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2009-06-06

The Charm Offensive: Can Obama, Bernanke & Geithner Dress Up This Pig?

This week, Team Obama took their dog and pony show on the road. Treasury Secretary Geithner went to China, Fed Chairman Bernanke to Capitol Hill, and the President himself began a Mideast tour in Saudi Arabia. This full-court press is not coincidental, and comes just as the federal government has begun unloading trillions of dollars in new Treasury obligations. The coordinated charm offensive is meant to assure the world-at-large that the United States can repay these obligations without destroying the dollar.

Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.

The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke’s testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.

Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke’s words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government’s current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!

The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?

Of course, it’s not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won’t spook the market by front-running their trades.

However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn’t be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it’s just a matter of time before someone admits it.

In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.

For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.

Will The British Pound Get Pounded?

When financial markets were on the way down, risk aversion reigned and every investment that was deemed risky crashed. The U.S. dollar and 10-year Treasuries did well as global investors fled to safety.

But for the last three months this trade has been in retracement mode. And the further it has retraced, the more it has fueled optimism in the outlook for a recovery.

Stocks have been rising. Foreign currencies have climbed. Even commodities finally showed some life, and when they did … they bounced strongly. As a result, the U.S. dollar and 10-year Treasuries have been sold.

Wednesday, though, was a key day in the financial markets.

That day may have marked …

The Top in This Aggressive Retracement Period - At Least For the British Pound …

Last year, British shoppers were flocking to the U.S., taking advantage of the pound's strength.
Last year, British shoppers were flocking to the U.S., taking advantage of the pound’s strength.

Just last year the pound was soaring to all-time highs against the dollar. And UK residents were enjoying their buying power in the States … snapping up U.S. real estate and traveling for shopping sprees in places like New York City.

However, when the financial crisis hit the U.S., it was quickly found that the UK was just as exposed, if not more so. And when it was finally determined that many countries were not “decoupled” from the U.S., but were in fact highly interconnected, the pound and other currencies came tumbling down.

British Pound Daily

Source: Bloomberg

The chart above shows the severity of the pound’s crash. Six years of strength in the pound (versus the dollar) was given back in 14 short months!

But in the last three months the pound has aggressively regained 23 percent of this fall.

As this retracement trade across risky assets turned into a recovery theme for the markets, the policy actions in the UK coincided nicely, beginning to show some effects and glimpses of economic improvement.

Nevertheless, in the face of this strength, the pound has been dealt two harsh blows …

Two weeks ago Standard and Poors downgraded the outlook of the UK’s AAA credit rating. Yet the pound proceeded to rally over 7 percent in the following weeks.

Then a political scandal struck when members of Prime Minister Gordon Brown’s cabinet were exposed for personal spending jaunts with taxpayer money. Yet the pound continued to rally.

Why?

It had very little to do with specific interest in the pound. But it had everything to do with the across-the-board retracement of the collapse in risky assets that took place from mid-2008 to March 2009.

Risk Aversion Trade - Round #2

This week, the wholesale retracement in financial markets reached some very significant inflection points …

The U.S. stock market, which has led this retracement, steadily climbed higher and higher and fed into an optimism that has fed back into the stock market. And when the stock market rises and optimism rises, so does confidence about the economic outlook. And voila, we have green shoots.

But in all likelihood, this feel-good rally has run its course. The U.S. stock market has climbed 42 percent in 13 weeks. What’s more, it has now reached its 200-day moving average AND significant long-term technical resistance.

On Wednesday, a key reversal signal flashed. Now the pound is feeling the heat.
On Wednesday, a key reversal signal flashed. Now the pound is feeling the heat.

When confidence is being manufactured by a rising stock market in simple retracement mode during the worst economic period since the Great Depression … look out below!

If there is one glaring characteristic of this financial market environment, it’s the tight relationship that has developed between markets in global crisis mode.

In other words, when the U.S. stock market runs into a wall, so will practically everything else. You could see this very clearly on Wednesday when sharp sell-offs took place in currencies, commodities and stocks all at the same time.

For currencies, when this rally subsides the biggest gainers are likely to experience the sharpest declines. As for the pound, it’s already feeling the heat.

Take a look at the following chart and you’ll see a clear reversal signal …

British Pound Daily

Source: Bloomberg

I’m seeing the same kind of foretelling technical signals in the Australian dollar, which was the biggest mover among major currencies on the way up.

The Aussie dollar has climbed 31 percent in three months, tracking the U.S. stock market closely all along the way as you can see in the chart below …

S&P 500 and the Australian Dollar

Source: Bloomberg

Bottom line: We could be entering round two of the risk aversion trade. And if we are, you can be sure that all of the negative issues and threats facing economies will come back into the crosshairs.

That could mean major downside for currencies like the British pound and the Aussie dollar.

ETFs Signal Economy Bottom

The proliferation of Exchange Traded Funds (ETFs) has long been talked about and now there is basically an ETF for just about any investing situation you can think of.  The rise in popularity for managed ETFs has now opened the door for managers to make the ridiculous now possible. Need to find an ETF that tracks Uzbekistan goat-herding clean bio-fuel companies? No problem, we’ll slap one together for ya!!!

But the arms race in ETFs has seemed to have taken a new turn-anti-American sentiment. There is no shortage of bad news surrounding the US economy and foreign governments have made no secret of the fact that they would LOVE to see the US lose its place at the head of the table and fall back to “equal footing” with their own economies. The call for a new world currency is just the beginning of this sentiment.

I’m not sure whether or not our current leaders are doing us any favors by groveling and acquiescing to foreign governments who have been allowed to manipulate (China) and steal (Russia) in order to regain strength.   But no matter, this is the collision course we are on and how it will play out is anyone’s guess.

But one thing for is for certain: savvy ETF companies will be more than happy to capitalize on this growing trend! There is now a focus on ETFs that trade on non-US exchanges and in non-US dollars. And let’s not forget the leveraged ETFs which are also looking to get in on the act. Let’s take a look at 3 ETFs that are looking to exploit this paradigm shift.

1.       The Claymore Gold Bullion Trust (CGL-UN.TO)  This ETF trades on the Toronto Stock Exchange and buys gold in Canadian dollars, rather than US dollars. What this accomplishes is allowing investors to take advantage of the upside in gold, while at the same time not having to have gains reduced by a potential fall in the US dollar. Take a look at our currency course to learn more about these relationships.

2.       The iShares MSCI World Islamic ETF (ISWD.L: 1101.10 +14.99 +1.38%)  This ETF is designed to track the performance of the MSCI World Index, but screens according to Shari’ah Investment principles. Upon closer inspection of this ETF, is anyone surprised that the top 5 holdings are US companies– Exxon (XOM), AT&T (T), IBM (IBM), Procter & Gamble (PG), and Johnson & Johnson (JNJ)? Looks more like a US Large Cap Fund to me. Shhhh!

3.       Lastly, let’s look the Direxion Daily 10-Yr (TYO: 76.71 +2.30 +3.09%) and 30-Yr Treasury Bear 3x Shares (TMV: 92.21 +2.12 +2.35%). These ETFs are leveraged ETFs that look to take advantage of falling bond prices and rising yields. Not only that, but they give you 300% of any potential move.  I must admit, I kind of fancy the moxie of these ETFs.  Just think: if I buy these in my margin account using 4-1 leverage, I can get a full %1200!

As we can see, for as bad the US may be and as unpopular as we are at the moment, I’m glad to see that some are not discouraged by this and actually embrace the principles that founded this country.   However, the same can’t be said for investors in these vehicles, which have been reporting low trading volumes. Could this rise in the number of ETFs that are shifting the focus away from the US actually be telling us that we are near a bottom in the economy? Perhaps the US is not as bad as everyone seems to be saying!!!

Stocks To Watch Next Week: Ascent Solar Technologies, Yingli Green Energy Holding And JDS Uniphase

Ascent Solar Technologies (ASTI: 6.71 -0.10 -1.47%) has resistance at $7.15, which was the high from Friday. The stock is trying to break through the major resistance at $6.98, and that may occur next week. If ASTI breaks through resistance, we should see a strong follow through move. Technically chart looks Bullish, with the 50 dma going up and MACD on top of 0. There is good upside potential in ASTI, so watch the stock closely on Monday.

