E.B. Capital Markets Research Blog

Q4 2008 Weekly Reports

2009-01-14T15:49:00.001-05:00

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.

Weekly Research from September 2008

2008-09-22T10:31:00.000-04:00

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

2008-09-22T10:28:00.000-04:00

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

2008-09-22T10:27:00.000-04:00

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.

Weekly Research from June 2008

2008-09-22T10:22:00.000-04:00

June 30, 2008

Basics, utilities and industrials score highest while healthcare, services and financials are weakest. The ratio compares the average score by sector to the average score across our entire universe and helps you stay focused on sectors creating the greatest alpha.

The S&P 500 has dropped 8.7% in June – the biggest fall since September ’02. In June, the SPY’s average daily volume has run 44% higher than during the April & May rally. The VIX remains too complacent, suggesting the market has further to fall. Both the January and March bottoms occurred on +30 VIX readings. The DJIA is on track for its worst June since 1930 and has now undercut its 2008 lows.

Arch Coal (ACI) believes U.S. coal exports will rise to 100mn short tons in 2010, well above the 80mn tons expected by analysts in 08. U.S. coal production is 1.1bn short tons, about 1/6th of global production. In the next decade, seaborne coal demand will rise over 20%. Newcastle Australia thermal coal prices hit yet another record, closing at $172.10 on Friday. China continues to wrestle with tight coal supplies at power plants. Energy shortages this summer will increase coal and diesel imports. Buy coalmining and mining equipment on down days.

Qatar is holding the line on oil production despite Saudi’s pledge to increase production. Oil hit another record, trading above $142 on the 27th. Money continues to flow into the USO with June’s average daily volumes nearly triple the average daily volume in Q1. Active gas rigs in the U.S. rose to record 1530 last week, sparked in part by rising use of costly horizontal drilling. Nat Gas production is set to rise 3.6% in 09 as a result of the pickup in drilling. If so, it will mark the biggest production gain since ’94. Total U.S. oil and gas active rigs are at a 22 year high. High crude and nat gas benefit day rates of expensive next gen equipment –supporting earnings at energy services companies.

Corn hit a record $7.99 a bushel last week, rising 4.2% on the week and near 30% this month. Corn is up 73% this year and remains well below its inflation adjusted high of $14+. Soybeans hit a 3-month high at $15.79 a bushel, gaining over 3% on the week. Flooding swept away nutrient enriched topsoil and will prompt additional fertilizer in the coming years. Meanwhile, lower grain production from the Midwest supports prices and will spark a surge in corn acreage next year. Agrium predicts U.S. corn acreage will surge to 95mn acres in 09, the highest since ’44. Buy down days in agriculture supply.

Gold rallied last week hitting a 1-month high. We wrote in last week’s report of the strong seasonality for gold in Q3. Last week, gold rallied over 3% while the market dropped. The inflation adjusted record high for gold is above $2000 an oz. Last week, average daily volumes in gold (GLD) rose 23% versus the first half of June and were 42% higher than in May. Buy gold

Financials declined for the 4th consecutive week as Goldman warned writedowns may continue into 09. MBIA hit a 20 year low last week, strained by payments and credit collateral calls on over 7 bn in debt. JPM, the creator of CDS’s and widely exposed to the instrument, fell 7.4% this month and is trading at October 05 prices. Financials risk remains too high on QSPE balance sheet migration. Sell on up days.

June 16 2008

Basics, utilities and industrials remain strongest, all posting scores above the average score across our 1800 stock universe. Financials and healthcare remain weakest.

Earnings clarity remains your best bet for excess return in 2008. Investors are punished for taking risk. Q3 is notoriously weak. Focus on leading baskets and stocks in our best list. Our Q1, 2008 Focus picks have returned 22% year-to-date. Use our weekly picks to outperform. The average return of the SPY in Q3 this decade is –2.57% (see table in our paragraph on gold). During 01, the SPY fell 14.49% in Q3. In 02, it fell -16.90% in Q3. The average return of the GLD in Q3 this decade is 8.17%.

Average daily volumes in the SPY are 45% higher in June than in May. The SPY has fallen 6.2% this month. The EFA has fallen 7.7% this month as contagion fear spreads. 24 of the DJIA are trading below the 200dma. The last time the DJIA was at this level the VIX was 32. On Friday, it closed at a lackluster 23. The risk to the market remains.

Energy uncorked? On June 3rd we wrote “Global fuel price subsidies and controls may be coming to an end as Malaysia blinks and India discusses lifting fuel price ceilings. At some point, likely post-Olympics, China will be forced to acquiesce”. China has now joined its Asian counterparts in easing the cork up the refined product bottleneck. The supply pressure will ease and Chinese refiners will import more crude. If not, China will be forced to increase ceilings again. The Sichuan disaster diverted scarce diesel and gas from neighboring provinces, straining supply and causing empty diesel pumps. Easing price ceilings will allow China’s refiners to increase capacity. Did China’s last fuel hikes in November curb demand? In May, China’s oil imports were up 25% YoY. The 2 largest months of crude imports in China’s history have occurred this year. One beneficiary? VLCC operators. Following last November’s fuel price increase, supertanker day rates rose for 2-months at the fastest pace in 16 years. A rise in African shipments to Asia will also boost voyage lengths.

U.S. crude inventories are at the low boundary for this time of year. The surge in prices has stoked talk over increasing domestic drilling acreage. Brazil’s heady deepwater E&P plans are already taxing offshore equipment supply, supporting day rates. Asia Pacific deployed rigs are at a 16-year high. Global investment in boosting capacity supports energy service profits. Sunday’s Saudi summit will likely bring little more than press releases. India’s inflation hit a 13-year high as price caps for fuels were raised. On June 4th, India eliminated import taxes on crude. India imports 70% of its crude and will continue to actively source imports. Saudi says work on its Khurais oil field will boost production by 1.2mn bbls/day by mid 09. RDSA declared force majeure for June and July at its Bongo field following a militant attack that impacted 184k bbl/day scheduled July production. Strike risk for Nigerian workers at CVX continues to rise as workers plan to go on strike on the 23rd. CVX produces 350k bbls/day in Nigeria.

Natural gas inventory is now 16.2% last year and 2.6% below the 5-year average.

Corn and soybean prices have marched steadily higher in June as investors digest the impact of Mid West flooding on future USDA production revisions. Up to 20% of Iowan farms were impacted. River flooding spread into farmland throughout the Mississippi. In ’93, the USDA had to reduce its corn production forecast 31% and its soybean forecast by 17%. Global stockpiles are too small and support prices. Prices are driving acreage conversion from pastureland to farmland. Increased acreage will drive future seed, fertilizer and equipment demand. “In today's dollars a bushel of corn would have to sell for $14.60 in order to be worth the same as corn in 1974.” (source: www.inflationdata.com). Buy ag supply on down days.

Will “clean coal” replace ethanol as the catchphrase of this election year cycle? It appears so with swing states and 44% of electoral votes in top coal producing states. The global reality is electricity capacity will grow dramatically in the next 20 years and with it, the demand for coal and nat gas. McCain’s energy plan benefits engineering companies and the makers of power generation equipment. In China, policy instituting price ceilings for thermal coal will boost capacity into summer, when expected power shortfalls are expected to be greatest. The unintended consequence? Discouraging coal production, increasing black market exports and reigniting export quotas. In short, China’s coal price caps will prove inefficient and will prop global prices.

The woes for financials continue and shareholder dilution risk remains. There is little incentive given “valuation” arguments are eroded by falling earnings estimates. QSPE’s will continue to migrate to balance sheets and pressure leverage. C traded below $20 Friday after increasing forecasts for writedowns. MER rumors sent the stock lower on Friday as investors grow increasingly concerned over level 3 valuations and QSPE risk. Financials have scored poorly all year. Sell them on up days. CDS’s hit 2-month highs as investors fear rate cuts from agencies. JPM developed CDS’s in the 90’s and is the largest buyer and seller of CDS’s in the market. AIG is also at substantial risk, having written down $9bn in CDS value in early May on top of $11bn in 07. JPM has swaps betting on future credit quality of $7.9 tn in debt (OCC). C has $3.2 tn in CDSs. GS & MS are the largest swap counterparties. 40% of CDS protection worldwide is on co’s rated below investment grade (Fitch, July, 2007) up from 8% in 2002. High yield debt defaults will rise fourfold to 6.1% by Feb 07 (Moody’s). A year ago, BAC reported hedge funds had sold 31% of all CDS protection. JPM, in its Feb Annual Report, disclosed $22 bn of credit swap counterparty risk unprotected by collateral entering 08.

European co’s borrowed more through bond offerings in Q2 than any Q2 on record, agreeing to pay the highest interest on the borrowings in 10 years.

Copper rose by the most since March. Sichuan rebuilding and So. American strikes help prop prices despite lower demand in the U.S. India, the fastest growing copper consumer, accounts for only 3% of global copper market. Any rally in aluminum will decrease substitution. Own FCX. Inflation adjusted gold prices peaked at $2145 (Sept 07 Dollars) in 1980 (www.inflationdata.com). In the past 3 years, the GLD returned 7.5% in Q3, 2005, -2.8% in Q3, 2006 and 14.3% in Q3, 07. Buy gold.

EU electricity prices have risen 50% in the past year. Eskom won a 27% rate increase. Global electricity rates will rise. Higher input costs are removing weak, low-cost competition from U.S. markets. Expect higher rates and capacity investment. Own utilities.

LNG imports begin for the first time in Brazil in July. W. Australia is diverting Asian diesel supplies as it deals with APA’s nat gas plant shutdown. Nat gas seasonality has now shifted to stock-by-stock. Own highest scoring.

June 16, 2008

The basics, utilities and industrials sectors all score highest in our work. Financials and healthcare are weakest. High scoring sectors benefit from earnings clarity while services, financials and healthcare all face spending, dilution and political risk respectively.

The SPX fell for its 2nd consecutive week, the first back-to-back drop since March. 2-year Treasury yields rose 65bps while the dollar also rallied last week. Both the 20- year (TLT) and TIP are broken.

The SPY volumes have risen markedly in the past 10 days as investors react to continued risk in financials and a failure of the broader market to hold critical 200dma support. End of quarter redemption activity and window dressing risk is building.

Growing concern over U.S. economic contagion knocked the EFA from at high of $78.77 in May to $72.48 on Friday.

In November 1993 the USDA cut its corn crop production forecast by 31% and its soybean production forecast by 16%, marking decade low forecast to production levels. From October ‘93 to April of ‘94, corn prices rose ~50%. The flooding in the Midwest is once again center stage with rivers throughout the grain belt at record levels and flooding in Iowa cities. Across the grain belt, 25% of planted acreage is at risk of yield loss. The USDA will continue to cut production forecasts in 08, helping support corn. The December corn contract rose 13% last week. Soybeans hit a 3-month high Friday. India and China continue to incent food imports to contain food inflation. Argentinean farmers continue to strike in protest of grain export taxes. The volumes in ag supply are beginning to trend higher in response to the rapid jump in grain prices/volumes. Own fertilizer, seed and equipment stocks.

Asian nations have already begun loosening price caps on oil and refined product. The Group of 8 are urging developing nations to abandon subsidies. Crude prices have gained 697% since 2001. US crude inventories are at the low boundary of average range for this time of year. China’s crude imports rose 25% last month and its refined imports are up 17% in the first 5 months. The Sichuan Province crisis, spring planting, power shortages and economic growth continue to propel import demand. Own energy service.

Natural gas seasonality shifts stock-by-stock this month. Natural gas in storage remains 15.4% below last year. Focus on leaders. Coal demand continues to support global prices – buy down days.

India has raised export taxes this week on iron ore and steel bars in an effort to help curb inflation, which is hitting its highest since 2001. Central banks in India, Russia, Brazil and China recently raised interest rates.

LEH was forced to dilute shareholders, selling $6bn in common and preferred, to bolster its balance sheet amid $2.8 bn in losses. Financials stocks took out prior lows. 5-day average volumes in the RKH are 62% higher than their 20-day average daily volumes. XLF 5-day volumes are 52% higher than their 20-day volumes. Dilution risk continues to force institutional liquidation.

Seasonal tailwinds for tech related industries fade by mid July. The NASDAQ, which has held up better than other broad market indexes, faces increased pressure into seasonally unfavorable Q3.

Biotech seasonality shifts positive in Q3, use weakness in leaders to build positions.

June 9, 2008

Basics and industrials remain our highest scoring sectors across our entire universe. Financials and healthcare are weakest. Large cap scores are under pressure while mid cap stocks have outperformed in Q2. The Russell 2k closed above its 200dma on Thursday and traded back below on Friday. The R2K has traded above average daily volumes for 7 consecutive days. The DJIA remains under pressure. Investors have embraced earnings clarity in 08, rewarding baskets benefiting from exports. Financials, which have scored poorly in ’08, remain a source of cash on dilution risk.

The above chart shows our sector score trends since March. Basics and industrials have remained strongest through Q2. Services have flattened, in line with historical seasonality, after peaking into Q4 EPS. Technology has steadily improved relative to other sectors since April. Healthcare is starting to move higher.

On June 6th, the S&P 500 declined 3.09%, marking only the 53rd trading day (of 14,70 trading days) where the S&P has fallen 3% or more. The 3.09% is the 41st worst returning day since 1950. Since 2007, we've had three negative 3% + days. The first occurred on February 27, 2007 (the SPX was up 2.85% in the 30 days following the February sell-off). The second was February 5th, 2008 (the SPX fell -2.86% in the 30 days following). Volatility is back with the VIX moving back above 20 last week. In 2002, there were 7 plus or minus 3% days.

Seasonal strength for natural gas fades by mid-June and becomes “stock-by-stock”. Focus on top scoring stocks in the basket and watch weekly best & worst lists for shifts.

The chart below shows the average score of our farm related universe versus the average score of our entire 1800 stock universe. The DBA, which has been basing since March, has moved back above its 50dma and is approaching the top of its Q2 range. Volumes of major ag supply stocks are returning. Buy ag supply on down days.

Vietnam, in a bid to control food inflation, is taxing urea and rice exports. Urea export taxes may run as high as 40%. U.S. fertilizer prices continue to reach new highs with DAP selling for $1050 a ton and urea costing $650 a ton. 70% of dry urea is imported, and the import market is shrinking as developing nations increase tariffs. The dollar weakening and rising freight costs further boost prices. Corn surged to a new record last week on concerns over crop emergence rates. Soybeans also broke out of its recent range and hit a 3-month high. Wheat is attempting to create a saucer bottom on Australian drought risk.

Crude oil surged on Thursday and Friday as global central banks hiked rates, pressuring the Dollar. The average daily volumes in the USO are driving volatility. Gasoline topped $4 a gallon over the weekend. Oil prices support E&P in hard-to-reach, pricey deepwater and support tertiary field recovery. Gas shales including Bakken and Haynesville continue to attract attention for potential size and scope. Energy service day rates benefit from demand for expensive next-gen extraction technologies. Nigerian strike risk to Chevron production impacts 350k bbls/day of crude and 14mn cu ft of natural gas. Buy down days in energy service.

Coal prices are rising steadily for Eastern coal. Powder River Basin coal remains flat, however will trend higher. On April 25th, Appalachian coal was trading 6.67x Powder River. Currently, its trading 7.68x Powder River. If Appalachian stays at this level and the Powder River spread moves back to 6.67, it would equal a price of $16.25 per short ton – a 15% move from its price on the 30th. Eastern coal production is down –1.1% YoY while Western is up 1.3%. According to GlobalCOAL’s index, Australian coal prices hit another record above $159 a mt on Friday. China’s largest coal producer, Shenhua, has upped coal production 17% YoY yet China’s coal stockpiles at utilities are 23% lower YoY. Buy coalmining and mining equipment stocks.

AIG hit a 10-year low on reports regulators will scrutinize its CDS bond valuations. AIG will continue to dilute. LEH counter party risk forced it to new multi-year lows. MER is next.

Rising input costs will produce higher electricity prices as small players exit utility markets. In the U.K., household energy bills rose 15% in Q1. UK electricity is 69% more expensive than 2003. Electricity futures for next winter are trading 2x last year. Utility seasonality is bullish beginning July. Buy utility stocks.

South African gold production fell 17% YoY due to power shortages.

Tech seasonality fades in 4-6 weeks.

Biotech seasonality is bullish in Q3. Use June and early July to build positions.

The Baltic Dry Index consolidated recent gains and will move higher as vessel supply remains tight. China imports will rise in the wake of the Sichuan earthquake. Own dry shipping and shipping tied to crude and refined product delivery as China’s appetite for diesel continues and Asian product price ceilings are increased.

June 2, 2008

In the month of May, coal, semiconductor, energy service, commodity and technology ETF’s performed best. In all, 13 of the ETF’s we watch rose more than 5% this month. 3 fell more than 5%: financials, regional banks and homebuilders. The winners were stocks with earnings clarity. The losers were those facing shareholder dilution.

In keeping with historical seasonality, mid and small cap stocks outperformed the S&P 500 and the DJIA in May. Typically, June is similar with NASDAQ and the Russell 2k outpacing the DJIA.

Volumes in the DBA (Corn, Wheat, Soybeans & Sugar) peaked in Q1. Only 2 days since April have traded above average daily volumes. The DBA is basing above $35 and the 200dma is converging on this level. A close below $34 would signal trouble for ag suppliers, while a close above $38 will reignite another up wave. Corn had its first monthly drop since August. The Int’l Grain Council increased their forecast for June 09 ending grain stockpiles by 1.6%, citing greater wheat production. Argentinean negotiations on grain export taxes continue with farmers rejecting recent offers for caps to variable tax rates. Global demand for ag supply remains high as acreage is converted from pasture land to farm land. China’s fertilizer export restrictions bolster prices. Vietnam, the 13th most populous nation and 2nd largest rice exporter, saw fertilizer imports jumped 40% in the first 5 months of 08. Last year, fertilizer imports rose 21%. Buy ag supply and equipment into weakness.

Technology stocks, in line with historical seasonality, performed nicely in May. However, volumes remain absent with the XLK average trading volume declining for the third consecutive month. QQQQ volumes, despite a 5% move in May are running well below Q1. Internet, high-tech and computer basket seasonality historically ends in 6 weeks. Watch volumes carefully on technology baskets and remain focused on the highest scoring names in our Best and Worst lists.

Metals were under pressure last week as the dollar found footing and the DBB broke down, setting a new closing low for Q2 (aluminum, zinc & copper). Keep a close eye on copper & aluminum producers. India’s ministry upped the limit on overseas borrowing for domestic spending to $100mn from$20mn to help prop up GDP growth while fighting inflation. India is also removing its export tax on steel and instituting a new export tax on iron ore of 15%. Rio Tinto believes global minerals demand will double by 2022. China will refocus attention on metal imports to support Sichuan and battle inflation given prices have fallen off highs. Own iron ore and mining equipment.

The 20 Year bond (TLT) broke down this week, putting in a new Q2 low. The TIP bounced off its 200dma on Friday. We saw rotation last week into month end. However, lackluster equity volumes raise questions as to gamesmanship versus sustainable rotation.

While personal spending and income rose, both gained less than in March. The trend of rising jobless claims continues to rein inflation and dampen GDP.

Oil inventories are average for this time of year. Gasoline and Diesel supplies remain within their historical ranges, albeit on the low end. Global investment in deepwater supports energy service dayrates. Buy energy service into weakness. Nat gas, which rose 6.5% in May, sees broad-basket seasonal support fade by mid June, becoming stock-by-stock. Plan portfolios accordingly around leaders. Nat gas inventories are 0.5% below the 5-year average and 15.9% below last year. Inventories in the west remain worst, 11% below the 5-year average. Own leaders.

The coal ETF (KOL) rose 22% in May as China’s utility coal stockpiles declined and Eskom, South Africa’s power company, failed to build adequate coal stockpiles into winter. Newcastle, Australia thermal coal prices hit a record above $151 a ton up from $56 a ton YoY. Vietnam, the largest coal exporter to China, is cutting coal exports 30% and expects to become a net coal importer by 2012. Richard’s Bay coal also hit a record, trading at $122.95 a ton. U.S. export demand is shrinking U.S. utility stockpiles, supporting rising prices for Appalachian coal. We’ve been advocating coal plays since spring 07 and clients continue to be rewarded. Use any short term profit-taking to boost weightings.

Industrials continue to score high in our work, supported by export demand and international GDP expansion. In Sichuan Province, rebuilding and repair of infrastructure, both industrial and farming, further supports industrial export demand, particularly for engineering and building-related stocks. Overall, 15mn people were displaced and 14,207 industrial companies were affected.

Seasonality embraces Utility stocks from July through January. At the same time, rising input costs are providing opportunities for utilities to raise prices for residential and industrial electricity and natural gas customers. Rising rates will support infrastructure investment and bolster utility margins. Overseas, Germany’s 09 electricity prices have risen 20% year-to-date. Use June and July to build utility weightings.

The Baltic Dry Index tested prior highs and digested gains last week. Global energy and commodity demand continues to pressure vessel availability and support prices while VLCC retirements offset newbuilds. China’s diesel and gasoline import demands will continue through 08, supporting dayrates. Own seaborne shippers.

Biotech seasonality kicks off a Q3 bull run in July. Use June and July to build positions in the highest scoring biotech stocks and watch best and worst lists carefully for those improving.

