Thursday Outlook: Commodities, Emerging Markets

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I don’t mean to tease you but the DeMark weekly sequential indicator with the completed “9” count was a good tip that the trend was ending. You’ll find that true on charts from DBC, XLE and so forth.

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The market is severely overbought, at least on a short-term basis. Keep that in mind if you decide to join the chase to buy financials, homebuilders, transports and so forth.

Congress will pass and the president will sign a budget busting housing rescue package assured to give new meaning to Moral Hazard concerns and pork. It’s a fine mess Greenspan & Co. created. Someone needs to clean it up and that’s what’s going on, especially in an election year. No question, it comes with a distasteful and costly tab. But, that’s the way things are.

Have a pleasant day.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in MZZ, TWM, IWM, QQQQ, QLD, IEF, PST, TLT, TBT, GLD, DBP, EFA, EFU, EEM, EEV, EWZ, RSX, FXI and FXP.

Comments

[David White]

I enjoyed your article. You made a lot of good points. However, you are failing to acknowledge that half or even one quarter of something that should recover is better than nothing (i.e. better than FNM and FRE going under). This by itself is a huge relief to the general investing public. FNM and FRE own over half of the mortgages. We cannot afford for them to go under. Certainly some of the banks reported bad earnings. But even those seemed to forcast improvement in the near future (for example Wachovia). A number of banks reported decent earnings, which were much better than had been expected (JPM, WFC, and BAC notably). this was overall very good news for the markets. The markets do seem to have been going straight up, but that has been fueled in addition by a large decline in the price of oil. Add to that a spate of good earnings (MCD, SLB, BHI, etc.). I am expecting more today as many Ag stocks report. Your techinical resistance lines look worthy of note. Still it is hard to say exactly what will happen in the market. The geopolitical situation with respect to Iran seems critical to market health. The price of oil seems critical. Other commodities going down may actually be helping many stocks. Certainly the banking news is helping the housing stocks, the financial stocks, and the stronger tech stocks. I don't pretend to know when this rally will end. We are still down a long way from not to long ago. The real estate market news has been minorly better recently. If that turns from a negative into a positive (even if only slightly), it could drag all the equities markets upward. Nonsense? I don't think so. Volatility? It seems a certainty. Do I know the future for sure? I am not sure anyone does. There are a lot of variables.
Over bought is a relative term. The market can go on for weeks in an overbought state. Often that is the mark of a strong market. I will look forward to your next directional article. Perhaps by then the picture will have become clearer.

[balois]

Thanks for straight and clear words.

David Fry writes

“…and, presto, money is created from rubbish! Do you then wonder why gold prices would fall and the dollar rally? I do and it gives me a headache...”

Stop wondering! In order to “keep the Dollar strong” (until further notice, just a hilarious oxymoron), it is possible that the Central Banks not only sell but short the heck out of gold.
By wasting their gold, they sacrifice also their own “strong” currencies, on the altar of the not-so-mighty dollar. Because they have still too many of them on their balance sheets. And they are mightily embarrassed. And the timing is just fine to do that in the general financial mess we are in. And some more inflation – who cares. If it gets out of hand, we ll just fix the “core” calculation formula and on we go, cheating ourselves.

Socialists playing capitalists on the back of us, the poor schleps, sometimes still with the illusion that we are living in a “free market”.

Have a good day

[David White]

I guess I was right about POT earnings. POT beat, and they guided substantially higher for the year. POT reported $2.82 EPS last quarter vs. an expected $2.61. This wasn't incredibly remarkable, although some people were worried about the effect of the high natural gas prices during that time. The real meat of this report comes in the guidance. POT increase FY guidance from $9.50-$10.50 to $12- $13. This is over a 25% increase in profits. This also brings the current PE down to 31.8 (at a price of $204). However, if we take the guidance as a profit projection of $12.50 EPS FY, that means POT will average about $4 EPS / qtr over the last two quarters of the year. This means the PE after next quarter's earnings would be about 22 if the price remained the same. After Q4's earnings the PE would be 16.7. If you presumed the current figures are a little bit of an underestimate, you might think the FY earnings would come in at $13.50-$14. At $13.50, the PE with a stock price of $204 would be 15.1. Finally you want to figure that this stock is going to grow 75% or more in 2009. There is definitely room for this stock to go up. Conservatively, a 75% projected grower for 2009 could trade at 30 times 2008 earnings (30 * $13 = $390). You might then predict that POT might rise in price from now until the end of this year by almost $200 (basically double). If you were being more conservative, you could predict, you might make that multiple 25. In this case the price would only rise to $325. This is still a 50+% rise. If you were being less conservative, you might pick a multiple of 40 or more as this was what the stock was at before this earnings announcement (actually the multiple was 44) . At a multiple of 40 times 2008 earnings, the stock might rise to $520. All of these are incredibly great scenarios. It looks like a very strong buy at this point.

[David White]

Apparently Bunge completely blew away their earnings this quarter, $5.45 vs. $2.27 expected. However, they only raised full year guidance by $2.25 a share, so there must be more to this story than I have gleaned so far. It definitely looks like a one time item is included with this quarter's earnings. Even so they are significantly ahead of last year.