Chart courtesy of www.stockcharts.com ( click to enlarge )

Yingli Green Energy Holding (YGE: 14.91 +0.14 +0.95%) broke the resistance on Friday, but not the move I expected. The stock broke early the $15, but pulled back down to close up 0.14 on the day. I’m watching the stock again on Monday, and I’m buyer once it breaks through Friday’s high of $15.48. We need to watch YGE for a few more days because there is good upside if the buyers return or there is any positive news on the company.

Chart courtesy of www.stockcharts.com ( click to enlarge )

JDS Uniphase (JDSU: 6.10 -0.05 -0.81%) - Wednesday, the stock broke out of the range that I thought would have happened on Monday. This move should be the start of a bigger move. Resistance for this continuation move is $6.35, Friday’s high of the day. If the stock can break through resistance, expect to see heavy buying drive the stock higher. There is good upside in this trade, so watch JDSU closely on Monday. Technically in a Bullish Mode.

ALL BUSINESS: Bond-market rout lifts mortgage cost

The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.

That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.

To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.

Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.

"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."

Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.

So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?

One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year — more than four times last year's all-time high.

"The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."

Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy's prospects for long-term health.

"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.

That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.

After Fed policymakers this spring said they would buy billions of dollars of government debt and more than $1 trillion of mortgage securities, 30-year fixed mortgage rates fell to 4.78 percent in April, the lowest since Freddie Mac started surveying rates in 1971.

Sales of new and existing homes began to trend higher. Mortgage refinancings also jumped, allowing borrowers to lock in lower rates. Fee income from this activity helped lift profits at many battered banks and gave consumers more disposable income to spend, which helped lift their confidence about the economy's prospects. All that was good for the nation's businesses.

But now, surging mortgage rates are threatening to undermine all that. Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif.

That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.

Also, many homeowners who wanted to refinance didn't lock in the super-low rates in April when the refi boom took off. "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."

All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.

World markets surge after strong US jobs data

 European stock markets extended gains Friday amid expectations of an opening jump on Wall Street after stronger than expected U.S. jobs data stoked hopes the world's largest economy may emerge from recession earlier than anticipated.

Figures from the Labor Department showed that the U.S. shed only 345,000 jobs in May. That was the fewest since September and well below market expectations for another 500,000 plus rise.

"The sharper than expected moderation in the rate of net payroll job losses suggests that the U.S. economy is perhaps closer to an actual recovery than previously thought," said Paul Ashworth, senior U.S. economist at Capital Economics.

"If the rate of improvement continues, output should begin to expand again in the second half of the year," he added.

Following the data, Wall Street futures jumped sharply with Dow futures up 107 points, or 1.2 percent, at 8,837 and the broader Standard & Poor's 500 futures rose 12.70 points, or 1.4 percent, at 953.20.

The expected solid gains enticed more buying in Europe. Germany's DAX was up 83.27 points, or 1.6 percent, at 5,148.07 while France's CAC-40 index rose 72.39 points, or 2.2 percent, to 3,384.42.

Britain's FTSE 100 index was the big gainer in Europe, rising 86.33 points, or 2 percent, to 4,473.27 with miners in big demand after Rio Tinto PLC scrapped its $19.5 billion deal with China's Chinalco and opted instead to raise $15.2 billion in a share sale and set up a joint venture with rival BHP Billiton.

The gains in Britain came despite mounting uncertainty surrounding the future of Prime Minister Gordon Brown another resignation from his Cabinet. James Purnell, who quit his position as works and pensions minister, called on Brown to quit to save the party from a mauling at the next general election.

So far, Brown has held firm and is currently attempting a restructuring of his government. Alistair Darling, the finance minister, has kept his job despite speculation earlier in the week that Brown wanted him out.

"In the financial markets, equities and the pound have greeted the political turbulence with equanimity — so far," said Neil Mackinnon, chief economist at ECU Group.

Earlier in Asia, Japan's Nikkei 225 stock average rose 99.05 points, or 1 percent, to an eight-month high of 9,768.01 while Hong Kong's benchmark Hang Seng closed up 1 percent to 18,679.53 in seesaw trade.

South Korea's Kospi took back its losses to add 1.2 percent to 1,394.71 but Shanghai's benchmark edged down 0.5 percent. In Australia, the main index advanced 0.9 percent.

Oil prices rose above $70 a barrel level, then eased, trading up 77 cents on the day at $69.58 a barrel. On Thursday the contract shot up $2.69.

The dollar gained to 96.95 yen from 96.63 yen, while the euro fell to $1.41 from $1.4190.

3 Value Stocks With Double Digit Growth Rates

Do you have guts? That’s what it takes to be a value investor amidst one of the sharpest 3-month stock market rallies Wall Street has ever seen.

Just a few months ago, value investors were riding high. The markets were hitting new multi-year lows. Price-to-earnings ratios were plunging.

For value investors, bear markets are usually stock picking paradises as equities move out of favor with investors and leave good quality companies available at rock bottom prices.

But a funny thing happened. There was a massive rally which lifted all stocks, especially growth stocks, and now it appears that there’s not much “value” in the markets. For big returns, many investors are pouring into growth.

All is not lost, however. Value investors just have to dig a bit deeper to find the solid companies that will provide the best returns for their portfolios.

Start with a low P/E

Value investors seek companies selling for under their intrinsic value.

The best place to start looking for value stocks is in the price-to-earnings ratio. In recent months, it’s been more difficult for investors to correctly value a company because earnings have been falling and earnings forecasts have been cut.

However, now that we’re nearly 6 months into the year and deep into the economic crisis, many companies are seeing a clearer picture of what sales and earnings will look like for the rest of 2009. This makes the P/E multiple now more reliable. Look for a P/E ratio that is as low as possible.

Yearning for some “growth” to go along with your “value”?

It’s possible a value investor could have both value and growth in the same stock.

Recently, I’ve been finding myself competing with my aggressive growth stock colleague, Bill Wilton, for coverage of the same stocks. He wants to cover a company for aggressive growth and I want to cover the same company for value. How could that be?

Growth and value are overlapping because the growth stocks were crushed in the market sell-off earlier this year and now have value characteristics.

Market conditions have created a rare opportunity for value investors to pick up stocks that are also growing quickly.

Value investors can look to the PEG ratio to find undervalued stocks that have higher growth rates. The PEG ratio is calculated by taking the price-to-earnings ratio and dividing it by earnings per share growth.

The earnings per share growth rates can be found on Zacks.com under the estimate page for a particular stock.

A PEG ratio under 1.0 symbolizes a company is undervalued. You can also find the PEG ratios on the quote page of Zacks.com.

Value stocks exist in any market

Even with the big market rally, attractive value stocks still exist. It might take a little more work to find them, but your portfolio will thank you when you do.

Dig a little deeper. The reward for value investors is finding that one company with great fundamentals that the market is ignoring and seeing the big gains when the market finally “gets it.”

3 value stocks with double digit growth rates

FUQI International, Inc. (FUQI: 15.55 +0.75 +5.07%), the luxury Chinese jewelry manufacturer, saw revenue jump 41% in the first quarter as the jewelry market in China remained hot despite the global economic slump. It has a forward P/E of just 7.5. The PEG ratio is a very low 0.32. Analysts expect year-over-year earnings growth of 24.05%.

NewMarket Corporation (NEU: 77.66 -0.25 -0.32%), the specialty chemical additives manufacturer, saw a record first quarter as quickly declining raw material prices boosted operating profit. It has a forward P/E of 13.7. Its PEG ratio is only 0.83. Analysts expect strong year-over-year earnings growth in 2009 of 31.37%.

Almost Family, Inc. (AFAM: 29.16 -0.30 -1.02%), the provider of home health and personal care, reported a terrific first quarter that saw revenue jump 77% year-over-year. The company has a forward P/E of only 9.9. Its PEG ratio is 0.42. Analysts expect year-over year earnings growth of 26.04%.

