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7/30/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Readers of this column have been made well aware of the potential risks associated with equity markets numerous times over the past month or so. We stated that we were beginning to feel like “the boy who cried wolf”. Well, there is now a rabid wolf at the door. The initial catalyst for the market plunge of this past week was the failure of private equity firm Cerberus Capital to secure adequate financing terms for their proposed buyout of automaker Chrysler. This failure has thrown up a red flag for the re-pricing of risk across the broad market spectrum. The other catalyst was the earnings report from lender Countrywide Credit (CFC-29.85). Contrary to what public officials have been expressing, it seems that CFC is beginning to see an increase in late payments on their Home Equity borrowers. The company stated that this problem is not isolated to sub-prime borrowers. Only time will tell how much de-leveraging needs to be done before the equity markets can stabilize. One thing for certain, is just as markets have a tendency to over-shoot on the upside; the downside will assume this very same tendency and leave very few survivors behind. How many hedge funds will have to fail and be forced to liquidate? Will there be a domino effect? Will de-leveraging adversely influence the financing for increased corporate buy-back activity? Corporate buy-back activity, through the reduction of shares outstanding, has been critical to softening the blow of deteriorating corporate earnings growth. De-leveraging will have negative implications for the global leveraged buy-out boom of the past few years. How far must prices retreat before strategic buyers can step in and pick up the slack? These questions will only be answered over time and continued price correction. At this time investors must learn to raise cash positions upon market rallies (Bear market rallies can be quite swift) and refuse the temptation of trying to pick price bottoms.
As an aside to our usual market commentary we would like to express our disdain for the commentary of our trusted public officials (senators, congressmen, Federal Reserve Governors, Treasury Secretary). These public officials consistently insult the intelligence of the American public with their lies and spin. From our esteemed President Bush and his misleading Weapons of Mass Destruction misguidance to Federal Reserve Chairman Bernanke and his erroneous comments regarding loan default issues and inflation, public officials consistently mislead the American public. It is this writer’s proposal that the American voting public demand a form of Sarbane’s Oxley for public officials who intentionally mislead their constituents. Wouldn’t legislation such as this be quite ironic and also promote accountability? The vote on this issue would be classic reality television.
The market sectors that we follow that continue to have positive technical weekly momentum are energy sector Oil Service (OIH) and internet (HHH). The IEF-82.47 (I-share 7-10 year Treasury bond) strength is reflective of investor flight to safety.
We would continue to use price weakness in these positive sectors as an opportunity to enter long positions accompanied by a strict protective sell stop discipline.
The sectors that currently have negative technical implications are the Regional banks (RKH), builders (XHB), Telecom (TTH), Brokerage (XBD), Large-Cap Pharmaceutical, and Retailers (RTH). New negative weekly signals have developed in XOI (Amex Oil Index), IYT (transportation index), SMH (Semiconductor Index), and the SLX (Steel Index). We would use any rallies in these sectors as a source of funds or to initiate short positions.
We decided to exit our long position in Walgreen’s on 7/28/07 and sold our long at a price of 45.70. We purchased the shares of WAG on 05/24/07 at a price of 44.60. This resulted in a gain of 2.46%.
Our only other long position, the shares of EBAY, was stopped out on 7/27/07 at a breakeven price of 32.70.
Take note that the VIX-24.17 (CBOE Volatility Index) increased from a reading of 16.95 the previous week. This column has consistently warned of heightened market volatility and last week was a prime example. At 24.17, the VIX is fearfully high. Look for an early week spike slightly higher to reflect investor panic, before the markets begin to stabilize.
II. GOLD
GLD (streetTracks gold index) – The GLD-(65.41) declined $2.17 or 3.21% for the week. The GLD index is up 3.69% year to date. Once again the GLD failed to act in a defensive nature amid market turmoil and succumbed to selling pressure with other asset classes. The GLD remains contained within the 2007 trading range (62.62-68.73). We would look to continue to trade this range but advise extreme discipline upon any violation of said parameters.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), fell victim to the negative market downdraft of this past week. As of this writing the Oil Service group was the only survivor on the weekly charts. The price charts of Schlumberger (SLB-93.02), Halliburton (HAL-36.06), Transocean (RIG-109.90, earnings due this week) and Ensco (ESV-61.67) all were able to maintain positive weekly momentum. Oil Service issue that we would continue to avoid include Baker Hughes (BHI-79.43) and B.J. Services (BJS-25.96). We would begin to reduce exposure in the large capitalization integrated oils. Exxon (XOM-85.59), Chevron (CVX-85.20), British Petroleum (BP-69.45) and Conoco (COP-79.80) are all indication near term signs of weakness. Natural Gas and Coal continue to look like sources of funds upon any price appreciation.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -22, a decrease from the previous week reading of +6. The Dow Jones Industrial average declined 4.21% for the week to 13266.37 -582.68. The average is currently up 6.82% for all of 2007. The downside correction has begun. The first price support level in the DIA is around the 128.00 price level. We shall be looking to short any rebound in the DIA-132.11 (Dow Industrial Diamonds) around the 136.00-137.00 price area.
