Tuesday, July 05, 2011

Q3 Seasonality Query Table


Simply type the symbol, or first letter, of the stock you're interested in to see the Q3 historical seasonality, and averages, over the past 5 years. Interested in a particular industry? Or sector? Simply select it from the drop down menu to see all the stocks in that group!



Tuesday, May 10, 2011

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Wednesday, January 14, 2009

Q4 2008 Weekly Reports

12/29/08

Utilities, healthcare and services score highest across our 1800+ stock universe. Basics and tech score weakest.

In 2009, focus on monthly trends in industrial production in the U.S. and abroad for evidence of economic recovery and profit expansion. Watch AAR’s weekly railroad freight data for evidence of rising demand.

In 1930, every month posted contracting production and the DJIA fell –33.77%, worse than the –17.17% drop in 1929. In 1974, 10 of 12 months posted contracting production and the market fell –27.57%. In 2001, every month posted contracting production and the market fell –7.1%. In 2008, 7 of 11 have contracted and the market has fallen –35.80%. As industrial production improves, equities will attract money flow from alternate asset classes.

Unemployment will rise in the first half of 09. California has put $4bn in spending on hold due to budget shortfalls. California’s unemployment rate is 8.4%, 3rd highest in the U.S. Own stocks benefiting from rising demand tied to economic hardship and avoid plays reliant on consumer credit. Our scores will adjust as the market shifts, providing you with early insight into leadership. Wait for conviction.

In healthcare, unemployment is straining Medicaid budgets and prompting the Fed to increase aid. Rising Medicaid rolls benefit private Medicaid providers. Cost containment will drive upside at hospital alternatives. Cost pressures, including rising unpaid bills from uninsured patients, will drive hospital closures. In NJ, 47% of hospitals lost money in ’07 while 5 acute-care hospitals closed in 08. Hospitals will continue to outsource everything from laundry, safety/training to ER’s, radiology and anesthesia departments. Own related stocks.

In services, education service providers will enjoy robust enrollment growth in 09 as dislocated workers retrain. Margins will improve alongside capacity as fixed costs are levered. Slower ad spending in early 09 will benefit providers through cheaper rates. Discount retail will win cost-conscious consumers. By year end, specialty retail will outperform as investor pessimism wanes, comps become easy, margins from cost cutting flow through to earnings and consumer balance sheets improve from 08. In the first half of the year, store closings will pressure CMBS as un-leased sq. ft. increases; forcing another wave of write-downs. The ICSC estimates 148k store closings this year, the most since 2001, with another 73k coming in the first 6 months of 09.

Banks and insurers will continue to write-down assets in the first half of 09. CMBS risk will grab headlines in the next quarter. Credit card charge off rates will rise alongside unemployment and pressure issuers. Cracks in the armor of small and mid size banks will become more evident by Q2. Large cap banks will remain volatile in the first half, however, portfolios will have unwound financial positions by the end of Q2, allowing for upside by yearend. Wait for scores to show you which will generate the most alpha.

In consumer, value and generic product portfolios will do best as consumers remain frugal through Spring and investors embrace stability and “above-Treasury” yields.

In technology, EPS risk will rise alongside falling industrial production forcing Street estimates lower again in the Spring. Corporate bankruptcies will increase grey market technology availability, pressuring lackluster demand for equipment in the first half of 09. January's CES will be an afterthought. Folks hoping for a breakthrough product in early 09 will be disappointed. GS estimates U.S./W. Europe and Japanese global spending on computers and software falling 8% in 09. Tech will exert itself alongside industrial production expansion, however, until then remain on the sidelines and focus solely on top scoring names. Avoid the temptation to buy winners from the last expansion and instead allow scores to direct you to the next expansion’s winners.

Basics will endure another wave of selling in the first half of 09 as emerging market financing remains weak. The USO will get 85% off its highs, rally significantly and roll over again. Commodity suppliers will lose price power. Lack of emerging market financing will strain supplier’s ability to provide financed sales to at-risk farmers, forcing EPS erosion at ag suppliers. Dividend paying basics will be forced to cut dividends. The basket will provide position-trading opportunities. Corn, soybeans and wheat have all rallied to multi-week highs. Focus on scores and underlying commodities before committing additional money into the basket. Watch Gaza news-flow for short-term impacts on oil and gold.

The yield curve will flatten further as investors go out in duration. The 2 to 10 year spread will fall below 100bps in the Spring. A bubble in Treasuries will provide risk and reward in alternate asset classes 2010. The drop in yields will drive investors into corporates and muni's during the first half of 09. Corporates have returned 2.3% more than Treasuries this month – the most since April – following dismal underperformance in October and November. Historically, corporate yields peak prior to the economy’s bottom. However, rising corporate default risk will keep investors from at-risk industries early in 09, with high yield attracting more investors in the back half of the year. Utilities, thanks to yields, will perform nicely.


12/22/08

Utilities and healthcare are the strongest scoring sectors across our entire universe. They are the only two sectors with an average score greater than the average score of our entire 1800 stock universe. Consumer and tech score weakest.

Money continues to flow into defensive sectors ahead of yearend. In healthcare, focus on cost containment plays including outsourced solutions, cost recovery and home healthcare. In large cap, cash rich businesses yielding above Treasuries with expanding margins score highest.

Winter weather further crimps retail spending as consumer balance sheet cleansing continues to weigh on spending. Own discount retailers benefiting from price sensitivity. Also, own education service providers benefiting from unemployment inspired enrollment, falling marketing costs and Government support for secondary market student lending.

The 2 to 10 year Treasury spread continues to contract at 138bps, down from 251bps at the start of November. Declining spreads weigh on financials. The 30-year yield has fallen to 2.55% on investor enthusiasm over future quantitative easing and continued economic risk. In Financials, avoid credit card default risk. DFS and COF are closing inactive accounts to avoid future use and risk of default. DFS alone is set to close 5mn unused accounts. Credit card issuers continue to chase rising default risk. COF has above average industry exposure to low credit score consumers while DFS saw charge offs climb to 5.48% from 5.2% last quarter. Currently, 30-year mortgages are only 7bps more expensive than 15-year mortgages. Madoff’s failure increases risk of ongoing redemption activity in the hedge fund industry as impacted investors reclaim investments to boost cash for operations.

Oil is 77% off its high. Historically, investors have success in buying bursting bubbles when losses retreat toward 85%. PBR, DVN, COP and CVX have all delayed investment plans, impacting clarity for energy service companies. Emerging market finance risk weighs on commodity suppliers, including agriculture suppliers. In basics, only own top scoring.

The SPX rose for its second week, the first back to back rise since September. Friday’s market volumes were higher thanks to option expiry. Volumes in related ETF’s, including DIA and SPY remained lackluster. The SPY last traded above average volume on December 4th. The Libor-OIS spread narrowed to the least since September.

12/15/08

Utilities and financials score highest across our universe. Basics and tech score weakest.

The SPX gained 0.4% while the DJIA lost 0.1%. Financials (XLF) have fallen 11.2% since the 8th. Basics are up 2.1% in the same period on hopes for Government infrastructure spending.

Volumes remain below average across indexes. The SPY has fallen 2.2% since its 33 point rally on the 8th.

Strength in financials is driven by non-CMBS and non-credit card dependent stocks. The markets have been digesting negative newsflow, moving up 18.7% since its low on November 21st. Overall, 25 banks have failed this year, more than the combined total of the past 6 years. BB&T picked up Haven Trust ($515mn in deposits) from the FDIC. On the 25th, the FDIC had listed 171 banks as ‘problem’, up 46% from Q2.

The commercial mortgage delinquency rate will rise, increasing writedowns in early 09. Credit card charge offs will rise with unemployment. Avoid banks with related exposure. On Thursday, the Fed is set to adopt new credit card rules restricting issuers from changing credit card interest rates on existing balances. The subprime credit card market may shrink, increasing payday loans. Credit cards would only be allowed to increase rates on new cards and future purchases/advances. The Fed action would require payments above minimums be applied to the highest rate balance rather than the lowest.

The spread between corporate bonds and Treasuries has risen to 885bps from 296bps this year. Corporate’s are yielding 10.8% (Merrill), up from 6.53% in January, despite Treasury’s hitting record low yields. The 2-year is yielding 0.76% and the 2-10 year spread is 181bps, down from 251bps at the start of November. The 30-year got closer to 3% (3.04%).

Emerging markets continue to weaken. Industrial production in India fell 0.4% in October YoY after rising 5.45% in September – the first negative reading in 15 years. Economists were looking for a 2.1% increase. Manufacturing accounts for 80% of India’s output and it fell 1.2%. China will increase money supply 17% next year as it further acts to restart production. Russia has widened the Ruble’s trading band 6 times this year, mostly recently on the 11th. Last Week, the Ruble fell the most against the Euro in 8 years.

FDX fell the most in 2 decades after cutting guidance. U.S. railroad freight carloads fell 10% YoY in November.

Industrial production will continue to fall. The following table shows U.S. industrial production by month from prior significant periods and resulting DJIA returns.

Industrial Production - Historical Prior Significant Periods DJIA
Yellow indicates month to month up change. Red indicates month to month down change. % Return
1928 7.2749 7.335 7.3952 7.3651 7.4553 7.5154 7.6056 7.7559 7.816 7.9663 8.1167 8.267
1929 8.3872 8.3571 8.3872 8.5375 8.6878 8.748 8.8682 8.778 8.7179 8.5676 8.1467 7.786 -17.17%
1930 7.786 7.7559 7.6357 7.5755 7.4553 7.2449 6.9142 6.7639 6.6436 6.4633 6.313 6.1626 -33.77%
1931 6.1326 6.1626 6.2829 6.313 6.2228 6.0725 5.9823 5.7718 5.5013 5.2909 5.2307 5.2007 -52.67%

1973 49.1607 49.9221 49.9085 49.8171 50.168 50.2121 50.4271 50.3357 50.7826 51.13 51.3693 51.2457 -16.58%
1974 50.8909 50.7566 50.7423 50.6271 50.9715 50.932 50.9239 50.4538 50.5021 50.3186 48.6566 46.9378 -27.57%
1975 46.3024 45.2098 44.731 44.7621 44.6709 45.0047 45.4923 45.9195 46.5145 46.7003 46.8201 47.3838 38.32%
1976 48.074 48.5115 48.5547 48.8553 49.0661 49.0693 49.3535 49.6908 49.821 49.8746 50.6214 51.1445 17.86%

1999 97.4849 97.8947 98.0864 98.2949 99.0314 98.8656 99.4962 99.9767 99.6093 100.9459 101.5527 102.395 25.22%
2000 102.465 102.8375 103.2423 103.8999 104.1433 104.2873 104.032 103.8104 104.2642 103.8077 103.8208 103.475 -6.17%
2001 102.748 102.1625 101.8291 101.5704 100.8683 100.2266 99.7613 99.4021 98.9667 98.4163 97.8874 97.8399 -7.10%
2002 98.3224 98.3983 99.1081 99.4718 99.9772 100.9301 100.6212 100.7317 100.7395 100.446 100.8772 100.377 -16.76%

2007 109.779 110.5181 110.4036 110.953 110.9686 111.3551 112.0024 111.9712 112.2598 111.8262 112.2962 112.386 6.43%
2008 112.57 112.2604 112.0235 111.441 111.2179 111.3292 111.4124 110.0712 105.9458 107.2854* -33.83%
* September and October data affected by Hurricanes and BA strike

In healthcare, own home healthcare as Medicaid enrollment increases drive cost containment. Hospitals are suffering from declining elective procedures. Own suppliers focused on training, cost cutting and outsourced lower-cost services.

