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10/29/07
Note: Event Calendar is located at bottom of page
I. General Market Overview
The rollercoaster ride from the major market indices continues. Early in the week fear was the dominant market emotion after an ugly earnings report from Merrill Lynch (MER). Merrill Lynch reported close to $8.0 billion in losses from subprime and other mortgage related investments. The shares of MER traded to low levels not seen in over two years. Later in the week the shares rebounded on speculation that CEO Stanley O’Neal was on his way out. The bears seemed to be firmly in control as rumors were rampant as to the next victim of the subprime derivative debacle. The shares of insurer American International Group (AIG-62.15) plunged on speculative rumors that a significant loss announcement was imminent. But as is the case in these violent markets, emotion shifted abruptly to the bulls after strong earnings reports from the likes of Apple Computer (AAPL-184.70) and Microsoft (MSFT-35.03). These impressive reports helped enable the market indices to recoup roughly half the losses from the prior week.
We would like to point out the recent price action in the shares of mortgage lender Countrywide Financial (CFC-17.30). The shares of CFC surged 32% on Friday after bullish earnings guidance from management. The only explanation for this dramatic move in the shares of CFC is simply that there was an abundance of bets placed on the short side. We would certainly question the credibility of any earnings projections coming from the management of CFC. We view this upside move as completely unsustainable and would look to initiate a short position upon a further advance to the 20.00 price resistance area. The price action in CFC is a perfect example of a near term “short squeeze”.
The week ahead brings the highly anticipated Federal Open Market Committee (FOMC) policy meeting. It appears that the markets are eagerly expecting further rate cuts from the FOMC. The consensus is expecting a cut of at least a quarter point in the Fed Funds and Discount rates. Will the Fed shock the markets once again by cutting 50 basis points? Will the markets be disappointed by a 25 basis point cut? It is our opinion that the Fed will move slowly this time and the market reaction will not be a positive one.
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX), large integrated oils (XOI), Natural Gas Index (XNG), Coal related issues, and the Biotech Index (BBH).
The Steel sector (SLX-86.66) remains as bulletproof as the metal it produces. U.S. Steel (X-111.28), earnings due this week, continues to benefit from bi-weekly takeover rumors. Arcelor Mittal (MT-81.57), the world’s largest producer, shows no signs of slowing momentum. Nucor (NUE-63.42) has risen 18% since lowering earnings guidance. Steel Dynamics (STLD-54.81) set new all times highs in the past week. This group continues to benefit from strong global demand and the charts reflect said demand.
The IEF-84.88 (I-share 7-10 year Treasury bond) was relatively unchanged on the week as the yield on the ten-year treasury decreased from 4.40% to 4.38%. It is interesting to note that the IEF did not decline commensurately with the advance in the major market indices. This lack of decline exemplifies the fear that still exists in the credit markets. Technically, the chart reflects a trading range of 83.00 on the low end with 85.00 being the top of the range.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-22.88), Transportation index (IYT-87.44) and the Semiconductors (SMH-33.79), the Financials (XLF-33.70), Brokerage (XBD-233.31), Oil Service (OIH-192.22), Internet Holders (HHH-67.28), Retailers (RTH-98.96) and the Large Cap Pharmaceuticals (PPH-81.05) are all indicating continued weakness.
In the Semiconductor space Intel (INTC-25.94) remains in the most favorable technical condition. Although appearing to be in a near term oversold condition, we would continue to avoid TXN, SNDK, MU, AMAT, and ADI.
The Builders (XHB-22.88) rallied this week in anticipation of further interest rate reductions. While we have stated repeatedly in recent letters that the Builders were deeply oversold, we are not ready to declare a bottom in this sector. This being stated, we do like the technical patterns of Toll Brothers (TOL-23.10) and Ryland Homes (RYL-28.40). Both stocks appear to be in “buy the dip” mode. We would continue to avoid the shares of CTX, PHM, and LEN.
The Brokerage (XBD-233.31) sector staged a relief rally after digesting the negative news early in the week from Merrill Lynch. The only name in this space that we consider in bull mode is the almighty Goldman Sachs (GS-235.92). The shares of MS, MER, LEH, and BSC all remain in distribution mode.
The Internet (HHH-67.28) sector has rallied back to the critical pivot area of 67.33. Google (GOOG-674.60) and YHOO-33.63), although appearing over-bought at this stage, remain the most technically attractive. We would currently avoid the shares of EBAY (EBAY-36.64) and Amazon (AMZN-90.00), as both appear to be in weekly corrective patterns.