Weekly Research From May 2008

2008-09-22T10:15:00.000-04:00

May 26, 2008

The ratio of average score by sector to the average score across our universe continues to favor basics and industrials. Healthcare and financials are weakest scoring.

The DJIA rolled down after testing and failing its 200dma for the 2nd time this month. The weekly decline was the worst since February.

XOM, BP, CVX , Total and COP will spend $98.7bn on E&P in 08 while the industry will spend $369bn this year. The IEA is likely to announce tighter than forecast future oil supplies in its November report, citing insufficient exploration and production spending. Crude consumption will rise 8.5% to 95.8mn bbl/day by 2012. Natural gas rose 6% last week to $12. Hurricane season, which begins June 1st, is beginning to generate chatter. The NOAA reports a 60-70% chance of 12-16 named storms in the Atlantic basin. In July, Brazil will import LNG by tanker for the first time. South American GDP growth is taxing hydropower supply. Brazil nat gas consumption will rise from 50.8mn cu mt a day to 134mn by 2012 (Petrobras). Chile reported GDP was hindered by hydropower shortages in Q1. Gasoline hit another national record at $3.93 per gallon. Own energy service, nat gas producers and suppliers.

Global price inflation for coal continued with Bukit Asam, which controls 25% of Indonesia’s coal, raising prices by 13%. Appalachian coal production is up 0.6% this year while production east of the Mississippi River is up 1.4% and west of the river is up 4.9%. Total U.S. production is up 3.9%. Central Appalachia coal has moved from $86.25 in mid April to $100.90 on the 16th. China’s coal prices hit a record on Thursday, up 62% YoY. Newcastle port thermal coal prices hit $138 late last week. Steel companies will continue to invest in coking coal and iron ore mining companies to improve self-sufficiency and contain price increases. Own coalminers and mining equipment.

Chinese rebuilding of the Sichuan province will bolster engineering, industrial and raw goods demand. Damage in the breadbasket region will further tighten global fertilizer supplies. China is diverting power from other provinces to Sichuan, straining supplies. China has also increased diesel power generation in Sichuan, creating additional import demand for refined product. Buy related plays, including seaborne shippers.

Argentinean export tax negotiations will continue to push and pull at grain prices. India’s local wheat purchases soared to its highest since 1947. U.S. net farm income will hit another record in 08, up 4.1% YoY to $92.3 bn. Global 08/09 wheat stockpiles are forecast to rise 12% as production outstrips demand for the first time in 4 years. Global wheat acreage is up 3%, the largest in a decade. U.S. yield per acre is the highest since 2004/05. Ending stocks will rise, but will remain below 2003-06 levels. Feed grain production will fall from last year, to 325mn tons from 351mn tons due to lower corn, sorghum and oats planting. Total feed grain supply is forecast at 366mn tons, down from 390mn. Late U.S. corn planting will impair yields. Ending corn stocks for 08/09 will be 763mn bushels down from 1,383mn bushels in 07/08. Oats production is expected at a record low of 90mn bu down from 92mn last year on record low acreage (total oats use will fall to 193mn bushels from 212mn). Corn ending stocks will be 1.243 well below the 1.9 in 05/06. Ending soybean stocks will be 169, well below 574 in 06/07. Buy seed and grain producers.

Farmer fertilizer costs are 228% higher than January 2000. From 01 to 06 world Nitrogen demand rose 14%, phosphates by 12% and Potash by 17%. Corn accounts for 43% of U.S. nutrient use. Ocean freight dayrates and record nat gas prices further push fertilizer prices higher. Half of U.S. nitrogen is imported and the weak Dollar has driven prices higher. Prices for natural gas, the feedstock for ammonia and building block for nitrogen, amount to 70-90% of ammonia production costs. Corn, wheat and soybeans use the most nutrients and global acreage has expanded. Own fertilizer and equipment stocks.

Buy utilities as rising input costs drive price increases and capacity investment.

Technology stocks are stock-by-stock. We continue to recommend selling weak scoring names on up days. For a list of strong seasonal technology stocks through July, simply drop us an email.

Financials remain under pressure as the XLF retreats to April lows. Volumes on the XLF have been below normal daily averages, which have been declining in Q2, since March. Shareholder dilution has continued this quarter and seasonality remains weak for most individual stocks in the sector. Brokers, including LEH and MER, have rolled over again and are set up to retest Q1 lows.

May 19, 2008

Our January and February Focus picks have had two months to start producing alpha. Their average return is + 25.38%. Only 1 is down. The Focus stocks are a great source of excess return. Returns reflect the close of the day of recommendation through Friday morning, not the close from the prior day like some research firms. On average, these picks beat Street earnings estimates by 13.2% this quarter.

Basics and industrials lead with the highest overall scores. Healthcare and financials are weakest.

Oil rose to a record above $127 on Friday after GS indicated China’s diesel purchases will strain supply. GS has 12.9% of their $200bn in energy stocks. The January storm-induced power shortages exposed systematic input failures similar to the 2004 shortages – a year where China’s crude oil imports rose 16.5% YoY. China's April gasoline imports were a 2-year high. Diesel imports have been very strong this year, rising 28% so far through April. During China’s 04 power crisis, U.S. diesel prices rose from $1.55 in January 04 to $1.96 in January 05. The IEA estimated distillate storage in developed nations falling 6.7% YoY. The Sichuan earthquake will tax diesel supplies as excavation switches to clearing and rebuilding. This is a major population center and a bread-basket region. China will continue to ramp efforts to keep goods in-country and will increase commodity imports. Saudi Arabia will invest $90bn in new production and refining through 2012 to meet Asian crude demand, which will rise by 20mn bbls/day by 2030. Own energy service stocks and seaborne shipping.

NYMEX trading rose 22% last month to 1.7mn contracts a day. Greenspan postulated last week supplies are tightening as futures growth is forcing more into storage. The retirement of single hull crude ships keeps vessel availability tight and supports prices. New double hull tankers are less expensive to operate and command higher prices. China’s rising crude appetite will benefit shippers. Expected fleet growth is shrinking as credit availability tightens. Capesize dayrates rose 15% in two days this week, to $115k. Spot vessel prices rose to 203.5k on Thursday from 196k on Wednesday. Buy seaborne shippers.

Over 216k structures were destroyed in the quake, including 7k schools. 4.7mn houses were leveled. Only 5% ($1bn) of the $20 bn in estimates is covered by insurance. It would not surprise us to see true damages closer to $40bn. Industrial engineering and products will benefit from rebuilding demand in 09, similar to how they reacted following Katrina. Insurance companies will fill the coverage gap in China as premiums rise.

On January 28th we dedicated our Monday report almost exclusively to coal, referring to the industry as entering a “perfect storm” for upside. In 07, we focused attention on coal stocks, featuring CNX as our Against the Grain on 2/26/07, BTU as an Against the Grain pick on 4/16/07 and JOYG as our Against the Grain on 11/12/07. CNX is up 105.41%, BTU is up 75% and JOYG is up 29.9% since. Is the coal move over? No. But, don’t worry fast money will sell new highs, providing an opportunity for stronger hands to buy. Coal provides 25% of global energy and 40% of global electricity (World Coal Institute). China and India will equal 60% of global coal demand by 2030. China uses more coal than the U.S., EU and Japan combined. India gets more than half its energy from coal and 80% of its electricity. Eastern U.S. coal prices are benefiting from global tight supply, sparking export growth and drawing down eastern U.S. utility stockpiles. Benchmark Australian coal is up 48% in 08. Newcastle coal exports hit their highest since February last week, driving their stockpiles to 8 week lows. Buy coalminers and mining equipment on sell-offs.

Gold hit a 3-week high and Copper ended the week at its weekly high. Eskom’s ongoing power shortage creates production risk in South Africa, supporting price speculation while labor strife in Chile supports copper global demand/supply tight. In February, China imported a record 42.9mn tons of iron ore. Coke coal prices are rising sharply in China. Steel companies have been able to pass along input prices and benefit from global demand in developing nations. Sovereign nations will continue to source long-term deals for raw materials. Own miners.

Natural gas inventories remain 15.8% below last year and are in the middle of the 5-year range. The Independence pipeline restart has been pushed back to mid-June. Western storage remains below last year (-26.1) and the 5 year average (-12.1%). Buy nat gas producers and suppliers.

DE's agricultural sales rose 34%. South American industry sales growth will remain above 30% as more pastureland is converted to farmland. Soybean old and new carryover numbers were bullish for the crop. Wheat exports were 16% above the 4-week average. Soybean exports were 5% above the 4-week average. Global acreage growth boosts seed, fertilizer and equipment demand. Buy ag-related.

Economic data pointed toward a weak economy last week with consumer confidence at a 28-year low, capacity utilization at the lowest since September 2005 (79.7%). Wages are growing less than inflation. BAC increased loan loss reserves on increasing risk of home equity and credit card default. MA has seen a marked increase in transactions and BAC has seen an increase in card use for necessities. Weak scoring financials should be sold into strength.

Technology is stock-by-stock. Own top scoring plays and avoid the weak scoring names. The strongest seasonal techs from May through July include: CHL, RCI, SYMC, AAPL, ALTR, CSC, CSCO, DELL, GLW, GRMN, HPQ, INFY, INTU, JNPR, MRVL, MSFT, NCR, ORCL, RIMM, SAP, VIP, ADTN, AKAM, CTSH, LRCX, MSCC, SAY, SNDK, JCOM, ALVR, DIOD, DRIV, SMSC.

May 12, 2008

Basics, industrials and consumers all post average scores above the average stock in our entire universe. Tech and healthcare are weakest (see table).

The market fell for the first week in a month. The SPX is down 5.7% year-to-date. Financials in the SPX have reported an 86% drop in profits YoY. AIG continues trend in shareholder dilution with a planned $12.5bn capital raising plan. AIG lost $7.8bn and wrote down $9.11bn and Fitch cut AIG’s rating. C continues to move toward improving its balance sheet announcing the planned sale of $400bn in assets in the coming 3 years.

Crude traded over $126 despite inventory builds. Nigerian monthly output hit decade lows in April. The EIA estimates gasoline prices will head 10 cents higher over last month as refiners convert to summer grade. Inventory is 0.7% above the 5-year average and the middle of the range for this time of year. Active rigs hit a 22-year high of 3417 in February. Average day rates per rig were $380.8k at RIG, up 26% YoY.

Deepwater production in the GoM accounts for 72% of Gulf oil and 38% of Gulf nat gas. Entering 08, 130 projects were producing in GoM deepwater, up from 122 entering 07. 15 deepwater fields, including Atlantis, Shenzi, and several tied in with the Independence Hub, began producing in 07. Independence Hub is expected to contribute 10% of GOM nat gas production when at full capacity. High prices, strong production rates, improved technology are driving increases in deepwater activity. Buy energy service on down days.
The US Trade balance shrank. Imports slowed more than exports, which also dipped. The $58.2bn gap is a 08 low. The shortfall with China was the lowest since 06. Imports fell to 6-year lows. U.S. exports to China were the second highest on record. Total exports dropped 1.7%, yet were the 2nd highest level ever.

Corn hit a record. The USDA corn stockpile forecast calls for the lowest global corn stockpiles since 1984. Corn needs to be planted by mid the 15th to avoid yield loss. Corn production forecasts call for a 1 bu per acre decline this year due to weather related delays. At 27% planted, below the 59% 5 –year average for this time of year, farmers need good weather this week. Soybeans can be planted later than corn, but risk yield loss if the ground is too wet at planting. Total corn use is forecast to exceed production by 635 mn bushels pushing ending stocks down 45%. At 763 mn bushels, ending stocks would be the lowest in 12 years. Argentina’s farm disputes continue to drive U.S. exports. Wheat has turned up. Wheat exports were 10% higher WoW and 15% above the 4 week average. EU grain production will rise 12% in the marketing year beginning July. As acreage is converted back to farmland demand for seed, fertilizer and equipment grows. Own related stocks.

China copper buys slowed as copper traded near recent highs. China remains underneath copper pullbacks. Use down days to buy. Platinum hit 7-year highs as UBS platinum ETN’s began trading. China may pay Australian iron ore miners 85% more this year, above the 65% hike RIO received. China’s crude steel output will rise 10% this year.

Nat gas inventories rose 65bn cu ft and are 11bn cu ft below the 5-year average and 17% below last year. Q1 LNG imports were down more than 50% YoY. West coast inventories are 27% below last year while producing region inventories are 20% below last year. Henry Hub prices are at Katrina levels. Regional prices climbed the most in the producing region. 10% of Gulf nat
gas has been shut-in since April 9 as a leak is fixed at the Independence Hub. Repairs could be completed this week. At 1,436 Bcf, working gas in storage is at the lowest level for this time of year since May 14, 2004, when working gas in storage was 1,388 Bcf. April heating degree-days were 6% higher than normal.

Global electricity price hikes will spark capacity investments and further strain supply. Coal prices remain high and rising U.S. exports are reducing U.S. stockpiles at utilities. Own coal mining and mining equipment. China’s PPI rose 8.1% in April up from the 8% rise in March, driven by costs of raw materials (fuel and power rose 11.8%). Food prices rose 11.9%. Raw coal prices were up 20.9%

May 5, 2008

Basics and industrials post the highest scores in our universe while technology, healthcare and financials remain weakest.

April’s relief rally has been fueled by asset relocation out of Treasuries. The TIP ETF peaked at $112 in mid March and is trading near $106. The TLT ETF (20 Year Treasuries) peaked a week after the TIP at $97 and is trading $92 (at 200dma). High yield enjoyed its best month in 5 years.

Risk rotation sparked short covering in oversold, weak scoring baskets including technology and financials. The DJ Transports remain nicely above support and are closing in on July 2007 highs. The XHB (homebuilders) is trending up and holding support. Commodity stocks in leading baskets have served as a source of cash as the dollar finds footing. The energy service stocks (OIH) have fallen from $210 on 4/21 to $194 on Friday. Basics (IYM) have pulled back roughly 5% in the past 2 weeks. Both remain in tact with strong scores and upside seasonality – suggesting weakness is an opportunity to buy top scoring names.

GDP contraction risk remains as inventories propped Q1. Job losses continue and wage inflation remains in check. PCE at 2.2%, falling from 2.5%, is Fed friendly.

Corn bucked the strong dollar commodity sell-off as investors grow concerned wet weather will reduce corn acreage. Corn has risen in 8 consecutive months. Corn needs to be in the ground by mid May to avoid yield loss. Wet weather prompts additional nitrogen applications. Net farm incomes remain the catalyst for spending on yield improving seed, fertilizer and equipment. Feed grain purchases, 91% of which is corn, are set to rise to $45 bn in 08, up from 38 bn in 07. China’s fertilizer tax hikes constrain global supply and supports prices, impacting a tight market reliant on imports (see chart). Seed purchases are forecast at $13.1bn up from $12.6bn last year. Fertilizer and Lime is $19.0bn up from $16bn last year. Global wheat hectares for 07/08 are roughly equal to area in 00/01 yet production is 605mt up from 581.5mt. Consumption has exceeded global production. Urea has risen from $200 a ton in 2000 to $450+ a ton. Buy pullbacks.

Utilities will raise prices as input costs have risen substantially. Eastern U.S. coal prices are rising thanks to 20% coal export growth –boosting demand for Powder River Basin coal. Coal utility companies will raise price 12-15%. China’s coal shock isn’t over as coal inventories are 3.9% lower YoY ahead of summer cooling demand. South African power shortages continue to reduce metals and coal production. Own coal and mining equipment stocks. Appalachian coal is trading near $90 a ton, more than double last year.

Codelco labor strikes have cut production and global copper supplies are down to 3.3 days from 4.9 days YoY. Codelco’s Andina, Salvador and Teniente Divisions, which account for 45% of Codelco’s annual production, were shut as of Friday. India, China and Middle East infrastructure demand remains strong, offsetting U.S. and EU contraction.

Natural gas inventories rose last week yet remain in the lower range of average supply for this time of year. Nat gas seasonality remains bullish in Q2 as summer inventory builds continue. Own producers and suppliers.

Working Gas in Underground Storage Compared with 5-Year Range

Crude inventories remain in the lower half of the average range for this time of year while capacity utilization is running at 85.4%, below potential.

Shareholder dilution continues to punish risk taking in financials. Fitch will release a report next week outlining the effects of its CDO ratings overhaul.

PBM’s continue to enjoy margin upside as consumers swap to generics.

http://www.prweb.com/releases/2008/04/prweb882354.htm

2008-04-23T22:16:00.000-04:00

Institutional investors incorporate independent research to beat benchmarks in dismal bear market, E.B. Capital Markets, LLC experiencing surge of new research clients.

Durham, NH April 22, 2008 - Over the next few weeks millions of investors will pour over mutual fund statements. Many will make a change. In response, mutual fund managers are looking for new ways to improve returns and grow assets. One way they're choosing is to embrace independent research.

In 2008, investment managers will spend an estimated $6 billion investor dollars on external research products, according to a 2006 study by TABB Group. Most will go to big Wall Street brokerage firms rather than small independents. The sub prime inspired recession; over $200 billion and rising in bank write-downs and the Bear Stearns collapse have investors questioning why their investment dollars are being spent on research from these same big brokerage firms.

Professional money managers are painfully realizing to survive and thrive in this market they have to think beyond traditional sources of information and incorporate research blending the best of technical, fundamental and seasonality research.

"Investment managers are too complacent and investors are going to continue to demand higher returns. One way managers can improve returns is access to information, and that includes independent research," said Ed Sheidlower, portfolio manager of the Bryce Capital Value Fund, the second highest performing fund in its category year-to-date.

"The marketplace for research is eerily similar to the post-Enron recession five years ago. In 2002, regulators forced brokerage firms to embrace independent research. Today, institutional portfolio managers are taking it upon themselves to search out the best research and are finding it often comes off-Wall Street," said Todd Campbell, President of E.B. Capital Markets, LLC. "The ability to outperform passive indexes always comes back to access to valuable information."

"There is a tidal wave occurring in the investment world as professional managers look across styles to find the best performing stocks," said Campbell. "If managers can't generate returns higher than the indexes, they'll lose assets and disappear. Invariably, professionals are turning to a fusion approach to stock picking, recognizing the best performers can be better identified by considering as much information as possible. Our research is a branch for surviving market quicksand."

In 2008, E.B. Capital Markets unique research approach has generated a 14% return with no turnover, significantly ahead of the -5.46% decline in the S&P 500 and higher than every one of the 9224 diversified mutual funds tracked by Morningstar. The research blends the best of technical, fundamental and seasonality research to find winners from a 2000 stock universe.

The S&P 500 is the most benchmarked index in the world and the de facto measurement of mutual fund success or failure. E.B. Capital Markets is 20% ahead of the S&P 500 in 2008.

One of the unique aspects of E.B. Capital Markets approach is the integration of seasonality research. In response to growing demand for independent research, E.B. Capital Markets has begun offering free 30-day research trials to qualified investors and institutional portfolio managers. "There was demand for our research to begin with, but now with our free 30 day trial, it has been like opening a floodgate as far as new clients," said Campbell. "The reason is simple - the numbers speak for themselves."

For additional information on E.B. Capital Markets, LLC, contact Todd Campbell or visit http://www.ebcapitalmarkets.com/.

March Weekly Commentary

2008-04-23T22:08:00.000-04:00

March 31, 2008

Q1 strength in Basics carries forward in Q2 as seasonal tailwinds remain strongest of major sectors. Energy stocks boast robust seasonal upside. Industrials and consumer seasonality are strong. Financials, tech (ex-Internet) and services are weak in Q2.

One of the key characteristics we look for in stocks is the ability to consistently beat the Street estimates and grow EPS. As the market wrestles with GDP contraction, EPS risk sectors continue to endure pain. Stay focused on high scoring stocks in our weekly best and worst lists and own our Focus and Against the Grain picks as they significantly outpace the SPX.

The S&P hit its 50dma and retreated on light trading last week. Similar to today, volatility created major % swings in the S&P 500 in 2002. In March of 02, the S&P rose 3.67% only to fall 6.1% in April. Use caution into the new quarter as volumes shrank considerably last week, underscoring hedge and prop funds sitting on their hands into fee time. Overall volumes on the SPX and DJIA declined again in March.

Technology seasonality is again weak in Q2. However, one exception is Internet seasonality, which perks up. We talked a lot about weak tech seasonality in Q1, and the market held true to history. Buy down days to support and use Q1 lows as stops. Outside Internet, unwind weak scoring tech stocks into rallies and watch resistance levels as short sellers re-emerge post quarter end.

Healthcare remains stock-by-stock. Focus on the highest scoring stocks for excess. We run several sector screens each week for clients. If you currently don’t receive best and worst lists by sector and would like to, simply email us.

The DJ Transports tested 200dma resistance and finished right on it. The DJT is a great proxy for broad market direction during recession. Rails, thanks to coal and grain activity, have held up best. In the past few weeks we’ve seen truckers and logistics begin to move higher.

Commodities recovered last week with the DBC trading above average volumes.

Despite VLO’s poor guidance, refiners traded higher as expectations shifted toward a drawdown in inventories as refiners cut capacity utilization. Utilization dropped to 82.2%, near post Hurricane (October 05) low levels. VLO’s gasoline capacity utilization dropped to 73%. Seasonality supports refiners into summer driving season.

Nat gas rebounded from the crude-inspired sell-off and offers upside as summer inventories are built and winter inventories dwindle. The UNG rose 6.7% last week as inventories fell again and remain below last year levels. Buy nat gas related for upside.