OPEC meets Wednesday to discuss more production cuts. The CRB was up 8.8% last week. Oil rose 13%. The Dollar had its biggest 1-week fall since 1985 with the UUP dropping 4.5%. Corn rose 21% last week, its biggest weekly gain since at least 1959, yet remains 53% off its June high. Copper also rallied up 4% on hopes for an auto bailout (the average car has 50lbs of copper tubing and wiring), yet remains ~ 50% off its high.

An ice storm on Thursday night cut power to more than 1.2mn utility customers in the Northeast sparking worries over freezing pipes and driving restaurant traffic. As a result our offices are running on limited connectivity and our phone lines remain unavailable. We hope to have full services restored in the coming days and apologize in advance for any inconvenience.

Tech scores remain too low to justify risk. Stay stock-by-stock - high scoring solely

12/8/08

The SPY remains below its November 28th closing high of $90.09. Volumes have remained comparatively light since the intraday low of 741 on the 21st.

There weren’t any high scoring (>80) stocks in large cap again this week. Only 3 mid caps score above 80. The scores will add conviction and point you to the next cycles leaders. Avoid bottom-fishing winners from past bull market cycles.

Friday’s employment report suggests continued pressure on consumer debt repayment. The broadest measure, U-6, has moved from 8.4% to 12.5%. Since December 07, the economy has lost 2.7 million jobs. Overall, the employment-population ratio has fallen to 61.4%. September unemployment was revised from –284k to –403k and October was revised from –240k to 320k.

Since October, the TLT is up 19%. The spread between the 2 and 10 year bond has contracted from 251bps to 178bps. Credit Default Swaps continue to price for record defaults at both non-investment and investment grade companies.

Financials continue to score near the top of our ranking, boosted by small cap regionals. The basket has led since the low on the 21st (see table) with the XLF up more than 3x more than the SPY. Focus on top scoring names and avoid large caps with exposure to credit card debt and CMBS. Delinquent mortgages are at record highs (6.99%). Avoid insurers.

Use down days to buy education service providers. Government intervention supports the secondary student loan market. Enrollment is rising alongside unemployment while advertising rates are shrinking. In retail, own high scoring discounters. Note: the IndexMetrix Specialty Apparel index has rallied 42.46% since November 21st versus the 18.86% return of the RTH. In consumer, own stocks without overseas currency risk and with generic/value product portfolios.

In healthcare, hospitals are caught in a cost squeeze. Rising unemployment is forcing greater enrollment in state Medicaid programs. Medicaid, strained by budget shortfalls, is focusing more on cost containment. Elective surgery is shrinking. Focus on home healthcare providers.

Investment fund flows continue out of emerging markets. Supplier financing for commodity related users has dried up. Pricing power for commodity suppliers is eroding. Avoid basics until the underlying commodities can prove they’ve broken the back of sellers. The Brazilian Real fell~10% last week, sparking intervention.

Technology stocks remain weak. Global economic contraction is weighing on future earnings. Business bankruptcies provide grey market product inventory – chipping away at new product sales. Through June, business bankruptcies are up 42%.

12/1/08

Utilities, financials and services score strongest while healthcare and tech score weakest.

The SPX has risen 20.9% from its low on November 21st. Volumes on the SPY last week were 20% below the November average and 25% below the Q4 average. Use resistance to unwind stocks in weak scoring sectors.

Our scores remain weak. On Tuesday, no large cap stocks scored above 80. Stay stock-by-stock until scores improve and add conviction. Use up days to unwind at-risk positions.

The 30-year fixed mortgage rate dropped to 5.76%, returning to September levels. Watch for narrowing in the 2 to 10 year spread- as long-term yields are coming down quickly and 2-years are already at 1%. This month, the spread between 2 and 10 year Treasuries has compressed from 251bps to 193bps. The 2-year yield is the lowest since November 20th when the SPX closed at 752. The TLT (20 Year) is up 13.8% this month.

Charge-offs of comm’l backed securities remain too low and will rise, straining commercial banks, who hold $1.4trn. Another $761bn is securitized in CDO/CMBS/ABS issues. Life insurers hold $313bn of exposure, equal to ~41% of their equity. Spreads on CDS for CMBS spiked in November on shifts in TARP’s directive. Of the CMBS outstanding, $41bn matures in the next 18 months.

The NRF reports the average shopper this past weekend spent 7.2% more than last year with total spending of $41bn. More than half of the weekend shoppers visited discounters (54.7%). The association continues to project holiday sales will rise 2.2% to $470.4bn. Focus on high scoring discounters.

Education service providers got a boost from last week’s Government intervention as self-financed tuition risk was reduced by a commitment to loan to holders of recently securitized student loans. Unemployment will rise, boosting enrollment while government intervention will support student loan markets. Buy education service providers. The average return of a basket of providers returned nearly 142% from the low of October 2002 to the high of October 2003 (note: unemployment peaked in June 2003).

Unemployment will boost enrollment in State Medicaid programs, straining state budgets and prompting increased Federal aid. Look for low cost healthcare solutions, including cost and payment auditing and IT to benefit as cost containment pressure rises.

11/24/08

Utilities, financials and consumer are the only baskets currently scoring above the average universe. Basics and tech are weakest.

The market has fallen 17% this month. Last week, the market failed to hold the 848 closing low from October 27th, sparking another sell-off as technicians retreated. Friday’s option expiry drove volumes and a 6.3% recovery in the SPX. Thursday’s SPY volume (814mn) equaled 169% of average daily volume. Friday’s SPY volume (623mn) equaled 129% of average daily volume.

The failure to hold prior lows restarts the bottoming process. Expect more volatility. The VIX topped 80 on Thursday for the first time since the low on October 27th. The VXO hit it’s highest since the low on October 10th. The market is at record levels below its 200dma. Use a rally to unwind weak scoring stocks at resistance and reposition into top scoring stocks and sectors on a retest.

Financials were dealt a major blow on the shift of TARP away from illiquid assets. Firms were forced to buy CDS on at-risk securities, spiking costs to insure both investment and non-investment grade debt. CMBS remains a significant overhang on future bank profits as default rates begin to reflect economic contraction. Cheap money and a steep yield curve provide support to bank profitability, however without a system for unlocking illiquid RMBS and CMBS securities, pressure will remain due to demand for related CDS. AAA rated CMBS are trading at 70 cents on the dollar. Insurer book value will shrink (basket has fallen 45% this month).

As a result, big banks are pricing for financial Armageddon again. As we noted Friday, 63% of all C shares are held by institutions, many of which are prohibited from owning sub $5 stocks. JPM, the CDS pioneer and largest holder of CDS outstanding (~20-25% of the $45trn market) fell 33% in three sessions. Stay focused on strong scoring banks and remain on the sidelines in weak players.

Falling commodity input costs benefit consumer stocks. Consumer companies have spent the past 3 years cutting expenses. Shelf prices will contract more slowly than input costs, benefiting margin growth. Own consumer stocks with limited currency risk.

In keeping with their defensive nature, healthcare stocks have outperformed the SPY this month. The PPH has dropped –7.39%. Concerns over reimbursement delays weigh on receivable reliant companies. Rising unemployment reduces elective treatment. Focus on solutions tied to chronic disease.

Service scores are boosted by education providers and discount retail. Unemployment is driving college enrollment. Access to student lending will be supported through Government intervention. Discount retailer’s benefit from greater foot traffic, low cost models and shifts from discretionary products to consumer staples.

Basic will remain under pressure with sellers into rallies until underlying commodities can break downtrends. Drops in global growth are pressuring financing in commodity dependent countries, increasing supplier-financed risk. Use rallies to rotate.

Technology remains pressured by global economic weakness and currency risk. Focus on the highest scoring names, especially those with little debt and large cash positions.

11/17/08

The S&P 500 made a new intraday low on Thursday; reversed and closed above the October 27th 848 closing low. The day marked the first above average volume trading in 10 sessions. The index remains within its range with resistance at 1000-1005. The market will need to close on volume above 1005 to shift itself into a new higher trading range with 1000 as support. An upside breakout above 1005 shifts our upside target to ~1160. Use down days to add to positions. Watch our best list for new stocks climbing higher as they’ll become tomorrow’s leadership.

The Russell 2000 double bottomed, entering Thursday 33.68% below its 200dma. There have been 25 days where the R2k has been more than 25% below its 200dma, 16 of them in 2008. The average return 5 days later is +5.54 and only 2 of the 25 (1 of this years 16) have been down 5 days later.