We would use any significant price rallies in these negative sectors as a source of funds or to initiate short positions.
Take note that the VIX-19.56(CBOE Volatility Index) declined from a reading of 22.96 the previous week. After trading as high as 24.00 early in the week, the VIX retreated correspondent to the market advance and closed near the lows for the week. We continue to view the VIX as in an uptrend with the 16.00 level being near term support.
II. GOLD
GLD (streetTracks gold index) – The GLD-(77.69) advanced $1.99 or 2.63% for the week. The GLD index is up 22.90% year to date. On 10-04-07, we initiated a long position in the GLD at 71.40. The recent strong upside move in the GLD is reflective of a market that is anticipating another rate cut by the Federal Reserve. At this time we feel that the GLD is in a short term overbought stage. We shall look to liquidate our long position at the market on this coming Monday morning. It is our current belief that we will be able to re-enter this trade at lower prices. A weekly close below the 73.78 level will cause us to revaluate our overall weekly bullish stance on the GLD. At this time, although short term over bought, the weekly price trend remains positive for the price of Gold. We remain of the opinion that the price of Gold is on track to eventually test the all time high of $850.00 per ounce.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), as mentioned last week in this column, continues to show diverging technical patterns.
The Large Cap Integrated Oils that have managed to maintain upside momentum are Exxon Mobil (XOM-92.21), British Petroleum (BP-77.78) and refiner Tesoro (TSO-64.48). Issues in the group that appear vulnerable to price correction are Chevron Texaco (CVX-91.65), Conoco Phillips (COP-84.81) and refiner Valero (VLO-73.13).
Quarterly earnings reports are due this week from XOM and CVX. Recently the energy names have had “sell the news” reactions to their earnings reports. The shares of TSO surged last week after legendary investor Kirk Kerkorian announced a tender for 20% of the shares outstanding.
The Oil Service (OIH-192.22) rebounded on the week but still remains technically vulnerable at this time. The 196.60 level is current price resistance for the OIH. The shares of Halliburton (HAL-41.28) and Transocean (RIG-116.93) are the most attractive charts in the space. Traders should anticipate increased volatility in RIG as their earnings report is due out this week. Oil Service names that we feel are currently in price correction phases include, SLB, BHI, ESV, and BJS.
Natural Gas (XNG-560.50) currently appears to be on the most favorable technical footing. El Paso (EP-17.39), Chesapeake Energy (CHK-38.81), XTO Energy (XTO-65.34), and Encana (66.97) all enjoy positive weekly chart patterns.
The Coal sector, although appearing somewhat over bought at this stage, has maintained favorable technical status. Arch Coal (ACI-40.96) and Peabody Energy (BTU-57.93) are both extended on the upside. We would withhold initiating long positions at these levels. Current long positions are advised to raise protective sell-stops to protect profitable trades.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -2, unchanged from the previous week reading of -2. The Dow Jones Industrial average advanced 2.14% for the week to 13807.02. The average is currently up 10.71% for all of 2007. Large Cap issues continue to outperform their small cap brethren. The S&P 500, as measured by the SPY (153.62) is positive for the year by 8.43%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund-82.01), advanced 3.69% for the week and are now positive by 5.32% for 2007.
Strangely enough, despite the 2.24% rally in the Dow Jones Industrial average last week, there were no new weekly signals generated by DJIA components. Aided by a strong earnings report from Microsoft (MSFT-35.03) the DJIA was able to recoup half the loss from the prior week drop of 4.00%. From a technical perspective we are of the opinion that the DIA (137.95) will face formidable price resistance around the 140.00 level. We see current technical price support around the 130.00-132.00 price levels.