Wall Street: Still Clueless

Do you have guts? That’s what it takes to be a value investor amidst one of the sharpest 3-month stock market rallies Wall Street has ever seen.

Just a few months ago, value investors were riding high. The markets were hitting new multi-year lows. Price-to-earnings ratios were plunging.

For value investors, bear markets are usually stock picking paradises as equities move out of favor with investors and leave good quality companies available at rock bottom prices.

But a funny thing happened. There was a massive rally which lifted all stocks, especially growth stocks, and now it appears that there’s not much “value” in the markets. For big returns, many investors are pouring into growth.

All is not lost, however. Value investors just have to dig a bit deeper to find the solid companies that will provide the best returns for their portfolios.

Start with a low P/E

Value investors seek companies selling for under their intrinsic value.

The best place to start looking for value stocks is in the price-to-earnings ratio. In recent months, it’s been more difficult for investors to correctly value a company because earnings have been falling and earnings forecasts have been cut.

However, now that we’re nearly 6 months into the year and deep into the economic crisis, many companies are seeing a clearer picture of what sales and earnings will look like for the rest of 2009. This makes the P/E multiple now more reliable. Look for a P/E ratio that is as low as possible.

Yearning for some “growth” to go along with your “value”?

It’s possible a value investor could have both value and growth in the same stock.

Recently, I’ve been finding myself competing with my aggressive growth stock colleague, Bill Wilton, for coverage of the same stocks. He wants to cover a company for aggressive growth and I want to cover the same company for value. How could that be?

Growth and value are overlapping because the growth stocks were crushed in the market sell-off earlier this year and now have value characteristics.

Market conditions have created a rare opportunity for value investors to pick up stocks that are also growing quickly.

Value investors can look to the PEG ratio to find undervalued stocks that have higher growth rates. The PEG ratio is calculated by taking the price-to-earnings ratio and dividing it by earnings per share growth.

The earnings per share growth rates can be found on Zacks.com under the estimate page for a particular stock.

A PEG ratio under 1.0 symbolizes a company is undervalued. You can also find the PEG ratios on the quote page of Zacks.com.

Value stocks exist in any market

Even with the big market rally, attractive value stocks still exist. It might take a little more work to find them, but your portfolio will thank you when you do.

Dig a little deeper. The reward for value investors is finding that one company with great fundamentals that the market is ignoring and seeing the big gains when the market finally “gets it.”

3 value stocks with double digit growth rates

FUQI International, Inc. (FUQI: 15.55 +0.75 +5.07%), the luxury Chinese jewelry manufacturer, saw revenue jump 41% in the first quarter as the jewelry market in China remained hot despite the global economic slump. It has a forward P/E of just 7.5. The PEG ratio is a very low 0.32. Analysts expect year-over-year earnings growth of 24.05%.

NewMarket Corporation (NEU: 77.66 -0.25 -0.32%), the specialty chemical additives manufacturer, saw a record first quarter as quickly declining raw material prices boosted operating profit. It has a forward P/E of 13.7. Its PEG ratio is only 0.83. Analysts expect strong year-over-year earnings growth in 2009 of 31.37%.

Almost Family, Inc. (AFAM: 29.16 -0.30 -1.02%), the provider of home health and personal care, reported a terrific first quarter that saw revenue jump 77% year-over-year. The company has a forward P/E of only 9.9. Its PEG ratio is 0.42. Analysts expect year-over year earnings growth of 26.04%.

A New Day For Bondholders In The USA As Court Refuses To Block Sale Of Chrysler To Fiat

It’s a scary day today for bondholders in the USA. The US Appeals court Friday refused to block the sale of Chrysler to FIAT. Essentially the secured creditors were forced to do what the government thought was best for them. Usually secured bondholders are paid off a % of their holdings after the liquidation of assets. This was not permitted to happen via the Chrysler sale to FIAT. Judge Arthur Gonzalez just set an extremely dangerous precedent, which will have broad implications via capitalism for years to come.

Capital usually flows to countries that have well established rules of law. Bondholders like to know what the rules are and that they will be protected in the event of a default or a Bankruptcy. That used to be the case in the USA. That is no longer the case, effective with today’s ruling. The supreme court is the last hope for rule of law in this country. Today we have moved one step closer to a dictatorial regime, whereby those in charge of running the government are have been set free to think for the collective populace, or in this case the bondholders of Chrysler.

The risks of owning bonds just went higher. Perhaps this will result in a re-rating of bond market risk, which will essentially result in higher financing costs for businesses. This could be an unexpected result of today’s actions.

Bloomberg Story

“The affirmance does set a precedent that the structure of this quick sale is acceptable, and that will help GM and discourage appeals,” said Seton Hall University bankruptcy law professor Stephen Lubben in an interview after the hearing.

The sale would be financed by the U.S. and Canadian governments, which would take equity stakes in the new Chrysler along with Fiat and a worker health-care fund.

“The alternative to the approval of the sale is liquidation,” U.S. Circuit Judge Amalya Kearse said during today’s hearing.

Thomas Lauria, a lawyer representing the Indiana pension funds, who rank as secured creditors, said the decision to approve the sale by bankruptcy judge Arthur Gonzalez puts the concept of secured debt “at great peril.”

Big, Positive Surprise In US Jobs Data

Just 345,000 jobs were lost last month, the smallest decline since last September. The unemployment rate, however, rose to 9.4% — its highest level since August 1983.

The nonfarm payrolls number is shocking. The drop was less than even the most optimistic forecasts had predicted. A smaller-than-expected drop in construction and temporary jobs appears to have played the biggest role in keeping the losses from being worse.

Adding to the surprise was an improvement in April’s job losses. The Labor Department now says 504,000 jobs were cut in April, versus the original estimate of 539,000 losses.

Though the positive surprise in nonfarm payrolls is very welcome, it is important to realize that the economy continues to contract. A smaller number of job losses still means that more people were laid off than were hired. Furthermore, the rising unemployment rate signals that more and more people are unable to find work.

That said, nearly all of the data released over the past couple of months points to the same thing — the pace of economic deterioration is slowing.

This is a step in the right direction and suggests that a resumption of growth could occur at some point during the second half of the year.

The rally in commodity prices and last month’s consumer confidence surveys  suggest many expect conditions to improve over next 6 months.

However, once GDP does return to positive territory, I’m not convinced many people will feel like they are part of an expanding economy.

Rather, I’m worried we could be looking at another jobless recovery. There are thousands of manufacturing jobs in the U.S. that won’t be replaced.

Rising foreclosures and credit card defaults will keep the housing market from rebounding. And CFOs will be more focused on keeping costs contained than allowing aggressive expansion.

It’s important to realize that though first-quarter earnings were better-than-feared and stocks have rallied since early March, full-year corporate earnings projections haven’t moved very much. Though we are seeing the earnings estimate revisions ratio (total positive revisions divided by total negative revisions) improve, top-down profit forecasts for the S&P 500 have been essentially unchanged.

At the same time, stocks and commodities have rallied since March. The upward moves have been fueled by a shift in risk tolerance. Though there are still things that could go bump in the night, I am more optimistic now than I was 2 months ago.

Given this backdrop, investors need to move off of the sidelines, while still remaining selective. Look for companies that could benefit from the recovery, such as Research in Motion (RIMM: 82.70 +0.69 +0.84%), and combine them with less economically sensitive names like Healthsouth (HLS: 12.92 -0.18 -1.37%). At the same time, don’t chase stocks whose valuations have become overly optimistic, such as J. C. Penney (JCP: 29.05 -0.44 -1.49%).

As far as the commodities rally, tread carefully, as some companies like Potash Corp. of Saskatchewan (POT: 113.63 -1.16 -1.01%) will be affected by factors outside of the economy. Conversely, other companies, like Weatherford (WFT: 20.63 -0.22 -1.06%) should provide better exposure to the early-cycle improvements.

US Unemployment Duration Stays Up

The big under-reported part of the unemployment situation is the increasing duration of unemployment. Being out of work for three weeks is very different than being out of work for 30 weeks. While over half the states and more than half the population does have extended unemployment benefits, it is a very scary prospect to not only be without a paycheck, but also having already exhausted your unemployment benefits. That means no income coming in, and given how low the savings rate has been over the past decade, likely no money period.