LME copper inventories remain at 7 month lows ahead of Q2. Iron ore contract prices for Rio Tinto are set to rise substantially and negotiations are ongoing with Asian steel companies. Xstrata spurred Vale’s $90 bn offer, adding an M&A premium to the mining basket. Coal price negotiations also continue with Canadian coking coal producers inking provisional deals worth $225 a ton. Asian negotiations with BHP and Xstrata may yield as high as $275-300 a ton. Newcastle port prices have dropped for the 5th consecutive week for thermal coal – to $125 a ton as China exports resume. The spot market is relatively quiet as negotiations continue.

Wheat exports were 3% above the 4-week average. Corn exports were 1% above the 4-week average. Soybeans were 22% below the 4-week average (net sales were unchanged for the 4-week average). The USDA grower intentions report comes Monday and will move grains as acreage expectations are digested and supply impacts considered.

March 24, 2008

We entered the week focused on the VIX. On Monday we got the mid 30’s reading we wanted, signaling oversold and sparking a 5.8% move from Monday’s low to the Tuesday close on the S&P 500. Tuesday’s up 4.24% move was the 17th best returning day on the S&P 500 since 1950. Historically, the S&P 500 is 1.55% higher on average 30 days following an up 4% day. So far in 2008, the S&P has had more 1% up and down days, as a percentage of trading days, than any other year in history.

The DJ Transports, which we’ve been keying on for the broader market, held the 4500 level. While holding the support it remains within its range and will need to clear 4875.

April did poorly in 2002, with the SPX falling 6.1%. Volatility in 2002 was big with 5 up 4% days in the year – which failed to inspire sustainable rallies given the S&P moved from 1148 to 880 at year-end. In 02, the bottoming process took months, initially putting in a low in July and then retesting in September, October and then again in February and March of 03.

Q2 sector seasonality for large caps (see table) favors basics again this coming quarter. Industrials and consumer improve. We’ve been mentioning signs of life in tech stocks in Q2. While the basket remains seasonally weak in the quarter, the Internet related stocks are historically strong. The 73% reading for the Internet basket place right behind basics, far outpacing the broader technology basket. Also, we notice several high profile solid seasonal tech names, including: GOOG, MSFT, ORCL, YHOO, AMZN, VRSN, CSCO, DELL, INTC, ALTR. Back in December and January we reinforced the weak seasonality for techs in Q1, highlighting specifically GOOG which has yet to have a positive Q1. The seasonality improving for Internets will provide support – buy and use the Q1 low for stops.

Volumes last week were big, trading above average daily volume in each of the past 6 sessions. Thursday’s volume, helped by expiry, was the 3rd highest this year and the biggest since January 23rd. The S&P moved up nearly 10% from the low on January 22nd to its peak on Feb 1st. The S&P hasn’t traded above its 50dma since December, a feet it will attempt this week. The two peaks of resistance since the January low are 1396 and 1388.

The ETF table shows the massive shift last week as shorts covered high beta positions and unwinded profits in commodities, moving month to date returns significantly.

Homebuilders, banks and retail rallied the most. Big banks trailed regionals. Biotech is the weakest of healthcare baskets this month, reflecting the end to seasonal support.

Shorts will stay on the sidelines this week into fees. Basics, heavily pressured by the rotation last week, will find support by month end. Short sellers will re-emerge in April at key resistance levels in financials and technology. Retailers lose seasonal luster post- EPS season.

3 Month Treasury yields touched .387% Thursday, the lowest yield since 1954 while the 30 year yield is nearing January 23rd levels.

Wheat exports rose on lower prices last week, 7% above the 4 week moving average. Corn exports were 17% above the 4 week average. Soybean exports were down 13% from the 4 week average as China soybean prices dropped (soybean net sales were 5% above the 4-week average overall). The unwinding of profits in the basket is creating a buy opportunity in farm related plays. At the end of March the USDA will update expected grain acreage – likely to move markets.

Crude sold off last week, trading below $100. Nat gas retreated in sympathy. Buy energy service, oil producers, nat gas producers and refiners as the recent sell-off has moved many back to attractive levels. Coal contract negotiations are ongoing. In the past 5 years, coal stocks have traded higher in Q2. The steep decline, fueled in part by China’s potential return to the export market, has created an opportunity to buy leaders on sale.

March 17, 2008

The table below shows the ratio of scores for each sector against the average score of the entire universe of stocks we follow. Basics continue to dominate while tech and financials remain weakest.

The Fed’s $200 bn repo announcement made us question what they knew we didn’t. Despite rumors of pending risk to BSC liquidity, BSC CEO Schwartz went on CNBC mid week to reassure investors – citing multi billions in reserves. On Friday, we got the truth. BSC had to be saved by 28 day financing from JPM and the NY Fed. The stock closed at $30 Friday only to be bought at $2 by JPM over the weekend. Schwartz won’t be getting birthday cards from shareholders. The risk continues to rise for banks despite the money helicopter pouring billions of liquidity into the system.

We had you focus on the VIX last week. While we saw some early signs of short covering in high beta sectors and selling of leaders to cover margin calls, the VIX and Put/Call didn’t signal oversold. The Fed action pre-empted a buy reading on the VIX – stalling the inevitable. On Friday, we started to see the VIX rise again, closing at its highest since March, 2003 at 31.16, up 14.18% and hitting 32.89 intraday. The bottoms of August and January both occurred on intraday mid 30’s reading. Continue to watch the VIX for an oversold signal (the chart below is a 5-Day).

The DJ Transports remain key to broad market strength. Until the DJ Transports can get back above resistance the broader market will remain at risk (see chart on page 3).

The end of quarter window dressing may benefit basics again into the final days of the month. Shorts will likely flatten to protect profits into fee time. Historically, April is a tough month during periods of weakness, especially following tax day. The Fed action, if it corresponds with a buy reading on VIX, could produce a rally into the end of the quarter. However, sellers will likely re-emerge after the quarter closes.

Dating back to 1950, the S&P is historically higher 30 days following both up 3% and down 3% days. We also crunched the numbers on the S&P during election years. From March of an election year to the following March, the S&P is up on average 7.56%. Democrat have an edge in returns.

2 Year Treasuries are at 03 yields – consistent with the rising fear reflected in VIX.

LME copper stockpiles are at August lows, helping support prices. Global stockpiles are at 3.9 days of consumption, down from 4.9 days last year. Foreign investment in commodities globally is rising. Own miners and mining equipment. Coal and iron ore contract negotiations continue. Buy down days.

The USDA reduced its forecast for ending May Wheat stockpiles again last week, dropping it 11% from the prior month. The weakening dollar further fuels U.S. grain exports, tightens supplies and props prices. US corn exports are up 29% YoY since September, well above the 15% lift the USDA had expected through August. Record farm incomes continue to support seed, fertilizer and equipment suppliers, while tight inventories help offset rising natural gas prices.

Gas inventories are at their highest since 93, suggesting refiners will curtail utilization. Crude hit $111 last week and Nat Gas surpassed $10. Seasonality remains bullish for nat gas an refiners.

Steel prices continue to rise, offsetting record input prices. Brazil’s domestic steel appetite is forecasted to rise 15% this year, helping Brazilian steel producers price and profit outlook. Own steelmakers.

March 10, 2008

Back on December 31 we wrote of the January Barometer – a unique gauge followed by those at the Stock Trader’s Almanac. Historically, weak January’s yield weak years – and Q1 is living up to expectations given January’s dismal performance. According to the Stock Trader’s Almanac, “every down January since 1950 was followed by a new or continuing bear market or flat year”. The Russell 2k exited January with its poorest return since 1990, -6.86%. The R2K is now down 13.8% in 08. The NASDAQ is down 16.5% ytd and 22.6% from its October high.

The SPX fell to 18 month lows last week. The Russell 2k put in a new closing low. The DJ Transports rolled over. The DJIA is down 6 of the past 7 sessions. Technicians continue to sell into short covering rallies. Use rallies to sell weak scoring sectors including tech and financials. Basics remain our favorite baskets, with the highest average scores. Commodity-related stocks may weaken as investors liquidate winners to cover margin calls, use pullbacks to increase positions. Look for a mid 30’s reading on the VIX to suggest short-term oversold (see chart on page 4).

U.S. jobs fell for a 2nd consecutive month, a sign of recession. Private jobs have fallen for 3 consecutive months. Factoring out Gov’t jobs, jobs fell 101k – the biggest drop since March 03. The Fed increased its monthly auction to $100 bn in an attempt to re-tame LIBOR.

The credit market liquidity spigot was turned off for Thornburg and Carlyle forcing margin defaults. Expect more call related unwinding as major markets break below January support. ABK’s capital “solution” diluted shareholders and is inadequate.

We’ve been vocal proponents of basics and they continue to score highest. On December 31 we wrote, “In the past 5 years, basic materials have led other sectors in Q1. Energy related stocks are particularly strong. Changes to China's import and export taxes add upside to global commodity prices.” China continues to drive commodities higher. Commodity related stocks might prove a source of cash as markets fall – bringing down valuations and allowing you to add to positions.

Soybean profit taking pushed Friday’s trading down daily limits. China canceled import soybean oil orders following their domestic prices falling 5.7%. In January, China's soybean imports jumped 41% YoY to 3.4 million tons. Volatility is rising alongside grain prices. Soybeans offer upside seasonality through the U.S. planting season. Use pullbacks to add to ag supply positions as U.S. exports will remain strong.

Tech stocks are living up to their historical Q1 weakness. We continue to advocate using rallies to step aside in Internet and Semiconductor stocks until positive seasonal tailwinds return.

Oil hit new records last week thanks to a weak dollar, OPEC maintaining production levels and inventories dropping. We wrote in late December “Crude will test $100 resistance. Q1 is historically strong for energy service stocks.” Buy coal, nat gas, refiners and energy service on any pullbacks. Natural gas, as we have mentioned over the past few weeks, is undervalued to oil and benefits from end of winter dwindling stockpiles and increased buys ahead of summer cooling season.

Biotech seasonal support ends by mid month. Healthcare becomes stock-by-stock. Use our weekly ratings to find best plays.

Specialty retailers, including our former Focus/Against Grain Picks BKE and ARO, reported same store sales last week. As per the trend, there were have’s and have not’s. The basket was broadly sold on the overall mixed results and ahead of the Friday jobs report. Only own best plays – such as BKE and ARO.

March 3, 2007

The table to the left shows the ratio of the average score by sector to the average score of our entire universe. Basics continue best, while tech and financials remain worst. Basics also offer the greatest number of high scoring stocks (>75) while tech and financials boast the largest number of weak scoring stocks (<25).

The table to the right shows the February returns of widely traded ETF’s. Natural Gas, Grains, Oil Related, Agriculture, Coal and Materials were the top performers.

The last above average daily volume day on the DJIA was February 7th. The S&P 500 had the worst February of the 10 largest world markets.

Economic news continues to be bearish with NAPM hitting 6 year lows at 44.5 and the PCE climbing more than hoped, up 0.4%. The Federal Reserve announced Friday that it will auction another $60 billion in March as it continues to combat the effects of a severe credit crisis. It repeated a pledge to keep holding the auctions "for as long as necessary."

Financials have rolled over and will retest. AIG’s loss (-$2.08) was it’s worst ever (89 years) due to its financial guarantee business losses, which guarantees $61.4bn in subprime tied securities. Investors continue to walk away from financials over worries of rising writedowns – rather than an abatement.

Lines of credit to hedge funds are the latest victims of the credit crunch. Peloton’s $1.8bn liquidation was forced by lenders increasing collateral requirements. Bill Gross, however, is bargain hunting muni’s citing “tremendous hedge-fund unwinds”.

Basics have been our top scoring sector all year. We wrote back in December of Q1’s positive seasonality for the basket and investors have moved significantly into related stocks and away from tech and financials (which have remained our weakest sectors in our scoring system in 08).

Next week, iron and coal powerhouse Xstrata will report earnings. Expectations are for a tripling of profits. In 06, Xstrata bought nickel miner Falconbridge for $16.2 bn. While nickel prices were weak last year, they’ve recently spiked. Last week nickel rose 12% thanks to a strike at a BHP mine (4th largest globally) in Columbia. Metals have enjoyed a big run in the wake of January’s hikes in export taxes in China. Rising global supply fears have so far offset recessionary fear. Investors continue to embrace inflation hedges.

Input prices for steelmakers, coupled with 5.8% steel demand growth, will bring more price hikes. Buy steelmakers.

Crude hit a record $103 and remains above $100 support. Natural gas, which we commented would close the gap to crude, rallied sharply last month. Continue to buy nat gas producers as higher crude and coal prices, cold weather and an upcoming buildup of supplies for summer cooling demand stoke investor enthusiasm.

Soybeans hit another record. China’s rapeseed production was negatively impacted by January storms; further upping China’s need for oilseeds. Wheat prices will spur additional acreage while record farm incomes drive investment. At the end of May, global wheat inventories will be the lowest since 1978. The most active wheat contract gained 25% this month. Grains at records crimped sales of corn and soybeans. However, nations continue to restrict exports and their tenders remain underneath pullbacks. Net sales of wheat were 23% above the 4-week average in the week ending the 21st, while exports were 9% below the 4-week average. Net sales of corn dropped to the weakest in a year, 52% below the 4-week average. Corn exports were 4% below the 4-week average. Soybean net sales were 6% below the 4-week average. Soybean exports were 26% below the 4-week average. India’s ag output grew at its slowest pace in 11 quarters, growing 3.2%. Soybeans are historically strong through the U.S. planting season (May).

Coal prices retreated slightly in Australia while the shipping queue dropped to 29 vessels from 36 a week earlier. UK imports from the America’s are rising as they seek supplies to offset South African risk. Coal contract negotiations for the year beginning April will capture media attention by mid month. Buy coal miners and mining equipment. Global investments in production will continue along with consolidation.

The IndexMetrix Specialty Apparel Retail index, -2.45% YTD is outpacing the broader retail basket. GPS met estimates and gave guidance with the high end above estimates as gross margins rose 230bps thanks to more sales of full-priced merchandise. KSS beat by a penny (1.31 vs 1.3) but cut guidance. Focus on specialty plays such as ARO and BKE.

February Weekly Research Notes:

2008-03-27T09:24:00.000-04:00

2/25/08

The market rallied 243 points in Friday’s final hour, turning the week slightly positive for the SPX and DJIA. The NASDAQ lost 0.8% on the week.

Basics continue to offer the highest scores while technology and financials continue to score weakest.

Indian wheat production will decline .3% this year to last. Russia has halted wheat exports to neighboring Belarus and Kazakhstan to prevent re-exportation. Last month Russia increased wheat export taxes fivefold to help rein inflation, taxes which didn’t apply to Belarus and Kazakhstan. The USDA upped its corn acreage forecast from 88 to 90 mn acres – boosting fertilizer demand. The USDA expects 7.4mn more soybean acres – much at the expense of cotton. Buyers came back into grain export markets last week. Wheat export sales were 15% above the 4 week average. Corn export sales were 8% above the 4 week average. Soybean export sales were 3% over the 4 week average. Ending crop levels continue to support grains on pullbacks. Buy ag equipment, fertilizer and seed plays into profit—taking.

Nat gas moved to 2 year highs last week as cold weather and rising electricity demand support nat gas plays as oil and coal alternatives continue higher.

Anglo Coal is cutting exports to help support Eskom’s emergency coal needs, driving Richard’s Bay Coal Terminal prices higher again last week.

Steel prices will rise as iron ore and coking coal prices move higher. Iron ore price hikes of 65% are driving PKX to up steel prices. Own steelmakers as demand will allow input prices to pass through.

Copper is at October highs despite U.S. recession risk. Own miners and mining equipment.

Buy refiners ahead of the summer driving season and improving margins.

2/18/08

The S&P 500 was up 1.2% last week, however is down 2.07% in February. The DJ Transports were flat and remain right below technical resistance. Volumes remained below average every day last week.

Our 2008 Focus and Against the Grain weekly picks are 8% ahead of the SPX this year. Use our weekly picks to add alpha to portfolios.

The chart to the left shows the average score across our entire large, mid and small cap universes by sector. Basics continue to have the highest average score, while also having the largest % of stocks scoring above 75. Technology and financial scores remain weakest. Use rallies to reposition into the strongest scoring sectors.

Despite assurances he’ll keep the floodgates open, Bernanke spooked investors by not being more dovish in his comments in Washington this week. Consumer confidence slipped to a 16 year low of 69.6, well below 76 estimates. The last time confidence was this low was February 1992 (note: the SPX returned 6.92% in the 12 months following).

The table below shows the ratio of average scores by sector to the average score of the entire universe.

FGIC, the weakest of the big three muni insurers, was downgraded by Moody’s and opted for splitting its portfolio. Ratings should be downgraded for MBIA and ABK too as bonds are already pricing that assumption into them. Investment banks failed to support $20 bn in auction rate securities last week, a $330bn market. Manufacturing in New York unexpectedly contracted this month for the first time in almost three years as new orders and shipments declined.

More than half oil traders think prices will fall, despite the biggest weekly move since November. More traders are on the sidelines, likely to fuel a test of $100. Chinese crude imports rose 1.8% to 13.94 million tons in January.

Rio Tinto is the 6^th Australian coal exporter to claim force majeure due to flooding and rains. Rains halted deliveries from their 4.5 mn ton annually Hail Creek coking coal mine. Coking coal is up 80% this year to $270 a ton. Australia is the world’s 2^nd largest coal exporter, exporting 65% of global coking coal. Steel co’s will continue to actively acquire mines to sure up supply. Buy mining and equipment.

Vietnam, China’s biggest coal supplier, will cut exports 32% this year and aims to remove itself from the export market as its GDP expanded 8.5% last year. Vietnam is currently the 8^th largest exporter. Coal for Europe delivery hit records last week, jumping to $145 a ton. Own coal producers.

Profit taking in wheat prompted Egypt, Japan, South Korea and Iran to reenter the wheat market this week – driving prices higher by weekend. Nearly half of China’s rapeseed crop may have been damaged in the winter storms, helping drive soybeans to new highs. Rapeseed, similar to soybeans, is crushed into livestock feed and cooking oil, and a shortage could impact soybean and soybean oil imports. Corn also recovered and appears set to move higher. Buy ag suppliers on down days. Sugar is now at 18-month highs. Buy ag related including fertilizer and seed stocks.

Copper rose on inventory and production worries, with LME inventories dropping 9.7 percent last week, the most since October 2005. Supplies are down 24% this year, and copper is up 17 percent. Buy copper and iron ore mining companies.

2/11/08

On February 5, 2008, the S&P 500 fell 3.20%, only the 53^rd trading day where the S&P has fallen 3% or more. The 3.20% drop is the 38^th worst day since 1950. On the 6^th, we sent clients the data on every 3% drop day since 1950, including how the market has been 1-day, 3-days, 7-days and 30-days later.

In the past 52 weeks, we've had two of the top 40 worst trading days, the other being February 27, 2007 (note: the SPX was up 2.85% in the 30 days following the February sell-off). Since 1950, the markets have been higher 81% of the time 30 days later, with an average 3.75% return. Buyers on a down 3% day have seen negative 1-day, 3-day, 7-day and 30-day returns only 3 times. The first was 11/19/1973 (the official start of recession, oil embargo, Watergate) when the Nifty Fifty dropped 20% in a month. On 11/19 the market fell 3.05% and finished 30-days following down less than a percent. The second was 10/16/87, the Friday before the Monday crash, the market was -18.5% 30-days later. The final was 8/27/98, as the Ruble stopped trading and the Russian default crisis spread - the market was -5.58% lower 30 days later. As of Friday, we've seen a negative 1-day and 3-day return since the 2/5 sell-off. The advance decline should be watched closely from here.

Only 1 30-day period has been up more than 3% if the 3-day return had been down more than 3% (Sept 2001).

Volumes have been light all week, even on the Thursday reversal. The DJ Transports ETF (IYT) sold off sharply this week on the heaviest trading in a year. On the 3 down days last week, the IYT traded on average 3.7mn shares a day. On the 2 up days, the IYT traded a little over 1.5mn shares. Buyers are on strike until the market successfully retests mid-January lows.

The best returning ETF this month is the DBA, up 5.5%. The UNG, UUP and KOL are also up.

Across our universe, basics have the best scores, technology the worst. This month, technology, retail and financials have lagged the SPX. Specialty apparel retailers are up 1.13% ytd, while the RTH has fallen -0.79%.

Last week grain commodities moved to records as Canada announced its ending wheat inventories will fall 30% YoY and U.S. stockpiles of hard spring and hard winter wheat will drop 25% and 27% respectively. On Friday, the USDA report signaled U.S. wheat inventories will fall to a 60 year low. The estimate is 6.8% below the USDA's January estimate and 40% below last year. The last time supplies were this tight we were rebuilding Europe after WW2. Wheat is up 30% this year. World wheat inventories remain at 1978 levels, despite record crops. Soybean inventory estimates were also revised 8.6% lower than January, down 72% from last year, thanks to the smallest crop in 12 years last year as farmers planted corn instead. U.S. corn inventory estimates remained in line with January estimates; however, acreage is likely to drop 4mn acres as farmers rotate crops. India's wheat crop will, at best, equal last year - and last year they imported 1.79mn tons of wheat. Foreign grain demand remains underneath grain futures, with tenders issued on every pullback. The USDA is also estimating feed demand will rise 6% as pork production rises 4% and broiler production rises 3.5%. Ethanol demand for corn will rise 52% in 08, while export demand will climb 15% - marking a record export year. Despite two banner corn crops in a row, global stockpiles are too low. Last week, wheat and corn net sales and exports dropped after big sales in prior weeks, soybean sales and exports took off - net sales rising 2x the prior week and 86% above the 4 week average. Soybean exports rose 22% last week, 4% above the 4-week average.

