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Showing posts from November, 2008

Chart of the Day: Capitulation Phase Over?

Actually this is the Chartiest of the Day report. Carter Worth on CNBC gave his reasonings for the market lows being hit on Oct 1oth follow by the lower low on Nov 21st which technically confirmed the Oct low since it only stayed below for 1 day. Carter was pretty accurate on the way down so I have faith in the guy. Interesting view which makes it seem like you should accumulate stocks around the S&P 840 low and look to sell any big gains at close to 990 at least for now. The market has clearly oversold, but he makes some good points on why the market won't rally big for now.

He also said that because we've breached the lows of Oct. 10, in the short term, the market will be directionless. “The capitulation phase of the bear market is over. Now we’re heading into the apathy phase,” he says. “We’re stuck in a range with 990 being the top and 790 being the bottom.”

Interesting comments on BMY. BMY has been one of our favorites in the Net Payout Yield portfolio.

Stat of the Day: Dividend Yields above Bond Yields

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In the last 45 years, the market has never seen the dividend yield of stocks even approach the 10 yr Treasury yield. Though this chart doesn't show it, the last time the dividend yield exceeded the bond yield was 1958. Whats even more incredible is that dividends aren't nearly as popular over the last 10 years. The Net Payout Yield would drastically exceed the bond yield now due to huge buybacks. This is definitely not the time to abandon stocks for low yielding bonds. Its exactly the time to buy some aggresive small caps or Net Payout Yield stocks if you want less risk.

More Signs of a Housing Bottom in Orange County

Interesting article in the LA Times about a real estate boom in Santa Anna. 10x the sales volume of last year and houses receiving multiple offers sure sounds like a bottom. When somebody has to make an offer on 3 houses before getting a house, its difficult for the market to fall. Definitely a sign of demand outstripping supply at the current levels though its key to note that its 45% below the peak levels. Still, investors will have more confidence in banks once the housing market has hit bottom. Banks also will be more willing to lend money. Also, its interesting to note how bearish the article is about possible future declines due to job loses and such. Overly bearish if you ask me.

All told, 357 homes in Santa Ana were in escrow in October, almost 10 times the volume of a year ago.Debini said the house they bought was actually the third they bid on. All of the foreclosed houses they pursued drew multiple offers, and they were outbid in their two previous attempts, she said.

Stat of the Day: Biggest PPI Drop on Record

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Today we got yet another record: the largest PPI drop ever. At a drop of 2.8%, Wholesale prices are dropping at a dramatic rate. These reduced costs should help most businesses save money and increase profits leading to additional spending. The previous low was Oct of 2001 yet another period that was the near the lows of a bear market.

The market continues to match or set records that were last reached at market lows whether Yield Curves, Valuations, or Costs. These indicators alone never tell us when the bottom has been reached, but they all add up to being much closer to the bottom then the top.




Stat of the Day: Off the Charts Yield Curve

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Another indication of the whackiness in this market. The yield curve is now off the charts bullish. This usually has a very positive impact on future bank earnings, but in a market where lending is limited its difficult to determine if the impact will be like normal cycles. Typically banks are encouraged to lend like crazy because the spread is so positive for them, but that isn't happening this time because of the financial crisis. You can bet though at some point in the future, this yield curve will help return the market to growth and inflation. In fact, its likely to cause irrational investments as it always does at the peaks and troughs.

This number is off the charts because of the huge compression in the rates of the T-bill. Its unlike anything the market as seen even in the last 25 years. Anytime this ratio gets above 2 it becomes very bullish for the future economy. The markets tend to forget that in periods of extreme bullishness or negativity that such monetary realities …

Hedge Funds Raising Cash

Lots of reports have contributed the huge market declines in Sept and Oct to liquidations and forced selling by hedge funds. Based on this article, it's becoming very clear that alot of hedge funds have over liquidated. Though funds aren't required to report cash positions the numbers add up to a good portion of funds already having sizeable cash positions. In some cases such as BP Capital, funds have already moved to mostly cash.