Economically it further depresses your spending, and psychologically it is just plain depressing. The average length of unemployment rose to 22.5 weeks in May from 21.4 weeks in April, and is up from 16.8 weeks a year ago. The median length of unemployment has also gone up sharply, reaching 14.9 weeks in May versus 12.5 weeks in April and 8.3 weeks a year ago. While the duration of unemployment always goes up during a recession, it has been particularly pronounced in this one (and the last expansion was noteworthy in how little it fell).

As can be seen in the graph below, on both measures the duration of unemployment far exceeds previous peaks. Also note that these measures normally continue to increase well past the end of the recession, which indicates to me that they are not about to stop rising any time soon.

We now have the unprecedented situation where the number of long-term unemployed (27 weeks or more) now outnumbers the short-term (less than five weeks) unemployed. Prior to last month this had never happened (well, the records were not kept during the Great Depression, but at least post-war it is unprecedented). The ratio of long-term to short-term rose to 1.21 from 1.10. That ratio has averaged 0.32 in the post-war period, and before this cycle the record was 0.78 hit in 1983.

A year ago, the ratio was an above average, but unexceptional 0.48. The number of short-term unemployed actually fell in May to 3.275 million from 3.346 million in April, and is virtually the same as a year ago (3.257 million). Short-term unemployed now represent just 22.4% of the unemployed versus 38.1% a year ago.

Long-term unemployment has skyrocketed. There are now 3.95 million Americans who have been out of work for more than half a year, up from 3.68 million in April and just 1.57 million a year ago. The next group down, those who have been out of work between 15 and 26 weeks, is also swelling rapidly - rising to 3.054 million in May from 2.531 million in April and just 1.238 million a year ago.

If the long-term unemployed are people with mortgages, it is hard for me to see how they will continue to pay them. This means there is still more pain in the pipeline for firms closely tied to the mortgage industry like Fannie Mae (FNM: 0.70 -0.03 -4.11%), Freddie Mac (FRE: 0.76 0.00 0.00%) and the mortgage insurers like MGIC (MTG: 5.05 +0.25 +5.21%). In the past, they might have been able to refinance their houses and tap the equity to have the cash to continue to pay the monthly mortgage bill (not a great long-term strategy, but it could tide you over). That option is now closed off as most people have very little equity left in their houses.

If people still have room on their credit card limits, they will tend to max out the cards, not on frivolous stuff, but just to keep the lights on. Once the cards are maxed out, the next step is bankruptcy. This is not welcome news for big card issuers like Capital One (COF: 24.11 -0.89 -3.56%). Expect bankruptcy filings to continue to soar.

However, even bankruptcy does not help people that much since so many of the big debts that people have are non dischargeable. Thanks to hefty campaign contributions to key Senators (of both parties - 13 Democrats went along with almost the whole GOP in caving to the banks), the terms of a mortgage on a primary residence cannot be changed even if you file (terms on the vacation house or the yacht can be changed, though). Student debt, taxes and child support payments also cannot be affected by the judge.

This recession has made almost all Americans (well, actually almost all people regardless of nationality given the worldwide nature of the downturn) poorer. However, it is long-term unemployment that tends to lead to destitution. Poverty is not a subject that comes up often when people talk about the market.

Since poor people don’t have money, they don’t count as far as the markets and the overall economy is concerned. After all, if the poorest 10% of the population were magically able to double their spending, it would hardly move the needle in terms of overall aggregate demand.

Where this increase in poverty is likely to show up is in the budgets of all levels of government. State and local governments are already under severe budgetary constraints, and California is teetering near the edge of bankruptcy. More desperately poor people are not going to help the situation. However, unless we want to see massive tent cities, and malnourishment bordering on starvation in this country, these people will either have to be taken care of by the government (Section 8 housing, food stamps, etc.) or they will have to find jobs.

Yes Friday’s jobs report was far better than I had expected; however, let us not lose sight of the fact that the economy is still losing jobs at a historically very high rate. The rate of layoffs has slowed, but the pace of new hiring has not picked up. It will be a long, long time before the number of jobs surpasses the last peak of 115.8 million private sector jobs we hit in November of 2007. Until then, there will be plenty of pain from sea to shining sea.

iShares MSCI Japan Index Fund (EWJ) And USD/JPY: Possibility Of A Secular Trend Change

I would like to explore the relationship between the i-Shares MSCI Japan Index Fund (EWJ: 9.28 -0.11 -1.17%) and the US Dollar Japanese Yen (symbol: USD/JPY) cross match. What piques my interest is that the Dollar is up almost 2% today against the Yen. Furthermore, the “next big thing” indicator suggests that both assets have a high likelihood of undergoing secular trend reversal.

Figure 1 is a monthly chart of the EWJ with the “next big thing” indicator in the lower panel. I have also placed pivot points on the price chart and a close above one of these pivot points provides a good entry point when the “next big thing” indicator is in the zone. Now look to the current time frame. Due to the “v” shaped bounce there is no pivot point to “tag” an entry. Nonetheless, price has yet to penetrate the very steep down trend line.

Figure 1. EWJ/ monthly

Figure 2 is a monthly chart of the USD/JPY cross match with the “next big thing” indicator in the lower panel. Once again, I have placed pivot points on the chart, and a close above of these pivot points provides a good entry point. Several failed signals are noted with the down red arrows, and in the current time frame, USD/JPY has yet to close above the most immediate pivot (or resistance level) at 99.679.

Figure 2. USDPY/ monthly

What should be clear is my pursuit to try to define those technical dynamics that lead to secular trend changes. Just a casual look at the charts show that when the “next big thing” indicator is in the buy zone, there is a high likelihood of a secular trend change leading to a multi year upward price move. We want tailwinds - not headwinds!

Now let’s contrast EWJ to USDJPY. See figure 3 a monthly chart; USDJPY is in the top panel and EWJ is in the bottom panel. From 1992 to 2005, the relationship is pretty clear. As the USDJPY fell (i.e., Yen strengthened), the EWJ rose. When the USDJPY rose, the EWJ fell.

Figure 3. USDJPY v. EWJ/ monthly

Starting in mid-2005, both assets have moved in lock step. The USDJPY and EWJ moved together into the highs of mid-2007, and both assets fell together in the deleveraging of 2007 and 2008. During this time period the JPY strengthened and the EWJ fell as well, and I believe this would fit with the new dynamic seen in the US and throughout the developing world in the non-commodity currency countries. Currency devaluation leads to higher asset prices.

USDJPYand EWJ are worth watching because they are both in a position to undergo a secular trend change. Whether the pattern fits the new dynamic or the old one is yet to be determined.

US Stock Markets End Lower On Friday; GM Plans To Sell Saturn And Wal-Mart Plans Share Buy Back

The markets were off Friday as the Dow Jones Industrial Average was the only major index to be in the black, up 0.15% to a level of 8,763.13.  The NASDAQ was down 0.03% closing at 1849.42 while the S&P 500 was down 0.25% ending at 940.09.  The 10-year once again saw price down ending with a yield of 3.83%.  A dollar gained strength today resulting with gold falling, settling at $962.60, and weaker demand saw crude prices fall to $68.44 a barrel.

General Motors (GMGMQ.PK: 0.865 +0.119 +15.95%) announced preliminary plans to sell its Saturn unit to Penske Automotive Group (PAG: 14.65 +0.05 +0.34%) which would put Penske in charge of Saturn’s parts, distribution, service, brands, and trademarks.  Mr. Roger Penske did not say how much the deal would be worth, but he said that the deal would allow for Saturn to retain 13,000 jobs in the corporation and the 350 dealerships.  The sale to Penske does not include the 51 dealerships that are located in Canada.  Penske stated that he will continue to sell three out of the current five models offered by Saturn, the Outlook, Vue, and Aura, while discontinuing the Sky and Astra.  Penske says that he will return to the original focus of Saturn, low cost energy efficient cars that effectively compete with other cars offered within the United States.  So far, Penske has been in talks with potential manufacturers to replace GM, with Renault Samsung Motors of Korea looking as a likely one.  If this agreement goes through, GM will be able to successfully sell two of the four non core brands, after announcing that they are selling their Hummer unit to China’s Sichuan Tengzhong Heavy Industrial Machinery Company Ltd. on Tuesday.