Fertilizer stocks continue to beat estimates as TNH EPS rose 286% thanks to rising Nitrogen prices. CF EPS rose 829% YoY thanks to higher Nitrogen fertilizer prices and higher volumes. Shortages continue to boost prices ahead of soybean and corn planting season. Own ag supply.

Coal stocks continue to lead as Newcastle thermal coal prices rose 25% into last week and flooding dropped Australian exports, lifting ships in queue to 28 from 22. China's power plant coal inventories rose again last week to 26.3mn tons, dropping the number of plants with 3 days or less supply to 38 from the peak of 89. Global power capacity continues to tax supply, prompting takeovers. Xstrata increased its bid for Australian miner Resource Pacific by 12% last week. BHP upped it's bid for RI0 to 3.4:1 from 3:1 - only to again be rebuffed. Indian steel company Ispat bought 2 coalmines through its Global Steel Holdings unit. As India's commodity appetite continues to soar, and deregulation occurs, expect India to challenge China in acquiring producers.

The 2.7% rally in the UNG this month is being driven by the rise in negative sentiment for new U.S. coal power capacity and a return of cold temperatures. The UNG has upside to the low to mid $40's.

Refiners offer upside, as they didn't participate in the Q4 energy rally due to oversupply of refined product and rising input costs. Now, ahead of the summer driving season, is the perfect time to build positions in refiners - especially those using sour crude. Refining capacity dropped last week to 84.3%, down from its peak in the low 90's in January. Expect production to drop and refined inventories to peak and contract in the coming months, boosting margins.

Copper, despite the U.S. GDP deceleration and recession risk, moved to a 3-month high. The 8% move was coppers biggest since May 06. Inventories are light and investors are cautious on Chilean supply given energy infrastructure challenges. Copper is up 20% so far this year.

2/4/08

What an interesting week last week was for the markets. We got another cut, as hoped, by big Ben and now Fed Funds sits happily at 3%. Will the Fed keep cutting? We wrote last fall job losses would help keep inflation in check and provide room for the Fed to ease. Friday, we saw the first contraction (-17k) in jobs since January 2003, and learned wages expanded at a slower rate than last month (0.2%). In 07, an average of 95k jobs were added monthly, down from 175k monthly in 06. There is room for further cuts. The economy remains troubled. The Fed announced it's continuing its auctions into February - with its 5^th and 6^th auction since December ($30 bn each). The liquidity spigot remains wide open.

January rewarded some of the worst performing sectors of Q4 as bargain hunter's overwhelmed negative newsflow. The table below shows the January returns for various ETF's. It is notable that the XHB moved nearly 50% from its January intraday low.

The chart below shows the current scores, aggregated across the major sectors for our large cap universe. Basics, which have the best Q1 seasonality over the past 5 years, score highest as a group. Technology, the lowest.

The next table shows the breakdown by sector including the percentages scoring above and below critical levels. Tech sports the highest percentage of low scores, Healthcare the highest of high scores.

Large Cap
	# Stocks	Average score	Median score	% 75 and above	% 25 and below
Basics	51	60.2	55	25.49%	3.92%
Consumers	42	53.6	55	14.29%	14.29%
Financials	53	48.0	45	9.43%	9.43%
Healthcare	35	55.8	50	28.57%	8.57%
Industrials	26	51.7	50	7.69%	3.85%
Services	74	49.1	50	10.81%	5.41%
Tech	74	41.1	35	5.41%	21.62%

Last week, MSFT made a hostile bid for YHOO. The $31 per share offer is 8.8% below YHOO's October high, and 28% below YHOO's January 6^th high. The offer shows just how troubled YHOO is and is not a ringing endorsement of Internet valuations. GOOG revenue growth is slowing and the stock is now 30% off its October high. Use rallies to sell Internet and semiconductor stocks.

MOT is admitting it lost the battle with NOK in the commoditized handset market and will explore opportunities to move the unit. Who would want to buy it remains in question, especially given the rising share growth of competitors? Regardless, smart phones remain attractive and technology stocks overall remain hit and miss for a bit longer.

The producers were the only ones making money in oil related last quarter. Energy service margins in U.S. markets were squeezed, forcing many players to miss expectations. Refiner margins were also squeezed. Crude producers, however, had record revenue and earnings. XOM made a $40bn profit in the quarter, and logged a 30% jump in revenue to $116.6bn. The fortunes may spread back to refiners in 08, however, as global power shortages increase the likelihood of rising crude imports. In 04, to meet power shortfalls, China's crude imports rose 16.5%. Just in December, China imports of diesel rose 16%. Refiners will cut capacity production and reallocate toward higher margin diesel, helping remove gasoline oversupply and improving prices into summer. Seasonality for refiners in Q1 is strong.

BHP's bid for RIO got challenging on Friday. Chalco, China's biggest aluminum maker, and Alcoa joined forces to buy 12% of RIO for $14bn. The deal is the biggest offshore deal for a Chinese company. Chalco has been vocal in opposing a deal between BHP and RIO, believing the deal gives too much price power to the combination. A combined RIO and BHP would be the worlds biggest iron ore supplier and the biggest aluminum maker and thermal coal producer. BHP has until the 6^th to make a formal offer to RIO, or it will have to wait 6 months. The $14bn infusion values RIO 21% above its' Thursday close. Regardless, the global appetite to sure up raw materials, like iron ore and coal, continues and will help offer upside to players like CLF and CNX.

The super SIV died but big banks are again flirting with a bailout. The bond insurers remain at risk of ratings downgrades. In an ideal world, these ratings would already have been cut. However, with $2.4 trillion of backed bonds at risk, no one is in a rush. The tide is coming, however, and can't be denied. Unless a deal is put in place soon, expect them to lose AAA status. As for Wilbur Ross and the potential acquisition of ABK, it's hard to believe anyone would acquire it at current levels given ABK was trading below $5 only 2 weeks ago. A take-under is a more likely scenario.

This week we'll hear more from Trichet and investors will parse every word looking for hints the ECB will finally acknowledge growth risk. When the ECB does cut, the U.S. will put in its absolute low of this cycle.

Everyone is aware of the dwindling coal supplies at Chinese power plants and their transportation gridlock. The supply risk is spreading to metals plants. Zhuzhou Smelter, China's biggest zinc smelter, stopped production for lack of power. Coking coal inventories at China's steel makers are tightening. The result is higher prices for metals stocks as China's global exports shrink. Copper, for example, advanced 7.5%+ in January. Zinc and aluminum also rallied. Aluminum, which is the most power hungry metal to produce, had its biggest weekly gain in six years - despite U.S. recession risk rising.

South Africa's power situation will not be soon resolved. Capacity is too tight to supply mines consistently with full power. The result is coal destined for export will be kept in South Africa for power production - driving Richard's Bay Coal Terminal prices higher. The rising need for coal to supply power infrastructure in China and India is driving the EU to source more Eastern U.S. coal. The 25% expected rise in Eastern U.S. coal exports will cut U.S. stockpiles at Eastern power plants, helping prices for Western coal - which is starting to gain traction in export markets to Asia. Mining equipment stocks will benefit as production investment increases. In South Africa, Anglo Coal, the biggest South African coal miner, aims to increase coal production by 67% to 100mn tons within 10 years. In India, new coal production will shift to underground mines. In Australia, Rio and Mitsui are investing $1.3bn in a new coal block with expectations of 6.5mn tons annually in production. Own mining equipment and coal mining stocks for more 08 upside.

Buy ag supply stocks as tight global grain markets provide record farm incomes, which will be spent on improving yields. Fertilizer inventories are too tight. Mid west grain reports show quality soybean seeds aren't available for the April/May planting season - meaning heavier seeding overall. Grain exports rose again last week with corn, soybean and wheat exports all above their 4-week moving averages.

Coal and grain shipments helped lift railroads. Last week's solid reports moved rails back over 200dma resistance. Watch carefully the DJ Transports, which have rallied 19% off the low on the 22^nd and have traded higher for 8 consecutive days. The DJ Transports will challenge resistance and provide clues as to a broader market retest.

January 2008 Weekly Posts

2008-02-19T09:27:00.000-05:00

1/28/08

Coal stocks moved up 16.9% from Tuesday's low (ETF: KOL). There is a perfect storm developing in coal markets. In 07, we helped focus attention on coal plays, featuring CNX as our Against the Grain on 2/26/07, BTU as an Against the Grain pick on 4/16/07 and JOYG as our Against the Grain on 11/12/07.

3 of the top 5 coal producing countries are dealing with export risk. China is artificially deflating power costs forcing power producers to hold the line on electricity prices despite liberalizing coal prices. In December, China coal prices rose 3.8% from November. In 07, China coal prices rose 14% YoY while electricity prices rose only 2.1%, squeezing power plant margins.

The result: the biggest power shortages on record. In 2004, China price controls forced 40 gw of shortages, prompting a 16.5% jump in oil imports as diesel generators made up the difference. This year, the shortage stands at 70 gw. 50-year storms, alongside the Feb 7th start to the Chinese Spring Festival, bottlenecked coal transports as record numbers (178.6 mn people vs. 156mn in 07) sought travel by train to family events. The bottlenecks put 10% of China power capacity at risk with 90 power plants idle (equivalent to the total power capacity in the U.K.)

As a result, China has shutdown coal exports for the next two months. Global supply has one less player and China will now compete more forcibly with supply from Australia and South Africa.

However, South Africa, the 5th biggest coal producer, is also enduring power shortages, threatening export volume. The Richard's Bay Coal Terminal is the biggest in the world. Prices in South Africa have already rose on EU and India demand, and now power shortages threaten reallocation of exports to state power provider Eskom. Richard's Bay coal prices rose $6 per ton Friday to $104.

Meanwhile, those same power shortages have shut-in underground mining at Anglo Coal's (the 2nd biggest coal miner in So. Africa) export mines and Richard's Bay Terminal inventories exiting December were historically low, at about 50% of max capacity (2.1mn tons).

In the U.S., miners have been enjoying decade high export demand as the EU has turned to us as an alternative to South Africa. The weak dollar and steep drop in shipping costs in December have further boosted demand. However, in Baltimore, CNX's (3rd largest U.S. producer) big coal port remains shut as it fixes its pier, which failed on Jan. 3rd.

European coal prices rose the most in 3 weeks and remain near highs. EU coal at $129 per ton has doubled YoY. 5 years ago the price was $35 a ton.

In Australia, the biggest coal exporting country, floods continue to hamper deliveries to ports, putting contracted coal deliveries in jeopardy.

In India, 14 power plants have virtually no coal inventory. Coal provides 25% of global energy and 40% of global electricity (World Coal Institute). China and India will equal 60% of global coal demand by 2030. China uses more coal than the U.S., EU and Japan combined. India gets more than half its energy from coal and 80% of its electricity.

India has announced new investments in underground coal mining - which is the major source for coal in China yet is only 20% of India coal production. Global investments in production will continue - bullish for mining equipment.

As a result of the rising power shortages, diesel demand will expand in '08, pressuring prices as refiners reallocate production. In 07, China diesel imports doubled. During China's last power crisis in 04, U.S. diesel prices rose from $1.55 in January 04 to $1.96 in January 05.

China's oil demand jumped in December with the highest growth in 7 months. YoY '07 China crude imports rose about 12% to 1.1 bn bbls. Price control inspired power shortages simply put-off future price hikes and will keep imports flowing into China in 08. In December, China diesel demand rose 16% - its biggest growth in 3 years. The IEA projects China crude demand will rise 5.9% in 08.

Ag suppliers are another area with earnings clarity. The DBA is up 18.6% since November 30^th.

POT joined MON and MOS in posting double digit percentage EPS beats this month. Global inventories remain tight (POT's potash inventory is the lowest since '91) while record farm incomes increase fertilizer, seed and equipment demand. U.S. grain exports are surging thanks to lower shipping costs and the weak dollar.

In the prior week, wheat exports were above estimates, corn sales were 25% above the 4-week average and soybean sales were 39% above the 4-week average (grain and coal volumes are helping rails).

China is increasing grain imports to guarantee supply and pricing through the Chinese Spring Festival.

U.S. farmers can't source high quality soybean seeds with the April/May planting season fast approaching. The shortage of quality seed will keep seed prices high and force overseeding of lower germination seeds this year. With corn and soybean prices remaining high, look for cotton acres to switch over to soybeans.

Global grain consumption is set to outstrip production for the 8^th of past 9 years as BRIC GDP growth fuels global grain demand. Despite an expect 88-90 mn planted corn acres in the U.S., world corn output in 07/08 season will be 6mn tons below world demand - keeping inventories at multi-decade lows.

The deadline for BHP to formally bid for Rio Tinto is Feb 6^th. Iron ore prices are set to rise for a 7^th consecutive year as producers negotiate contracts with China to close the pricing gap with spot prices. Rio Tinto is boosting margins by supplying only 90% of contracted volumes at contracted prices. Global steel demand is expected to rise 6.8% in 08, despite the U.S. slowdown. Consolidation in miners will continue as companies look to sure up and internalize supply.

Steel input cost increases are prompting higher steel prices. AKS is raising prices for carbon steel by $30 a ton for March 1st and later orders. Hot rolled band spot for Jan 14 rose 6% to $659 per metric ton. NUE has increased hot-rolled coil prices by $80 per ton, to $660/ton for March - the highest level since 04 and up from $544/ton from December. Global supply is tighter as China export taxes are removing lower cost product from markets.

Copper prices are holding December lows despite U.S. recession risk.

1/22/08

The Russell 2k fell 4.5% & the NASDAQ fell 4.1% last week. The Russell is now 21% off its July highs. The NASDAQ is 18% and the SPX is 15.8% off highs.

The average small-cap stock in our universe is 15% below its 200 day moving average. The average small-cap stock has 8.88 days to cover. There are 415 small-cap stocks trading more than 5% below their 200 day moving average. 75% of the mid cap universe is more than 5% below its 200dma - 318 stocks. The average mid cap is 16.1% below its 200dma. Shorts are at 6.18 days to cover, up from 5.17 (+20%) days one month ago. The average large cap is now 8.39% below the 200dma. 220 large caps are more than 5% below their 200dma. The average days-to-cover on large cap has climbed 11% since December 4^th to 3 days. The NASDAQ is down 11.7% this year.

Earnings clarity is worth a premium as technical investors have shifted to sellers into strength and fundamental investors update earnings models to reflect U.S. GDP contraction. Use oversold relief to upgrade.

The stocks in our Jan. 2nd "worst" list have fallen -11.86% on average. The stocks in our November 6^th, 2007 "worst" list have fallen -34.48% vs. -12.7% for the SPX. Avoid/Short our worst lists.

Ag supply fell Thursday as market leaders succumbed to profit taking. Use pull-backs to buy suppliers as farmers increase spending in the wake of record farm incomes. Corn exports were 4x larger than the week ending January 3^rd, and 20% higher than the 4-week average. Corn sales in the 07/08 marketing year are 1.687bn bushels, up from 1.298 bn bushels YoY. Soybean sales in the 07/08 marketing year are 805.1 mn bushels, up from 793.5mn YoY. Wheat sales in the 07/08 marketing year are 1.097 billion bushels, verus 652 million YoY. World corn output in 07/08 season will be 6mn tons below world demand - keeping inventories at multi-decade lows.

Iron ore prices are set to rise in 08 and consolidation chatter continues as steel makers act to sure up supply and contain costs. Rio Tinto is now delivering only 90% of supply at contract prices - boosting margins by delivering the remainder at much higher spot prices. Iron ore prices have risen for 6 years and negotiations for 08 are underway. In November, BHP valued Rio Tinto at $140bn. New rumors have BHP pricing Rio Tinto at $180bn. BHP will have to make a formal bid by February 6, or risk having to wait for 6 months. Vale is rumored to be interested in buying Xstrata in a $60bn deal. Tata Steel is looking for iron ore acquisitions. AAUK is in talks to buy 2 iron ore mines for $5.5bn. Arcelor Mittal , the biggest steel maker, wants to have 90% (up from 47%) of its iron ore sourced internally by 2018. China may flex its sovereign wealth fund muscle to add supply and offset inflation. Iron ore price expansion is driving profits. Sinosteel, China's 2^nd largest iron-ore trader, tripled profits in 07. AAUK's Kumba Iron Ore Ltd, Africa's biggest iron-ore producer, saw profit rise 48% YoY ex 2006-items. Overall, steel companies are effectively sitting underneath iron ore prices hoping for a sale to step in and buy. Buy related stocks.

The rise in iron ore and coking coal prices is driving steelmakers to raise prices. AKS is raising prices for carbon steel by $30 a ton for March 1 and later orders. Hot rolled band spot for Jan 14 rose 6% to $659 per metric ton. NUE has increased hot-rolled coil prices by $80 per ton, to $660/ton for March - the highest level since 04 and up from $544/ton from December. Steel supply remains tight, despite falling U.S. demand. China's export taxes are reducing global supply while world steel demand is estimated to expand by 6.8% in 08 (Int'l Iron & Steel Institute). Buy steel.

Copper prices are moving higher as LME inventories dropped 5.2% in the past month.

U.S. GDP contraction is helping China rein export growth. A 7% decline in U.S. imports yields a 1.5% fall in China exports - less than a 1% drag on China GDP growth, according to Rio Tinto's Chief Economist Vivek Tulpule. The Yuan continues to gain ground and boost U.S. export activity.

China coal shortages in the Yunnan and Guandong southern provinces are creating power shortages. China, the biggest coal consumer, shifted to a net coal importer in 07, and will remain a net importer through 2010. The growth in China's power capacity pushes China coal demand to 2.76 bn tons in 08, up from 2.62 bn in 07 and above the 2.58 bn tons it produced (80% higher production than 2002). China is increasing regulations to curb mining accidents (3800 deaths in 07). Bottleneck fears in Australia and India demand impacting African port prices, is driving coal prices higher - boosting overseas demand for U.S. coal. Miners will invest in more production - boosting mining equipment. India's government controlled Coal India Ltd, which produces 85% of India's coal, is upping investments in underground coal mining to offset power demand. Currently 80% of CIL's coal supply comes from open cast mines while China produces most of its supply from underground mines. Overall, CIL aims to up coal production from 43 mn tons to 67 mn by 2011/12.

Last week's EPS related sell-off was driven by continuing write-downs at major banks and brokers and upped loan loss provisions for consumer debt including credit cards. Further, the ABK and MBIA credit rating risk potentially impacts $2.4 tn of debt - another shoe. ABK abandoned plans to raise $1 bn because MBIA's $1 bn bond offering last week dropped to 70 cents on the dollar, yielding nearly 25%. Fitch downgraded ABK on the news.

Dollar LIBOR dropped below Fed Funds for the first time in 2 months and asset backed comm'l paper grew 3.4%, its 3^rd consecutive week of expansion. The TED spread continues to reflect easing credit.

Exchanges remain our favorite financials as they've reported record 07 volumes. Last week, NITE beat estimates by 92% thanks to volatility inspired volume growth. CME 07 volumes rose 28% YoY will electronic trading grew to 77% of all volume. ICE Europe volumes rose 49% and ICE U.S. rose 22% YoY. NYX bought the AMEX and its ETF and options business. Global volumes will continue to benefit from asset relocation in Q1.

As we've been writing since the end of December, seasonal tailwinds have ended for Semiconductors and are ending for Internet stocks. Use rallies to sell.

GE EPS and guidance was solid thanks to demand for power generators and plane engines. GE's infrastructure group saw sales rise 30%. 50% of GE sales are international. GE inked a $500 mn turbine deal with Abu Dhabi. Power capacity investments will continue worldwide - buy related stocks.

Blackstone bought PFGC for a 43% premium as distributors are passing along higher costs faster than input costs are rising. Sysco, the largest food distributor to restaurants, saw profits climb the fastest since 2004 as it raised prices.

IBM upped forecasts thanks to Europe and Asia sales. IBM now expects $8.2-$8.3 vs. $7.9 estimates. IBM sales to BRIC nations rose 39% in the first 3 quarters of 07.

SLB missed estimates as nat gas related sales prices fell and more than offset the 30% rise in sales to Middle East and Asia. Overall, SLB sees capital spending on oilfield services rising 13% to $2.9 bn. 3205 rigs operated globally in December, up 2.5% ytd (BHI). Focus on offshore, Eastern Hemisphere players.

1/14/08

202 of 390 large caps, 294 of 430 mid caps & 400 of 580 small caps in our universe are trading more than 5% below their 200dma - all records since we began tracking in 2004. The average mid and small cap stock is 13.8% below its 200dma. The SPX is 11% off its October high. On Thursday, the Russell 2000 was trading nearly 20% below its July high.

Fear has swung the pendulum too far suggesting a 5% relief rally. Use snapback rallies to rotate into our favorite sectors below.