When the S&P 500 gets more than 25% below its 200dma, the average return 5 days later is +4.60. It entered Thursday –32.48% below. There have been 32 such periods since 1950.
Russell 2000 > 25% below 200dma
Date Open High Low Close Adj Close 200dma % from 200dma 5 Day Return
10/27/2008 468.11 474.33 448.4 448.4 448.4 694.06955 -35.40% 20.09%
11/12/2008 478.71 480.09 452.8 452.8 452.8 682.775 -33.68% ?
10/24/2008 472.63 480.72 461.62 471.12 471.12 695.3508 -32.25% 14.30%
10/28/2008 448.39 482.72 441.92 482.55 482.55 692.9199 -30.36% 13.10%
10/23/2008 503.1 507.56 468.29 489.92 489.92 696.59625 -29.67% 4.95%
11/11/2008 490.76 497.43 480.82 482.29 482.29 683.98845 -29.49% ?
10/9/2008 550.69 558.11 499.2 499.2 499.2 707.5308 -29.44% 7.48%
10/29/2008 483.42 506.03 480.31 490.88 490.88 691.88715 -29.05% 4.84%
10/8/1998 322.23 322.23 303.87 310.28 310.28 435.77515 -28.80% 7.91%
10/15/2008 549.48 551.8 502.07 502.11 502.11 702.7398 -28.55% 0.00%
10/22/2008 525.35 525.35 494.75 501.97 501.97 697.70725 -28.05% -3.87%
11/10/2008 511.71 515.19 490.06 493.1 493.1 685.103 -28.03% ?
11/6/2008 514.46 514.56 495.84 495.84 495.84 687.0635 -27.83% ?
10/9/2002 340.32 340.32 326.88 327.04 327.04 452.5882 -27.74% 7.28%
10/9/1998 310.28 318.57 309.85 318.4 318.4 435.257 -26.85% 7.69%
11/7/2008 499.24 509.06 494.26 505.79 505.79 686.14945 -26.29% ?
10/13/1998 325.62 325.69 320.33 320.33 320.33 434.2741 -26.24% 11.86%
10/7/1998 332.55 332.55 319.82 322.23 322.23 436.33815 -26.15% 0.85%
10/10/2008 490.24 526.39 467.92 522.48 522.48 706.15805 -26.01% 0.76%
10/10/2002 327.04 336.18 324.9 336.18 336.18 451.84005 -25.60% 7.90%
10/30/2008 498.23 514.18 496.44 514.18 514.18 690.9585 -25.58% -3.67%
10/7/2002 347.98 347.98 337.57 338.29 338.29 454.0419 -25.49% 2.44%
11/5/2008 542.16 542.84 513.58 514.64 514.64 688.0479 -25.20% -12.02%
10/12/1998 318.4 327.63 318.4 325.62 325.62 434.7799 -25.11% 8.24%
10/14/1998 320.33 325.87 319.53 324.98 324.98 433.76565 -25.08% 10.76%
AVERAGE 5.54%


Despite bad earnings and weak economic data the market has behaved better than during the first capitulation low on October 10th. The volumes going into Thursday were far below those going into the low of the 10th.

Unemployment peaks well after markets bottom. Instead focus on stocks likely to rise from growing demand from greater unemployment, including education service providers.

Consumer spending tanked with retail sales a record low of –2.8% last month. Yet, the RTH put in a higher than previous (24th) intraday low on Thursday and sell volumes remained very light ahead of Thursday’s reversal. The energy to sell has diminished in the face of an endless stream of negative news.

The regional banks (RKH) held their July low last week despite word Treasury is switching tracks for deploying its TARP. The yield curve remains steep, supporting profits. Cheap Government money and higher demand deposits allow for inexpensive market share growth as weak competitors are folded into strong hands.

We are moving away from the wholesale selling of all stocks to the market differentiating between the strongest and weakest.

The DBC remains in a structural downtrend, boosting profits at consumer companies and reducing pricing power at basics related suppliers. Basics are trades until underlying commodities re-exert.

Technology stocks continue to score poorly as earnings risk tied to global recession weigh on valuations.

11/10/08

Financials, utilities and healthcare score highest across our universe this week. Basics and tech score weakest. The average score in our universe has ticked back above the 4-week moving average score. The Street is looking for 9.7% EPS growth next year on our 380 stock large cap universe, down from 19.8% at the end of September.

The unemployment rate will continue to rise into next year. The number of people collecting unemployment is the highest since 1983. California’s unemployment rate is now 7.7%, 4th worst in the nation. Historically, unemployment rates lag the market recovery. In 03, the unemployment rate peaked 3 months after the retest in March and 8 months after the 02 October low. The unemployment rate peaked at 9% in May 1975, 7 months following the October ’74 low.

The market is moving within its recent range. Bear market bottoms are not “V” bottoms. Instead, they retest lows – providing a lot of back-and-fill action and opportunity to buy without chasing whipsaw market action. The current closing low is 848 on the S&P 500. The market enjoys seasonal tailwinds as we’re now in the most robust period for annual returns. Consider the table to the right. In the 5 days prior to and including the October 10th low, the SPY traded 656.3mn shares. In the 5 days prior to and including the October 27th low, the SPY traded 490.1mn shares, 25% less. Volumes have been light as the market has remained range bound. Despite a continuing barrage of negative economic and earnings news, the market remains 9.7% above the October 27th low. As long as we remain above the 848 closing low, use down days to build positions in our best lists. The market is tilting toward upside reward (see this week’s Technical Commentary for additional remarks).

South Korea has cut its interest rates 3x in the past month. The Fed Fund Futures are predicting the U.S. will move closer to free money in mid December, anticipating another 50bps in cuts. Core inflation is higher than benchmark interest rates for the first time since the ‘80’s. UK interest rates are the lowest since 1955, and likely heading lower. Banks continue to tighten lending standards. The Nikkei is its lowest since ’82. Easy money and a steep yield curve, coupled with cheap market share growth, benefit financials.

Utilities benefit from the unlocking of credit markets and downward pressure on natural gas, crude and coal.

Healthcare stocks focused on services, treatment and margin improvement (IT) offer upside.

Consumer stocks offer margin improvement, as shelf prices remain high as input costs retreat. Services stocks are hit-and-miss. Focus on market leaders where expense controls meet the retailer’s ability to convert traffic to sales per sq. foot.

The Dollar continues to put downward pressure on commodities, remain on the sidelines until underlying commodities confirm upside. Dwindling foreign investment impairs commodity-reliant emerging markets, dampening demand. The correlation of the Dollar to Oil has risen to -0.959 (ytd = -0.768).

Many expect tech to lead us out of recession, however scores continue to favor other baskets, as investors remain concerned over global demand impacts on tech earnings. Wait for the basket to prove itself and only own leaders appearing in our best lists.

11/3/08

The SPX traded higher in 3 of the past 4 days as we ended the fiscal year for many funds. However, volumes were below average with Friday’s marking the weakest for the week.

Utilities, financials and consumer score highest across our universe. Basics and tech score weakest. A score above 1.00 indicates the average score in the sector is larger than the average universe score. Overall, mid cap scores highest.

In the 3 months ending January 31st, Industrials, utilities and basics post the strongest seasonal history of producing profits. Services and technology stocks have below average seasonality for the next 3 months. Seasonality is based on rolling 3-month periods over the past five years.

Barclay’s tapped Middle East investors for $11.8bn, paying an astronomical 14% yield. Gov’t spending and exports helped support GDP; exports are slowing on Dollar strength. LIBOR has fallen for the past 15 days and marked the first monthly decline since May. Global re-inflationary policy supports a steep yield curve, supporting bank profits. Government supported consolidation is driving low cost market share expansion.

Consumer scores are high thanks to retail shelf prices remaining elevated and input costs declining. Retailers have prepared for a year for the consumer recession, cutting inventory and expenses. A leaner industry offers greater profitability post-recession

Healthcare fell less than the market in October yet offers upside potential post-election. Healthcare plans profits have been hit by investment portfolio write-downs. Approach the basket stock-by-stock using our best and “cheap” stocks lists.

Brazilian credit risk creates problems for farming as the lack of lending availability dampens spending on related supplies. With 50% of GDP in debt, Brazil has counted on the commodity boom to support debt levels. As commodities have retreated, so has investment. Watch emerging markets closely for rising default risk and impacts on related U.S. suppliers. At some point, reduced investment supports commodity prices. In the meantime, ag suppliers will lose price power. Cargill and ADM, for example, have halted financing to Brazilian farmers. Brazil is responding by increasing the amount of money available for farm lending. Brazil’s primary surplus fell to 6.2bn reais in September from 10.2bn in August. The tug of war between tight historical supply, population growth and production will intensify. Argentina had its ratings cut again Friday by S&P, spurring rising concern of debt default. Wheat had its worst month in 22 years. Ag supply offers trade opportunities only until scores confirm and underlying grains trend higher.

U.S. sales of grains to oversea buyers are weighed on by the stronger dollar and global halt in shipping, with the Baltic Dry Index 90% off its highs. Rails have propped transports, thanks in part to strength in commodity shipping. Watch for weakening in rails and resulting weakness in the DJ Transports. Last week rail shipments dropped 4.7% YoY. Inter-modal dropped 4.1%, waste and scrap metal shipments fell 22.7%, auto’s fell 28.1%, metals dropped 22.3% (coal actually rose 6.5%). Total rail volume ytd is now trailing ’07. Overall, commodities posted their worst month in 52 years (Bloomberg). The DJ Transports (3885) enter resistance at 4000.

Intel is the latest tech company to indicate the global recession could slow sales and profits. Corporations are increasingly demanding cuts in service costs and discounts from tech equipment and service firms, further hampering profits. Stay stock-by-stock.


10/27/08

The market broke below its recent range, violating the lows established on the gap down rally day of the 10th. The uncertainty of where the new low will occur and the tempered upside into new resistance at the prior low of 899, suggests reducing overnight risk. It is likely we will indeed find another bottom, establishing downside support, this week. Until then, expect sellers to emerge on moves up toward 900. Ideally, the low should mimic the 10th, a steep volume draw down and heavy volume reversal. In short, until the market establishes a new low or recovers resistance at 900, you should return to the sidelines. We are noticing late day volume buying across major indexes suggesting short sellers are covering and value investors are entering the market. Consider this point, the average days-to-cover of short interest in our large cap universe was 3.28 on September 30th. As of last week, it has dropped to 2.26. To be clear, you should wait for either a steep decline volume reversal or a close above 899 resistance to add money to our “cheap stocks” list/wish list.

The majority of clients are mandated to remain invested. Avoid committing new money to favored stocks and groups until the heavy volume sell-off or recapture of resistance occurs. It may very well occur this week. There are plenty of diverging arguments for both bears and bulls. While many are counting on 2002 support, you shouldn’t. Let the market dictate where it stops, be it at ‘08, ’02, ’94 (445) or some other level.

A couple considerations, the DJ Transports bottomed in ‘01 at 1916 and 1908 in ‘03. It stands at 3448. The NASDAQ (1552) bottomed at 1108 in ’02. The Russell 2k (471) bottomed at 325 in ’02. Clearly, all indexes are not equal in regard to how close they are to what many hope to be support.

The Election is quickly approaching; yet another variable into the bottoming equation. We believe Election risk is factored into the market. Consider the Election “event” as the removal of one of several overhangs weighing on market sentiment.

