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INDEPENDENT Financial Advisor / Professional Investor- with over 30 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Market Update 11/26 -- Plenty To Be Thankful For - IF You've Been Bullish

    Over the course of the last 2 years I have repeatedly written about the "secular bull market theme" in my missives on this blog, in concert with my commentary on various articles published here on SA.

    I note as we enter the last few weeks of 2014, the dissenters, naysayers or whatever word one can conjure up to describe those that continue to argue those points with me, are still pretty vocal in their disdain of the equity market.

    Bull markets are based on climbing the proverbial "wall of worry", and this cycle has been no different.

    I have consistently argued that the current bull market could be one of the biggest we will witness in our lifetimes. Often calling it the "opportunity of a lifetime" , a 'game changing life event" for those that chose the bullish equity path in the last few years. That stance has continued to provoke the ire of many who simply don't wish to embrace this market. Sadly as I have stated before, they have truly been left behind.

    Both investors and corporations continue to act conservatively because of the uncertainty caused by a host of issues.

    "Uncertainty" , doubt is typically the engine of bull markets.

    Here's a list of the concerns I ran across this past week that many have cried over & over as reasons to stay on the sidelines. The true proverbial "wall of worry".

    However, the list is long and has proven to have been relatively fruitless for anyone subscribing to it . One has to wonder when investors will grow tired of being so scared. My guess it will be at the TOP, in my view we are far from that on the sentiment, fundamental and technical level.

    1) Corporate profits growth isn't sustainable.

    2) Profit margins will fall.

    3) Corporate taxes are too high.

    4) Corporate taxes are too low.

    5) The stock market is extremely overvalued.

    6) Buybacks are the only factor supporting the stock market.

    7) Small businesses can't grow.

    8) Employment is abnormally weak.

    9) Wage pressures will cause inflation.

    10) There's too much regulation.

    11) There's too little regulation.

    12) The government is too big.

    13) The government isn't doing enough.

    14) The government won't support energy investment.

    15) Capex growth is anemic except within the energy sector.

    16) The ECB is too loose to benefit the PIIGs.

    17) The ECB is too tight and is fueling deflation.

    18) Corporations are too uncertain to hire and invest.

    19) Corporate profits are an unsustainable large proportion of GDP.

    20) Monetary policy has been impotent.

    21) The economy can't survive without QE.

    22) The US has too much debt.

    23) The US budget deficit is too large.

    24) The US is de-basing the dollar.

    25) The strong dollar will hurt earnings.

    26) The Fed's policies will cause inflation.

    27) Deflation is spreading around the world.

    28) Treasuries are in a bubble and have disconnected from the economy.

    29) Low rates are forecasting economic weakness

    30) Invaders.

    a. Terrorism

    b. Immigration

    c. Ebola

    31) The separation of wealth is historically wide.

    32) The owners of capital are being targeted.

    33) Pensions will bankrupt municipalities.

    34) Public employee unions are being targeted.

    35) There's too much uncertainty to take risk.

    36) Investors are taking too much risk.

    37) Developed economies will suffer in the "new normal".

    38) Expectations for the emerging markets are too optimistic.

    39) China credit markets are an accident waiting to happen.

    40) Geopolitics.

    a. Iraq

    b. Iran

    c. ISIS

    d. Al Qaeda

    e. Syria

    f. Israel/Palestine

    g. North Korea

    h. Argentina default

    i. Brazil election

    j. Russia/Crimea

    k. Russia/Ukraine

    l. Russia/NATO

    m. Japan tsunami

    n. China/Japan

    o. China/Taiwan

    p. China/Hong Kong

    41) High oil prices will hurt the consumer.

    42) Low oil prices reflect the weakness in the economy.

    43) Housing will be a drag on the economy.

    44) Housing is in another bubble.

    45) Bond spreads are too wide.

    46) Credit downgrades will be numerous.

    47) Bond spreads are too narrow.

    48) Sentiment is overly optimistic.

    49) Derivatives are dangerous.

    50) Hedging downside risk is critical.

    WOW - no wonder the average Joe/ Mary isn't investing !!