Thursday, Bernanke suggested the economy will need "substantive" cuts. Job losses keep wage inflation in check, providing cover for Fed cuts. Overseas, pressure is rising in Europe to ease. The Bank of England, which chose not to cut last week, will ease at their next meeting. The Pound has declined against the Euro for 4 consecutive weeks, and against the dollar for 2 weeks. We mentioned last fall, we believe the dollar will bottom when other central banks ease. In November, factory output in the U.K. fell 0.1%. In December, Canada lost 18,700 jobs, the first drop in jobs in 8 months. Canadian manufacturers lost 33,200 jobs last month and 131,600 jobs in the past year. Canada will reignite exports through rate cuts. India's industrial production expanded at its weakest level in 13 months, suggesting India may delay further hikes.

China's trade surplus fell to $22.7bn from $26.2 bn in November while China M2 increased the smallest in 7 months. The Yuan's rise, combined with the elimination of export incentives, are cooling the economy while a weak dollar is allowing U.S. companies to grab export share from Europe. China is still sitting on a record $1.53 trillion in foreign exchange reserves, up 43% YoY. U.S. exports set records for the 9^th consecutive month, climbing 0.4% to $142.3 bn. Our gap with China narrowed to $24bn from $25.9 billion in the previous month.

Earnings clarity is worth a premium. Baskets offering greater EPS clarity include energy service, agriculture supply & coal. Basic industries post the strongest Q1 seasonality. Rio Tinto reports this week and has traded higher in 4 of the past 5 February's. GGB and SID are up 5 of the past 5 February's, returning 6% and 12% respectively on average. Copper will trade up ahead of the end of month Fed meeting.

A weak start to January is the recent norm for the OIH. The OIH has traded down the first 10 days in 2 of the past 3 years. In the last three years, the OIH has returned 8.4%, 8.1% and 8.2% respectively from the January 11^th close through January 31^st. Energy service companies benefit from bigger exploration budgets. For example, Statoil's 2008 spending will be a record. Deep-water exploration and drilling spending is estimated to rise 30% to $25 bn a year by 2012 from 08.

On Friday, the USDA announced winter wheat seedings below estimates at 46.6mn acres. Estimates were for 48.6mn. In 2007, 44.9mn were seeded. Wheat stockpiles are estimated to drop to 60 year lows. U.S. grain exports continue to benefit from the weak dollar and growing demand from Asia. Foreign buyers remain underneath wheat bids. The USDA also cut its corn ending stock estimate by 359mn bushels, as more corn is expected to be used and yield estimates decline. Last week, Dupont cited demand for agriculture products as one reason for upping guidance. The prior week, MON beat Street estimates by 31%, citing greater South American demand. Ag supply can be bought on down days as record farm incomes are reinvested in yield per acre. POT, for example, has been up 5 of the past 5 February's, posting an average 4% return.

Coal prices rose 73% last year. Bottleneck fears and tight supply in Australia and South Africa continue to fuel near high spot prices. China, seeking to increase domestic commodity supply, continues to discourage exports, while importing heavily from Australia. Through November, China coal imports rose 39% in 07. India coal demand is so strong, South African producers are considering exporting very poor quality coal to India to fill the gap. Meanwhile, high South African prices are driving Europeans to source more coal from the U.S. Buy any sell-offs.

Technology, especially large cap tech, is a mixed bag for Q1 seasonality but tend to do a bit better in the second half of January. Drop down in market cap where possible. Avoid semiconductors and Internet stocks as seasonality tailwinds have ended.

Markets moved Thursday and Friday on the CFC acquisition by BAC. BAC, for its part, moved to protect its $2bn investment last August, which had declined 57% in value. BAC CEO Lewis had little faith CFC would get back to the $18 convert price anytime soon, and $4 bn for the entire company, versus the earlier $2bn 16% convertible stake, was more attractive than throwing continual small chunks of liquidity at CFC. The move to buy the thrift puts BAC over the 10% deposit cap.

Financials will move this week on C and MER reports and both COF and Amex have upped reserves to offset rising credit card defaults. Overall, exchanges remain our favorite basket in finance. The DJIA had only 2 above average volume days in December. In January, volatility surges have pushed volumes to 6 consecutive above average days. Exchanges are benefiting from faster asset relocation and increased hedging. Buy exchanges on sale. CME & ICE are more than 13% off December highs.

Healthcare stocks will become more volatile as seasonality tailwinds fade in February and the basket begins to trade on political risk. Focus your attention on plays tied to an aging population and where technology will boost margins.

Utilities offer solid Q1 seasonality and can be bought as investors shift defensive.

1/7/08

We've been writing the Fed will have room for cuts as wage inflation is contained. Friday's job report provided additional cover and rationale for continued 08 central bank easing. The Fed acknowledged credit risks (yet again) with Friday's intraday announcement; increasing the January auctions 50% to $30bn. While the TED spread has narrowed from 221 bps on December 11^th, to 143 bps last week - it remains too wide. Globally, central banks will have to continue to make money cheap.

Since the 26^th, the NASDAQ has fallen 8% and the Russell has fallen 9.5%. The SPX is now 6.9% off its December closing high. The SMH has fallen 13% since its December 10^th peak. The XLK is down 8.1% since the 26^th. Importantly, the DJ Transports (along with the Russell 2k) has set a new closing low, now trading 13% off its December 10^th level. To emphasis the size of the most recent sell-off, the following example highlights leaders near or greater than 10% off December highs: AAPL, ICE, CME, MA, RIMM, BIDU.

Earnings season gets underway on Tuesday with Alcoa. Investors have set the bar low. AA is trading 26.3% below its July high.

The pendulum has swung toward oversold. The VIX had its biggest one-week move in two months, rising 15%. Our small cap universe has the 2^nd highest reading of stocks trading more than 5% below their 200 dma's since we began tracking the data in 04 (November 23, 2007 boasted the highest reading on record at 373). Volumes on the SPX spiked to their highest level since the SPX rallied 24 points on the 21^st, suggesting we're near capitulation.

Volatility and volumes boost exchanges, which sold off this past week and offer solid entry points (CME, ICE). Use weakness to your advantage and buy leading exchanges.

Use market weakness to buy ag supply stocks. The ag commodities ETF (DBA) is up 12.8% since November 30^th. Farmers are flush with record incomes and spending on equipment and supplies continues to rise as farmers look to boost yield per acre. MON's 31% beat of Street estimates provides insight into ag supply for upcoming EPS. Latin America spent heavily last quarter to capitalize on multi decade highs in various grains. Grain prices remain high thanks to developing nation demand growth drawing down stockpiles. Pullbacks in grains will elicit renewed tenders from major grain importers such as Japan, Egypt and India. The removal of import taxes in China on various commodities will further prop pricing (DBA, BG, DE, POT, TRA)

Coal stocks ran strongly in December alongside per barrel's march toward $100, and are now selling off. Use weakness to buy coal stocks such as BTU, CNX and ACI. Australian export demand will remain strong and US exports are benefiting from tight supply in African ports supplying the EU.

Energy service stocks will post another solid year of EPS expansion as high oil prices continue to fuel exploration budgets. Use pullbacks in energy service to add to positions for Q1 strength. Buy crude on pullbacks into the $80's or a breakout above $100.

Our weekly best and worst lists have done a nice job of keeping you in the right names and avoiding losers. For example, the 13 stocks in our small cap best list one year ago returned 25.55% (0% turnover) while the 7 stocks in that list with scores below 20 (worst) fell 51.8% in the past 52 weeks. Use our best and worst lists to narrow your focus.

January is an important indicator for full year returns. Historically, January's performance shows how the year will finish. Further, the first 5 days are a good indicator for how January will finish. This suggests bulls will look to mount a rally early this week. If they fail, it will become even more important to rely on our weekly Focus and Against the Grain picks and our Best and Worst lists to outperform indexes.

A weak dollar helped BA reach its 3^rd consecutive year of record plane orders. Backlogs at supplies remain near records. Aerospace suppliers are one of the few baskets where earnings have above average clarity. On sell-offs, buy names like HON, BEAV & UTX.

Technology Q1 seasonality is mixed. Semiconductor seasonal tailwinds have ended and Internet seasonality ends mid month (GOOG, for example, has yet to post a positive Q1). The CES and MacWorld will help move consumer electronics related stocks. Historically, small and mid cap tech have offered better upside than large cap in Q1.

Healthcare stocks have begun to breakdown as February is around the corner -marking the end of its seasonal support. As the candidates leapfrog through the primaries, look for more volatility in the baskets. Focus your buys on stocks with strong demographics for demand and where technology will boost margins. Use our best lists to find the winners.

12/31/07

The Russell 2000 has led the S&P 500 by 70bps in December ("January Effect").

January is an important month. Historically, January returns are an excellent barometer for the year.

Weekly, we pick one Focus and one Against the Grain pick. Our Q1 2007 picks returned 23.07% through Friday. In 2008, use our two weekly picks to add excess. (see below for this week's picks)

In the past 5 years, basic materials have led other sectors in Q1. Energy related stocks are particularly strong. Changes to China's import and export taxes add upside to global commodity prices. Despite tight monetary policy, profit at Chinese industrials continues to propel investment and inflation. The Yuan will appreciate further against the dollar, benefiting U.S. exporters in 08. Iron ore, grain and coal related stocks will enjoy profit growth.

Healthcare will become more volatile in 2008 as candidates leapfrog in the polls. Seasonality supports the sector through February. Overall, own stocks where demographics support demand (re. Orthopedics) and where technology will improve margins (re. PBM's).

Exchanges remain the primary focus in finance. As global markets open and discretionary incomes rise, volumes will grow. Volatility is driving faster asset relocation across bonds, futures and stocks while spurring increased hedging. Profits at exchanges will continue alongside record average daily volumes.

Consumer electronics makers and suppliers are best in technology. Internet stocks lose steam come mid month and semiconductor positive seasonality has ended. Instead, rotate tech focus into consumer electronics names.

Crude will test $100 resistance. Q1 is historically strong for energy service stocks and the basket has run in December, up nearly 10%. A successful move above $100 will help propel oil an additional 10%-20% higher. Coal stocks will move up as prices rise. U.S. coal exports are rising, improving balance sheets.

Grain prices remain near highs. Watch for farm surveys regarding corn versus soybean acreage, as shifts will affect fertilizer demand. High farm incomes boost equipment and supply demand. We expect more EPS upside.

December Weekly Commentary:

2008-01-02T15:18:00.000-05:00

12/31/07

The Russell 2000 has led the S&P 500 by 70bps in December ("January Effect"). January is an important month. Historically, January returns are an excellent barometer for the year. Weekly, we pick one Focus and one Against the Grain pick. Our Q1 2007 picks returned 23.07% through Friday. In 2008, use our two weekly picks to add excess. (see below for this week's picks) In the past 5 years, basic materials have led other sectors in Q1. Energy related stocks are particularly strong. Changes to China's import and export taxes add upside to global commodity prices. Despite tight monetary policy, profit at Chinese industrials continues to propel investment and inflation. The Yuan will appreciate further against the dollar, benefiting U.S. exporters in 08. Iron ore, grain and coal related stocks will enjoy profit growth. Healthcare will become more volatile in 2008 as candidates leapfrog in the polls. Seasonality supports the sector through February. Overall, own stocks where demographics support demand (re. Orthopedics) and where technology will improve margins (re. PBM's). Exchanges remain the primary focus in finance. As global markets open and discretionary incomes rise, volumes will grow. Volatility is driving faster asset relocation across bonds, futures and stocks while spurring increased hedging. Profits at exchanges will continue alongside record average daily volumes. Consumer electronics makers and suppliers are best in technology. Internet stocks lose steam come mid month and semiconductor positive seasonality has ended. Instead, rotate tech focus into consumer electronics names. Crude will test $100 resistance. Q1 is historically strong for energy service stocks and the basket has run in December, up nearly 10%. A successful move above $100 will help propel oil an additional 10%-20% higher. Coal stocks will move up as prices rise. U.S. coal exports are rising, improving balance sheets. Grain prices remain near highs. Watch for farm surveys regarding corn versus soybean acreage, as shifts will affect fertilizer demand. High farm incomes boost equipment and supply demand. We expect more EPS upside. Best Wishes for the New Year!

12/24/07

On Tuesday, the R2K triple bottomed, testing and holding 735. The R2K has rallied 6.2% since its Tuesday intraday retest. The average small cap remains -9.35% below its 200dma. We have had 7 consecutive weeks with more than 300 small caps > 5% below their 200dma's (peaked on 11/23 at 374, current is 346). The average small cap has 8.85 days to cover and is expected to see 30% EPS growth next year. Last Tuesday, 177 large caps were > 5% below their 200dma - the third highest reading since 04. The 2nd biggest reading occurred in the nearly 10% summer 06 pullback and the biggest (192) occurred on 11/27/07. 240 mid caps (56%) are > 5% below their 200dma, the third highest reading ever (highest was 11/21). The average mid cap is -8.52% below its 200dma, has 5.5 days to cover and is expected to see 18.5% EPS growth next year. The DJIA fought back to hold its 200dma, entering 50dma resistance. The SPX remains below both averages. Tax loss sell pressure ends this week. It's time to position for 08. China's rate hike to 7.47%, a 9 year high, helps offset export pain from dollar appreciation. The Yuan rose last week to the highest since "ending" the dollar peg in summer 05. The US Dollar Index is set to move back to the mid 80's, helping relieve some energy and import inflation pressure. The ECB infused $500bn and coordinated auctions injected another $40+bn last week (93 bid in the first auction, 73 in the second). The pressure will mount on the ECB to ditch hawkish chatter and join the BoE and Fed in cuts. Both the ECB and the Fed have reiterated they will continue to inject liquidity, with the Fed announcing it will offer auctions indefinitely until credit eases. Personal incomes at 0.4% were below 0.5% expectations and help contain wage inflation. Consumer spending rose 1.1%, above 0.7% estimates as consumers tapped savings, driving the savings rate to negative 0.5%, the lowest since August 05 (note: the SPX has returned 22% since August 05). Spending was the highest in November since July 05. GS made lemonade from credit crisis lemons while MS and BSC put up their first losses in history. Foreign trade and petro dollars have been holiday shopping. This week, MS received a $5bn investment from China's sovereign fund, with MS selling up to 9.9% of the company and agreeing to pay 9% interest. MER may see an investment from $100 bn Temasek - Singapore's sovereign fund (WSJ). Also interesting, GS bought 19.9% of FMD on Friday for $260.5mn. Overall, we remain focused on exchanges. As we move into 2008, global volatility, the opening of developing nation exchanges and more hedging will all drive profits. Last week, BBY reported solid numbers thanks to strength in consumer electronics. Buy tech related ahead of January's CES and MacWorld. Global demand for electronics is robust as discretionary incomes rise and the dollar, comparatively, remains attractive. The NASDAQ has returned nearly 3x the SPX in 07 and tech earnings are set to grow 21% next year - more than any group. ORCL reported a 35% rise in profit, helping add upside to software and productivity enhancement stocks. Asian demand for wireless services continues to rise. CHL added 13.1 mn subscribers in the past two months and now has 362.8mn customers. Global demand for smart phones and cell phones continues to drive maker and supplier profits. AAPL and RIMM will target Asia in 08. RIMM beat on top and bottom line last week as sales and profits doubled YoY. The company added 1.65mn subscribers, up from adding 1.45mn in the prior quarter and now have 12mn subscribers. In the quarter, RIMM shipped 3.9mn devices. Own wireless device suppliers. Retailers are priced for worst-case holiday sales. Any neutral to positive weekend sales from the final days before Christmas will help move stocks higher. Cold weather and snow helps boost apparel and contains markdowns. China removed rebates on commodity exports, keeping more commods in country and forcing other Asian nations to source elsewhere - supporting coal, metals and grains. The Shanghai Futures Exchange reports copper stockpiles dropped for the 6^th week and are the lowest since February. The US will export more coal and ink long term deals with the EU. As China wrestles to contain 11 year high inflation, look for more China imports of dry goods. Asia's biggest container shipper, Cosco Holdings expects profits 50% higher than anticipated in September thanks to a doubling in dry goods shipping rates this year. In response to high spot prices, RIO will triple iron ore sales in the cash market in 08. RIO is also spending $1.1 bn to up Australian coal and U.S. copper production. Globally, steel companies continue to invest to shore up iron ore supplies. New U.S. energy legislation helps lift ag supply demand for the next decade as ethanol production is set to move to 36bn gallons in 2022 vs 7.5bn gallons in 2012. Tenders for wheat from India and Egypt are sitting underneath wheat prices. MHS is investing 140mn in a 340k pharmacy -another example of the growth expected in generics. WAG reported same store sales rose 5.4%, helped by a 5.9% rise in prescription sales as prescriptions filled rose 3.7%. Over $77 bn in brand drugs are set to become generic in the coming 5 years, further fueling PBM's. Own biotech, healthcare services and pharma through February.

Best Wishes for the Holidays to you and your families!

12/17/07

Weekly, our focus and against the grain picks help you beat the market. Our 8 January picks are up 17.22% this year and our Q1 picks are up 20.57% through Friday, versus up 3.5% for SP500. Our Q2 picks are up 6.55% versus 3.38% for SP500. Our Q3 picks are up 2.68% versus -2.33% and our Q4 picks are up 1.78% versus -3.85% for SP500. Scroll down to see this week's picks. The return of volatility and volumes is constructive. Volumes, absent the first week of December, returned following the Fed announcement. In the eyes of traders, the 25bps cut to the Fed Funds and Discount Rate were viewed as too little to spark GDP expansion. The Fed also announced coordinated auctions with European and Canadian central banks, but it did little to move markets - generating a short-lived rally as investors viewed the $40 bn in auctions as too small. The Fed, however, continues to demonstrate it will remain market friendly until the credit crisis is resolved and Friday's down day volumes were lighter than the prior two up days. Inflation data last week worried investors the Fed would again become hawkish. However, it is expected to see inflation rising alongside import prices. The dollar is down 8.6% against the Euro this year, despite rising 1.5% against the Euro last week. We wrote months ago the dollar would bottom once the BoE eased. The dollar has now put in a low and broke its downtrend. The US Dollar Index should move back to the low 80's - helping offset some import price pressure. The weak dollar boosted apparel prices 0.8%, the fastest rate since 1999, as imports got more costly. Retail sales, ex-gasoline, were above estimates last month. It is widely priced into retailers this will be the weakest sales growth since 2002. Everyone is leaning toward the same side of the ship. Buy retailers, especially consumer electronics. US industrial production rose 0.3% in November, above the 0.2% expected, suggesting export growth is helping manufacturers offset domestic weakness. Production of consumer durable goods rose 0.9%. Citigroup shaved another 16bps off Tier One capital by bringing 7 SIV's onto its balance sheet. New CEO Pandit recognizes the need for transparency. C's Tier One ratio remains below its 7.5% internal target, but well above regulated levels and the 6% ratio widely seen as well-capitalized. The SIV's have $49bn in assets, down from $87 bn in August. The Super SIV is likely DOA. Pandit's actions may become boilerplate for banks in the coming months, especially if the action helps mark the bottom in C's stock price. Goldman Sachs will move markets when it reports EPS on the 18^th. Big short bets by its prop team will likely generate nearly $4 billion of profits during the year ended Nov. 30, erasing $1.5 billion to $2 billion of mortgage-related losses elsewhere at GS (WSJ). Our favorite financials industry remains exchanges. The CME is up 19.6% and ICE is up 24.3% since September while the XLF has fallen 14%. Global asset relocation is happening at faster rates - driving record average daily volumes. China also announced its opening its markets further by allowing foreign companies to issue bonds and stocks. Meanwhile, Hong Kong has presented a plan to allow Mainland Chinese investors to buy stock on its exchange. As developing markets open - global volumes will rise. As wheat neared it's October highs Egypt pulled its tender. The reality of tight stockpiles remains and the pulled tender does little but provide a floor for wheat prices. The Farm Futures Magazine farmers survey indicates farmers intend to plant more corn, at the expense of Soybeans, than thought back in August. Grain prices near highs are driving farm incomes and spending on equipment and supplies. Any corn acreage upticks will boost fertilizer sales. China and India continue to spend on infrastructure, fueling a global footrace to sure up iron ore supplies. Tata Steel announced a $1.5 bn investment to develop a new iron ore venture in the Ivory Coast. Also, Russia's second largest steel player will spend $2.2 billion to buy Ukrainian assets including an iron ore complex. Global demand could drive iron ore prices up 50% in 08. China completed the funding of its sovereign wealth fund - raising $200 bn through special bond offerings. The group is seeking global asset managers to help it spend its money. The Middle East, for it's part, flexed its petrodollar fueled wealth this week. Kuwait followed Saudi's GE Plastics deal earlier this year with its own $9.5bn deal with Dow Chemical. We'll continue to see oil receipts recycled into infrastructure and equity deals. Supertanker day rates in the Middle East rose to three-year highs last week. Freight rates have almost quadrupled in the past month. High dry goods shipping rates drove retrofits away from oil, while single hull tankers were retired from oil shipping duties, crimping supply. Shippers continue to profit. Consumer electronics spending on video games and consoles is robust again this year. NPD reports game software sales at $1.3 bn last month, up 62% YoY. Console sales were up 52% YoY. MSFT sold 770k Xbox 360's - up from 366k units in October. Suppliers and related plays benefit. Own biotech, healthcare services, products and pharmaceuticals through February.