Readers should take note that three Dow Jones Industrial components, PG, VZ, and XOM are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, GE, GM, HPQ, INTC, JPM, KO, MCD, MO, MRK, MSFT, PG, WMT, XOM
Dow 30 stocks with negative weekly signals:
AIG, AXP, BA, C, CAT, DD, DIS, HD, HON, IBM, JNJ, MMM, PFE, T, UTX, VZ
· Underline names have changed from previous week*
V. OPEN POSITIONS
GLD- 10/04/07 Long@ 71.40 / Sell at mkt 10-29-07
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% XHB- 8/06/07 Long@24.40 / exit 8/08/07@ 27.80 Gain of 13.90% DIA- 8/08/07 Short@ 136.30 / exit 8/16/07@ 127.81 Gain of 6.22% DIA-9/13/07 Short@ 134.30 / exit 9/18/07@ 137.31 Loss of 2.24% SNDK-10/11/07 Long@ 50.00 / exit 10/12/07@ 48.00 Loss of 4.00%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 15 trades, net return of + 18.63%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, October 29
Economics
Earnings Before: ACV, ARLP, ASH, BPHX, BWP, BVN, CAN, DJO, DCO, ENTG, FSNM, GEHL, GLYT, GW, HTZ, HUM, KDN, K, LANC, LTR, LPX, NTE, NNDS, NWA, RSH, SCHN, SSW, SRP, SPG, VZ, VNUS
After: ACTU, AATI, ALGT, ALO, AFG, AMMD, ASCA, ATHR, ASX, DP, CF, EEP, EOG, FTI, FDG, FNDT, GERN, HCP, ININ, JKHY, MSPD, ODSY, OSG, PBI, POL, PRAA, PPS, PWAV, PFG, RCII, SCUR, SOHU, SNWL, SONO, SFN, SPN, SUPG, TTES, TWLL, TXRH, UHS, VRTX, VLCM, VMC
Events 14TH Annual MARHedge/Institutional Investor Global Hedge Fund Investing Summit Cambridge Energy Research Assoc. Global Power Summit TDWI World Conference SourceMedia Wealth Management & Retirement Planning Forum CFO.com Technology Summit SourceMedia Small Business Banking Conf.
Tuesday, October 30
Economic
10:00 Consumer Confidence: 100.0 cons
Earnings
Before: ASX, AG, AAI, AL, AMED, AXL, AHG, ADP, AVP, BEAV, BEC, BMS, BJS, CRDN, CL, CMC, COCO, CPO, RRD, ENR, EXR, FE, FSRV, FPL, RAIL, FDP, GKSR, IT, GT, GPI, HSII, HERO, HLT, HEP, INFS, IVC, JAH, LCAV, LIZ, MHO, MLM, MAS, MEDX, MGM, NURO, ODP, ONNN, OVRL, GLT, PEI, PER, PMI, PG, Q, SAF, SEPR, SINT, SIRI, SAH, STE, SYY, TKLC, TEN, TEVA, TRW, TUES, X, UA, VPHM, VSH, VTAL, WEC, GOL, VNO
Events
Connect Scotland Investment Conference Fintech Mergers & Acquisition Senior Exec. Forum SMi Group Gas to Liquids Conf. Vertical Events Conf.-Mining 2007 Resources Convention 14th Africa Upstream 2007 IQPC Oil & Gas Talent 2007
Wednesday, October 31
Economic
8:30 GDP-adv: 2.1% cons 8:30 Chain Deflator-adv: 2.1% 8:30 Employment Cost Index: 0.9% cons 9:45 Chicago PMI: 53.0 cons 10:00 Construction Spending: -0.3% 10:30 Crude Inventories: -5288k prev. 2:15 FOMC Policy Statement
Earnings
Before: ALU, ANR, ALVR, AUXL, AVA, BRY, BLT, BYD, BCO, BPO, CCJ, CRS, CKP, CLX, CEG, DADE, DHX, DSPG, FCL, FTD, GRMN, GIL, GBX, HES, HURN, ICON, IDA, IACI, IDCC, IFF, IRM, JNY, KNDL, KFT, ID, LAZ, LOJN, MAC, MAG, MKTX, MA, MCGC, MNC, NCR, NEM, NHWK, NTMD, NOVA, OCR, OSCI, PMTC, PPL, PEG, RHB, COL, ROC, SGR, SPIL, SBGI, SPNC, SPW, SSYS, SYNM, PNX, THOR, RIG, TRX, UMC, VC, WY, WSX, WYN, ZGEN
Events
Lombard Street Research Liquidity Theory of Asset Prices Seminar Richmond Events Financial Services Technology Forum Richmond Events Finance Directors’ Forum Marine Money Magazine Dublin Ship Finance & Investment Forum Richmond Events Property Forum BIOCOM Investor Conference