In other news, Wal-Mart (WMT: 51.07 +0.20 +0.39%) announced at its annual meeting plans to repurchase $15 billion worth of stock.  This is in an effort to show shareholders that Wal-Mart will be a successful company even after the recession is over.  Wal-Mart has been very successful in the weak economic environment, attracting many customers who were trading down because of their tightened purse strings, posting sales of over $400 billion for the first time in its company’s history.  The company was up over 16% last year, being one of only two companies in the Dow Jones to be in the black in 2008, but this year is down almost 9% as many begin to question on the outperformance of other retailers in what many think will be the end to economic turmoil.  All CEO Michael Duke and Wal-Mart can do is post good numbers and show investors that they are going to be a successful company in both good and bad economic conditions.

In great economic news, employment rates increased slightly but job losses slowed, giving the best economic signal so far that the economy might be bottoming out.  The US department of Labor said that non-farm payrolls dropped to 345,000 well below the estimated 520,000 number.  Unemployment was at 9.4% increasing 0.5 percentage points, missing the average economists estimate of 9.2%.  The gradual slowing of this number is great news for the economy as a whole but before we will see significant improvement it is necessary that this unemployment number does not keep going up.

Rio Tinto Walks Away From Chinalco; Launches A Rights Offering

Rio Tinto (RTP: 193.76 +11.08 +6.07%) decided to walk away from a $19.5 billion deal with Chinalco originally announced in the middle of February, in which the Chinese company could have controlled up to 19% of Rio Tinto PLC and 14.9% of Rio Tinto Limited, and could have benefited from the proposed copper, iron ore and aluminum joint ventures.

Rather than this tie-up, Rio Tinto will seek to raise $15.2 billion through a rights offering and will pursue an iron-ore joint venture (JV) with BHP Billiton (BHP: 60.29 +3.25 +5.70%). This equity infusion will go a long way to paying down a portion of its hefty debt load largely assumed from the prior acquisition of Alcan — without having to sell stakes in some of its better mines at what appears to have been a less than favorable point in the commodity cycle.

In fact, the company says it intends to use the net proceeds to pay off of a tranche of the Alcan credit facilities due in October 2009 and the substantial prepayment of the tranche due in October 2010. Even better, the company says net debt will be reduced to approximately US$23.2 billion — easily surpassing the prior $10 billion net reduction target set for year-end 2009.

As for the terms of the rights offering, Rio Tinto will sell the new shares at a large discount to existing shareholders. The company said it will offer 21 new Rio Tinto PLC shares for 40 existing shares at a price of 1,400 pence per share, which is a 48.5% discount to the closing price on June 4, 2009. Also, RTP will offer 21 new Rio Tinto Limited shares for every 40 existing shares at A$28.29 per share, which is an approximate 57.7% discount to the closing price on June 4, 2009.

Rio Tinto announces iron ore joint venture with BHP Billiton

Also, Rio Tinto and BHP Billiton signed an agreement to form a joint venture [JV] covering both companies’ entire Western Australian iron ore assets. All the current and future Western Australian assets will be owned 50/50 by BHP and RTP. BHP will pay Rio Tinto $5.8 billion to take its equity interest in the JV up from 45% to 50%.

Both companies believe the JV will create production and developmental synergies exceeding $10 billion, which are expected to come from actions that include combining adjacent mines, and consolidating the management, procurement and overhead activities into a single operation.  The agreement excludes the Hlsmelt plant.

According to RTP, a $275.5 million break-up will be required if either party decides not to proceed with the transaction, fails to recommend the transaction to shareholders, or breaches the exclusivity provisions agreed upon. The companies expect the JV to be completed around the middle of 2010.

2009-06-05

Russia’s Problems Impede Its Long-Term Profit Promise

For global investors searching for long-term profit plays, the message is clear: Don’t spend a lot of time looking at Russia.

Russia’s Pravda, formerly the official organ of the Soviet Communist party, published a blistering attack on the United States last week. That would not seem so strange, except that the attack accused America of “descending into Marxism.”

Meanwhile, the Russian stock market has doubled since January and the price of oil - Russia’s principal export - has nearly reached $70 per barrel. Though it seems an extraordinary question to ask, we still have to ask it: Does the Russian economic model have something to teach us?

The writer of the Pravda article clearly enjoyed penning it. There were a lot of barbs about the United States, such as “the population was dumbed-down through a politicized and substandard education system based on pop culture.”

There also were some attacks on the United States’ policy toward Russia in the 1990s: “The initial testing grounds was conducted upon our Holy Russia and a bloody test it was.”

But then there is the claim that “Prime Minister [Vladimir] Putin warned [President] Obama and [former U.K. Prime Minister Tony] Blair not to follow Marxism, it only leads to disaster.”

Enjoyable though it is to imagine the Russians lecturing the Obama administration about sound economic management, in reality they have no grounds to do so. A few months ago it appeared that the Russian economic model would not make it through 2009, as the state spent the last of its oil revenue to prop up both the banking system and the dodgier politically-connected oligarchs.

A country that was wealthy when oil was $140 per barrel became deeply impoverished when oil prices dropped all the way down to the $30 range. Those of us who had been alarmed by Russia’s increasing geopolitical and economic assertiveness indulged in a little schadenfreude, feeling that it couldn’t happen to a nicer bunch of guys.

Now, the table has turned again. At $68.87 a barrel, the price of oil is far higher than the price assumptions on which the majority of Russia’s oilfield-investment calculations were based.

Russia has effectively seized the assets of the British oil company BP PLC (BP: 50.36 -0.55 -1.08%).  Last week BP accepted the very unpleasant Mikhail Fridman as chairman of its joint venture TNK-BP, a sign that its attempt to control the investment into which it had put the majority of the capital was ended. In the long run, the forced expropriation of foreign investors will prevent the Russian oil sector from remaining truly competitive. But in the short run, the expropriated foreigners have found so much oil there that huge revenues are assured for at least a decade, provided the oil price remains reasonably high.

In other sectors, too, the free cash for those with political connections allows deals to be done. Opel, for example, General Motors Corp.’s (GMGMQ.PK: 0.865 +0.119 +15.95%) European subsidiary, was sold not to the Italian company which had a strategic plan for it, nor to the Chinese company that could use it to enter the European market, but to Magma Group, a Canadian parts company controlled by Russian interests, with financing from the Russian state-controlled bank Sberbank Rossii OAO.

The result may not make much sense operationally, but it is another example of Russian interests controlling major strategic assets in Europe. Needless to say, the various gas and oil joint ventures undertaken by Gazprom OAO (OGZPY.PK: 23.40 -0.10 -0.43%) in Eastern Europe, the Mediterranean and North Africa are also extensions of Russian power.

The fact that Russia’s MICEX stock index is up 100% since early January (albeit still 40% below its December 2007 high) is not very relevant to the people who run Russia.

They appear to have two objectives: Using the capitalist system to make themselves and their colleagues very rich and projecting Russia’s power on the world stage - just as the former Soviet Union used to do.

To Prime Minister Putin, capitalism is an attractive discovery, because it works economically much better than Communism did, and thus allows Russia to regain more of its former power than would have been possible under the Soviet system.

In this sense, Putin and current Russian President Dmitri Medvedev have finally achieved the original goals of Mikhail Gorbachev’s reforms in the 1980s; the objective of those was certainly not to bring down the Soviet government or upset the system, but simply to get the economy working more efficiently towards the leadership’s objective of greater Soviet power. Minus the other ex-Soviet Republics, Russia has now achieved this objective - and it may not stay minus the other Republics for very long, if Russia’s rulers have their way.

Given the way the system is rigged against the outsider, Russia is not a particularly attractive place to invest. Clearly, there may from time to time be a good short-term bet that Russia’s rulers will overcome current difficulties. However, the world contains other good managers besides Putin, and some of those others have a genuine interest in shareholder value and determination to create more of it.