12/10/07

The DJIA recovered its 50dma last week and is 900 points above its November intraday low. The SPX similarly recovered 1500 resistance. The NASDAQ is set to challenge its 50dma. The Russell 2k remains deeply on sale heading into "January Effect" seasonality. Will global GDP growth help U.S. companies offset the credit crisis in 2008? We got clues last week from the Organization for Economic Cooperation and Development (OECD). In 2008, OECD sees member country GDP contracting to 2.3% from 2.7% in 07. BRIC country econ growth in 08 will remain robust. Chinese GDP will slow to 10.7%, remaining double digits for its 6^th consecutive year, as imports grow and exports slow on a stronger Yuan. Russia will grow 6.5% (down from 7.3%). Brazil will grow a tad from its current 4.8%. India will grow 8.8% (down from 9.4%). Also, South Korea will grow 5.2%. The U.S. will grow 2% and climb to 2.2% in 09. The Euro Zone will slow to 1.95% (down from 2.6%). Japan will slow to 1.6% (down from 1.9%). Canada's GDP will slow to 2.4% from 2.6% and then pick up in 09. Mexico's GDP will improve in 08 and hit 4.5% growth in 09. A weak dollar and global economic growth will offset domestic consumer spending risk. Productivity at 6.3% is containing wage inflation yet Friday's job report showed wages up 3.8% YoY, jumping 0.5% due in part to the jobs mix - the biggest monthly gain since June. Consumer confidence continues to weaken. Michigan consumer sentiment fell to 74.5, below forecasts, and down from 76.1 last month. Retail same store sales last week were mixed, with 19 beating, 2 meeting and 22 missing estimates. Overall, retail sales grew 4% (Thomson), above 3.3% estimates and the prior months 1.6%. Retail remains priced for worst case spending. As the market moves into 2008 and central bank policy eases the strain on wallets, retail will trade up. The Fed meeting this week is widely anticipated. Last week's market rally came on light volume - suggesting folks are waiting on the sidelines. The Fed will remain dovish as credit illiquidity shifts the scale back to GDP risk. Tech stocks are on sale and offer above market EPS growth next year, with large cap tech EPS to grow over 20%. A weak dollar is boosting tech exports. Developing country discretionary incomes are driving technology growth - including PC's, notebooks, cell & smart phones. Buy tech. China and India 08 GDP will drive coal higher. Rumors of a bid for Xstrata, the biggest thermal coal exporter, moved the stock up double digits in London Friday. Chinese long-term contract coal prices are likely to rise 10% next year according to China's largest producer. China steel demand will account for 56% of growth, boosting steel and input prices on metallurgical/coking coal and iron ore. World crude steel demand is estimated at 1.3bn tons in 07, up 7% YoY and is expected to grow another 6% in 08 to 1.38bn tons. China's steel consumption is estimated at 493mn tons in 08, up 10% YoY. BHP is supposedly seeking a near 50% increase in coking coal. The Australian Bureau of Agriculture and Resource Economics (ABARE) is forecasting record iron ore prices next year. China, the biggest iron ore buyer, will see iron ore imports reach 370mn tons by yearend. Price negotiations are getting under way with rumors of a 30% increase. Global growth will impact shipping rates. Spot rates for freighters rose 48% in the first half of 07 from Australia to China, and rose 83% for Brazil to China. Since few Chinese steel mills have long-term shipping contracts, dry shippers will likely benefit again in early 08 until extra supply comes online. Farm incomes are growing thanks to high grain prices. Wheat is in tight supply as unfavorable weather has impacted harvests. Argentina, which accounts for 10% of wheat exports, is worried its crop will shrink due to frost. The wheat export market is 105mn tons. Egypt is tendering to buy 55k-60k for late December and early January. India may buy up to 550k tons this coming week and bought 150k metric tons in its latest tender (they had hoped to buy 350k tons). Brazil's soybean crop is mostly planted. Watch weather in Brazil closely. Fertilizer prices, which have risen markedly, may spark more U.S. soybean planting next year as farmers shift away from nutrient intense corn. If corn declines, fertilizer prices could fall. In the meantime, acreage growth is driving ag supply profits - keep positions into 08. Global aerospace sales are forecast to rise 5.9% next year. Petrodollars and economic expansion will drive civil aircraft demand. Next year, the AIA expects 480 "large" commercial plane deliveries, up from 443 this year. Globally, military investment is rising. The UK is expected to spend $60bn on defense (2.3% of GDP vs. US at 4% of GDP) and the pressure to update its aircraft is mounting. India, which has the 3^rd largest military budget in Asia, increased its defense budget by 8% to $24.4bn and is in need of new aircraft. Overall, U.S. aircraft makers have a 3019 commercial plane backlog as of September 30^th (prior to Dubai) with 2214 of those to int'l customers. Exchanges remain our favorite spot in financials. NYX's November average daily volumes on its exchanges rose 26.8% to 3.3bn shares, while Euronext transactions rose 68% and NYSE's ARCA options exchange saw volumes up 72% YoY. The CME's average daily volumes rose 41% to 13mn contracts in November. Average daily volumes for ICE Futures Europe rose 30%. Buy biotech, healthcare services/products and pharma through February. Own utilities companies as colder weather helps spark load demand and lower rates benefit debt.

12/3/07

November was the worst month since December 2002 as the markets got the most oversold this year. Large caps traded at 1.38x their 5 year PE low, marking the most pessimistic investors have been on future earnings in 2007. Large, mid and small caps trading more than 5% below their 200dma's set multi year highs. In large cap, 192 stocks were more than 5% below, surpassing the prior high reading of 189 set July 19, 2006, near the end of a 2 month, 1k point decline. 266 mid caps and 375 small caps got at least 5% below their 200dma - also marking the highest points since 04. Overall, the Russell 2k corrected 13.8% and the SPX 10.7% from the October high to the November low. Historically, December is the 2^nd best month for small cap returns with an average 5.1% pre election year return (Stock Trader's Almanac). The "January Effect" begins mid month. The average small cap stock in our universe is expected to see EPS grow 20% next year and remains 10% below its 200dma. Small cap investors willing to buy risk will be rewarded. Inflation remains in check as jobless claims rise. Income growth at 0.2% is the lowest since April. Un-rounded core PCE remains in the Fed's target range. Credit illiquidity will keep the Fed market-friendly. LIBOR's spread to 3 month T Bills hit its widest since August as 3 month yields fell below 3%. One month LIBOR hit decade highs. Fed Vice Chair Kohn indicated November econ data may require "offsetting" action at the Fed. Bernanke echoed those sentiments suggesting the Fed will consider "renewed turbulence" in relation to growth versus inflation risks. Buy technology stocks. Last month, investors priced 08 tech earnings similarly to financials- with both baskets trading at 1.3x 5 year historical PE lows. Small cap tech EPS is estimated to grow 22% next year. INTC, MSFT, STX, HPQ & AAPL all issued bullish global demand comments. In China, discretionary incomes have grown 13% through September. Consumer electronics sales in China are up 30% YoY. WMT reported consumer electronics sales climbed 4.9%. China's tech imports doubled in 06, with 40% coming from the EU. A weak dollar in 07 and continued Chinese tech import growth, suggests U.S. tech companies benefit at the expense of European counterparts. Overall, US exports to China are up 16% YoY. Tech stocks offer upside thanks to global growth and an accommodative Fed. Retail stocks are priced for worst-case holiday sales. Any neutral or positive news in an election year with a friendly Fed will move them up. The RTH tested and held its $92 low three times in November. Weak consumer confidence, high gas and slowing economic growth are priced-in. Services stocks are trading at the same ratio to 5 year PE low on current and next year estimates. Street estimates reflect fear. A hardy "cyber-Monday" and "Black Friday" offset weak guidance. Lux retailers JWN, SKS and TIF beat. Sovereign wealth funds are growing a half trillion a year. Middle East GDP growth at 5.9% is well above the 3.5% 1990-2002 average. Since 2002, Middle East incomes are up 75%. Petrodollars are recycling into infrastructure with Saudi set to spend $642 billion on projects in the coming 13 years. Petro wealth flexed in November, with more than $100 bn in aerospace orders at the Dubai Airshow, an 8% AMD stake and 4.9% stake in Citi by Abu Dhabi. Aerospace remains a big investment for the Mid East, with 30% of all 2007 Airbus orders coming from the region. The Dubai Airshow added to record supplier backlogs. Buy the recent weakness. There are 1.3 bn Chinese consumers and another 1% born annually. India and China's GDP growth continues to fuel demand for grains. Corn & soybean futures remain near highs and wheat has turned up off October selling. Exports of grains from the US are rising. Global stockpiles are being boosted on global supply fears. China imported 3mn tons of soybeans in October and November. India is expected to buy 700k tons of Wheat this month. Soybeans are up 60% this year, the highest since 1973. The USDA has upped its farm income estimate to $87.5 bn from $87.1 bn - more than a 45% jump YoY. The winner remains ag supply. DE sold 32% more farm equipment in Europe and South America and fertilizer demand and pricing remains positive for manufacturers. US coal exports are set to rise 20% as more EU buyers are shifting to cheaper US suppliers. India's power capacity is set to grow 60% by 2012 - mostly through coal-powered plants. Globally, 1000 new coal plants are planned for the coming 5 years. Buy coal and coal mining equipment players. Big pharma needs pipeline growth and biotechs are enjoying positive news. Cost containment (ex. PBM's) remain important to margin growth. Own bio, healthcare products/services and pharma through February. In financials, remain focused on exchanges. Global asset relocation and volatility are driving average daily volume records while costs are being reduced through globalization and technology.

November Research Notes:

2007-12-19T09:36:00.000-05:00

November 26, 2007

Consumer electronics and deep discounts helped retailers outpace estimates this past weekend. Overall, ShopperTrak reported sales on Friday and Saturday were 7.2% higher than last year. Investors will now worry about a front-loaded shopping season, providing additional opportunity to buy leaders on sale. The death of the consumer is overpriced into retail stocks.

The average large cap stock is trading at only 1.38x its 5 year historical PE low. Large cap investors are the most pessimistic on future earnings as they've been all year.

This is especially true in tech - where stocks are trading at only 1.3x their 5 year PE low and about the same ratio as financials. The average large cap tech stock will see earnings grow 17.5% next year.

The DJIA tested its August closing low last week, marking a nearly 10% correction from the October high. On the 21^st, the NASDAQ closed 10.3% off its October high. The NASDAQ recovered its 200dma on the holiday shortened light volume Friday.

Small cap tech stocks are estimated to see earnings grow 22% next year, yet the average small cap tech stock in our universe is 11% below its 200dma.

Credit illiquidity will keep the Fed dovish and spark cuts from the Bank of England in 08. Tech stocks reward investors willing to take risk when the pendulum has swung to fear.

Last week, Japan and South Korea bought 201k tons of Wheat and India is expected to import 700k tons in the coming weeks. A weak dollar continues to boost demand for US grains overseas. Soybeans are up 61% this year and are the highest since 1973. The USDA reported 1.847 metric tons of corn was exported last week - well above the high-end expectations of analysts. Demand for crops continues to boost profits for ag suppliers. DE results provide further evidence as DE enjoyed 32% sales growth of ag equipment in Europe and South America.

BA has received 1047 plane orders this year, more than last years record and the third consecutive year above 1000 orders. A perfect storm in aerospace demand is boosting bottom lines at suppliers - many of which are enjoying record backlogs.

The Energy Department predicts we'll produce 118mn bbls of oil a day globally by 2030, up from 85 mn today - thanks in part to spending on energy service. High oil is also boosting coal demand. India is set to grow utility power capacity 60% by 2012 - mostly through coal fired plants. Thermal coal costs hit records in Europe, Australia and South Africa in the past month. The cost of Chinese raw coal is up 12.4% YoY. High costs overseas are increasing US coal exports to Europe.

Average daily volumes on the NYSE have been above average every day in November (except Friday's half day). Own exchanges which offer upside on global volume growth and cost controls.

November 19, 2007

The average large cap stock was -2.61% below its 200dma this past week, similar to mid August's reading of -2.74%. The average small cap is -8.27% below its 200dma, worse than the mid August -4.94% reading.

On Friday, the market tested the prior Monday's low and held with higher volume. Broad market selling has put many leading stocks on sale. Financials and services put in a bottom the week of November 5^th, prior to the market low on the 12^th(scroll down to view charts). Watch these sectors as a successful retest would be bullish.

Sovereign petrodollar wealth flexed last week with over $100 bn in aerospace orders announced last week in Dubai and an 8% AMD stake announced by Abu Dhabi on Friday. Expect more sovereign fund deals in the mid market space.

U.S. technology exports to China are benefiting from the weak dollar and rising discretionary income in developing countries. In the first 9 months of 2007, Chinese disposable incomes rose 13% YoY. In 06, Chinese technology imports doubled, with the EU accounting for 40%. This year, decreases in the dollar benefit US technology companies as China's technology imports grow. Despite strong technology profits last quarter, investors instead extrapolated weakness in financials across all sectors.

In financials, buy exchanges where global asset relocation is driving record daily volumes and cost controls are boosting profits.

Industrials are retreating, putting aerospace suppliers on sale in the face of rising backlogs. The success at the Dubai Airshow puts BA and Airbus on track to test the 2057 order record set in 2005. Demand for aerospace equipment & supply will reignite investor interest once credit crisis fear mitigates.

Grain prices remain high, driving acreage growth. The urbanization of developing nations is increasing grain demand. Ag suppliers will benefit from the need-to-feed.

Oil prices are boosting coal prices and keeping enserv dayrates high. Investors took profits in integrated oil, coal and enserv last week creating an opportunity to buy leaders closer to support.

Apparel stores traded higher last week, despite negative news. Fear is overpriced into retailers. WMT's China store revenue rose 45% YoY. Consumer electronics sales at WMT rose 4.6%. China's retail sales grew 18% (inflation accounted for a quarter of that) while China consumer electronics retail sales were up 30%. PC, smart phone & notebook sales remain strong globally.

Berkshire increased positions in HMO's -signaling a belief in the profitability of a private/public universal healthcare solution. Icahn took a 1.5mn share stake in GENZ - a bet big pharma will pay up for big biotechs. Continue to be long bio, healthcare products/services and pharma through February. Drug store stocks did particularly well last week.

November 12, 2007

The NASDAQ has had five 50+ point down days since 10/19. The DJIA has fallen 350+ points three times since the 19th. The SPX is 7% of its high. The NASDAQ is 8% off its high. The SPX is 2.7% above the August low support. The NASDAQ is 7.2% above the August low support (XLK is 5.6% above). The DJIA is less than 2% from the August low support.

Market weakness and volatility are providing excellent entries into leaders. We expect the major markets to find support and lift into yearend. Buy risk for upside into 08.

Market daily volumes have been above average since mid October and remain bullish for exchanges. Next month, look for more S&P and Moody's CDO rating downgrades as each has over 700 CDO's on review. Credit illiquidity remains unresolved and will keep the Fed dovish.

Buy weakness in technology stocks, especially consumer electronics and computer related stocks. EPS growth for tech is strong thanks to rising global incomes. Semi's offer upside as Q3 pessimism creates opportunity for upside through yearend on rising investor excitement over 45 nanometer hafnium semiconductors.

Exports have hit new highs for 7 consecutive months, rising 1.1% to $140bn and narrowing the trade gap to its tightest spread since May 05.

The Dubai Airshow will move aero supply higher. Petrodollar fueled aerospace orders will drive supplier backlogs higher. The UAE announced $34.9 bn in orders Sunday - a Dubai show record.

As farmers seek to maximize yields, ag suppliers enjoy greater demand. This week, MON guided higher on demand and improving margins.

Biotech will move as investor's watch BIIB bids for clues as to valuing biotech pipelines. MRK's surprising VIOXX settlement removes an overhang, adding upside to pharma. HMO's offer upside into early 08. Healthcare services are attractive as companies seek to improve margins. Medical products offer upside as an aging population drives product and equipment demand.

Oil prices near $100 boost coal demand. Coal prices have risen 51% this year and U.S. coal exports are growing 20% YoY. Worldwide, over 1000 new coal power plants are planned for the coming 5 years. Energy service remains attractive given rising E&P budgets.

18 retailers missed same store sales estimates, while 10 beat. TGT and COST were winners. Consumer spending risk is overpriced into current valuations - buy retailers.

Metals benefit from renewed consolidation chatter as BHP pursues RIO. Specialty metals, especially titanium and hafnium producers, offer upside.

November 5, 2007

Every week we highlight one focus and one against the grain stock pick. Our January picks (8 total) are up 23% on average vs. 5.75% for the SPX. Our Q1 picks (26) are up 20.5%. Our Q2 picks (26) are up 12.8% vs. 5.6% for the SPX. While speculators whipsaw markets on daily news, our goal remains to find select ideas likely to beat the benchmark in the coming 6-12 months.

This past week the Fed jawboned markets with tough talk on inflation. Friday's job number reflects a shift to lower wage jobs, keeping inflation tame. The credit markets are the key to future Fed policy. Access to debt markets must ease before the Fed will shift hawkish on inflation. Ignore jawboning. The liquidity spigot will support the equity markets into 08.

Historically, the NASDAQ returns 6% in pre-election year December's. Own technology stocks. INTC, MSFT and STX EPS reports add conviction. Global PC and notebook sales are rising as developing nations create consumer wealth. Samsung, Nokia, Apple and Motorola wireless sales further boost the case for related suppliers, infrastructure and software stocks. Buy semiconductors as seasonality shifts bullish in November through year-end. Exports and business investment drove Q3's 3.9% GDP and assuages fear the Fed is too late. Technology, a historically strong performer at this point in the Fed cut cycle, will move higher.

Retail stocks reflect worst-case consumer spending. Buy fear for seasonal upside into 2008.

Biotech has moved nearly 15% since the Q3 bottom. Own biotech, healthcare services, healthcare products and pharma through February.

Our favorite financials are exchanges and asset managers. Global excess liquidity, partially fueled by China's account surplus and petrodollars, is driving global volumes across exchanges as costs shrink. Asset managers are cheap on future fee revenue growth. Increased volatility is bullish for attracting capital and driving equity markets higher - bullish for fee revenue.

Aerospace supply profits are rising thanks to global military aviation and civil air needs - population and middle class growth globally will drive further upside.

Oil production drops and larger E&P budgets boost energy service and coal stocks.

Continue to own ag supply as farm acreage expands and developing nations return to the global markets to stockpile grain.

October Research Notes

2007-12-19T09:33:00.000-05:00

October 29, 2007

**Congratulations Red Sox Nation**

We wrote last week "We expect the market will establish a bottom within two weeks." Since 1950 November is the SPX best month with an average pre-election year return of 2.1%. December is historically very strong for NASDAQ stocks in pre-election years - averaging up 6%.

October's sell-off provides a great opportunity to buy leaders. Specifically, increase technology positions. We are in the most robust seasonal period for tech returns and tech EPS has been solid. INTC, STX and MSFT guidance is bullish for global computer demand. INTC's President on Bloomberg TV referred to notebooks as selling like "hot cakes" globally. Component makers will move up into 08, boosting optimism for semiconductors. Wireless device sales are also robust. Samsung's record 42.6mn handset sales, NOK's 112mn shipments, AAPL's 1.1mn iPhone sales and MOT's shipments up 4.8% sequentially all point to strength for wireless related equipment and services. T further boosts the services theme, reporting 64% growth in demand for wireless services such as Internet and email access. Consumers continue to demand next gen technology and services. Global demand in developing countries will remain a driver as Chinese consumers embrace technology. Further Fed cuts benefit technology stocks as GDP expands and spending increases.

The BoE is the next central bank set to blink as growth estimates are ratcheted down. The Fed, faced with rising job losses and benefiting from tame wage growth will remain dovish.

Exchanges remain our favorites in financials. Global excess liquidity from developing nations and Petrodollars continue to boost volumes with CME, ICE & NDAQ all showing robust average daily volume gains. Brazil's Bovespa exchange went public in the 5^th largest IPO this year - valuing the exchange at $9bn U.S. dollars. Speculative money formerly earmarked for real estate and sophisticated debt instruments continues to rotate and fuel exchange profits. Own asset managers ahead of liquidity driven market upside. Bank ROE's are near '98 levels and are getting closer to actionable.

Mid East tensions are reigniting oil after a brief retrenchment. Own enserv and coal through winter heating season.

Aerospace suppliers are attractive with GD, NOC, LMT upping guidance. Supply bottlenecks will resolve with capacity, allowing suppliers to reap greater profits.

Consumer confidence is the lowest since May 06 at 80.9. The consumer's death has been overpriced into retail. Buy fear for excess return as monetary policy rejuvenates markets and optimism.

Own healthcare through February 2008.

October 22, 2007

The absence of uptick rules allowed sellers to control momentum Friday. We expect the market will establish a bottom within two weeks as global liquidity trumps short sellers and the Fed remains dovish.

Buy technology stocks. Samsung sold a record 42.6mn handsets. NOK shipped 112mn units, above 110mn estimates. INTC upped its guidance and margin outlook. STX and INTC both reported tight inventories. Technology demand will enjoy robust international demand and will benefit from a strong holiday season for consumer electronics.

The Fed will remain friendly. Bernanke & Paulson continue to warn of credit crisis inspired GDP risk. Tame inflation allows GDP re-inflation. On May 7^th, we asked "is inflation DOA?" and said the Fed will shift friendly. Jobs remain key. Higher California unemployment pressures Fed cuts as California's 6.3k job claims jump accounted for 22% of last week's rise nationally (28k). Job losses are keeping wage inflation in check. The UK will become dovish as inflation remains tame and GDP forecasts for 08 are dropping (2.2% vs. 2.9%).

