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3/19/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Last week the major U.S. stock market indices retreated roughly one percent as a multitude of worries continued to plague investors. The Japanese Yen rallied, fueling concern of global liquidity removal via the un-wind of the carry trade. There was also unwelcome news on the inflation front as the Producer Price Index (PPI) and Consumer Price Index (CPI) both came in with readings much higher than had been anticipated. The news did not get any better as General Motors (GM) revealed that sub-prime lending defaults had impacted their since sold GMAC financing division.
The Federal Reserve has a two day meeting this week. Our belief is that interest rates will remain unchanged. We feel that there is little that the Fed can do at this point other than try to jawbone the markets in to believing that things are not as bad as they seem to appear. The Fed cannot cut interest rates as inflationary pressures continue to mount. The Fed also cannot raise interest rates and risk sending the U.S. housing market in to a dizzying downward spiral. We think that the Federal Reserve will express rhetoric that will try to convince the markets that what has started out as a sub-prime brushfire will not accelerate in to a major five alarm blaze of credit defaults. Readers should keep in mind that we have yet to experience the fallout of the upward adjustment coming for homeowners who carry adjustable rate mortgages. Federal Reserve chairman Bernanke, the pressure is just beginning.
There was one other news item that caught our attention last week. Private equity giants Apollo Partners, Kohlberg Kravis (KKR) and Carlyse Group all announced that they were considering public stock offerings. What do they see that is making them consider “cashing out” to public investors? Just remember that there are some very intelligent people at the helm of these private equity firms. Buyers Beware! It continues to be our opinion at this time, that due to a confluence of negative factors, a near term global market top is in place and investors should look to raise cash positions into any such market rallies.
Our only position in the marketplace was a long in the shares of United Healthcare. We went long on 2/27/07 at a price of $51.80. Due to concerns of deterioration within the sector we decided to exit the position. On 3/15/07 we sold UNH at a price of $54.00, a 4.2% gain. We will hope to re-enter this trade at a lower price level.
As we look up and down at the sectors that we follow, we are hard pressed to find an industry group that is an attractive long candidate at this time. We would continue to avoid the financials, homebuilders, semiconductors, internet stocks, retailers, large cap pharmaceuticals, and energy until appropriate discounting has been accomplished.
Our overall feeling is that a Global asset correction has begun and we currently believe that investors should use any market strength to raise cash positions
Take note that the VIX-16.79 (CBOE Volatility Index) increased from a reading of 14.09 the previous week. This is a 20% increase from the previous week volatility reading. We believe that the extended run of low volatility has come to an end and that investors should be bracing for more turbulence.
II. GOLD
GLD (streetTracks gold index) – The GLD-(64.62) advanced $0.37 for the week. At this time we shall continue to be on the sidelines in the GLD until a more discernable trend emerges. The current atmosphere of a Global asset correction remains of significant concern to us here.
III. Energy
Shares in the energy complex (Oil, Oil Service, Coal, Natural Gas) all retreated last week as crude oil fell roughly 3%. From a technical standpoint, the picture continues to be troubling, with very few bright spots. We feel that as recession fears continue to mount in the U.S. markets, the issue of demand will increasingly act as a cloud of negativity for energy related issues. We increasingly believe that the energy complex can be re-entered at significantly lower price levels.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -22, a slight decrease from the previous week reading of -20. The Dow Jones Industrial average declined 1.36% for the week to 12,109.37, -166.79. The Dow average decline completely erased the previous week’s gains. Our critical weekly support level for the DIA-121.05 (Dow Industrial Diamonds) of 125.48 was violated two weeks ago. We shall reiterate that old support levels have now become new resistance levels. We shall lower our DIA resistance level to 123.00-124.00. We advise readers to look to exit longs positions or institute short positions at these price levels. The tide has officially turned for now from “buy the dip” to “sell the rally”. The strongest chart patterns in the Dow 30 are the following; AA, BA, MO and T. The weakest chart patterns in the Dow-30 are as follows, GE, JNJ, MSFT, and PFE.
Last week we mentioned the shares of Altria Group (MO-84.73) as indicating signs of near term strength. We went long MO on 3-13-07 at a price of 85.00. Unfortunately, we were stopped out of the trade on the market opening the very next day. We sold the position at 83.85 for a loss of 1.3%.
Readers should take note that there are no Dow components due to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, BA, MO, T
Dow 30 stocks with negative weekly signals: AIG, AXP, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MRK, MSFT, PFE, PG, UTX, VZ, WMT, XOM
· Underline names have changed from previous week*
V. OPEN POSITIONS
NONE
VI. CLOSED TRADES
UNH- 2/27/07 Long@51.80 / exit 3/15/07 @ 54.00 gain of 4.2% MO- 3/13/07 Long@ 85.00 / exit 3/14/07 @ 83.85 Loss of 1.3% JNJ- 1/10/07 Long@ 66.20 / exit 1/31/07 @ 66.98 gain of 1.1% HAL-1/31/07 Long@ 29.54 / exit 2/23/07@ 31.70 gain of 7.3%. AXP-2/23/07 Long@57.90 / exit 2/27/07@ 55.90 Loss of 3.45%
2007 NET RESULTS ASSUMING $10,000.00 INVESTED IN EACH TRADE : 5 trades, net return of + 7.85%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, March 19
Economics
11:00
4-week T-bill Announcement
Before:
MOVI, NT
Events
Fed’s Kimmitt speaks at 4:00 about trade and the
economy in Berlin
Tuesday, March 20
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
CAMT, CRZO, CMC, FDS, MCS, PERY, PRGS, SUP
Events
A.G. Edwards Energy Conference
7:00
MBA Mortgage Applications (3/16): 2.8% prior
Earnings
Before:
AIR, CHRS, DIET, GMTN, MS, ROST, SMRT
Events
Fed’s Open Market Committee meets a 9:00 to
discuss interest rates and economy
8:30
Jobless Claims (3/17): 323k cons
Earnings
Before:
ATU, BBA, BKS, CAG, CHTT, CRAI, CTR, EBS, FDX, FRED, KBH, GIS, NWY, SCHL, TWP,
WSM
Fed’s Kroszner Speaks at 12:00 on credit markets
in North Carolina
10:00
Existing Home Sales (Feb): 6.35 mln cons
NONE
Events
Fed’s Lacker moderates
Liquidity Risk panel at 8:30
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* The following information has been provided for informational purposes only and should not be used or construed as an offer to sell, a solicitation, or an offer to buy, or a recommendation for any security. EquityLetter does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. |