Very few stocks score above 80 in our work. We’re in a market of relative vs. absolute return. Of the major ETF’s we track, only the Dollar (UUP) and the 20-year Treasury (TLT) are positive this month.

Financials, whose scores moved positive in small cap in July and in large cap in mid September, continue to benefit from Gov't intervention. PNC's acquisition of NCC is another example of cheap market share growth. While we’re starting to see a relative weakening in small cap financial scores, large and mid cap remain top rated. Watch this closely, as many investors who cast aside credit crisis risk are now evaluating comm'l and consumer debt risk.

Consumer stocks benefit from late ‘07 through mid ‘08 shelf price increases alongside steep declines in commodity input costs. Retailers will emerge post-recession stronger and more profitable as they’ve spent the past year reducing expenses, re-positioning product mix and re-engineering inventory models.

Basics are intriguing. In mid and small cap, the baskets score has moved back above the average score for a 2nd consecutive week. The last time the basket scored above average was early in Q3. The basket remains under GDP and Dollar pressure, however, pressure of forced liquidation may be easing and investors may be considering the upside impacts of Global re-inflationary policy and the intrinsic value of hard assets.

Healthcare stocks historically produce SPX leading returns through the December following the Election year. In October, the PPH, IYH and IBB have all produced above market declines. Scores in the basket have weakened, however, suggesting investors are using risk money to buy into financials (last month) and basics (most recently). Wait for scores to re-exert and focus buy power on top scoring baskets.

Use our wildly cheap large and mid cap reports to compile your wish list (see final page of today’s report).

10/20/08

The SPX made lows of 839 on the 10th, 865 on the 16th and 918 on Friday. 899, the closing low from Friday the 10th has held. We believe sellers will emerge at 1075 and 1175. In the short term, we would view a close below 899 as bearish for another move lower.

Options expiry influenced end of week trading, putting pressure on the market this week. Watch transports. The DJT (3692) is well above its ‘02 low (1900). A close below 3632 on the DJT is bearish for the DJIA.

In our small cap universe, 93% are more than 5% below their 200dma. The average small cap stock is –34.64% below its 200dma. The average large cap stock is –25.71% below its 200dma with 95% more than 5% below.

In October 1974, the SPX bottomed at 62.28, it retested 46 days later getting 4.2% from the low (65.01). In October 1987, the SPX bottomed at 224.84. It retested on the 27th, 7 days later, getting to 3.7% above the low (233.19). It retested again on December 4th, slightly undercutting by 40bps the October low (223.92). In ’98, it bottomed on August 31 at 957.28 and retested 28 days later on October 8th at 959.44. In ’02, it bottomed on October 9th at 776.76 and retested 105 days later at 800.73, 3.9% above the October low. Bottoms in recessions are re-tested.

The NASDAQ is sitting at 1688. It’s ‘02 low is 1108. The Philly Sox Index (239.13) got to 223 intraday last week, near its ’02 closing low (214.06 on October 9th, 2002). Tech scores remain under pressure and continue to point toward underweight. Semiconductors, however, can be bought. Watch technology scores for improvement and a crossover above the average universe score – we have not gotten that signal yet.

Healthcare, defensive by nature, has crossed back below the average scoring stock. Historically, healthcare outperforms the SPX following Presidential elections. Investors are rotating out of healthcare into too-big-to-fail financials. The rally in Financials kicked off in June with small cap financials crossing above the average small cap score. Large cap financials did the same in mid September. Basics scores are starting to tick higher and are close to crossing back above the average universe score.

10/13/08

The DJIA touched 7888, putting it into a retest of the lows of 2002. The SPX got to 840, 47% off its 2007 peak. The average large cap stock in our universe is 22.9% below its 200dma. Last October 9th, the average large cap stock was trading 20.86x current year EPS. As of this week, the average is 13.09x. Last October 9th, the average large cap stock was trading 1.86x its 5 year PE low on 07 EPS. Currently, the average is 1.25x.

October has a strong history of marking the bottom of bear markets. In ‘02 the bottom occurred on October 9th. In ‘87 it was October 19. The sell-off in ‘98 ended October 8th. In ‘90 it ended October 17th. In 74 it was October 3rd. In ‘66 it was October 7th. Overall, including ‘98 and ‘90, 4 of last 5 bears ended in October and 6 of last 8 ended in October.

The chart below shows the VXO in 1987. The VXO is the “old” VIX calculation, based on the S&P100 it provides us with more relevant data on extreme readings. Intraday, the VXO got above 100 Friday (103.41).

As we move beyond Yom Kippur headwinds will ease. Forced liquidation from the end of Q3 will slow. Treasury yields support asset rotation back to risk. We believe we will see a trading rally, however, this rally will fade into resistance forcing a retest of lows.

Financials remain top scoring. The G7 has stated it will not allow any large systematic bank failure. The global printing press is focused solely on unlocking credit markets. The LEH counterparty risk, which overhang last week’s action, will be digested. Own top scoring financials benefiting from demand deposit growth and inexpensive market share acquisition costs.

Consumer stocks benefit from shrinking input costs while retail prices remain high. Investors will continue to embrace defensive stocks despite short term trading rallies as unemployment spreads.

Healthcare scores have moved below the average score in our universe. Pre-election jitters have returned to the basket. Historically, healthcare outperforms the SPX through the year following the Presidential election.

Basics remain heavy as deleveraging and a strengthening Dollar work against global reinflation efforts. Expect trading rallies in basics back into support, where sellers will re-emerge and drive them back toward lows.

Tech is weakest as investors avoid EPS risk. Bargain hunters will emerge sparking short term trading rallies and short covering. We expect rallies will meet sellers at resistance forcing baskets to retest.

10/6/08

The SPX fell 9.3% last week as the market wrestled over bailouts, GDP risk and a bank bidding war. The Russell 2k put in a new 2008 closing low, as did the NASDAQ and all major market indexes. 1075 is the 61.8% retracement level, roughly ~19% below its 200dma. Volumes were above average yet well below mid September levels. A successful test and close above 1075 sets up a 10% rally.

The number of stocks trading more than 5% below their 200dma is it’s highest since January’s bottom.

Big banks rallied sharply in the past month as investors shifted from “the next bank to fail” to “which banks will succeed”. Embracing under-owned large cap banks is generating significant excess. Money market redemptions are flowing into FDIC insured bank accounts, supporting cash starved balance sheets. Government intervention supports large cap megabanks. Fear of insolvency has become fact of insolvency, allowing investors to speculate on which leaders will thrive post-recession. Buy financials.

Consumer stocks are benefiting from recent price increases and falling commodity input costs. Retailers have had a year to prepare for a lean holiday season. Product mix and inventory levels will separate leaders from laggards in Q4. Own the top scoring only.
Small and mid healthcare stocks score better than large cap healthcare stocks. Big money is rotating away from liquid large cap healthcare. Medical instruments and healthcare plans have the best Q4 seasonality in big cap.

The Dollar hit 2008 highs last week, further pressuring industrials and basics. The USO is challenging its mid September low. Natural gas has been sideways for a month on below average volumes, yet offers positive seasonality on winter inventory builds. Ag supply dropped significantly last week as MOS disappointed, commodity dependent emerging markets questioned future financing and Farmer Mac raised capital to avert a regulator downgrade. The underlying grains do little to add conviction. Remain on the sidelines until they can re-exert.

Technology stocks continue to slide as risk money goes into financials. Semi’s offer short term positive seasonality into late November. Wireless operators also offer upside seasonality. Funding costs are weighing on Telco.

9/29/08

This past week, financials moved into the top spot across our entire universe. The large cap financials, which have scored below the average large cap stock since March, moved above average this week. Small cap financials, which have scored above the average small cap stock since June, remain strong. The next two weeks will test the resiliency and sustainability of the basket. Clearly, have and have-nots are being identified and Darwinistic bets are being made for Q4.

Small regional banks remain disadvantaged by Government regulation. Investors, who sold financials in Q2, are returning to large cap despite continued failures and Government intervention. Volumes were light last week as investors avoided risk ahead of quarter end. Watch early October action closely as short restrictions are lifted and investors return from sidelines.

Despite negative news, financials and homebuilders are performing best in September, suggesting the appetite to sell has abated. Basics have performed poorly, with coal (KOL) and ag supply (MOO) falling –29.77% and -21.60% respectively.

Post election legislation supports larger insured populations, boosting demand for healthcare services, treatment and equipment. Margin pressure drives investment in healthcare IT. Generic sales growth supports biotech M&A as big pharma bolsters pipelines.

Despite EPS contraction and rising job loss, consumer staples and retailers offer upside potential through Q4. In 2002, retail (RTH) rallied 7.2% from the end of September to the end of November. Job loss drives macro risk; forcing inventory and product mix adjustments. Focus on top scoring names in the basket.

Basics remain under pressure as the Dollar finds its footing near support and the global economic slowdown reduces demand. Natural gas offers positive seasonality on winter inventory builds. Ag supply failed to recapture support as underlying grains remain under pressure. Focus on natural gas for basics exposure.

Tech stocks retreated this month as investor’s reduced EPS risk. Semiconductors offer positive seasonality beginning mid October. Use down days to accumulate positions in top scoring names.

Monday, September 22, 2008

Weekly Research from September 2008

September 22, 2008

The market shook off a tremendous amount of negative news last week. We were looking for support at 1075-1175 and the market split the difference, bottoming on Thursday at 1133 alongside a 42.16 VIX reading. We expect the VIX will remain within a much higher band for the coming 4-6 weeks compared to the first half of 08.

Legislative rallies rarely do more than extend the inevitable. We have been saying the bottom is in process and the market will head higher following Yom Kippur. In the post-regulated world we have question whether 08’s absolute bottom was made last week. Over the weekend the short selling restriction and garbage pail debt entity were discussed ad nausea. There remains a great number of questions, however, its clear the Government is focused on accommodating markets.

On Friday, the SPX and DJIA rallied into their 50dma’s. The DJIA could run as high as 11,900 if it successfully shakes off sellers. If it fails and rolls over on volume, the market will make new lows. The SPX has 3.5-5.5% additional upside if it can continue upward through its 50dma to prior resistance at 1300-1325.

We expect more regional bank failures, as the Government will force weak hands to fold as part of its MBS rescue plan. Sellers will migrate to other hedging strategies, likely in the derivative/debt markets. Unintended consequences will likely create significant volatility and intra-week swings, creating plenty of opportunities to make money by sticking to discipline. Buy high scoring sectors and stocks and avoid companies with risky balance sheets and equity dilution risk. The Gov’t will support large cap financials at the expense of smaller players.