Readers should take note that DowJones Industrial components, DIS, GM, PG, and VZ, are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
BA, IBM, MMM, PG, Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, INTC, JNJ, JPM, KO, MCD, MO, MRK, MSFT, PFE, T, 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% GLD-4/26/07 Long@67.01/ exit 5/15/07@ 66.60 Loss of 0.006% DIA-4/3/07 Short@125.18/ exit 4/16/07@127.20 Loss of 1.6% NVLS-4/26/07 Long@32.40/ exit 5/16/07@30.52 Loss of 5.8% DIA-6/20/07 Short@136.50/ exit 7/02/07@135.20 Gain of 1.00% EBAY-7/11/07 Long@ 32.70 / exit 7/27/07@ 32.70 scratch trade WAG- 5/24/07 Long@ 44.60 / exit 7/28/07@ 45.70 Gain of 2.46%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 11 trades, net return of + 3.90%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, July 30
Economics
Earnings
Before: ACV, ARLP, ADM, ARM,
SAN, BWP, BVN, CCJ, CAN, CTCM, DCO, FPL, GEHL, HUM, SFI, JAH, LTR, MNST, NTE,
NNN, NSTC, NS, PBI, RSH, ROC, SRP, SPG, TBBK, TSN, WWY
Events
SRA 3rd
Annual Summer Technology Conference
Tuesday, July 31
Economic
8:30
Personal income: 0.5% cons
Earnings
Before: AG,
AL, ALU, AMED, AEP, AHG, ARJ, ADP, AUXL, AVP, BEAV, BMS, BPHX, BRKR, CAM, CACS,
CBS, FUN, COH, CVH, CRY, ETR, EEE, SFRV, FDP, IT, GM, GPI, GTXI, HC, HW, HMA,
HSII, HLT, HEP, HOLX, HUN, IMCL, IPSU, INFS, IACI, IVC, LDR, LCAV, LIZ, MHO, MMP,
MRO, MCS, MLM, MAS, MCGC, MTCT, NCR, NNI, NURO, UWN, GAS, NMX, ONNN, OSTK, PEI,
PER, PPC, PMI, RBC, RTIX, RJET, SAF, SGK, SMG, SINT, SIRI, SAH, JOE, THOR, TKR,
TWP, UA, UTHR, VCI, VLO, VNO, WMI, WEC, SNICI
Events
Government
Technology Minnesota
Digital Government
Summit
Wednesday, August 1
Economic
10:00
ISM Index: cons 55.5
Earnings
Before:
ASF, AGN, AT, ALVR, AHM, APU, AMCS, MT, ASPV, AVA, BEC, BRY, BYD, CBI, CI, XEC,
CZN, CTSH, CSR, DWSN, DVN, D, RRD, DRQ, ECLP, EFJI, ENB, ENDP, ETM, EXR, FCL,
GRMN, GWR, GTIV, HNT, HP, HWCC, HGSI, IRM, JNY, KNDL, KFT, ID, LAZ, LFUS, LOJN,
MKTX, MSO, MA, MWV, MCO, MWIV, NICE, NTMD, NJR, NBL, NOVA, OMX, OSK, OC, PKD,
PH, PNK, PNCL, PEG, Q, RHB, RYI, SBGI, SPW, SHOO, SSYS, SYNM, TSTY, TEVA, THQI,
TWX, TWC, RIG, TRX, TRW, UGI, UMC, VZ, VTRU, VPHM, VC, WYN, ZGEN
Events
Deutsche Bank's
Thailand, Indonesia & Philippines Banks & Property Conference
Economic
8:30
Initial Claims: 301k Prior
Earnings
Before: EYE,
AGYS, ATG, AMRI, ATK, ALD, AMT, ANPI, ANSS, AIV, ILA, ARQL, ASTSF, AACC, AIZ,
RATE, B, BNT, BIOS, BLT, BCO, BKC, CNQ, CNP, CETV, CTL, CHTR, CKP, CSK, CTEC,
CBB, CLX, CMS, CDE, ED, CEI, CVS, DNR, DSX, DRAD, DTG, EK, ECIL, EDO, EMS, ENTG,
ENZN, EXPE, EXTR, FAF, FLA, GET, GTOP, GIL, GLBL, GTI, GMCR, HAE, HPY, HL, HTZ,
HOS, HYC, IDEV, IPCC, IFS, IP, ITG, ISTA, KTO, KBR, KBALB, LEA, LCUT, LIOX, MAC,
CLI, MTRX, MDTH, MESA, MM, MGM, MORN, NRP, BABY, NSR, NI, NOK, NRG, NUS, NYX,
OGE, OMG, OCR, OPXT, OPTN, ORCH, VITA, OSCI, PTRY, PTEN, PDGI, PDC, PPL, PDE,
QCCO, PWR, RRI, RSTI, RDC, SRE, SPIL, SNN, HOT, SPH, SUP, SFY, SMBI, SMA, SYPR,
TLM, TICC, TE, TOPT, TWGP, THS, TRMP, TRXI, TXU, USPH, ULBI, UNT, UIC, USM, VRX,
VNDA, VSE, VIA.B, VICL, VSH, WPI, WST, WLK, WMB, WWE, WPL, CUB, DIOD, EPEX, GSF,
BID, THO, WRES,
Events
ASID 2007
Friday, August 3
8:30
Non-farm Payrolls: 135k cons
Earnings
Before:
ASX, AFR, BRNC, BW, CSAR, DMRC, EOG, FCN, HERO, ZEUS, PG, TTI, THI, TNP, WY,
WLSC
Events
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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. |