By all means, look for Russian companies in consumer sectors that are outside the grip of the oligarchs - but do not expect to do too well, because you may find your company has a new and very expensive sleeping partner. Probably the best vehicle is the Market Vectors Russia ETF (RSX: 24.13 +0.23 +0.96%), which benefits from Russia’s still-low Price/Earnings Ratio of 7.2.

But remember this: Russia isn’t a great global growth market like China, India or Brazil. And without major changes, it never will be.

Intraday Views As Gold Reaches Support Levels

Here at the Trader’s Expo, there has been a lot of talk about gold, particularly with the volatility of the last two days.

GLD (Gold ETF) has pulled back into a possible confluence support level - let’s see it and also see the volatile Trend Day Down, Trend Day up, and Friday’s morning gap action on the intraday charts.

GLD Daily:

Gold (GLD) was making an impressive run up to challenge the $1,000 ($100) level but met resistance just shy of this critical target level.

From an Elliott fractal standpoint, it appears that we had Wave 1 up off the April lows, Wave 2 down into the May lows, and then the move through May has been a 3rd wave with the current pullback a possible Wave 4 into support.

We have simple confluence support (on GLD) at $94, which represents the rising 20 day EMA and the 38.2% Fibonacci retracement at $93.63 (I drew it inverse).

The next lower level of confluence EMA and Fibonacci support comes in around $92.  I would feel less confident if we pulled back beneath that level.

For now, odds seem to favor support at this level, or at least a favorable risk-reward opportunity for those so inclined.

However, do be careful, because GLD (and Gold) have been quite volatile the last few trading days.

GLD 5-min 3-day chart:

Gold “fell off a cliff” on June 3rd, producing a steady and sustained “Trend Day Down.”

A pullback in an uptrend is completely expected, so it wasn’t shocking, but what was shocking was the about-face Trend Day Up that formed on the next trading day (Thursday).

Both of these were almost perfect examples of Trend Days in terms of the gap and EMA resistance/support.

As if that wasn’t ‘bad’ enough, we gat a sharper and more violent gap down on Friday’s open which took price beneath Wednesday’s lows and we’ve pulled back in what appears at this moment to be forming another possible Trend Day Down.

It’s enough to make your head spin!  Unless you’re scalping (playing for small, intraday targets), this is very difficult to trade at the moment for swing traders due to the gaps.

Be safe if you’re a newer trader taking part in this action.

Investment News Briefs: Countrywide’s Mozilo Charged With Fraud, US Mortgage Rates Hit 6-Month High

Countrywide’s Mozilo Charged with Fraud; Mortgage Rates Hit 6-Month High; Intel Gets Foothold in Wireless; UAL Looking to Jettison 747; Rio May Sell $15 Billion in Stock After Chincalco Deal Fails; Oil Prices Jump 5%; Allison: Banks Need $100 Billion Cushion; Retail Sales Plunge

  • The Securities and Exchange Commission yesterday (Thursday) filed fraud charges against former Countrywide Chief Executive Officer Angelo Mozilo. The charges may involve Mozilo’s sale of shares of giant mortgage lender Countrywide, which last year was sold to Bank of America Corp. (BAC: 11.86 -0.01 -0.08%) CNNMoney reported. “We do not believe there is any fair basis for allegations to be made against Mr. Mozilo,” attorney David Siegel told CNN. “All of Mr. Mozilo’s stock sales were made in compliance with properly prepared and approved trading plans and reflected recommendations by his financial advisor over a long period of time.”
  • U.S. mortgage rates soared to their highest levels in almost six months this week, threatening the overall recovery of the U.S. economy. Interest rates on U.S. 30-year fixed-rate mortgages increased to 5.29%, up from 4.91% in the week ended June 4, according to a survey released yesterday (Thursday) by home funding company Freddie Mac (FRE: 0.76 0.00 0.00%). The higher rates reflect an increase in yields on U.S. Treasury bonds, despite government efforts to keep rates at low levels to lift the hard-hit housing sector.  “Any additional rate increases will significantly hurt the home purchase and refinance markets, which will really hurt the economic recovery,” Alan Rosenbaum, president of Guardhill Financial, a New York City-based mortgage banker and brokerage company told Reuters.
  • Intel Corp. (INTC: 15.92 -0.21 -1.30%), is buying software company Wind River Systems Inc. (WIND: 11.63 -0.13 -1.11%) for about $11.50 a share in cash or $884 million, a 44% premium over Wind River’s Wednesday closing price.  The purchase will help the world’s largest maker of semiconductors get its chips into more consumer electronics and wireless devices. Wind River makes operating systems for a wide range of wireless devices including cars and mobile phones, serving customers such as Sony Corp. (NYSE ADR: SNE). “If you have a chip you want to put in a lot of things other than a PC, you need code,” Dallas-based analyst Cody Acree told Bloomberg. “Wind River brings that, and it brings customers.”
  • Boeing Co. (BA: 52.65 +2.08 +4.11%) and European consortium Airbus S.A.S. have been asked by UAL Corp. (UAL: 0.00 N/A N/A) to submit bids to replace its wide-body fleet, including its aging 747 jumbo jet, according to a letter made public by Reuters yesterday (Thursday).  Boeing’s order could amount to as many as 150 planes, a move experts say could jumpstart demand for new planes from embattled U.S. carriers as they struggle through the recession.  The U.S. airline industry’s fleet of jets is older than its foreign rivals despite widespread concerns that older planes use far more fuel than modern aircraft.
  • Rio Tinto PLC (RTP: 193.76 +11.08 +6.07%) may sell as much $15 billion in stock to replenish its coffers and pay down debt after a $19.5 billion investment from Aluminum Corp of China Ltd. (ACH: 26.35 +0.15 +0.57%) fell through, Bloomberg reported, citing anonymous sources.  Rio may also sell interests in some of its Australian iron ore mines to BHP Billiton Ltd. (BHP: 60.29 +3.25 +5.70%), said the people, who declined to be identified because Rio’s board hasn’t approved the deal.  Rio is trying to sell assets to repay $10 billion of debt this year. Its total debt of $38.9 billion was incurred mainly through the 2007 purchase of Alcan Inc.
  • Oil prices rose more than 5% after Goldman Sachs Group Inc. (GS: 149.01 -0.46 -0.31%) said prices might hit $85 a barrel by the end of the year due to higher demand and lower supplies, Bloomberg reports. Goldman rescinded its forecast that said prices would briefly fall before a rally. “There seems to be a growing realization that oil will end the year in the $80 area, and this is spurring some buying,” said John Kilduff, senior vice president of energy at MF Global Ltd. (MF: 6.13 +0.34 +5.87%).
  • U.S. retailers posted disappointing sales in May as unemployment surged and consumers cut spending, according to a Thompson/Reuters poll. Sales were weaker than expected at 63% of the 30 retailers tracked by Thomson Reuters. May same-store sales fell 4.8% compared with May 2008.

Are There “Leaks” In The Stock Market’s Half Full Glass?

Other than a wild last 20 minutes this past Friday, S&P futures have been relatively calm the past few weeks, especially when compared to the volatility we saw towards the end of 2008 and the first part of this year. This is quite evident when looking at a chart of the S&P volatility index, or VIX, which has hovered just above and below the 30 level recently, near 9-month lows. Signs that the worst of the economic crisis are now behind us and a better than expected earnings season have been responsible for the approximately 38% rally in the S&P 500 since its lows were made back on March 9th. Economic reports have sent a mixed message regarding hope for an economic recovery, but yesterday’s reports were definitely viewed as positive for the economy, as weekly jobless claims fell by 4,000 to 621,000 last week. The bigger news, however, was the decline in continuing claims, which was the first decline in 17 weeks.

Also supportive was the surprisingly large gain in business productivity, rising a revised 1.6% annual rate in the first quarter. This improved productivity helped corporate profits rise by 3.4% in the first quarter. However, this gain came at the cost of lower employment, with companies cutting jobs and extracting more out of remaining workers. This now sets the stage for this morning’s release of non-farm payroll figures for May, with current estimates looking for a decline of about 520,000 jobs last month, with the unemployment rate expected to jump to 9.2%, which if true, would be the highest unemployment rate in nearly 25 years! Though the stock market seems to be in a positive mood, there may be some storm clouds on the horizon, as Treasury yields have soared, despite purchases from the Fed.