The U.S. equity market may become the only game in town as Treasury yields fail to support principal risk. Global money flows will continue to move into safe harbors as economies slow – benefiting U.S. markets.

Financials opened at their highs and traded lower through the day. A classic regulator inspired short squeeze prompted a narrow but significant market rally dominated by financials. Tech and healthcare lagged throughout the day. Entire prop shops sat Friday out. Going into quarter end, there is little incentive to game markets and a lot of incentive to protect risk.

In healthcare, increased U.S. insurance rolls benefit treatment related stocks. Cost containment continues to support healthcare IT spending. Own healthcare and use sell-offs to add to positions.

In basics, focus on natural gas. Nat gas stocks benefit from utility builds ahead of winter and oversold conditions. On Friday, natural gas stocks were one of the few baskets to trade higher throughout the day rather than open on highs and base.

In technology, build semiconductor positions on down days. They remain oversold and offer upside. Outside of semi’s, stay stock-by-stock using our daily best and worst lists.


September 15, 2008

The market has yet to reach levels consistent with max fear despite wrestling last week with the failure of FNM and FRE, the imminent failure of LEH and the forced sale of MER.

An actionable low is likely in the coming 3-4 weeks. Such a low could cut below the July low (SPX support at 1175 and 1075) and coincide with a +30 VIX. We began to see fear enter markets this week on rising volumes. The VIX has moved from 20 to 25 since August 28th yet remains too complacent.

Healthcare stocks remain top scoring in large and mid cap universes. As elections near, investors digest impacts of each candidate. Under both candidates, more Americans will be covered by insurance, boosting demand for treatment. In the past, healthcare returns outpace the S&P 500 from August through the following December. Use down days to add to leaders.

MER’s self-financed CDO sale upped write-downs, adding pressure to Level 3 assets; which in some stocks exceed market caps. A failure of LEH, and de facto failure of MER, triggers further losses and dominoes through the finance sector (ex. AIG, MS, JPM, GS, WB). Financials have climbed in our rankings as stock-by-stock names have improved and climbed the wall of worry. Investors will embrace legacy leaders post non-Fed supported failures. Avoid the temptation to bottom-fish oversold at-risk brokers/banks and remain focused on owning top scoring leaders. We expect more regional bank failures due to increasing consumer and commercial default rates. We’ll watch small cap financial scores closely and keep you updated.

Consumer staples stocks are rallying as investors rotate toward defensive baskets, retail prices remain elevated and input costs shrink. Retail has been improving despite consumer weakness. Top performers this year include WMT, BKE, ARO and URBN. The IndexMetrix Specialty Apparel Index is up 6.71% this year; the RTH is up 5.28%. Since June, the Specialty Apparel Index has moved up 15.62%, the RTH has gained 10.82%. The best YTD performers in the Specialty Apparel Index: PLCE, ROST, GYMB, URBN, ARO. Since June, JNY and MW have performed best. Use weakness over the coming weeks to build positions in leaders. Post Ike, consider the rebuilding demands impact on LOW (131 TX stores), FAST (148 Texas stores) and HD (176 Texas stores).

The XLK has traded to new 2008 closing lows this week. The SMH has also undercut ’08 lows. Techs continue to endure EPS pressure on worries of global economic contraction. An actionable low in the coming weeks presents an opportunity to buy tech on sale. Compile your wish list and target prices and wait for the bottom to be firmly in place.

The Dollar strength and commodity fund withdrawals have pushed basics down sharply this quarter. The Dollar (UUP) moved from $22.10 to a high of $24.83 this week, before retreating on Friday. Most commodities remain under pressure and are due for a bounce. Sellers will likely meet rallies into support while Dollar bulls will only step aside for a brief period while the Dollar digests recent gains. Nat gas is the only commodity basket we’re currently recommending long.


September 15, 2008

The market has yet to reach levels consistent with max fear despite wrestling last week with the failure of FNM and FRE, the imminent failure of LEH and the forced sale of MER.

An actionable low is likely in the coming 3-4 weeks. Such a low could cut below the July low (SPX support at 1175 and 1075) and coincide with a +30 VIX. We began to see fear enter markets this week on rising volumes. The VIX has moved from 20 to 25 since August 28th yet remains too complacent.

Healthcare stocks remain top scoring in large and mid cap universes. As elections near, investors digest impacts of each candidate. Under both candidates, more Americans will be covered by insurance, boosting demand for treatment. In the past, healthcare returns outpace the S&P 500 from August through the following December. Use down days to add to leaders.

MER’s self-financed CDO sale upped write-downs, adding pressure to Level 3 assets; which in some stocks exceed market caps. A failure of LEH, and de facto failure of MER, triggers further losses and dominoes through the finance sector (ex. AIG, MS, JPM, GS, WB). Financials have climbed in our rankings as stock-by-stock names have improved and climbed the wall of worry. Investors will embrace legacy leaders post non-Fed supported failures. Avoid the temptation to bottom-fish oversold at-risk brokers/banks and remain focused on owning top scoring leaders. We expect more regional bank failures due to increasing consumer and commercial default rates. We’ll watch small cap financial scores closely and keep you updated.

Consumer staples stocks are rallying as investors rotate toward defensive baskets, retail prices remain elevated and input costs shrink. Retail has been improving despite consumer weakness. Top performers this year include WMT, BKE, ARO and URBN. The IndexMetrix Specialty Apparel Index is up 6.71% this year; the RTH is up 5.28%. Since June, the Specialty Apparel Index has moved up 15.62%, the RTH has gained 10.82%. The best YTD performers in the Specialty Apparel Index: PLCE, ROST, GYMB, URBN, ARO. Since June, JNY and MW have performed best. Use weakness over the coming weeks to build positions in leaders. Post Ike, consider the rebuilding demands impact on LOW (131 TX stores), FAST (148 Texas stores) and HD (176 Texas stores).

The XLK has traded to new 2008 closing lows this week. The SMH has also undercut ’08 lows. Techs continue to endure EPS pressure on worries of global economic contraction. An actionable low in the coming weeks presents an opportunity to buy tech on sale. Compile your wish list and target prices and wait for the bottom to be firmly in place.

The Dollar strength and commodity fund withdrawals have pushed basics down sharply this quarter. The Dollar (UUP) moved from $22.10 to a high of $24.83 this week, before retreating on Friday. Most commodities remain under pressure and are due for a bounce. Sellers will likely meet rallies into support while Dollar bulls will only step aside for a brief period while the Dollar digests recent gains. Nat gas is the only commodity basket we’re currently recommending long.

September 8, 2008

The Treasury will buy $5bn of MBS in the next month as part of its nationalization program of FNM and FRE. The Treasury gets a 10% coupon on $1 bn (each) of preferred and warrants valuing the companies at less than $1 per share. If liabilities exceed assets quarterly, the Treasury will inject up to $100bn (each) in exchange for add’l senior preferred. Clearly, FNM and FRE were facing insolvency, caught between impossible to finance mandates, asset devaluation and sketchy reserve accounting. The MBS market should unlock helping stabilize related valuations. Job loss becomes the next hurdle in stabilizing housing. While fees will shrink and rates drop, borrowers still face strict lending requirements. Further job loss will pressure house values and continue to impair valuations. Clearly, “too big to fail” has helped major finance plays, while small players have been allowed to collapse (re. Silver State this weekend). The boycott threatened by debt buyers is, for now, a memory. We worry; however, about regulator inspired bottoms and question whether the natural selection process of washing out the markets will be pre-empted, similar to regulatory bottoms previously in 08. The market failed to reach levels of max fear and without such fear, represented in this case by VIX, markets still have a lot to prove. Meanwhile, another valve on the liquidity spigot has been opened, as short term funding (LIBOR + 50bps) will also be made available to the 2nd largest U.S. borrower: Federal Home Loan Banks. The Treasury doesn’t want to be in the mortgage business, as evidenced by requiring FNM and FRE to keep mortgage holdings to less than $850bn by the end of 09 and to cut holdings by 10% annually until assets reach $250 billion. They hold $1.58 trn in mortgages, up from $136 bn in 1990. Who will step in to buy these assets remains a mystery, but likely the Treasury is counting on its guarantee enticing foreign investment. Foreigners held $1.3 trillion, or 21.4%, of GSE long-term debt as of the middle of last year (U.S. Treasury) with China owning over $300bn.

The failure of Silver Lake (Nevada), the 11th bank to fail this year, continues to point to risk in states which enjoyed robust development this decade. Mortgages in California, Florida, Arizona, and Nevada accounted for 47% of Fannie’s credit losses in Q2 and 65% of FRE’s losses.

We’re only one step into forming the actionable bottom we expect to see in the coming weeks.

As you know from our comments, we like to track volume alongside price. Volume surges on down days do little to encourage embracing risk.

We fell sharply across just about every basket last week. However, capitulation requires bigger volumes and more put buying. The VIX, which has done an excellent job in helping folks figure out when investors are panicked, still doesn’t reflect max fear.

In fact, a study of past 3% daily declines on the SPX this decade shows 30-day returns following the sell-off are essentially flat when unaccompanied by a +30 VIX. When the VIX does confirm above 30, the return jumps to ~6.5%. Clearly, the market rewards risk when fear is maxxed out – and we argue we’re not there yet. We don’t deny regulator inspired risk will force short sellers to cover. We do, however, question whether a short squeeze will be anything more than an opportunity for mutual and hedge funds to sell into strength to meet redemptions.

Healthcare stocks, one of the only baskets attractive to both technical and fundamental clients, sold off this past week, providing an opportunity to add to leaders. This high scoring basket continues to have its share of 2008 ups and downs, however, the discounts built into them in Q1 and Q2 point toward profits through December 09- in line with historical returns from Election Year August’s through the following year. Pharma is the latest basket to join in on positive Healthcare seasonality. Use sell-offs to up positions.

Financials shrugged off a lot of the pain this week (the XLF finished up on the week) ahead of the Treasury’s busy weekend. Broker eps kicks off this month and post MER firesale level 3 valuations will be a topic of discussion (albeit far less of one given the FNM/FRE bailout). Writedown risk is arguably priced into bank valuations and any retest of prior lows in financials will likely be tied to loan demand destruction and defaults caused by job loss and declining personal income. So far in 08, small cap finance has been a safe spot. Given the willingness of Government to bail out big caps and let small caps fold, we may see a shift in investors willingness to support smaller regionals. Watch scores closely for any declines. More aggressive investors can begin to traffic in larger cap financials, stock-by-stock, strongest scoring only.

