper end with the 85.50 level being the lower end of price support.  For the time being we would look to reduce long exposure upon any price rallies up toward the 89.00 resistance area.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-20.67) finished the trading week with a 10.65% advance.  Year to date the XLF is currently down 29.32%.  The XLF rally was certainly not driven by any fundamental improvement in the banking industry but rather by a manipulative ruling by the Securities and Exchange Industry (SEC).  The SEC has made it extremely difficult to borrow the shares of approximately 30% of the components of the XLF.  The lack of availability to borrow shares (a prerequisite to short shares) spawned a high volume short covering rally in the XLF.  It seems that free market capitalism doesn’t work so well on the downside so the Government regulatory agency saw fit to change the rules of the game.  This being stated weekly “buy” signals have been generated in XLF components Bank America (BAC-27.49), Citibank (C-19.35), Wells Fargo (WFC-27.86), J.P. Morgan (JPM-40.02), and State Street Bank (STT-69.82).  Wachovia Bank (WB-12.97) remains in weekly sell mode at this time. While we shall respect these buy signals we would certainly not rush out and purchase shares of these companies at current market prices.  If we were to initiate long positions it would be upon a retest of recent low price areas.  As far as the XLF is concerned we would like to see a weekly closing price above the 20.67 price level to confirm a possible relief rally move up to the 24.00 area of price resistance.

 

          The Brokerage sector (IAI-32.94) index advanced 11.02% on the week.  The year to date performance of the IAI is a negative 37.75%.  The IAI rallied because of the same reasons mentioned above in the XLF section.  Despite the 11.02% advance the IAI failed to generate a weekly “buy” signal.  The 33.10 price level shall remain as weekly price resistance.  The IAI is entering week nine of “sell” mode and shall remain so until there is a weekly closing price above 33.10.  Weekly “buy” signals have been generated in IAI components Morgan Stanley (MS-38.57) and Goldman Sachs (GS-182.84). IAI sector components that continue to remain in weekly “sell” mode include Merrill Lynch (MER-30.91), Lehman (19.11), and Raymond James (RJF-28.00).  Raymond James is due to report earnings in the coming week.

         

B.     Builders

 

 The Homebuilder exchange traded fund (XHB-17.09) advanced 16.10% and is currently negative year-to-date by 10.28%.   After setting new 52-week lows early in the week the XHB reversed course and experienced a sharp oversold bounce higher.  While the XHB did in fact close above our weekly price resistance level of 16.74 we would like to see some follow through in the form of a weekly closing price above the 17.29 level to confirm a change of trend.  If there is indeed such a confirmation we feel that the XHB could rally back up to the 20.00 area of major over head price resistance.  XHB components Pulte Homes (PHM-11.38) and Ryland Group (RYL-24.45) have both generated weekly “buy” signal in the past week.  Conveniently, both companies are due to report quarterly earnings in the coming week.  Despite the rally of the past week XHB components that currently remain in weekly “sell” mode include Centex (CTX-14.01), Lennar (LEN-12.17), Toll Brothers (TOL-18.92) and Beazer Homes (BZH-4.70).  Do not chase this over sold rally, rather look to short the XHB if it reaches the 20.00 area of major over head price resistance.

 

C.  Semiconductors

 

The Semiconductor group (SMH-28.72) advanced 5.43% for the week.   Year to date the SMH is showing a negative return of 8.41%.  After spending three weeks in weekly “sell” mode the price action of the past week has generated a weekly “buy” signal for the SMH.  We now view the 27.62 price level as weekly support for the SMH.  We would look to buy the dips for now with a near term upside target of 30.50-31.00 for the SMH.  Weekly “buy” signals have been generated in SMH components Intel (INTC-22.09), and Texas Instruments (TXN-28.82).  Despite the rally in the SMH, components that currently remain out of favor include Applied Materials (AMAT-18.28), Micron Tech (MU-5.70), SanDisk (SNDK-17.57), Novellus (NVLS-20.81), and Analog Devices (ADI-31.65).  TXN and SNDK are due to report quarterly earnings in the coming week.  Look to buy dips in the SMH, INTC, and TXN but avoid the names that have not confirmed a change of weekly trend.