    On the Sentiment level, sure we get the weekly bullish/ bearish levels from AAII and such, and many view them as the holy grail to determine the next market move. In the short term, maybe so, but in the long term , look at the inflows and outflows of equity funds as a guide to what people are thinking. I note that May, June, July, Aug, Sept and Oct have seen net outflows of U S equity funds. (data from Morningstar & ICI Statistics). Just as the S & P has maintained its path to new highs. Investors aren't "embracing' this market and still don't believe. The list of worries preys on their minds and with the financial crisis still fresh in many investors minds, I don't see that changing anytime soon. So for those that remain steadfast in their desire to garner portfolio gains from equity ownership, that is "bullish".

    Fundamentally we are at record corporate profits. Those profits have improved by 300 % since the 2009 lows. Coincidentally the market has increased threefold in that same timeframe. The cries that the market has outgained corporate profits is uncalled for.

    Technically -- the Long Term uptrend hasn't been violated. We can hear stories, commentary about divergences, short term technical trends, etc., but until that LT trend is violated the market will continue higher. To that end we had yet another Dow theory buy signal this past week, indicating we are NOT at THE top. Anyone following these posts should now realize that these "signals' are indeed "real" and to be reckoned with. Just go back and look at how many times they have been both recorded and mentioned here on this blog. My guess is about 16- 17 of those since I started here on SA, and we are now at new highs.

    Sorry if I sound like a broken record on this sector, BUT broadly speaking, in my opinion energy stocks - are within days/weeks of bottoming, irrespective of the decisions to be announced by OPEC at its meeting this Thursday. That certainly does not mean that I envision a huge near-term oil rally, but even a period of stabilization would support recovery in energy stocks, particularly given the prospect of sector rotation into energy and out of the recently outperforming S&P sectors. WTI is now testing that $73 support level once again as the weakness continued on Tuesday because of commentary out of the OPEC meeting. As I finish this blog post i note that WTI is precariously perched a few cents above the intraday low of $73.21. This will be yet another test of that low and the old adage of repeated testing of a resistance or support level usually means it will eventually break thru. In this case to the downside.. Stay Tuned..

    I mentioned the airlines a while back and I don't believe that positive story and price appreciation is over just yet. With oil down at these levels and no "v" recovery in the price of crude anticipated, they should show good earnings growth for the next 2- 3 quarters, a lot more growth than analysts are anticipating. I havent seen any price upgrades in the last 30 days on names like DAL & AAL.

    Best of Luck to all ,, and be thankful for all that we have !!

    Nov 26 11:41 AM | Link | 3 Comments
  • Market Update 11/22 --- Chugging Along..

    Can u say "fumes" - that's what it feels like the S & P is running on as it meandered it's way through the week. Two weeks ago I mentioned that the rally might take the S & P to 2050 before running out of gas.

    No one knows where this recent uptick will end, - I'll take a "guess" that we could trade up to around S & P 2045- 2050, before we get the next downdraft.

    Well that was my intro to this weeks blog update when I prepared those comments mid week. However, along came China cutting their interest rate and Draghi, once again mentioning Euro QE and the fumes were ignited Friday when the S & P and the major averages all took off to new highs with the S & P closing at 2063. The Dow 30 is within a whisker of 18,000, and the Dow Transports pegged a new high as well. Yes, yet another Dow theory buy signal.

    As I mentioned in earlier missives the sharp sell-off in October and equally sharp recovery produced a V-shaped bottom and took everyone by surprise, including myself. Such action is rare when the sell-off is so deep (approximately 10%). Typically, a market will test the low or at least take a longer period of back-and-forth trading to recover, as investors debate the reason for the pullback. Nonetheless, the recovery was impressive as internal action suggested conviction on the part of buyers.

    An updated look at the S & P: The uptrend for the large-cap S&P 500 remains intact after the quick recovery back above the 200-day moving average and back above the uptrend line drawn off the 2013 low as the chart below indicates. The current upside trend line suggests "resistance" near 2080. The secondary trend "support" is near 1975 (there are plenty of short term support areas before we get to that level), while the PRIMARY trend support is just above 1800.

    (click to enlarge)

    Despite all of the tough talk, right now all we are seeing is the

    typical Washington drama with both sides posturing themselves. I continue to believe we may see compromise in the air ,but we will have to see how that plays out between now and year-end. If my theory prevails, it would be pretty bullish for the equity markets. Stay tuned.

    The above comment was written before Mr. Obama, took his stance on Immigration on Thursday night. I tend to leave politics out of my investment decisions as it really doesn't matter where one stands on these issues, and all those individual biases tend to cloud one's investment making decisions. Suffice to say harmony in Washington would be a positive going forward while constant bickering presents speed bumps as the market does not like uncertainty. But as we have seen in the past, some of those speed bumps have been great times to buy equities.