Thursday,
November 1 Economic
8:30 Personal Income: 0.4% cons 8:30 Personal Spending: 0.4% cons 8:30 Core PCE Inflation: 0.2% cons 8:30Initial Claims: 331k prev 10:00 SIM Index: 52.0 cons 10:00 Pending Home Sales: -6.5% prev 5:00 Auto Sales: 5.1 min cons 5:00 Truck Sales: 7.2 min cons
Before: ASVI, AIXD, ACW, ASF, AGYS, ATG, AGU, ATK, AMSC, AEE, ABC, AMCS, ANPI, ANSS, ARQL, AACC, AIZ, AZN, ARTE, BDX, BBI, BXC, BRNC, BRKR, CAM, CNQ, CTL, CMS, ED, CRY, CVS, CYNO, DNR, DMRC, D, DRQ, EK, ECLP, EIX, EDO, EFJI, EGO, EMS, ELMG, ENDP, ENZN, XOM, FCSX, FAF, FCN, GET, GWR, GTIV, GLBL, GTI, HAE, HNT, HTV, HPY, HSIC, HOFF, HOS, HGSI, ITWO, IAR, IFLO, INCY, IFS, TEG, IPG, IGT, ITG, ISTRA, KBR, KYPH, LB, TVL, LIOX, LFUS, CLI, MRO, HZO, MMC, MHS, MM, PCS, MLNM, MSSA, MINI, MNTA, MTCT, MYGN, NRP, BABY, NSR, GAS, MJR, NBL, NMX, CHUX, OMX, ZEUS, OPXT, ORCH, OSK, OC, PTEN, PRGO, PCG, PDGI, PXP, POZN, PRAI, PDE, PGN, QCCO, RDN, RTSX, RVSN, RBC, ROK, RDC, RRST, SFUN, SMG, SRE, SNN, SPR, S, SRT, STN, SHOO, STRA, SUP, SFY, SMA, TSO, TWTI, TBL, TOPT, TWP, TRMP, TRXI, ULBI, UNT, UTHR, VRS, VNDA, VICL, WRNC, WRES, WST, WMB, WLSC, WWE, WPL, DIOD, ROIAK, TOMO
After: ABCO, AFCE, ACS, ARE, ALKS, ARP, ANEN, APPB, ATPG, ADBL, AVNX, ACLS, BEBE, BGFV, BMRN, BLKB, BBBB, BUCY, CA, CAB, ELY, CALL, CBM, CPT, CAPA, CBOU, CBEY, CBS, CEGE, CTLM, CPHD, CEM, PLTE, CLF, COGT, CGNX, CSTR, CNXT, CROX, CYTC, DVA, TRAK, DENN, DEPO, DGII, DTE, DRCO, EHTH, ERTS, RDEN, EQ, EVC, ERES, FLML, FLS, GMST, GNSS, GGC, GYI, GFIG, ROCK, GSF, GCOM, GES, GLF, HAIN, HRS, HSTX, HVT, HIMX, HYC, IDSY, IMMR, INSP, NSIT, IBI, IN, ITMN, IVAC, SWIM, DMX, ITRI, JSDA, KOSN, LNCE, LDK, LF, LPSN, LMIA, LOOK, MSSR, MTD, MWY, MIL, MOH, MRT, MOVE, MYL, NAPS, NATL, NFS, NLS, NKTR, NLST, NBIX, NEXT, EGOV, NGPS, NUVO, OII, ORH, OIS, ASGN, OTEX, OPLK, OPNT, OTTR, PEET, POM, PCR, PAA, LGBT, PSYS, PSA, QLTY, QSII, RSYS, RMKR, RAS, RMD, RTEC, RUTH, SAFT, SLRY, SNTS, SBAC, SGMS, SIMG, SWKS, FIRE, SM, SXE, STNR, SUNH, SPSX, SYMM, SYNA, BRLC, TSRA, THQI, CLUB, UEIC, UHCO, USU, YSI, VCLK, VRSN, VSAT, VVUS, VOLC, WLT, WRI, WDC, WPTE, WMGI
Events
IMN European Real Estate Opportunity & Private Fund Investing Forum Arch Investment Conferences New York CERA North American Electric Power Executive Roundtable Standard & Poors Annual Project Finance Conference Friedland Capital Life Sciences Conference AGA/EEI Customer Service Best Practices Work Shop Forbes Leadership Networks Forum CERA North American Natural Gas Executive Roundtable
Friday, November 2
8:30 Nonfarm Payrolls: 90k 8:30 Unemployment Rate: 4.7% cons 8:30 Hourly Earnings: 0.3% cons 8:30 Average Workweek: 33.8 cons 10:00 Factory Orders: 1.0% cons
Earnings
Before: TDSC,
LNT, ALY, AIV, ARJ, B, CNP, CVX, CI, CBB, DUK, EDS, EBS, ENCY, FRP, GSX, HPOL,
HWCC, IP, JRCC, MGLN, MSO, NNI, NRG, NYX, OMG, PDX, PDC, ROLL, SCG, TLM, TSTY,
TE, VIA.B, WR
Events
American Assoc. for the Study of Liver Diseases Meeting Standard & Poors Credit Risk Summit Imperial Capital Global Opportunities Conference
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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. |