Debt investors are becoming nervous about the massive amount of debt the U.S. is running up, with stimulus packages and bailouts expected to propel the debt to GDP ratio to levels not seen since just after World War II. At some point, all this debt will force rates higher, as borrowers will want to receive higher compensation to absorb all this debt, which will, in turn, drive the cost of borrowing higher for other entities such as corporations, home buyers and state and local municipal bodies. These higher costs can slow down any economic recovery which would have defeated the whole purpose of the government ’stimulus “in the first place! If so, the rampant gains in the stock indices we have seen lately could come to an abrupt end.

Trading Ideas

Given the nearly 40% rise and relatively low volatility levels, traders expecting either a major correction or a continuation of the uptrend in the S&P futures may possibly wish to investigate the purchase of E-mini strangles in anticipation of volatility increasing or a big move in the futures. With the June contract expiring in less than two weeks, traders may wish to look at options against the September futures for trading ideas. An example of a long strangle trade would be buying the July 960 call and buying the July 900 put. With the Sept. E-mini S&P trading at 931.50, this strangle could be bought for 45.50 points, or $2275 per strangle, plus commissions. This debit is the maximum loss on the trade, and the trade is profitable if the September futures are trading above 1005.50 or below 854.50 at expiration in July. However, many traders would close out the position before expiration if the futures make a big move or if volatility increases sharply to help minimize the effects of time decay on the position.

Technicals

Looking at the daily chart for the June E-mini S&P futures, we notice prices trying to hold just above the recent consolidation around the 930.00 area. This is also just above the 200-day moving average, which is viewed by many technical traders as the determinant as to whether a market is bullish or bearish. Though bulls are currently winning the battle for control, the 14-day RSI is displaying a bearish divergence, as this indicator has failed to make a new high reading at the recent highs. Volume at the highs has also been less than stellar, which could signal that fresh buying has not emerged on the breakout. 950.00 remains resistance for the June contract, with support found at the bottom of the consolidation near the 875.00 area.

Sensex Up 94.87 Points On Friday For 13th Consecutive Weekly Rise In 4 Years

Sensex rose 94.87 points or 0.6% to 15103.55
Nifty climbed 14.25 points or 0.3% to 4586.90.
Mid Cap fell 0.7%. Small Cap fell 1%.
BSE 500 was up 0.3%. Sensex gainers: 20
Of 13 BSE Sectoral indices, 9 posted gains.
Advancers: 1496, Decliners: 1334, Unchanged: 60
Advancers outpaced decliners by a ratio: 7:6.

Sensex Day’s Range: 15257.30 - 14993.60
Nifty Days Range: 4582.20 - 4453.45
52-Week Range: 15992.90 - 7697.39
52-week % change: -5.5

Sensex gainers included Grasim +6.1%, Tata Motors +5.3%, Bhel +5.3%, L & T +4.4%, Infosys +3.9% and Tata Power +3.8%.

Sensex losers included ITC -5.5%, Reliance Infra -3.7%, State Bank -3.1%, DLF -2% and Reliance Ind -1.9%.

Capital Goods index rose 3% led by BEML +13.2%, Bharat Elec +5.7%, Bhel +5.3%, Walchandnagar +5%, L & T +4.4% and Kirloskar Oil +1.5%.

IT index climbed 2.6% helped by Aptech +3.9%, Infosys +3.9%, Financial Tech +1.9%, TCS +1.9% and Wipro +0.5%.

Auto index raced 2.5% assisted by Hero Honda +5.6%, Tata Motors +5.3%, Mahindra & Mahindra +3.1%, Cummins +3% and Ashok Leyland +3%.

PSU index moved up supported by Dredging Corp +5.2%, STC India +5%, IOC +3.9%, Chennai Petro +3.7%, MTNL +3.7% and Nalco +3.1%.

Other sectoral movers were: Teck +1.6%, Consumer Durables +.8%, Healthcare +.8%, Bankex +0.5% and Power 0.2%.

FMCG index fell 2.3% due to selling in ITC -5.5%, United Breweries -3.2%, Ruchi Soya -3%, United Spirits -1.3% and Tata Tea -0.9%

Realty index plunged 2.1% helped by Phoenix Mills -8.9%, HDIL -5.7%, Indiabulls Realty -4.8%, Anant Raj Ind -4.1% and Puravankara Projects -2.5%.

Other sectoral losers were: Oil & Gas -0.8% and Metal -0.03%.

Volume shockers on the BSE:
JP Hydro 32.05 million shares; Unitech 30.50 mln shares; Satyam 26.57 mln shares and Ispat Industries 22.82 mln shares

Turnover:
Total traded turnover remained above Rs 1 lakh crore mark today as well, which stood at 1,01,636.53 crore. This included Rs 26,735.22 crore from NSE cash segment, Rs 65,938.39 crore from NSE F&O and the balance Rs 8,962.92 crore from BSE cash segment.

Buzzers:
MRPL +23.8% at Rs 93.65, Parle Software +20% at Rs 102.95, CHI Investments +20% at Rs 44.25. Zodiac Clothing +19.7% at Rs 354.85 Bannari Amman +14.8% at Rs 1035 and Jeetking Info +13.4% at Rs 214.

Heavy Losers:
Fem Care Pharma -14.2% at Rs 561, Solar Ind -12.4% at Rs 249.55, Lakshmi Overseas -10% at Rs 105.20, Sunflag Iron -9.8% at Rs 24.40, Nucleus Software -9.6% at Rs 106.45 and Compuage Info -9.2% at Rs 49.55.

Oil drilling counters bullish:
The shares of Aban Offshore rose 8.5 per cent to Rs 1240.95 on the BSE after its report about recast of debts came in the Economic Times today.

Shiv-Vani Oil too hit 10 per cent upper circuit filter but fell to end high 8.4 per cent to Rs 328.85 on the BSE.

Analysts say, the rising oil prices and the falling interest rates augur well for the companies

Sugar shares attract buyers:
The sugar shares attracted sizable buying after CLSA initiated coverage on the sector with a buy rating. Bajaj Hindusthan was up 8.9% and Bannariamman gained 12.8%. Balrampur Chini, Dhampur Sugar, Dharani Sugars, Dwarikesh Sugar, KCP Sugar, Oudh Sugar Mill, Ponni Sugars (E), Rajshree Sugars, Sakthi Sugars, Shree Renuka Sugars, Simbhaoli Sugar, Triveni Engg, Upper Ganges and Uttam Sugar surged 2.5-5%.

Media attracts buying:
Multiplexes such as Adlabs Films, PVR and Inox Leisure rose 4-5 percent on expectations they will start releasing movies from next week after a spat with producers over revenue-sharing got resolved.

Market this week:
Sensex up 3.3 per cent
Nifty up 3.1 per cent

Commerce Minister sees export stimulus in Budget:
In an exclusive interview to CNBC-TV18, Commerce Minister Anand Sharma hinted that there would be a stimulus package for exports in this Budget as the government was concerned over the fall in exports. He also promised to ensure export incentives to continue beyond 2009.

Sharma stated that the Commerce Ministry would recommend measures to the Finance Minister and that he would personally discuss all issues related to the Commerce Ministry with the Finance Minister. He added that interest subvention would also be under consideration.

Asian Markets:
Hang Seng, Nikkei, Straits Times and Seoul Composite went up 1-1.4%. Jakarta Composite was up 2.27%. However, Shanghai Composite fell 0.48% and Taiwan Weighted lost 0.28%. MSCI’s measure of other Asian markets rose 0.8

Optimism:
–The underlying trend in the market is that, apart from expectations of reforms, there is a visible chance this government will last for the full five-year term and there will be continuity in policies

–Faster economic growth on increased reforms is expected to fuel corporate earnings

Silver Elliott Wave Alternative Counts Analysis

Having looked out to months if not years and decades in our last article, we shift to the other end of the scale and how the eight hour chart of silver is going. I mentioned a near top to subscribers recently and one target price was the 61.8% Fibonacci retracement of the entire March to November 2008 drop. On the NYSE that drop was $20.90 to $8.79 and if we do our sums that retracement comes out at $16.27. Yesterday silver got as high as $16.23 and has reacted to the downside with a dollar drop so far.