    The secular Bull theme: Looking at studies of past secular bull markets reveals that equity markets tend to enter a long period of expansion after emerging from an extended period of negative returns (the lost decade of 1964-1982, or 2000-1012). Typically these expansion periods last for 15 years with annualized returns

    of ~16% per year.

    Using March 2009 at a starting point implies we have many years left in this secular bull market, certainly there will be weak periods of market action thrown at us. However, long term investors need to use that premise as their backdrop when making investment decisions.

    As we enter into end of the year tax selling season and window dressing, its time to review any positions that you may be emotionally attached to but are not working. In addition, I have occasionally raised cash when the market has a late year or early January correction. At the very least, I try to have some extra ammunition in early January, when professional investors are back from their holiday breaks and are ready to place bets for the year.

    In my view, investors should continue to emphasize diversification among sectors and styles. When the occasional opportunities arise, as they did briefly several weeks ago, particularly now look into the Energy sector, where one should be ready to pick up bargains. I never know exactly when that will happen, but it sure helps to have

    sold some turkeys at Thanksgiving and raised some cash. There will always be another stock to buy.

    My sector theme for the 1st half of 2015 : Following up on my earlier blog commentary on "Oil". So far the $73.25 intraday low that I highlighted last week which 'felt" like the bottom, held at least for the time being.

    It is also worth noting that the current "bear market" in crude oil, at

    416 days, is the second longest bear market in the past 30 years,

    with the longest being the 541 calendar days affair between 6/24/92

    and 12/17/93. Thus, it may be this extended period of weakness is drawing to an end.

    Now my feeling is that we are now witnessing that the "bottoming" process is in fact playing out. To that end, I note that the crude inventory report showed an increase last Wednesday , yet the market shrugged that "bearish" news off , WTI moved higher initially and closed flat on the day.

    A close above $76.44 portends a change for a counter trend rally while a close below $73.61 opens up the door for the next support level to come into view which is the $64 area. WTI closed @$76.66 on Friday -- Stay Tuned

    Energy & oil Stocks: Stock prices across most all areas of Energy remain under attack as crude prices continue to fall. Although there does not appear to be any let up at the moment, I believe opportunities are just around the corner. Several reasons support this stance.

    First, my investment time frame is not short term or trading-oriented and tends to look out beyond six months. Although it is impossible to determine how low the stock prices will go before they find a low, I believe the odds are high the stock prices will be higher rather than lower from current levels over the next six months, even in a flat equity market. And that suggests outperformance in the near term.

    Second, the trade has simply become too one-sided with everyone trading on news that is fully recognizable to all. The news causing crude prices to fall has been a rallying dollar, plentiful production in the U.S., and Saudi Arabia's willingness to let prices fall. The Wall Street herd mentality is magnified in volatile sectors such as energy. The dramatic short-term price moves often seen in this sector create a feeding frenzy for the "hot money crowd." We are in one of those feeding frenzy periods of selling. At some point, the price of crude, and share prices of the energy stocks, will fall too far and attract fundamental buyers; and the hot money will go somewhere else. Aside from the trading aspect of the sector, the fundamentals don't warrant the degree of selling that has been seen. This leads to my final two reasons.

    Third, earnings in the third quarter and commentary from management teams in the Energy sector did not paint the dire picture reflected by the fall in stock prices. One company, Continental Resources (NYSE:CLR) went as far as to remove hedges on crude for 2014/2015/2016 as a sign they feel the price of the commodity has fallen too far. Finally, although virtually every firm has lowered their price deck forecast for crude, most all maintained long-term price decks above $75 for WTI and above $80 for Brent. At those price decks, many areas in the U.S. will remain profitable for new production.

    In summary , if you are a short-term trader, you may want to tread lightly. If you are a long term investor, patience will likely be rewarded.

    Some pundits are saying that the bear market in crude oil is an

    ominous precursor to a bear market in stocks, but this is

    is not backed up by the historical facts. According to Bespoke group, eexamining the SPX's performance during bear markets in oil

    shows the SPX has an average +3.02% (median +5.51%) gain two thirds of the time.

    Which brings me to my "Special Situation BHI & HAL "

    I just published an article highlighting the positives to ponder in taking a position in Baker Hughes.

    Economy :

    A few positive headlines from this week, catalysts that helped the markets grind higher.