These drastic moves put alot of cash available for reinvesting in the market once a rebound occurs. Adds more fuel to the argument that an eventual rally could be just as fast as the deline. Below are some samples of firms that have drastically reduced their reporting holdings during Q3 and in most cases the cash position has been identified as 30, 40, 50% and sometimes even more. That money can't remain on the sidelines forever and at least for these funds the selling will be limited going forward.

Hedge-fund manager David Tepper entered the third…

China Stimulous Plan - $586B

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By now I'm sure just about everybody has heard about the details of the stimulous plan out of China today. A lot of debate has taken place over whether its really new spending or mostly just a rehash of existing plans such as the earthquake rebuild. Regardless, the Chinesse economy is likely to benefit from these additional funds being spent. APWR is our favorite stock based on this news as any increase in demand in China will just further stress the power grid in mainland China requiring the services of APWR. APWR has been crushed due to its speculative appearance and the drop in the China markets, but it has a huge $800M backlog plus another potential $300M deal in the works. Not to mention, APWR is just now producing windmills that will provide for a substantial boost to the bottom line.

Looking for a stock that will indirectly benefit from this stimulous plana and you need look no further. Even the chart is starting to look more bullish.

GM Target Set at $0

Not sure I've seen a analyst come out with a $0 target, especially on a DOW stock. According to this article, Deutsche Bank cut GM to 'sell' with a target price of $0. While Obama has already stated that he is behind some sort of help for the ailing US automakers, the pressue seems high that taxpayers not be impacted. These analysts seem to think GM might get a AIG type of deal where the shareholders are basically diluted out of existense. The issue is that any GM deal needs to get major concessions from labor to make them able to compete with the likes of Honda and Toyota. Otherwise, why not let them go bankrupt and see what happens to their labor deals. Constantly saving overpriced contracts will never solve the problem.

Either way, I'd stay away from the stocks of GM and Ford until this all shakesout.

While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM's equ…

Stat of the Day: Stock Allocation at 58%

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From the chart above, Bespoke provides a nice picture of how the market has become so momentum based. Stocks fall and the allocation recommendation for stocks drops as well. Most analysts would advise the opposite if writing a textbook, but when it comes to real world applications it seems that people pull out of stocks at the lows and pile in at the highs. This is another of the historical indications we have regarding buying stocks now.

The average recommendation has dropped from 68% to 58% even though the market is back to the area of the 2003 lows. Just another indication of how the attitude towards stocks has dramatically shifted since 2000.

With gas prices and interest rates falling on a daily basis, its difficult to envision how the market will remain weak much longer. Americans like to spend and the stars are aligning for a great big shopping spree. Valuations and just too cheap to ignore.

The Obama Rally?

As we watch the S&P500 surge 4% to over 1,000, it has probably caught alot of people off guard expecting a further selloff with Obama likely to win the election today. The market has enjoyed a nice rally the last couple of weeks following widespread panic selling and hedge fund liquidations over the previous couple of months. We're now likely seeing a rebound as the market is now seeing more certainty with the election finally happening. The market has likely more then discounted a Obama win and is now coming to grips with the facts that the world won't end. In fact, we've lately heard that Obama will likely delay the expected tax increases until maybe 2010 at the earliest.

As usual it appears the market has priced in the worst case scenario and now is waking up the reality that world isn't going to end. After such a huge run, it's likely that the market will use the 1,000 point area as a place to pause before the ultimate rally. We'll likely see 940 or 960 …

Dirt Cheap Valuations

Now Jeremy Siegel joins us in an article at Yahoo! Finance. This guy is known for being very conservative in his approach to the stock market and constantly warned about overvalued stocks in the late 90s. He is bullish on not only the US market but the Worldwide market. The PE ratios in part of Europe and Asia are remarkedbly low in the 7s. Check out his summary of the world markets PEs.

He makes a compelling case of using normalized earnings to value stocks. Otherwise, throw out the peak and trough or outsized gains and losses to focus on the core earnings level. Do you really want to value a stock based on the current weak economy or based on what it would earn if the economy was growing 2-3%? Just like you shouldn't value a stock based on what it earns when the economy is growing at 5%. That isn't sustainable and neither will be any valuation assigned to that growth.

I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investo…