David Fry's Daily Market Outlook for Wednesday

Homebuilders having some problems? And here I thought they were "value plays" according to some prominent Wall Street analysts. The one thing that seems so amazing is that no one seemed to take seriously any of the warnings, not to mention insider selling, issued by CEOs of all these firms. It's bizarre on the surface, but perhaps just reflects the high levels of cash rationalizing investments.

There's some spillover as the subprime story has become a bobber that pops to the surface every few days only to be pushed lower quickly by officialdom. Bernanke gets his shot Wednesday with congressional testimony. Can the man successfully talk out of both sides of his mouth? On the one hand he'll be suggesting that the Fed is "vigilant" in fighting inflation which might help the dollar and push gold lower. On the other, he'll be under pressure from politicians to do something about mortgage issues a-la lowering interest rates. He can't have it both ways can he? Five will get you ten he's undergoing intense rehearsals with his handlers tonight.

Does Chucky have another sequel in him?

Chucky the Consumer had a rough day today. Consumer Confidence data was slightly lower. That doesn't mean you should mess with Chucky. The one story I found interesting was the supposed rub-off from the subprime mortgage issues to Harley-Davidson Inc. (HOG) where it was reported that their borrowers are well, somewhat subprime. So, if you're looking for a used chopper, you might get one cheap soon.

The dollar was only slightly lower today despite strong German data and lousy U.S. data. Again, Bernanke might be ready to say something to lift Bucky. However, if he does, gold will decline and so will everything else one would think.

Okay, let's talk "a little" about the stock market since I think we'll see more meaningful and decisive action Wednesday with Bernanke's testimony.

Elsewhere and overseas...

That's enough charting for Tuesday, since Wednesday could be more significant in terms of volume and trend. But again, the news cycle is impossible to predict. [As I write this Beazer Homes (BZH) is according to the Charlotte Observer under a criminal investigation. Its stock, already down 1% during regular hours, is down another 15% in after hours trading.]

I see that bond market Big Daddy Bill Gross of PIMCO stated that the Fed will have to either cut interest rates low enough so that mortgages would be at 5% or, he continued, home prices will have to fall 20%. He says the Fed's hands are tied. I just said that which means, well, nothing at all really.

Disclaimer: Among other issues, the ETF Digest maintains positions in: PowerShares DB US Dollar Index Bearish (UDN), streetTRACKS Gold Trust ETF (GLD), PowerShares DB Energy Fund (DBE), PowerShares DB Commodity Index Tracking Fund (DBC), iShares Lehman 7-10 Yr Treasury Bond ETF (IEF), MidCap SPDRs ETF (MDY), Telecom HOLDRS ETF (TTH), Rydex S&P Equal Weight Energy (RYE) and iShares MSCI Germany Index Fund (EWG).

Comments

[CrossProfit:]

The key was, is and will be 'insider selling'.

Insiders don't sell in mass if they expect the stock to maintain its current level over the next three months. The bump in homebuilder stocks was to allow the brokerage houses to unload all the stock that the specialists took off the hands of the insiders.

The same is true for IPO issues. After the six month moratorium is over, insiders start selling if the stock is overvalued. Specialists and sometimes the underwriters either directly or through proxy, buy the stock and artificially push the stock up another 10% - 15%, unloading on the way up. Once they have re-sold the newly accumulated shares, the stock drops. This is the reason you find that so many IPO issues go up during the first six to ten months only to come back down over the following six months.

As a rule of thumb you can assess the true value of a stock by observing the price that insiders start selling. For example; if the IPO price is $6.50 and insiders commence selling at $15 and terminate at $17, the stock may still climb to $19.50 before falling back to $12, which is about 20% below the original starting point of the exercise. The same percentage rules apply to existing stocks. Remember, insiders know the true value of a stock better than all the analysts in the world. When a stock is grossly undervalued, usually in the 40+% range, insiders will borrow to purchase stock, so it works both ways.

Follow the financial performance of the company and the official guidance, stay away from any hype and most importantly check earnings. If there aren't any or they are coming down, the stock will follow suit.

CrossProfit (IL)
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2007 Mar 28 06:42 AM