Banks have recorded over $20bn in losses and write downs in Q3. BAC alone suffered $4bn, driving ROE to 11.02% from 16.6% - well below its 5 year average ROE of 18.3% and near 1998 levels of 11.4%. Exchange volumes are booming thanks to global asset relocation. Petrodollars and excess savings in developing countries are driving asset shifts - bullish for exchange profits. Asset manager's future EPS are too conservative. BLK reported a 6% Q3 lift in AUM. Stocks like AB are too conservatively forecasting AUM fee revenues.

The weak dollar is helping US industrials offset domestic weakness. Historically, industrials do best as GDP expands following Fed eases.

Exchange rates are boosting grain exports as India and China take advantage. Int'l shippers are benefiting, as exports to Asia keep Capesize vessel day rates high. By 2050, the global population is forecasted to grow to 9bn from 6.6bn. China has lost 5 mn mu's of arable land from 05 to 06 as land is industrialized. India's middle class is larger than our nations population and growing. Grain stockpiles are being drawn down to multi decade lows. Wheat prices and stockpile drops are prompting record plantings. Int'l demand is driving acreage growth while robust grain markets boost demand for equip and supplies. Soybean demand is rising in developing nations. GE is estimating int'l sales to rise to $130bn by 2010 from $80 bn. TXT upped Cessna delivery forecasts by 24%. Civil air and military plane demand continue to rise globally. Aero suppliers offer EPS upside.

Expensive oil helps coal and LNG plays.

Auto suppliers will benefit from Fed rate cuts.

Retail remains cheap and fear is widespread.

Buy biotech. Merger activity will rise as pharma fights to boost drug pipelines. UNH, the largest insurer, beat estimates and guided higher thanks to medicare related business. Own services, products and pharma through February.

October 15, 2007

Thursday's profit taking and rising intraday volatility are healthy and support higher markets into yearend as weak hands are shaken out of leaders. A friendly Fed and motivated White House will prop the markets into elections. Use pullbacks to add to leaders.

Buy retail. The consumer's death has been over anticipated. Wall Street has been downgrading semiconductors. Use October selling to buy. Investor Q3 pessimism shifts to optimism alongside consumer electronics holiday shopping season (Sept electronics store sales up 0.9%).

Technology stocks can be bought into sell-offs. Lower interest rates are reigniting investor demand for EPS risk stocks. Seasonality boosts tech for Q4 and Q1 upside. ORCL's bid for BEAS is timely ahead of the coming tech rally. Skittish investors continue to capitulate and cover short positions. Cell phone sales remain strong with Samsung selling a record 42.6 mn handsets last quarter. Own wireless, networking, Internet and software.

Int'l infrastructure demand and the weak dollar helped trade. GE reported a 39% jump in large-equipment sales internationally and commented global orders are "accelerating". GE expects int'l orders to rise to $130bn in 2010 from $80bn in 06.

BA's 787 delivery delay masks the underlying bullish sector outlook. Defense spending from allied countries, coupled with a weak dollar, will drive revenue and profits. Meanwhile, delays are due to big demand at suppliers - bullish for supplier EPS. Civil aircraft demand will fuel orders. Record oil prices boost lightweight plane demand. Use the sell-off in aerospace to buy.

Specialty metals retreated Thursday on ATI's warning. The risks will be mitigated over time as industrial demand reignites. Expect consolidation and stock buy backs (re. AA).

Oil at record levels boosts coal stocks. Shippers also benefit.

In finance, exchanges and asset managers offer the best risk reward. Rising volatility further helps average daily volume growth while a rising market boosts management fees.

A lot of volatility has come into grains this month. Exports of Soybeans to China continue to rise (import tariff cuts to 1% are now effective). Recent rains in Brazil allow soybean planting. Overall, acreage growth continues. The EU approval of an add'l 10% of plant-able acres boosts demand for ag suppliers.

Auto supplier seasonality is now bullish. Look for UAW contract resolutions to help propel suppliers higher.

Own biotech, healthcare services, products and pharma.

October 8, 2007

Jobs took center stage Friday as September added 110k jobs and last month's negative growth was revised positive. A lot of demand stayed on the sidelines last week ahead of the report. Look for the market to trade higher as investors digest the news and impact on economic strength. Private jobs grew 70k, while California's unemployment rate is trending negatively - jobs remain a concern to the Fed and support cuts.

Own retail as future job growth will be supported by the administration into the election year and 4.1% YoY wage growth helps support holiday spending.

Canada's unemployment rate is the lowest since 1974 (5.9%) with wages growing 4.1% YoY as the loonie is at 30 year highs to the U.S. dollar. Foreign economic strength and the weak dollar continue to drive U.S. export growth. Look for industrials and multinationals to continue to benefit.

The EU is looking to implement a carbon emissions penalty of as much as 4bn on the aviation industry by 2012. Sellers took BA lower on concerns of 787 delays. Use weakness to buy. Foreign civil air demand will grow alongside GDP growth. Meanwhile, BA and Thales were selected by the UK to oversee the communication systems in vehicles for its biggest defense project - a $122 bn vehicle replacement program slated to begin in 2012

Global military spending will continue to benefit U.S. players. Own defense and aerospace suppliers, including specialty alloy stocks - nicely off Q2 highs.

The grain markets have been more volatile as investor's book gains. Use commod inspired weakness to add to ag supply positions. EPS beats will be fueled by acreage growth (approx 5% crop growth in Brazil for 07/08).

Buy semiconductor stocks ahead of month end. Holiday sales of consumer electronics will push semi's up in November and December.

Own telco, wireless, networking and software. As consumer adoption of next gen services grows, so does the demand for infrastructure, security and data management. This is the time of year to embrace risk.

MER and WM joined C, UBS and DB in pre-announcing EPS risk tied to the credit crisis. Greater clarity provides a catalyst for buyers. Own exchanges, which benefit from rising global average daily volumes. Buy asset managers, which were discounted too heavily in Q3. Strong markets in Q4 will drive fee revenue. Small and mid cap banks in retirement and grain belt states can be owned for upside as seasonality improves, the Fed encourages loan demand & foreign banks bargain hunt mergers/acquisitions.

Biotech, healthcare services, products and pharma will trade higher through February.

October 1, 2007

Welcome to Q4.

Our Q1 Focus and Against the Grain picks enter Q4 up 21.71% ytd (zero turnover) - nearly 3x the SPX. Use our weekly picks to increase returns into year end.

Consumer spending in August came in at 0.6%, above 0.4% expectations, while incomes rose 0.3%, below expected 0.4%. PCE is up 1.8% YoY - smallest since 2004. The economy lost jobs last month for first time since 2003.

Buy retail. The Fed, to the chagrin of Q3 prognosticators, will boost Holiday spending given tame inflation and rising recession worry. The ICSC said retail sales at stores open at least one year fell 1% last week. LOW and TGT cut sales forecasts. Consumer confidence is 99.8 and existing and new home sales and prices continue to fall. The news favors dovish policy and retail stocks have priced in fear.

The dollar made another record low against the Euro. Chicago PMI came in better than hoped at 54.2, likely thanks to exports. Industrials are benefiting.

Analysts are predicting a 10%-11% growth in Brazilian soybean acreage with $10 per bushel prices. Soybean planting has been delayed due to dry weather. Exports of wheat have risen 130% YoY as China and Australian wheat production forecasts are substantially lowered due to drought. The EU approved an add'l 10% of land formerly regulated fallow for planting this fall and next spring. London's dry bulk index hit a record last week as dayrates for Capesize vessels climbed to a new high.

Russia's Sukhoi unveiled its regional Superjet plane, including parts from BEAV, HON, CW, GR. British Air ordered 36 next gen planes (24 from BA) last week worth approx $6-7 bn after discounts. Specialty metals are back in favor following steep Q3 declines. Investors, buoyed by a friendly Fed, are buying back shares of aerospace related metals.

GM's deal with the UAW is seasonally attractive as auto suppliers historically pick up ground following weak September's. The deal provides stability to the industry as it clears the path to deals with Ford and Chrysler.

GS is looking for up to 4 bn in write downs from MER. Broker risk remains too high to buy yet. Instead buy exchanges. CME is reporting 58% YoY growth in e-mini volumes in September (155% YoY in August). Eurodollar interest rate futures volumes climbed 27% YoY through the first nine months of 07. Rising stock markets will boost asset managers, which were punished on Q3 market fears.

NVS is funding $65 mn to MIT for discovering new cost-saving production techniques. Future margin improvement may likely come from cost savings rather than price increases. Biotech is attractive through February. Seasonality embraces healthcare services, products and pharma in October for a multi month run into early 2008.

Holiday inspired next gen consumer electronics sales, sparked by product cycles at AAPL and NOK, set semi's up for upside. Use the first 2 weeks of October to build positions through year end, especially in those tied to PC and wireless chips. Telco and network supply will benefit from consumer adoption of next gen services and lower Fed inspired financing costs.

September Comments - 9/24/07

2007-10-16T14:13:00.000-04:00

The dollar moved to record lows against the Euro, further fueling precious metals. As the dollar finds its footing, gold will lose its luster as seasonality shifts away from the sector and toward risk. Book gains in gold this week. The Fed is signaling future cuts, sending a clear sign to investors to focus on profit growth. Buy any market sell-off through May 08. The S&P rose 2.9% last week (-1.8% from its all time high). Brokers reported mixed last week, with GS best thanks to shorting mortgages. LBO rev streams remain at risk with last month the smallest for deals since mid 2005. Equity revenues were strong at brokers, bullish for exchanges. The NDAQ/Dubai/OMX deal reignites consolidation chatter. Investors got too pessimistic on asset managers in Q3 - buy for excess through Q1 as fee revenues will strengthen alongside the market. Telecom (TTH) has moved 13% off its August low. Telco and wireless can be owned as investments in network infrastructure rise alongside consumer adoption of next gen devices and services, and in light of future cheaper financing. Materials have reignited post cut. Own specialty and recycler metal companies. TIE rec'd a 10 year $700 supply deal from UTX last week for aerospace engines. Buy titanium stocks as they're set to retest Q2 highs. Retailers will move higher in Q4 as investor perception will reflect a friendly Fed. Buy tech stocks in early October as investor appetite for risk increases once the new quarter is under way. Foreign investors continue to invest with the Middle East spending $68 bn this year (Gulf countries generate $1.2 bn a day in oil exports) Expect more deal flow from the Middle East & Asia. HON won a 16bn 20 year contract from Airbus - another example of revenue and EPS upside for aerospace suppliers. Expensive oil further boosts next gen plane orders while middle class expansion boosts travel. Int'l military spending will rise as air fleets are modernized. China may cut its Soybean import tax from 3% to 1% to encourage more imports - bullish for dry goods shippers and spending on ag supply (China's soybean imports may rise to 34mn metric tons annually from 28mn metric tons beginning in October). Use any weakness in biotech to increase holdings for upside through February. MRK's AIDS vaccine failure boosts GILD. Own cancer and diabetes related stocks. Increase ownership of healthcare services, products and pharma into October, when seasonality shift positive.

September Comments - 9/17/07

2007-10-16T14:10:00.000-04:00

The Fed is set to adjust policy on the 18^th. The ECB and BoE were smart to become dovish, especially in light of Friday's Northern Rock liquidity crisis and bank run ($4 bn withdrawn by depositors in past 2 days). Ahead of the Fed, investors covered shorts. The debate now shifts to whether the Fed is late and how aggressive they should be. While we may see some sell the news, the tide is shifting accommodative at precisely the correct time of year. Ahead of elections, the White House will use its leverage to coax economic strength and while the Fed isn't beholden to the President - it is ultimately beholden to protecting economic wellbeing (for now, we'll ignore taming inflation). Dovish perception will climb in Q4, boosting stocks at a seasonally strong time of year. Use remaining September jitters to reposition weightings and embrace risk. It's that time of year again for retail. On Friday, retail sales came in light yet the RTH moved higher. Fear is priced into the sector. Buy retail over the coming couple weeks for Q4 and Q1 exposure. Internet retail is already moving higher. Wireless and telco suppliers can be bought as holiday consumer electronics demand will boost next generation services and drive network upgrades. MER warned CDO's may impact EPS. Brokers report month end. Risk remains too high to buy in September. Instead, focus on exchanges. YoY average daily volume growth is spurred by global volatility. Also, buy asset managers. Investors abandoned them as the market weakened and are too pessimistic about Q4 and Q1 fee revenues. Biotech remains our favorite spot in healthcare. We expect positive news out of the industry in the coming quarters. Use quarter end to increase healthcare services, products and pharma exposure. Seasonality shifts bullish for these industries in October. Gold has been stellar thanks to tightening money in China and a weaker dollar. Use the end of September to unwind precious metals holdings. Utilities enjoyed a hot August. Buy ute's in the grain belt and in retiree states. Blackrock announced a 200mn agriculture hedge fund (making the contrarian in us nervous). The global outlook remains bullish with shrinking grain supplies, Australian drought and rising South and North American exports. However, keep a close eye on the basket for signs of tiring. Buy aerospace as 100 orders last month at BA and Airbus further boost the basket. Expect continued strength as government's modernize aircraft too.

September Comments - 9/10/07

2007-10-16T14:09:00.002-04:00

The average return (buy and hold) of our Q1 Focus & Against Grain picks is +11.78% YTD (4x SPX). Use our weekly Focus and Against Grain picks to find excess for the coming six to twelve months. Average market volumes returned on Friday as investors sold the jobs report. The last time we saw a negative jobs report was August 03. (SPX is up 50% since). Job losses provide an excuse to retest August lows, but also provide impetus for a friendly Fed. Since 06 we've talked about pre election strength and the White House goal to prop markets into elections. Expect normal Q4 and Q1 seasonal strength. September, while troublesome, provides a launch pad for Q4 excess returns. Use opportunity created by fear to buy our favorite sectors. The ECB and BoE shifted policy last week, becoming less hawkish. Investor perception of the Fed will shift similarly dovish in Q4. Retail (RTH) has fallen 10.5% since the June high. Hopefully, our "avoid retail in summer" weekly reminders helped you. Now, it's time to switch sides and compile a list of favorite retailers. Use the weeks of September 17^th and 24^th to buy consumer and retail stocks for holiday upside as the retail media worry machine will sputter in Q4. Gold stocks, which we've advocated all quarter, are rewarding patience as investors buy the weak dollar trade (gold is up 8% in Q3). Use strength to sell precious metals in the final week of September. The risk to broker EPS keeps us on the sidelines until October. Instead, buy exchanges as YoY average daily volumes benefit from global volatility. Also, buy asset managers on sale, as investors are overly pessimistic on fee revenue for Q4 and Q1. Biotechs are moving higher as PM's buy news catalyst growth stocks to offset EPS risk names (IBB is up 8% since mid August lows). Own biotech through next February. Use September to buy healthcare services, products and pharma as investors re-embrace these industries in October. Expect additional upside EPS guidance from ag suppliers. High grain prices are driving acreage growth and equipment/seed/fertilizer demand. India and China will remain a positive force on pricing into 07. Buy grain shippers as day rates will remain strong and dividend yields are attractive. Aerospace can be bought on overhang of BA's 787 test flight delay. Global demand for military planes alongside civil aircraft demand will boost EPS into 07. Buy telco and wireless as NOK N95 and iPhone price cuts help fuel global wireless services demand.

September Comments - 9/3

2007-10-16T14:09:00.001-04:00

Welcome back from the long weekend. September is a troublesome month - especially in the options expiration week. The market finished flat last week despite a rise in intraday swings and light volume. The DJIA, SPX and Nasdaq all finished up similar amounts to historical pre-election year August average returns. The market will retest the August low. Use up days to reposition ahead of quarter end. Tight commercial paper markets continue to force unconventional lending. The August window cut proves Fed actions convert bad news into good. We expect a bullish Q4 as investor perception of a dovish Fed rises ahead of the election year. In the meantime, volatility will continue in September. While the consumer has been conflicted all summer, September back-to-school season kicks off a multi-month run for the group beginning in October. Use the final two weeks of September to buy favorite retailers. Stay on the sidelines in brokers through month end as headwinds remain. Instead, own exchanges where revenue benefits from higher average daily volumes. The precious metals will move up in September and should be sold in the final week. Recent declines in biotech create opportunity in leading names as we're only one month into a seven-month window of strong seasonality. By October, investor interest will rise in pharma, healthcare services and healthcare products. Use September to broaden healthcare exposure. Telecom and wireless remain our favorite tech related groups. Next generation devices and converged services are driving network expansions. We expect robust holiday selling of related consumer devices (N95 & iPhone) will continue this trend. Unrelated tech should be avoided until month end. India and China ag demand continues to influence grain prices and support farmer equipment upgrades and acreage expansion. Use September to build exposure to ag supply. Foreign governments will update fighter jets in the coming decade. Rising civilian aircraft demand, fueled by global middle class expansion, boosts aerospace revenues and profits. Own aerospace suppliers for Q4 and Q1 upside.

August Comments - Aug 27

2007-10-16T14:06:00.002-04:00

MS cut its forecast for retail sales to 3% in 08 down from 4.5% - which would put spending growth at the lowest rate since 03. History repeats. Each summer the Street builds fear into markets for a weak holiday season. The good news? We've been saying "avoid retail" all summer and now the Street is helping set up for our mid September buy point. Use the final two weeks of September to buy retail. With one month left in Q3, there's still time to position for upside. Telco and wireless offer better returns this month than tech and can be bought for upside through Q4. Next generation devices will be the focus of holiday spending. Biotech is in the first stages of a multi month seasonal run - own through February. By month end, healthcare services, products and pharma will start to trade higher. Use the first few weeks of September to buy. Gold and silver will move up in September as uncertainty and volatility, alongside tighter money in China, help fuel demand. The mid month seasonal strength shifts back to weakness come this week and into September. September is historically unfriendly to investors. However, September will provide entry points for managers looking toward Q4 and Q1. We expect a retest of the August bottom with a higher low. The market will trade up in Q4 as perception shifts dovish and thanks to pre-election year economic tweaks. The market demonstrated last week its ability to shake off bad news, trading up in the face of jumping foreclosures and increasing layoffs. If incented by the Fed, the market will similarly shrug off bad news in Q4. Aircraft orders remain strong thanks to global middle class growth. This past weeks' Russian Air Show reinforced commitments to future civilian aircraft demand and a growing desire for partnering with western companies. Use any September weakness to build positions. The ag supply stocks remain attractive thanks to rising soybean acreage in South America. Wheat exports will increase and further help commodity prices and ag spending. Look for more suppliers to up South American sales forecasts on the heels of DE's increase to 30% sales growth. It remains too early to buy investment banks as CDO, CLO, LBO revenue streams suffer. Instead, use September to buy exchanges, as they'll report high average daily volumes thanks to rising global volatility.

August Comments - Aug 20

2007-10-16T14:06:00.001-04:00

We've been writing the credit markets are wounded and the Fed needed to do more than repo band-aids. Friday, the Fed blinked and took another step in the right direction. While we would prefer direct consumer relief to accompany the discount window cut, it's clear the Fed is willing to prop the economy ahead of the election year. Our stance on the market remains unchanged. Q4 will be a great quarter for returns. Q3 remains troublesome and volatile. We said last week mid month is best for returns in August and we expected a trading rally. Well, we got what we wanted. Where do we go now? The market will likely retest with a higher low in late August or early September. We will get much more aggressive in buying risk in late September and early October. The consumer remains conflicted. We'll look to buy retail in mid September. Investment bank revenue streams remain at risk. Use rallies to rotate into exchanges as volumes surge thanks to spiking volatility. Buy precious metals as uncertainty, Asian GDP growth and fear of the Fed re-inflating markets help move them up in September. Utilities offer upside and dividend protection thanks to summer cooling demand. Investors sold great stocks early last week, providing nice entry points into some of our favorite industries. Notably, buy aerospace suppliers. The Russian Air Show this week will highlight the desire to link with western partners, with BA a development consultant on the newly formed Russian conglomerate UAC"s regional Superjet. The DoD tanker refueling award further boosts NOC and BA suppliers and next years Dreamliner launch improves EPS. The ag supply stocks are on sale. Investor interest will rise into the South American planting season as Brazil makes up for the U.S. shortfall in soybean plantings. Deere upped its South American sales growth forecast to 30%, bolstering our view. Biotech stocks have six more months of seasonal strength - own them. September kicks off additional strength throughout healthcare - including pharma and products/services. Avoid tech until October and instead buy telecom and wireless with better seasonality and benefiting from growth in adoption of next gen wireless features and services, and the corresponding build out of infrastructure.