Technology stocks bore the brunt of selling this week with the XLK down 5.4% and the SMH down 7%. Investors are increasingly pulling money out of foreign markets (Russia had to stabilize the Ruble last week), including domestic multinationals such as big cap tech stocks. As a result, money from tech has flowed to Treasuries (the TLT gained 1.7% last week). Our expectations remain for an actionable low in the coming 4-5 weeks, providing significant upside. Volumes to support a sustainable run are most likely to come by mid October, following Yom Kippur.

The basics continue to weaken under the weight of global slowdown. The USO broke down through its 200dma on rising volumes. The IYM put in a new 2008 low. The UNG traded slightly higher despite market weakness, reversing early day losses on both Wed and Thursday. We continue to recommend buying natural gas only at this stage, preferring to wait for additional conviction in underlying commodities before re-embracing producers and related suppliers.

Services, specifically retailers, tend to put in actionable entry points in September. Use mid to late month to begin acquiring leading retailers for upside through next February.



September 1, 2008

Healthcare, industrials and tech score highest across our entire universe. Services, Financials and consumer are weakest.

Sectors offer solid seasonality across the board in the 3 months beginning August 31 and ending November 30th. Conglomerates, Ute’s and Financials have done the best in this coming 3-month span over the past 5 years.

An actionable low is likely in the coming 4-6 weeks. The July low, sparked by regulation and a +30 VIX, failed to offer follow through in August. Financials, which bounced sharply in July, lost ground this month. Historically, Q3 is the most troublesome quarter for the markets. As we move into October/November, historical seasonality begins to reward buyers of risk in September/October. Watch closely for pullbacks. Compile a list of favorite names and entry points.

Q4 and Q1 traditionally reward September buyers of retail. Use sell-offs in the next 4-weeks to build positions in leading retailers.

Pharmaceuticals become the next healthcare industry to move into seasonal strength, kicking off a multi month run beginning early September. Political risk is historically priced into healthcare stocks in the first half of Election Years. In the past 5 Presidential Election Years, a basket of widely traded large cap healthcare stocks outperformed the SPX in 4 of the periods beginning Aug 31 and ending the following year. Use political inspired volatility to build positions in healthcare.

Tech remained hit-and-miss most of the quarter with a narrow basket of stocks accounting for the bulk of returns. As we move into September, however, we should be presented with opportunities to be rewarded for buying by the time we close November.

Purchases rose 0.2% in July, down from 0.6% in June. Services spending was unchanged. Inflation adjusted spending fell 0.4%. Inflation adjusted disposable income fell 1.1% marking back-to-back declines (June fell –1.9%).

The 4-week moving average of jobless claims is 440,250, up from 324,750 YoY. There are 1.6mn more unemployed people YoY.

Personal Income fell 0.7%, the first fall since August 05 (est. were -0.2).

PCE rose 2.4%.

The basics remain under pressure as global GDP risk contagion spreads. Typically, nat gas rises through November from the end of August. Hurricane risk has moved the basket in the past week adding some speculators. Use their unwinding to buy. The DBA has yet to support owning risk in ag supply. Remain on the sidelines until the DBA re-exerts itself. Coal stocks depend on Australia price strength. U.S. spot prices peaked for No Appalachian coal on August 1st. Watch for price stability and improvement and own top scoring coal stocks only.

India’s economy grew 7.9% in Q2, the slowest since 04, down from 8.8% in Q1. India inflation has tripled to 12.4%.

The TLT has risen from $90 to $94 in August.

The VIX remains overly

Weekly Research from August 2008

August 24, 2008

LEH’s top peanut hawkers are working the crowd to elicit a white knight as media reports of rising counterparty risk return. Once again, U.S. investment banks are hunting abroad for money. The economic jig saw puzzle continues to frustrate investors as see-saw market action on light volume whipsaws buyers.

The market mayhem provides little incentive for risk. Despite rapid appreciation in July, Financials have failed to attract sustainable buying in August. Q3 is a historically troublesome quarter. September, specifically, has been unkind to NASDAQ. With a backdrop of EPS uncertainty, risk outweighs rewards in many baskets.

Healthcare, following robust early quarter performance, is taking a breather and consolidating gains. Global industrialization continues to increase the world’s middle class, sparking healthcare demand and resulting in rising investment in treatment. In a troubled sea, healthcare is an island. Overweight healthcare through Q3. Big pharma is the next industry to participate, kicking off robust seasonality in September. In election years, healthcare pundits worry over political risk. However, historically, investors embrace healthcare following elections, especially insurers.

The following table shows returns of key healthcare stocks from August of a Presidential election year through the following calendar year ending December. On average, key healthcare names have returned 11.37% of excess to the S&P 500 in the past 5 Presidential Election periods. The basket of names below didn’t post a negative return in any of the periods, with an average return of 28.43%. Historically, the political risk associated with the basket is already reflected in prices going into Election Day.

Returns of Key Large Cap Healthcare Stocks from August of Election year through Following Year
Time Period 8/31/04-12/31/05 8/31/00-12/31/01 8/31/96-12/31/97 8/31/92-12/31/93 8/31/88-12/31/89 Average
JNJ 5.90% 30.70% 36.10% -6.40% 50.90% 23.44%
MRK -23.90% -13.90% 66.40% -26.70% 45.70% 9.52%
ABT -2.60% 30.10% 49.50% 0.19% 50.00% 25.44%
PFE -25.99% -6.48% 113.42% -7.80% 43.51% 23.33%
UNH 88.00% 49.79% 28.75% 78.11% 61.16%
CI 68.10% -2.90% 53.20% 33.00% 30.40% 36.36%
AET 103.70% 18.47% 8.20% 67.00% 27.00% 44.87%
BMY 2.50% 3.40% 123.10% -7.30% 40.60% 32.46%
SGP 14.50% -9.20% 127.10% 20.90% 68.40% 44.34%
GENZ 31.10% 59.50% 16.30% -31.70% 18.80%
AMGN 33.00% -25.50% -7.10% -21.80% 54.50% 6.62%
BIIB -23.70% 48.10% 46.90% -19.30% 13.00%
DNA 89.60% -43.00% 15.50% 56.90% 1.60% 24.12%
Average Return 27.71% 10.70% 52.11% 10.39% 41.26% 28.43%
S&P 500 13.00% -24.30% 48.80% 12.70% 35.10% 17.06%
Avg Excess 14.71% 35.00% 3.31% -2.31% 6.16% 11.37%
Value of $1 through $3.35 $2.63 $2.37 $1.56 $1.41
1988 $1.94 $1.72 $2.27 $1.52 $1.35

Basics sold off ahead of the Olympics on fears of a post-Olympic hangover. Now, as the Olympics close, folks wonder about the impact of restarting shut-in manufacturing. China is already addressing the increase in power demand, instituting another wave of export restriction for coal. Higher taxes will curb Asian supply and support Newcastle prices. Keep a close eye on coal plays and Australian prices to gauge sustainability. M& A continues in coalmining with Severstal paying $1.3bn in cash ($450 a ton) for PA coalminer PBS. Watch U.S. spot coal prices alongside Dollar moves as sustained upside in the Dollar may impact EU driven demand for U.S. mining.

Soybean and corn have both turned up off lows, supporting ag supply. In the first 6 months of 08, Brazil has bought ahead far more fertilizer than last year. We want additional conviction from the DBA, which regained its 200dma this week and is now challenging its 50dma. If the DBA continues up, ag supply will too. Wait for conviction.

Nat gas offers position traders opportunity. Last year, nat gas bottomed in the first week of September, kicking off a 2-month rally. As investors digest global energy demands and levels of GDP risk, nat gas offers significant upside potential. Own high scoring leaders trading above 200 dma’s.


August 18, 2008

Healthcare continues to benefit from risk aversion as investors step aside in GDP sensitive stocks and buy day volumes in oversold sectors remain weak. Industrials and tech also score strong. Financials and basics score weakest. Small cap scores highest.

Overweight healthcare through Q3. The next healthcare industry set to move higher is pharma. Historically, the beginning of September kicks off a rally in drug stocks through February. Biotech, which kicks off positive seasonality in July, has moved up 17.4% (IBB) this quarter and has seasonal legs through next March. The PPH has traded up in 64% of the sessions since July up from 45% in June.

Tech remains hit and miss through the remainder of Q3. Stay focused on high scoring stocks only and let stock scores provide conviction name-by-name.

How much in additional losses remain on bank books? Last week, the WSJ raised questions about WFC’s level 3, mark-to-mystery assets, which climbed $3.3bn to $5.28bn last quarter. Despite the increase in level 3 assets, write-downs were tame. In the post MER self-financed fire-sale world, investors may suffer additional pain. Bank lending requirements in both the U.S. and Europe continue to increase. In the U.S., tighter standards for commercial and industrial lending weigh on GDP. The cost to borrow for companies continues to rise. AIG paid 8.25% for 10 year money and may need to dilute again this year. We remain concerned the energy, as measured in up and down day volumes, associated with the recent rally in financials is fading. The table (above) shows the underperformance of financials so far this month.

U.S. consumer prices rose 5.6% through July, the fastest increase in 17 years. Foreclosures continue to rise and home values continue to fall. Despite the Fed’s liquidity spigot, auto and mortgage rates are climbing. In June and July, gas accounted for 4.4% of consumer spending, above the 3.9% for autos and parts – marking the first time in 26 years consumers spent more on fuel than the vehicle itself. Capacity utilization, which has averaged 81% from 1972-2007, is running at 79.9%. Consumer confidence, however, rose for its first back-to-back gain in 2 years as gas prices fell.

The Dollar posted another solid week, rising for a 5th consecutive week. The UUP is up 8% from its July low with volumes running nearly double July daily averages.

Gold dropped to 8 month lows. China hiked coking coal export taxes beginning August 20th. Australian coal prices will need to rebound to re-energize the basket despite U.S. spot prices remaining strong.

Cooler, wet weather in the Northeast has dampened utility demand and helped fuel the seasonal sell-off in nat gas. Last year, the UNG bottomed in the first week of September (and again in December) as investors begin to bargain hunt on winter utility stockpile builds. Aggressive position traders can consider stepping back into intact leaders and waiting for follow-through.

August 10, 2008


Healthcare is the strongest scoring sector while consumer and basics score weakest. Investors continue to rotate into healthcare and reduce exposure to global GDP risk. Healthcare historically leads in Q3 and so far, healthcare hasn’t disappointed. In the past week, the IYH recovered its 200dma on heavy volume. Biotech benefits as investors reposition EPS risk into news flow risk. The IBB has risen 14.7% this quarter and has traded lower on only 3 days since July 21st. The PPH is beginning to trade higher too, moving up 4.9% this month on rising volumes.