[David White]

Ditto DO which reported $2.99 vs $2.77 expected ($1.81 in the year ago quarter). It is beginning to look like ther are at least some good results being reported this quarter.

[David White]

Ditto SYT.

[David White]

Further Morgan Stanley raised its view on European banks today to in-line. Things are looking up!

[David White]

Since POT raised its full year guidance by 25%+ today, we should be able to expect a 25%+ pop in the stock price over the next few weeks. I think the Canpotex price increase has not been reflected in the stock price yet. Now the guidance is out. It is rosy. It is historically conservative. The projected 25% increase in profits should be reflected in the stock price as the "slower anlaysts" raise their POT 1 year target price, revenue and earnings estimates. An early analyst raised his/her target to $425. I am estimating that the stock price will increase over the next few weeks to $250-$260. It may go higher. Still it has the rest of the year to reach whatever its new, higher target will be. It should be a good short term play (as well as long term) as long as the markets hold up. The grain prices generally seem to be stabilizing.

[David White]

Of course, Scotia then cut POT to sector perform. Maybe they only read the earnings news. It was a beat, but not overly impressive for POT. The guidance is very impressive though. Add to this the news last week that POT will increase potash capacity by 2.7M tons a year by 2012, then you have quite a good looking scenario. I think the Scotia analyst is nuts. Of course, POT is in a great sector. TRA apparently did very well.

[David White]

In my book any analyst who thinks an increase in company FY guidance (with only 2 Q's remaining) of 25+% on the year deserves a cut in its rating from outperform to sector perform is crazy. That figure amounts to approx. a 50% overall increase in the projected second half earnings just from this point onward (ignoring how much better it is than last year). The actions of some of these analysts boggles my mind. I can understand why my sister (an executive at a DJIA company) has such a low opinion of analysts.

[David White]

Perhaps this is another stock manipulation trick. If Scotia et al can get everyone to sell now, they can buy the stock up cheap while the analysts up their ratings. Some people were no doubt just betting on the earnings pop. Still stocks rise for weeks after good news like this.

[Brian inMontreal]

Dave, Apparently Wall Street got (according to Bush, what an expert) and they are now hungover.
So why is the FED still pouring on the Booze !?!?!
Bush and the oil boys must just love this party so much they don't want it to end.
I guess the Democrats get to turn out the lights. I bet that's not going to be pretty ?!?!?!

[Brian inMontreal]

Opps, Wall Street got a hangover, sorry (I even proof read it, to fast).

[David White]

The FPE (2009 earnings) for POT was 9.72. If you multiply in this 50% profit increase for 2H 2008 to 2009 earnings. Those earnings will be approx. $20 * 1.5 = $30. At $30 EPS for 2009, the current FPE (2009 earnings) would be $204/$30 = 6.8. This may not work exactly like this, but it should still be great. It might even be better.

[David White]

If the price increase announced by Canpotex doesn't really effect prices until Sept. 1, much of the increase will be in Q4. This may mean the increase is a greater than 50% increase per quarter (if mostly due to price). $2.50 in FY EPS spread over only 4 months amounts to about $.60 per month. This might mean +$1.80 for the Q4 estimate (and further quarter estimates).

[David White]

Brian in Montreal: Actually I think the whole oil situation is being handled particularly badly by the US. Much of the US trade deficit is now due to oil. The US needs to produce more and use less. It hasn't made appreciable inroads in either of these areas.
I am not at all sure Obama will be elected. McCain is clearly the most experienced in foreign affairs (and with the military). Obama may understand minority US citizen point of view better than McCain. However, I am not at all sure that will translate into a better understanding of terrorists, especially Middle Eastern ones. The US seems to slowly be turning the housing crisis around. It seems to be saving the banks (and its citizens) from disaster. It still needs badly to address its oil crisis. It uses too much, and it produces too little. Both of these things have to change as quickly as possible.

[fatcat]

Damn,Dave...take achill pill..

[Ops did itagain]

David White writes:
FNM and FRE own over half of the mortgages. We cannot afford for them to go under. Certainly some of the banks reported bad earnings. But even those seemed to forcast improvement in the near future (for example Wachovia).

So I have several questions for you:
Why can't we let them go under? We let real industries go under all the time and they create real wealth unlike fred/fani. Isn't letting bad companies fail the idea of free markets? Or are we now the new soviet union? And if they are too big to fail how is making them bigger good for the tax payers?

Also on bank's earnings: Why would you trust the banks forecast from the same banks that not long ago said all was well we need no new capital?

[tamarak]

David White

Cramer attributes the lack of buying interest in POT after the earning report as due to the perception by hedge fund managers that an end to the ethanol mandate is likely and that would invalidate the projections of future earnings. Your POT forward PE estimates would be too optimistic under their scenario.

On a percentage basis over the past month, money has flowed most out of oil & gas and basic materials, and into health care and financials. (online.wsj.com/mdc/pub...) While the fundamentals for potash and agriculture appear sound for the long term, the short term demand for POT shares could decline more before sentiment turns back in favor of basic materials.

[mythoughts]

Anyone who shorts POT need to see a psychologist. Today is a great buying opportunity for POT 1-09 calls.