August Comments - Aug 13

2007-10-16T14:05:00.000-04:00

Historically, mid August has treated investors more kindly than beginning and end of month. We expect a trading rally and retest with higher low by month end. We remain in summer doldrums with huge volatility (highest since April, 2003) providing above average volumes. The shutdown of additional bond funds spurred global liquidity stimulus (>$130 bn Friday alone) unseen since September 11^th. Last week, we reminded clients markets are notoriously troublesome in Q3, yet end the year nicely above summer lows. However, the majority of returns come in Q4. The troubles aren't over for investment banks & their CDO, CLO, LBO revenue streams. Continue to avoid the basket and use rallies in the group to sell and buy exchanges instead. Above average volumes will continue through year-end. The Q3 credit crisis will act as upside catalyst in Q4 as perception shifts to a dovish Fed ahead of the election year. Meanwhile, use the mid month trading rally to unwind seasonally unfavorable sectors for the remainder of Q3. Gold and silver stocks are rising thanks to the global flight to quality. Own precious metals through quarter end. Avoid tech stocks through quarter end. Instead own telco and wireless stocks offering strong seasonality and benefiting from network upgrades resulting from increases in consumer adoption of next generation devices. The retail sales numbers were disappointing, and no shock to our clients, given our "avoid retail in summer" stance. Instead, we'll buy back into the basket in mid to late September. Utilities will trade higher thanks to summer cooling load demand and investors appetite for dividend protection. Use weakness to increase your biotech positions. Aerospace suppliers will continue to beat on EPS in Q4 and Q1. Buy sell-offs in the basket as civilian aircraft demand remains robust and the DoD is set to award its 40 bn tanker refueling contract this fall. The ag supply stocks can be bought on sale ahead of the South American planting season. Demand for ag supply will be strong in Brazil thanks to weaker Q2 U.S. soybean planting.

August Posts - Aug 4

2007-10-16T14:03:00.001-04:00

8/4/07

The last time the SPX intersected its 200dma was in Q3 of 2006. The last time the Russell 2k was this far below its 200dma was Q3 2006. The SPX and R2K moved up 11% & 17% respectively from those lows into year-end. The bulk of those returns came in Q4. We remain in the historically troublesome summer doldrums - the toughest period for returns. The market is set to establish a low this week and create a trading rally. Traditionally, mid August has been more kind than the beginning and end of the month. We expect a rally, then a retest with a higher low near month end. Since September is also troublesome, sell the August trading rally and sector shift. The rising credit debacle will, eventually, help fuel perception of a friendly Fed - moving stocks higher in Q4 ahead of election year. Meanwhile, stay defensive and wait for us get more bullish in late September. China's GDP continues to fuel global exports, helping ease some pain in the U.S. economy. China continues to work with the U.S. to loosen financial boundaries and derail U.S. protectionism. China's main focus, however, continues to be controlling its growth rate. China's recent rate hike and bank reserves policy boosts precious metals which will trade up through September. The EU and BoE held interest rates steady this past week as they evaluate the credit crunch. However, the bias remains to tighten in the fall. Buy gold and silver. Incentives on new homes are undercutting existing home values and weighing on HELOC defaults. The consumer will remain dormant until Back to School. Technology stocks should be avoided. Instead, own telco and wireless. Consumer adoption of converged data, video, audio devices continue to fuel investment in network infrastructure. China will buy 410m bushels of US Soybeans this year and oilseeds imports in China could double by 2015. Look for ag supply to trade higher as Brazilian soybean acreage climbs this fall (11mn fewer soybean acres were planted in the U.S. this year). Own aerospace suppliers benefiting from the upcoming DoD 40 bn tanker refueling award and the global rise in civilian aircraft demand. Biotech will trade higher as growth PM's rotate out of EPS risk into news catalyst stocks. Utilities offer upside thanks to dividend protection and summer cooling demand.

July Weekly Report Commentary

2007-09-06T14:39:00.000-04:00

July 30, 2007

We kicked off July advising you unload tech by mid month.

As expected, historical seasonal weakness hit the markets in the tail end of the month with the DJIA falling 4% in its biggest drop in 4 years last week. Foreign markets also dropped, with the EFA down 7% since mid July.

As clients recalled we weren't shy about buying the February sell-off, the question we faced this week was "when, or what, will prompt us to issue a buy the market" call.

We cautioned mid July we didn't like hearing market rally supporters saying "this time is different". Instead, trust seasonality, and seasonality tells you to rotate sector weights for the remainder of the quarter.

We've said for weeks the subprime virus will spread. In May, Bernanke warned lenders use caution in deal lending. In June, BAC commented about tighter LBO financing standards. Since early 07, prime lending benchmarks have tightened. Now, we know subprime lopped 500 mn off CIT earnings, imploded two BSC funds, and forced write-downs and downgrades. We will see more of this activity. Rotate into seasonally strong sectors.

Oil prices have boosted OPEC's spending on U.S. assets, but does little to help consumer spending. Retail should be avoided until mid September.

China's 11.9% Q2 breakneck growth, its fastest in 12 years, pressures global tightening and boosts gold and silver stocks. Own precious metals through Q3.

The same issues weakening markets in Q3, will likely serve as catalysts for a friendly White House in Q4.

Until then, embrace biotech as PM's shift from EPS risk to news catalyst stocks.

BA's deliveries jumped 18% YoY. Suppliers will move higher through 08's Dreamliner delivery date. The DoD will award its 40bn tanker refueling contract this fall, boosting NOC and BA suppliers.

In Q2, 11mn less soybean acres were planted in the U.S. In Q3, ag supply will move higher as investors predict a big fall South American planting season. China's livestock feed demand will fuel Brazilian soybean acreage growth. Own dry goods shippers.

Underweight tech for the remainder of Q3. Instead own telco and wireless benefiting from consumer adoption of next gen products and solid seasonal upside.

Utilities will move up thanks to hot summer weather and dividend protection.

In financials, own exchanges benefiting from VIX driven volume growth and consolidation and avoid brokers.

July 23, 2007

China GDP at 11.9%, its highest in 12 years, spurred another China rate hike as inflation clocked in at its highest in nearly 3 years. Gold and silver will continue higher this quarter. The global economy continues to tighten, and rising U.S. economic uncertainty helps provide precious metal demand in the seasonally strong Q3.

You should be light in your tech exposure by now given our comments the past few weeks; remain underweight the basket through Q3. Instead, own biotech as PM's rotate out of EPS risk and into news catalyst plays.

Sub prime dominated news chatter this week as loss reserves were hiked at BAC, CDO ratings were cut, and US consumer lending weighed on banking profits. JPM's CEO Dimon is preparing for a "less favorable environment". 20 plus LBO bond and loan offerings have been postponed or restructured. The most recent failing to elicit buyers is KKR's buyout of Alliance Boot. CIT revalued its mortgage related bonds, yet remains too optimistic at 93 cents on the dollar - a worrisome trend. Expect more write-downs and larger loss reserves at banks.

The liquidity crunch in prime and sub prime will further erode home values. As the demand for risky debt disappears, deals lacking financing contingencies put investment bankers on the hook. Avoid brokers. Instead, own exchanges benefiting from rising volumes. NDAQ did record trading vols in Q2, up 20% YoY.

Foreign investment in US assets climbed substantially thanks China's trade gap and rising payments to OPEC. However, higher oil, while good for OPEC's spending spree on U.S. assets (9.1 bn on U.S. securities in May), remains a lead weight on retail stocks. Avoid them until mid September.

The rise in per bbl continues to drive nat gas and coal demand at utilities going into August's hot summer days. Look for ute's to trade up as PM's seek defensive dividend stocks. Shippers of dry goods, rail and ocean, will also trade higher.

Wireless and telco stocks are the best tech related industries for Q3, further helped by the quick adoption of next gen consumer devices and new network supplier products.

Ag supply will trade up ahead of South America's Q4 planting season and aerospace supply tied to NOC and BA will move higher in Q3 ahead of the DoD tanker refueling contract (40bn).

July 16, 2007

I get nervous when I hear "this time is different".

We, however, have learned to trust seasonality.

The NASDAQ has moved 5.1% in the past 12 trading days. So, we hear, "this time is different, the tech rally will continue." We don't think so.

While our forecast for higher markets through 07 remains in tact, we continue to believe the NASDAQ rally, beginning in June, will stall. Since '87, the COMP averaged up 3.2% for the twelve-day rally from June until mid July, only to sell-off through month end. (Stock Trader's Almanac) So far, we are not seeing anything different from what has happened historically. You should step aside from tech this week for the remainder of Q3. The exception is telco and wireless, which will reward investors in Q3.

CDO rating risk rose last week as S&P and Moody's acted to restore confidence by downgrading related bonds. Brokers remain most at risk as defaults and steep pricing incentives on new homes (think end of year auto deals) undercut existing home prices. Instead, own exchanges, which will move up thanks to volatility and the quest for global trading integration.

Gold is set to move back to highs as monetary policy increases demand for precious metals. Inflation concerns continue overseas & China GDP this week will further fan the fire.

Consumers are conflicted. Rising wages and job creation increase confidence, while higher costs & declining home values reduce spending. Summer is not the time to own retail.

Bernanke begins his presentation to the House on the 18^th- expect volatility.

Use recent market strength to sector rotate for the remainder of Q3. Buy biotech through July. PM's will shift away from EPS risk to news catalyst plays - boosting the group.

Utilities offer upside and dividend protection as summer cooling season ramps into August. High per bbl drives utility demand for nat gas and coal - bullish for producers and shippers. Rotate out of energy service and buy nat gas and coal.

Ag supply stocks will beat on EPS and trade higher through Q4 as investor chatter rises ahead of South American planting season.

Aerospace supply stocks will move higher into year-end thanks to global passenger growth and civilian aircraft demand. BA, NOC and suppliers will move up through Q3 ahead of the DoD tanker refueling contract award.

Rising room rates are boosting hotel REIT's.

Smaller cap stocks typically do best in pre election year July's.

July 9, 2007

The NASDAQ rally continued into early July as expected and is set to stall by mid month. The iPhone launch has helped boost telco suppliers. In the past five years, telco and wireless communications have been the best tech related industries in Q3.

The brokers continue lower as rising rates tied to inflation worries fuel speculation of a slow down in deal financing and tighter prime lending standards. We continue to favor exchanges as global consolidation and monetary policy will drive volumes. (ICE, NMX) The historically troublesome Q3 offers plenty of excuses for investors to book profits. The rising per bbl will impact profit margins while tighter employment and rising wages also dampen earnings. We expect the media chatter will continue to fuel profit taking this summer, especially surrounding consumer discretionary spending. Rising wages and headline inflation will keep the Fed on hold, dampening Q3 bulls.

The market will move higher into year-end, but the notoriously troublesome quarter will whipsaw investors. Keep focused on our best lists and the focus and against the grain picks for maximum excess.

The Bank of England tightened rates, further boosting gold into seasonal strength for precious metals. Own gold in Q3 as coordinated monetary policy; rising inflation worries & commodity price related margin erosion will continue. (AEM, GLD, AAUK, SA, GG)

Growth PM's will move into news catalyst stocks, including biotech, and out of EPS risk plays. Buy biotech through month end. (GILD, GENZ, CELG, AMLN)

As the market gets defensive, utilities will move up as investors embrace yield and speculate on higher electricity demand into cooling season. High per bbl will boost natural gas and coal stocks - and related railroads and shipping. (MRO, APA, ARLP, ACI, BTU)

REIT's are benefiting from global gdp growth pushing office rents/building sale prices higher and hotel REVPAR. (JLL, SHO)

Agriculture suppliers will beat thanks to the record corn planting in Q2. Look for strength during late Q3 and early Q4 as South American soybean planting makes up for the drop-off in US soybean planting. (TRA, BG, MOS, POT, ACET)

Use Q3 weakness to buy aerospace suppliers, as they will enjoy EPS growth through 07 and 08. (BEAV, MOGA, GR, TDY, CW) Look for NOC and BA to trade up ahead of the DoD tanker-refueling contract this fall.

July 2, 2007

The SPX is struggling with its 50dma entering Q3. The June Nasdaq rally will fade by mid July. Use early month post-iPhone launch upside to reduce weights.

Overall, Q2 buying was supported by M&A, buybacks, global asset relocation and inflows out of speculative residential real estate in the U.S. In Q3, risk to deal financing is rising as BAC's Lewis tightens financing standards. Broker seasonal headwinds are increased by BSC's CDO debacle. BSC's hiring of Lane from LEH demonstrates a need for image rebuilding and risk to asset outflows. MER's stepping aside indicates rising fear in default rates. Likely, prime lending standards, which rose in Q1, continued to tighten in Q2 - further pressuring home values. Own exchanges instead as rising VIX lifts volumes and global exchanges build derivative platforms.

Biotech begins a multi month rally this month as PM's shift out of EPS risk and into newsflow catalyst plays. July sector shifts will prompt outflows in Q2 leaders as PM's digest second half profit forecasts and summer historical weakness.

Utility stocks trade higher on summer cooling demand. This boosts natural gas and coal stocks. Use energy service Q2 gains as a source of cash to buy natural gas and coal.

$70 oil weighs on consumer confidence and spending, bearish for retailers. As we've said for weeks "summer is not the time to own retail". Instead, look to buy in mid September.

Global commercial construction is up as the IMF is set to increase its global growth forecast amid strength in the EU and Asia. Basics and industrials tend to struggle in the quarter, and will offer buy opportunities for Q4. Use any weakness to buy aerospace and agriculture supply.

Consolidation in metals will spread to specialty alloys and structural steel. Demand for next generation aerospace remains robust as global economies fuel middle class passenger and business travel. Last months Le Bourget Airshow added upside with Airbus and BA order flow. BA & NOC will trade up in Q3 ahead of the Q4 40 bn tanker refueling contract with the DoD. We remain early innings in the multi year EPS expansion.

Soybean planting in the U.S. is the smallest in 12 years (64 mn acres), further sparking soybean prices. High soybean prices in Q2, coupled with record U.S. corn planting, mean ag supply companies will beat expectations. South America will have a robust fall planting season supporting ag supply into Q4.

Gold & silver stocks, an afterthought in Q2, will move higher in Q3 as coordinated tightening overseas fuels demand for precious metals.

2007-07-10T13:49:00.000-04:00

Our weekly comments from June:

Our buy and hold picks were up 16.5% in Q2

6/25/07

The SPX fell the most it has since March as it tests its 50dma for the third time this month.

In the final week of the quarter, expect Nasdaq stocks to lead before stalling in early July (GOOG, AAPL). The iPhone launch will add additional catalysts to telco supply and wireless software stocks (CIEN, ALU).

Overall, Q3 is most troublesome for returns. Q2 was buoyed by M&A activity and global asset relocation, which drove volumes.

As bond yields have trended higher, risk has risen to deal flow revenues at brokers. Prime lenders are increasing loan standards since Q1, further weakening home sales. Q3 is marked by sector relocation as PM's digest second half earnings forecasts alongside an increase in negative media chatter. Tighter lending and M&A deal flow risk is supported by BAC's CEO Lewis comments this month describing BAC as more selective on bridge loans and deal lending. Likely, other major banks are reigning in financing in the wake of Bernanke's May comments to use more caution. Higher rates may squeeze broker profits as brokers continue to use record leverage and write-down risk rises post BSC CDO hedge fund troubles. Instead own exchanges. Last week's 13% jump in the VIX boosts volumes and consolidation will continue post CME & BOT (ex. LSE's buyout of Italy's Boursa). (ICE, NMX)

Sector rotation in Q3 will lift biotech as PM's seek growth tied to newsflow catalysts rather than EPS risk. (GILD, CELG)

Utilities will also move higher as PM's seek dividend protection (XLU).

REIT's, buoyed by strong lease rates and comm'l sales prices, will attract investors. (JLL, SHO)

Nat gas offers more upside than enserv as utility demand into the summer cooling season rises. (COG, SFY, PQ, FTI, )

Gold & Silver stocks, an afterthought in Q2, also see inflows and trend higher in the coming quarter and can be bought in July (GLD, SLV).

China's investment in urban factories rose 26% YoY to 420 bn further boosting basics imports from Australia and South America - good for dry shipping stocks (DRYS, QMAR). Global energy demand will continue to prop nuclear supply and engineering stocks. (EME, CW, CCJ, GE)

Ag supply stocks will post better-than-expected EPS as high Soybean prices boosted infrastructure, seed, & fertilizer purchases in South America - and corn planting did the same in the U.S. (CAT, DE, MON, BG, POT, TRA, GEHL)

Airplane orders in Paris last week help add additional catalysts to suppliers. Buy aerospace supply on any Q3 selling. (HON, PCP, BEAV, TDY)

6/18/07

A few contrarian stats to consider: Wall Street analysts are more pessimistic than ever issuing the fewest buy to hold ratings ever (Bloomberg). Further fueling gains are record short positions with 3.1% of all outstanding shares held short - the largest percentage since the early 1930's, and NYSE short interest at a record 11.8 bn shares - up 7% from last month.

Overweight tech into quarter end and unwind them early next month. The Apple iPhone launch will move wireless software and related telco supply into month end.

Inflation data last week kept the market volatile as investors shook off prior week gains in bond yields and bought stock. The Nasdaq will lead into early July. The core CPI at 2.2% YoY is contained. The core PPI remains in check too, the exception being a 3.7% YoY rise in intermediate goods which serves as an excuse to sell EPS risk in the troublesome Q3.

Retail sales were decent, however, unconvincing, as rising gas price chatter will force retail stocks lower through summer, allowing a better entry in mid September.

Last week, BA upped plane demand targets through 2020, helping drive investors back to suppliers. China's rising middle class will make up the bulk of passenger growth, driving profits at plane equipment suppliers.

Sell brokers to buy exchanges - which will further consolidate in the wake of CME & BOT. MON upped its' profit forecast last week.

The US corn planting season has wrapped up and it was a great season for seed, fertilizer and equipment demand. High Soybean prices in Q2 likely boosted equipment and seed upgrades in Brazil. Strength in ag supply is good for dry good shipping co's, including DRYS and QMAR.

The fast approaching Q3 will see more sector rotation. PM's will book Q2 winners and relocate into dividend plays like utilities and REIT's. Also, we'll see a rebound in gold stocks beginning mid July. The biotechs will enjoy inflows as PM's look to capture newsflow related, rather than EPS related, upside.

6/11/07

Into Friday, rotation out of the DJIA shaved 400 points off the high and technology stocks found buyers. The Nasdaq and small cap will lead in June with Technology being the best sector through the first week of July. (GOOG, AAPL, ORCL, NUAN, VDSI, NTGR, ALVR, JCOM) The initial shipments of the iPhone, scheduled for June 29, will sell-out. The short-term tech rally will stall by mid July.

The troublesome Q3 is approaching and PM's are taking profits in Q2 winners, such as basics, transports, consumer and banking. This will continue through month end.

The summer is not the time to own retail. The consumer is tired and credit card spending slowed in May. A better entry into retail will present itself in mid September.

The energy service stocks did great in Q2 and it's time to take profits and rotate into natural gas and coal. (OXY, RRC, ARLP, BTU) Instead, we'll see buyers in news-flow plays rather than EPS risk stocks. This means biotech will begin a multi month rally in July. Use June weakness to buy.(GILD, CELG, ONXX, AMLN)

While inflation remains contained, recent econ data has provided an excuse for selling the market. Don't confuse seasonal weakness with a shift in the administrations desire to boost the economy into the Presidential Election year . The White House remains the markets best friend in 07.

The defensive nature of Q3 will help drive returns in REIT's. Hotel REVPAR remains strong and recent consolidation is boosting high dividend hotel plays. Also, multi year highs in office rents - and in office tower sale prices - is boosting M&A. (ENN, JLL)

Utilities have sold down in June and offer upside beginning in July as PM's seek defensive dividend stocks. (VVC, FPL, PPL) Corn-belt ute's are enjoying load demand growth. (LNT, ATO, AEP)

Gold, which has been dead money for all of Q2 will get interesting again in mid July. Look to get involved in precious metals in late June and early July for Q3 upside.

The industrials tied to aerospace, auto supply and power generation can be held through the rocky Q3. (TDY, CW, TEN, BEAV, CTB)

6/4/07

In pre-election years, the R2K has beat the DJIA by 1% in June. The Nasdaq has led the DJIA by 1.7%. We expect sector rotation ahead of the notoriously troublesome Q3 - suggesting profit takers will emerge in basics, cyclicals, consumer, banking & transports.

Instead, money will flow into technology stocks in June as the COMP plays catch-up through the first week of July. Tech will also see interest following the June Apple Developer's conference -and the ever-secretive iPhone release. (ORCL, NUAN, ADTN, NTGR, JCOM)

The biotech stocks pick up steam in July as money rotates away from EPS into catalyst driven biotech and high dividend sectors like utilities (VVC) and REIT's (DDR, ENN, JLL). The ASCO conference in early June will help support cancer plays. (CELG)

The oil service stocks have had a great run, moving up 24% since we told you to buy in early February. Now, however, it's time to take some profit and wait to see how the summer storm season impacts supply. Natural gas, refining and coal, however, remain ok thanks to rising utility demand.

The China chatter has died down a bit since the trade talks concluded. However, they will continue to be a driving force behind industrials tied to export industries.

The small cap auto suppliers, especially those tied to emissions and engines, are rallying thanks to growing auto penetration in China and India, a stabilization of the US auto industry, and more stringent regulations. (TEN, DCI) The military order flow for IED-proof vehicles will continue to help boost chassis, tire and truck equipment suppliers and makers. (SPAR, TWI)

The aerospace suppliers are also moving again thanks to renewed interest in Asian passenger growth and recent Airbus orders from Qatar and Latin America. (BEAV, ESL, MOGA) This and a RTI contract extension from LMT, are boosting specialty alloy stocks again. (ATI, TIE, RTI, BW)

Commercial building remains robust fueling profits for structural steel and comm'l REIT's. (STLD, CHAP)

We continue to like corn-belt ute's and regional banks as infrastructure spending continues to fuel regional growth. (NTRS) The consolidation in financial research is likely to continue. (DNB, FDS, IT)