Industrialization of heavily populated developing nations is driving investment in healthcare research and development. A wealthier, longer living population is improving demand for the treatment of chronic disease. Biotech pipelines are increasingly attractive to major pharmaceuticals, prompting recent M&A and boosting takeover premiums. Overweight healthcare for the remainder of Q3.

Large cap stocks post the highest average scores, followed by small cap. The Russell 2K is the first broad market index to challenge its 200dma. The QQQQ is testing resistance, however, the last above average up day on the QQQQ was July 17th.

Financials continue to creep up our sector ranking. Volumes on the major financial ETF’s have been lackluster in August. Financials have moved sharply higher following the regulator inspired short squeeze. Remain focused on high scoring financials and reduce weightings of low scoring as the sector digests resistance. Historically, financials have solid Q3 seasonality. Avoid embracing down-trending financials. Our scores will confirm sustainability – watch individual scores.

Technology remains stock-by-stock. Lackluster Q3 seasonality and EPS risk have weighed on tech during the recent rally. The XLK and SMH have finally begun to trade off July lows. The XLK has yet to have an above average volume up day in August. Remain stock-by-stock in technology and reduce weights to low scoring names.

In consumer, focus on large cap as scores are higher as stocks have benefited from risk reduction. In services, historically an actionable low for Q4 upside in retailers occurs between mid August and mid September.

Basics remain under pressure as investor concern over U.S. growth contagion rises. A post Olympics ramp up in Chinese production could shift supply tightness. Watch closely for commodity import data into China in the final months of 2008. Power shortages continue to support global commodity prices in the face of speculative unwinding. The USDA releases its crop production report on the 12th. Remain on the sidelines until suppliers break current downtrends. Sell volumes in the DBA peaked in the 3rd week of July. Watch for higher volume up days and a continuation of low volume down days. In ’93, the USDA had to reduce its corn production forecast 31% and its soybean forecast by 17%.


August 3, 2008

Healthcare, utilities and basics score highest in our entire universe. Financials, consumer and services score weakest.

Basic industries performed worst in July with the UNG falling 30.43% after losing seasonal tailwinds. The +30 VIX inspired rally produced the greatest monthly return in financial ETF’s. The RKH rose 18.23%. The XLF rose 6.76%. Healthcare was the only basket of technically intact stocks with earnings clarity to perform in July. Historically, healthcare has strong positive seasonality in Q3.

Healthcare is our highest scoring sector. Beta investors have swapped EPS risk for newsflow risk. Despite legislative risk, healthcare, especially biotech have rallied sharply in July. The IBB rose 15.3% last month. Global industrialization is increasing spending on drug therapies and driving R&D. An aging population in developed nations increases the demand for cancer, diabetes and heart disease drugs. The Center for Disease Control has increased its estimates of annual AIDS infection rates from 40k to 56k. Investors will continue to embrace healthcare through Q3. Use down days to buy leaders.

Basics sectors are testing 200dma support levels as investors rotated on Dollar stabilization. The UUP (Dollar) rose 1.33% in July and is closing in on resistance. Watch the Dollar Index carefully as it tests trend lines before committing capital to lagging basics stocks.

The DBA is trading very light volumes. Its last day of above average volumes was 7/23/08. Buyers will wait for conviction and rising volumes. Ag supply stocks offer EPS clarity and can be bought on down days to 200dma support. Investor interest will return on USDA production forecast revisions.

Chinese and Indian coal supplies at utilities remains too low. The pre-Olympic build out of Chinese infrastructure fueled commodity demand. As the Olympics have approached, investors have stepped aside. Watch carefully commodity import data post-Olympics.

Tech remains hit and miss through Q3. In July, the XLK fell 3.5% while the SMH dropped 6.04%. Investors have been unwilling to embrace tech stocks during the Q3 regulator inspired rally. Techs remain weak and stock-by-stock. Own highest scoring only and avoid weak scoring names.

Financials produced sizeable returns in July, however, remain a weak scoring sector. Investors covered shorts on regulatory risk. Historically, bottoms have been elusive when jumpstarted by legislation. MER’s self-financed fire sale does little to stem the wave of write-downs and forces re-valuation for at-risk related investments at competitors. Avoid weak scoring financials and traffic solely in the highest scoring names, which are primarily in small cap.

Consumer and services stocks remain under pressure as job losses increase and wage growth slows. Historically, a better entry into retailers has occurred in late Q3 for Q4 upside. Remain on the sidelines.

Overall, the universe of attractive large cap stocks has not expanded. The number of large cap stocks in our universe trading more than 5% above their 200dma has moved from 52 four weeks ago to 54 last week. The average large cap remains -8.14% below its 200dma. It is too early to declare sustainability of the current rally. The IWM and MDY will be the first broad index ETF’s to challenge resistance. Watch the DJ Transports closely. The IYT rose 0.41% in July and will need to follow through in August for the DJIA to rally further. The final 3 days of July saw the IYT retreat 4.6% on 36% greater volume than July’s average.

Weekly Research from July 2008

July 28, 2008

Utilities, healthcare and industrials are strongest with consumer and services weakest.

Market risk reward is balanced. Reduce exposure to weak scoring stocks and raise cash until the market recaptures resistance.

The rally, while sharp, has yet to significantly increase the number of technically attractive stocks. On July 1st, 99 of our large cap universe were trading above their 200dma. Last week, 105 were above their 200dma. So far, the rally has primarily been a reversion to the mean. For example, the number of large cap basics above its 200dma has declined by 8 since July 1st, while Financials added 5.

The average large cap score remains below its April and June range (see chart to left).

Healthcare advanced again last week as investors sought safety from falling commodity baskets. Healthcare should be overweight in portfolios for Q3. Use down days to buy.

Investors shunned EPS clarity in basics last week in favor of oversold baskets and cash. Despite strong reports and guidance from coal and ag supply, sellers punished stocks like POT and BTU following reports. The average large cap basic stock is –1.3% below its 200dma. Use down days to buy high scoring basics trading above their 200dma.

Financials are into 50dma resistance. Despite significant upside since the +30 VIX on the 15th, the average large cap financial stock remains 19% below its 200dma (up from 24% on July 1). Day traders piggybacked the regulation-inspired short squeeze. Financials need to prove sustainability as they enter resistance. Unwind weak scoring financials until scores confirm sustainability and financials recapture technical resistance.

Technology stocks continue to be hit-and-miss this quarter. The SMH failed to follow through on INTC inspired strength, trading near January lows. The XLK remains below its June 30th close. We’ve written a lot about narrow tech seasonality this quarter and advise caution. Only traffic in the strongest scoring tech stocks. Wait for scores to provide conviction.


July 21, 2008

Basics, utilities and healthcare are highest scoring while services and consumers are weakest.

On Monday, we released our VIX report showing how the market has behaved since 1990 during periods where the VIX crosses above 30. On Tuesday, the VIX hit 30.78, kicking off a substantial short covering rally into EPS season. Will the rally last? The VIX will set a higher range for the remainder of Q3. Regulator inspired volatility won’t help the markets anymore than a band-aid helps a torn ACL. The regulator inspired rally this week provides an opportunity to focus on leaders. Use weakness in high scoring sectors to buy cheap and rallies in low scoring sectors to sell high.

The DJ Transports regained their 200dma. Watch transports closely for clues as to how long the rally will last.

Healthcare continues to attract volumes as investors rotate back into the basket. Q3 is historically kind to biotech. Globalization is driving world spending on drug development. TEVA bought BRL for a 16% premium on Friday, after rumors earlier in the week drove BRL up from $46 on the 16th (45% premium to the 16th close). Branded pharma sales have gone from 45.9% in ’03 to 30.6% in May (IMS). IBB buy day volumes continue to dwarf sell day volumes. Buy biotech.

China is facing a power generation shortfall of up to 4.5% as utility stockpiles at 198 of the 541 major power plants hover around one-week of supply. China export quotas could crimp world supply similarly to early 08 and support prices. U.S. coal exports are up 40+% thanks to European demand. Buy coalmining and mining equipment.

This week we’ll see EPS from BG, POT and TRA/TNH. Ag supply will continue to offer EPS clarity. Potash is increasing its capacity by 2.7mn mt, bringing capacity to 18mn mt in ’12. BG, which has a strong fertilizer business in South America, is launching a U.S. fertilizer distribution/sales business to capitalize on increased acreage. Own ag supply.

Nat gas has gone from $13.50 to $10.50 in less than a month and is entering support. The UNG has retreated from $63.89 to $50.20 and will look to hold $46-$48 support. We warned on fading nat gas seasonal tailwinds in June. Focus on the highest scoring plays only and watch summer storm reports.

Oil has retreated from $145 to $128 as U.S. refined supplies climb. Oil services stocks benefit from ongoing growth in E&P, especially in horizontal land rigs and in capacity strained deepwater. Avoid producers and focus on suppliers. SLB profits rose 13%, beating estimates ($1.16 vs. $1.13). SLB revenue rose 20% to 6.75bn. WFT, DO & SII report EPS this week.

In metals, gold looks attractive on global inflation and Mid East unrest. Copper is trying to find footing as investors weigh inflation against recently increased world GDP growth forecasts.

The XLF rallied 24% since bottoming on Tuesday. Shorts covered MER’s loss and ongoing writedowns. C’s losses also sparked buying. C moved from $14.50 to $19.35 since Tuesday. Fast money is short ahead of EPS and using reports to cover positions as regulators tighten restrictions. Use rallies into resistance to unwind low scoring names. Focus instead on high scoring and smaller market cap plays, which score highest.

GOOG fell the most in a day in its history Friday on worries over slowing growth. So far, SPX EPS reports have missed estimates by 0.9% (Bloomberg) for Q2. MSFT guided below estimates. IBM beat on business spending and is trading near 52 week highs. Tech in Q3 is very hit and miss – focus only on high scoring names.



July 14, 2008

The utility, basics and healthcare sectors are the only groups scoring above the average stock (1.00). Consumer, services and financials are weakest. As much as things change, they remain the same. We are in a period of dislocation. Stay focused on leading stocks and baskets. There will be relief rallies and short covering rallies and other temporary lifts along the way. Use sell-offs in leaders to buy and avoid the temptation to bottom fish in weak scoring stocks and sectors. Over time, scores will confirm when the absolute low has been made.