We also mentioned that the US Dollar may find support at its last major bottom of about 78 in mid-December and this would cause a negative reaction in silver and gold. The Elliott Wave count for the move since 17th April offers support for this thesis as the chart below suggests.

An identifiable 12345 impulse wave can be seen which could now see downside to the next major level of support. The alternate wave count is given below which allows for a little more upside in the days ahead. Once this correction finishes it is one more surge up to new multi-month highs for silver. The alternate count is invalidated if silver drops below a price of $14.80 which is a violation of wave 2 territory.


 

Thursday Stock Market Snap Back Rally Session

The indices had a real good snapback session after yesterday's losses, moving higher from the get-go, consolidating all morning, and then moving higher mid-day. A subsequent mid-afternoon consolidation held support, and they came back up in the last hour to close near the session highs.

Net on the day the Dow was up 74.96 at 8750.24, the S&P 500 up 10.70 at 942.46, and the Nasdaq 100 up 17.30 to 1492.74.

Advance-declines were just under 4 to 1 positive on New York and 2 1/2 to 1 positive on Nasdaq. Up/down volume was about 3 to 1 positive on New York on total volume of 1 1/4 billion. Nasdaq traded over 2.4 billion and had a better than 4 to 1 positive volume ratio.

TheTechTrader.com board was nearly all higher today. Only a few issues were down just small fractions.

Leading the way to the upside was portfolio position OGXI, up 4.37 to 25.02. Potash (POT) gained 4.13 to 114.79, and Mosaic (MOS) added 1.24 to 53.68.

Financials were very positive, with Goldman Sachs (GS) up 7.32 to 149.47, JP Morgan (JPM) up 1.37 to 35.35, and Morgan Stanley (MS) up 1.48 to 31.20. Wells Fargo (WFC) advanced 97 cents to 25.10.

Apple (AAPL) jumped 2.78 to 143.74.

The U.S. Oil Fund ETF (USO) gained 1.44 to 37.69, as crude oil snapped back. The iShares MSCI Brazil Index ETF (EWZ) rose 1.84 to 56.07.

The iShares FTSE/Xinhua China 25 Index (FXI) was up 73 cents, and the Direxion Financial Bull 3x Shares (FAS) gained 84 cents to 10.52.

Thetechtrader.com portfolio positions: Patriot Coal (PCX) snapped back 48 cents to 8.80, Pyramid Oil (PDO) added 85 cents to 8.40, China Green Agriculture (CGA) advanced 70 cents to close at 8, and Brigham Exploration (BEXP) jumped 43 cents to 3.91.

There was a big move in the junior solars today, as Canadian Solar (CSIQ) advanced 3.08 to 15.65 and Yingi Green Energy ( YGE) jumped 1.74 to 14.77. Low-priced biotech OCLS was up 1.04 to 4.40 on 6.6 million.

Stepping back and reviewing the hourly chart patterns, the indices had a positive session today, spiking up at the close and moving higher in a 45-degree rising channel with a strong close

Tomorrow, I'll be presenting at the Traders Expo in Pasadena, Calif., and off the desk. So have a good weekend, and we'll talk to you again on Monday.

Good trading!

 

A Little Perspective Into This Week’s Market Trend

At last, the end of an eventful week is upon us with the release of US unenjoyment figures today.

Yesterday’s central bank hoe-down was a bit of a limp fish, with no particularly earth-shattering revelations from the BOE, BOE, or JCT. Yet there was one interesting datapoint that certainly caught the eye, particularly in advance of today’s payroll report.

While the initial jobless claims figure was bang in line with expectations, the generally-smoother continuing claims figure registered a considerable surprise, coming in lower than the previous week and undershooting the consensus forecast by a robust 120k. Given that this data is among the most useful in pinpointing economic turning points, this would appear to be more fodder for the green shoots crowd.

And so it might well prove to be, in the end. Then again, perhaps not. After all, it takes more than one week’s worth of data to confirm a trend or a turn. And while the chart above appears to suggest that continuing claims are indeed flattening out, with the benefit of a little perspective we can see that this change is essentially undetectable from a longer-term perspective. So while yesterday’s figure may prove to be an important turning point in the fullness of time, Macro Man is waiting to reserve judgment….and he certainly isn’t making a judgment on today’s figures based on yesterday’s data.

One other notable feature yesterday was a melee in the foreign exchange market around 1pm London time yesterday, when the dollar suddenly went bid, particularly against sterling, and rumours started to fly that Gordon Brown was resigning/no he wasn’t/yes he was/no he wasn’t.

Leaving aside the issue of whether Gordo’s continued presence on the public stage is a positive or a negative for the pound, the recently-hibernating bears on sterling are beginning to rouse from the slumber. Surely recent price action is a turning point?

Well, again, maybe it is…but maybe it isn’t. It turns out that Rio Tinto has spruned Chinalco’s advances with a two-word response (the second word of which is “off”) and decided to raise money and go it alone. This capital raising is being done on an FX-hedged basis, which entails the sale of significant amounts of sterling….and guess what? Yesterday’s most notable sellers of the pound were the three book-runners!

It’s not like we needed a reminder that this market remains rather challenging for traditional macro punters, but yesterday’s sterling price action provided one anyways. Hopefully with the benefit of a few months’ perspective we can look back at this period, shake our heads, and enjoy a good chuckle.

 

The S&P 500 And The 200-Day Moving Average

Lately there has been a great deal of talk related to the S&P 500 (^GSPC: 942.46 0.00 0.00%) closing above its 200 day moving average for the first time since the end of 2007.

The first question traders should ask themselves is whether this technical artifact has any relevance to trading. The simple answer is that it depends upon how many people pay attention to the 200 day moving average and incorporate rules related to it in their trading methodologies. For example, there are many traders who prefer - or insist upon - long positions only when the instrument in question is above its 200 day moving average and shot positions only when it is below the 200 day moving average. In sum, if enough people pay attention to the 200 day moving average, it becomes a self-fulfilling prophecy of sorts.

But is there an edge in incorporating the 200 day moving average into trading decisions? Condor Options took up this subject earlier today in Exponentially Curb Your Enthusiasm and concluded that since 1965, long only strategies that incorporated the 200 day simple moving average (SMA) and exponential moving average (EMA) for the SPX both beat a simple buy and hold approach. (Interestingly, the EMA approach had a better track record than the SMA approach.)

A quick glance back at a long-term SPX chart show why the 200 day SMA has helped generate excellent timing signals. Note that from 1996-2000 and 2003-2007, the 200 day SMA kept investors in the bull market almost all the time. Investors would have been in cash (or perhaps even short) during the 2000-2003 bear market and from the beginning of 2008 to the present.

Looking at the SPX since the beginning of 2008, one can see the steady decline in the 200 day SMA, which actually peaked in January 2008.

Before getting too excited about the 200 day SMA, it is important to look under the hood at the data that goes into the calculations. Right now, the 200 day window includes data going back to August 19, 2008, when the SPX closed at 1266.69. Tomorrow that number will be dropped from the calculations and replaced with one that is likely to be close to today’s close of 942.46. That is 324 points lost from the index calculations, which means that if the markets drift sideways, the 200 day SMA will be declining at rate of about 1.6 points per day as the higher closes from August scroll off. In fact, since the beginning of 2009, the 200 day SMA has dropped 48, 46, 69, 46 and 37 points in each of the five months.

Another factor to consider is that the lows of March 6th and 9th are now almost three calendar months behind us. That translates into 61 and 62 trading days. It also means that the March lows will be in the midpoint of the data series in 38-39 trading days, which means that the 200 day SMA is most likely to continue to decline until the last week in July before turning back up.

So, go ahead and consider the 200 day SMA to be a potential support level or long/short inflection point, but going forward, this line on the charts should continue to decline and be less and less relevant, unless, of course, the markets follow the green line down.