The SPX had its 6th consecutive weekly decline. The VIX finally marched its way toward 30 last week, reaching 29.44 Friday. The DJ Transports continue to wrestle with resistance. Our current market view is for a 5-10% SPX rally (~1350) sparked by a plus 30 VIX (the March VIX high was 32.24; January was 31.01). For comparison, in 2002, the VIX closed over 40 on 10 days. 3 were in early October, the rest were in Q3. Overall, the VIX spent 84 days in 2002 above 30; all AFTER July. The S&P 500 traded down 11% in the final 6 months of 2002.

Of the 40 distinct periods since 1990 where the VIX crossed above 30, the average 12-month return of the SPX from the first +30 reading is 15.78% since 1990 (34 of 40 were positive). The worst 2 12-month returns were from Sept and Oct 2001, down -17.67% and -18.19% respectively.

Down Monday’s following down Friday’s are harbingers of future weakness. Use rallies to resistance to unwind positions in weak scoring baskets/stocks.

In the past 5 days, the IYM (DJ Basics ETF) saw its average daily volume rise 111% from June levels as it rose 2%; lifting off 200dma support.

Macarthur Coal, the 3rd largest supplier of pulverized coal and the M&A target of POSCO and MT, upped guidance on pricing and production/shipping gains. Indonesia, the 3rd biggest coal exporter, may restrict coal exports by requiring miners to set aside coal for domestic use. Indonesia is investing heavily on power capacity, primarily powered by coal.

The re-allocation of energy to Sichuan has strained China’s supply chain forcing further drawdowns of utility coal stockpiles. In the past, shutting power plants has driven diesel and crude import growth. China’s decade plus long policy of closing small mines has reduced the number of mines by 80%. Last month, Beijing attempted to curtail coal prices with caps – another in a spate of failed price control policy. China shut power production at 58 units (2.5% of its total units & 14,020 mw of capacity) while coal stockpiles have fallen below 3 days supply at 64 plants. Total coal supplies across China's power plants stands at 11 days - down from 15 days in March. This chart from Reuters tells the story: https://customers.reuters.com/d/graphics/CN_CRPIDX0708.gif

Oil hit a record $147 on Middle East tensions last week. Natural gas inventories are 15% below last year and 3.1% below the 5-year average. The BHI rig count is 1922 in the U.S., up 131 YoY. All the growth is in land rigs, primarily horizontal rigs –with most rigs deployed for shale development. In the last cycle (70’s-80’s) of rig build-out, we crossed 2000 rigs in 1977 and last saw 2000 rigs in 1985. In 81 and 82 we saw over 4000 rigs deployed. The int’l rig count is 1102 (832 oil). Middle East rig counts are trending about 10% higher than 06. Asia Pacific rig counts are trending about 20% higher than 06. Oil rigs in Brazil, Columbia and Mexico have doubled in that time period. In 06, Int’l rigs ran around 940-950. Energy service dayrates continue to support EPS growth.

What did we learn from GE last week? GE’s total orders jumped 8%. GE’s infrastructure unit had revenue grow 26% while its profits grew 24%. Oil&gas; trains, jets, power turbines, etc continue to offer EPS clarity. Its healthcare unit grew 11% while GE Money profits fell 9%. Sectors leading our rankings offer EPS clarity; stay focused on them.

Gold hit it’s highest since March and is on track to test $1000. Gold average daily volumes are rising as it heads higher. For example, on Friday, the GLD traded 2.5x normal average daily volume. Aluminum hit records, supporting copper. Buy miners/producers and mining equipment.

The USDA upped corn surplus estimates for ‘09 on reduced animal feed & ethanol demand. Global corn consumption will rise, however, to 794.6 mn tons, from 774 mn tons this year (2.6%). Inventories will total 105.3mn tons, down from 124.6mn tons this year. Overall world production next year will be 775.3mn mt vs. 788.8mn mt. The U.S. soybean surplus exiting this year will be 20% lighter than thought last month. Inventories before next years harvest will be 140mn bu down from the 175mn bu estimate in June. This year’s crop will be 3bn bu down from 3.105bn bu estimates last month. Yield per acre will drop to 41.6 from 42.1 June estimates. World soybean production will be 237.8mn mt in the crop year beginning October, down from 240.7 June estimates. Global consumption will be 237.9 mn tons, up from 232.2mn this year. The DBA rallied 22.4% from late May to its late June high and has retreated 6.7% since the 26th back toward support. In Brazil, fertilizer purchases were 20% higher YoY through May. Farmers bought 9mn mt versus 7.5mn tons last year. Buy ag suppliers on down days.

Inflation in India topped 11.89%, the fastest since 1995. Russia upped rates for the 4th time in 08 as inflation hit a 5-year high of 15.1% in June. Global growth (BRIC) continues to be robust, exporting inflation to developed nations.

Con Ed may increase NY electricity prices by 22% this summer. Benchmark wholesale power prices in NY are up 17% YoY. Electricity rates worldwide are trending higher – buy utilities.

China’s obesity problem is growing alongside GDP and industrialization. 25% of China’s population is overweight. From ‘89-‘00 obesity rates have doubled. There are 325 mn overweight people in China, a number which may double in 20 years (UNC- Chapel Hill). China has the highest global growth rate for pharma sales and is expected to move from the 9th to 5th largest pharma market by ’12. China & India account for nearly 50% of new diabetes cases daily. China’s drug spending doubled from ‘78-‘02 and now totals $18.7bn.

Buy day volumes on biotech and pharma have surged in July. The average daily volumes are rising as the basket trades higher. Growth funds, nervous about tech EPS quality, are migrating to biotech in Q3. AMGN, for example, has only traded down 4 days since June 12th, rising ~20% in the process and trading 57% more shares per day versus April & May.

FNM & FRE sent financials sharply lower. CDS counter party exposure at major investment banks, including JPM (reports later this week), continues to weigh on the basket. LEH CDS protection rose sharply, further increasing counterparty risk. Big broker dealers account for 40% of the $45 trillion in CDS's. Hedge funds account for 32% ($14.5trillion). Sell financials into rallies.



July 7, 2008

Sector scores across our entire universe continue to favor basics. Utilities are strong as are defensive consumer stocks. Tech and financials are weakest. Our sector work has kept us focused on the right baskets in 08 and we will continue to favor them until scores suggest differently.

Are we at peak pricing in the commodity market? We believe PE’s will contract further, both for basics and the broader market, before the commodity run ends. World food and oil supply remains low and developing nation growth, while slowing, is high. While inflation is high in developing nations, it is not at historical highs in the U.S. (the U.S. inflation rate averaged 7.09% in the 70’s and 5.55% in the 80’s – see chart on page 7).

In the 90’s basics PE’s bottomed in ’96, yet basics prices marched higher through ‘98. Over the past 12 years, basics prices have risen substantially, despite PE’s reaching lows in ‘96 & ‘01. The market PE isn’t at historical lows either. The S&P PE ratio is 17.64 at the end of Q2. The historical average is ~16. The average annual PE of the S&P in the 70’s was less than 10. The historical sector weight of basics from 1990-1996 was ~6% and above. Basics sector weight in the S&P 500 in the 70’s was >12. While there are signals market PE compression is occurring, PE’s remain well above prior lows and arguably don’t signal peak pricing. Inflation adjusted corn and gold prices remain far higher than current levels. If we extrapolate inflation-adjusted highs in oil across commodity baskets, significant upside remains. Historically, the final year of low rates into the first year of rising interest rates have been bullish periods for cyclicals.

In Q3, seasonality continues to favor basics. In the past 5 years, the average large cap basic stock returned 9.95% in Q3. Utilities also perform well in Q3. Financials have solid seasonality, however, were weak in Q3, 2007 returning –4.63% on average last year. Services and consumer have the weakest seasonal upside in Q3. In healthcare, large cap biotech has returned 3x the average healthcare stock in the past 5 Q3’s (7.41% vs. 2.33%). In technology, stocks up 4 or 5 of the past 5 years in Q3 have returned on average 13.52% while the entire large cap tech basket has returned only 3.02% in the quarter. PM’s seeking sector exposure in out-of-favor baskets should focus on high scoring, seasonally strong plays.

India is facing substantial edible oil shortages, prompting speculation of up to an 80% increase in imports through October. In April and May, India imported 300k tons of edible oil per month. In the coming months, India may average close to 550k tons of edible oil imports a month. In the past 7 months, India’s edible oil imports rose 15% YoY. Global food demand continues to support prices. In the U.S., the USDA’s grain production estimates will continue to drop through fall. Vietnam imported 27% more fertilizer YoY in the first 6 months. Midwest flooding will significantly impact yield per acre as nitrogen fertilizers and topsoil were washed away. The inflation adjusted high in corn occurred in 1974 at $14.60 a bushel. Buy ag supply on down days.

China, which raised fuel prices in hopes of improving supply, has eliminated its crude import VAT rebates. Price increases last November did little to curb China’s energy appetite. With continued power shortages into summer and rebuilding in Sichuan, domestic refined output increases will support crude imports. VLCC operators are getting up to $196k a day transporting oil from the Middle East, up to 6x more than their costs. High oil and gas prices are driving expensive deepwater and horizontal drilling – supporting energy service day rates.

Meanwhile, hurricane risk hasn’t been discussed much during the recent rise in crude and nat gas and presents a summer wildcard. USO volumes since mid June are running 170% higher than Q1 as investors push money into commodity ETFs. Buy energy service and nat gas leaders.

Newcastle Australia coal prices hit another record above $172 last week. Vietnam’s shrinking coal export supply supports global coal prices. The coal ETF (KOL) fell from $58.50 at month end to $49.11 on the 3rd. Use down days to buy coalmining and mining equipment.

Gold stocks offer positive seasonal tailwinds through Q3. Newmont Mining, for example, has returned 11.02% in the past 5 Q3’s on average, well above the SPY’s average 2.35% return. Gold remains well below its inflation adjusted highs above $2k/oz

Utility rates will rise as input prices near records drive regulators to lift price controls. Own utilities.

AMGN has 5 drugs in the 3rd stage of trials, including motesanib, which has shown promise in shrinking thyroid tumors in the most advanced stages (37k new cases annually, 1600 deaths). 15% of patients don’t respond to traditional treatment. Supergen’s Dacogen stumble boosts upside for Celgene’s Vidaza. Cancer treatment spending continues to expand support biotech growth. Buy biotech.

The average homeowner goes through 500-900 gallons of heating oil a year. With heating oil at $4.50 this summer, consumers will face spending challenges this winter. Services scores have been hard hit and will remain under seasonal pressure until Q4.