    "ZEW's Indicator of Economic Sentiment for Germany has increased for the first time in 2014. The recent growth figures for the euro area suggest that the economy is stabilizing, which contributed to the indicator's increase. "However, the economic environment remains fragile, not least due to ongoing geopolitical tensions," says ZEW President Professor

    Clemens Fuest. - ZEW

    Existing Home sales rise in October

    Philly Fed manufacturing Index surges

    Best of Luck to all... Enjoy the Thanksgiving Holiday !!

    Disclosure: The author is long BHI.

    Additional disclosure: I am long numerous equity positions - all of which can be seen here on my SA Instablog. It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.

    Nov 22 7:20 PM | Link | 13 Comments
  • Market Update 11/15 -- New Highs, But Many Still Don't Know Why !..

    During a recent financial seminar that I recently attended, I heard this quote from a money manager when talking about the typical "client".

    Quite frankly, most of them cannot understand why stocks are "up."

    Many think it is all about the liquidity the Fed has injected into the system; and of course that has helped. Lets clear up some misinformation that has been the crux of the bear argument since the Fed entered the scene. There's no doubt that Central Banks wield enormous power, but I sometimes get the impression that people think Central Banks are omnipotent. How many times have I heard about QE and how the Fed has "manipulated" asset prices higher. The implication from the naysayers is that the Fed has artificially boosted asset prices as though there is no underlying fundamental reason for asset prices to be where they are. The most common arguments around this assertion generally involve charting the Fed's balance sheet next to the stock market or declaring that interest rates would be dramatically higher if the Fed weren't involved in the markets. That my friends is totally misleading.

    Stock prices have rallied in tandem with record high corporate profits, so its' categorically wrong to claim that stock prices have no underlying fundamental driver. Would they be lower if the Fed wasn't involved in the markets so aggressively? My reply, "show me that to be fact". We can't know that for sure , but what we do know is that stock prices are reaching record highs at the same time corporate profits are at record highs and that actually makes a lot of sense.

    So, if next year's "bottom up, operating earnings" estimate for the S&P 500 is anywhere near the mark, earnings will have almost tripled from their 2008 trough. Moreover, the equity markets do not care about the absolutes of good and bad, but rather are things getting better or worse. To be sure, all of the recent economic data continues to indicate that things are indeed getting better.

    Along with Corporate profits, perhaps a look at the picture below is all one needs to know about the state of U.S. corporations.

    The chart above tells a story, one that investors need to realize. It perfectly illustrates "one" reason why the stock market has been so strong. It shows how much cash S&P 500 companies are holding relative to their total assets.

    Companies are flush with cash. Corporate profits are at an all-time high. Many companies are collecting cash with the sole intention of returning it to shareholders or reinvesting it back into the company.

    This is one aspect that completely differentiates the current all-time highs from previous tops in 2007 and 2008. I've said it many times; this isn't 2000 or 2007. Look where the cash levels were during those previous two peaks in equity prices as compared to today.

    As the infamous catchphrase goes, "follow the money." In this case, follow the cash S&P 500 companies are collecting. It's been driving their share prices higher.

    So we keep hearing the same arguments from the same people who continue on this crusade with the fed and continually get the "macro" calls wrong. Its an endless stream of the same negative commentary about how the Fed is manipulating everything. It's the same old story, some people seem to want to blame their misunderstandings of the monetary world on an easy scapegoat. And the Fed is certainly an easy target there….

    Watching the results from corporate America and using that as one tool to devise an investment strategy , has worked, and will continue to work... Bottom line, its NOT all about the Fed !!

    This past week the market meandered around in new high territory, while staying in a fairly narrow trading range.

    While I don't see an inverse "v" pattern shaping up that would take the averages down swiftly, I see signs that are indicative of past action in the markets after "runs" like what we have just witnessed. . Some sideways to slightly lower price action in the days,weeks ahead, as most indicators I follow, show stocks are overbought in the near term. Then again, maybe the 'chase " for performance is on and we'll see sideways action and money rotating in the last few weeks of the year. Stay Tuned.

    Here is one area of the market that won't be chased into year end.. The sector that I spoke about last week, continues to garner my attention and deserves additional commentary. - Oil

    While watching the action last week in the Oil market, I have come to the conclusion that what is taking place now is strictly technical in nature. Last Thursday with NO headline news to speak of the price gapped down, then later in the afternoon the same day, crude dropped $1 in a matter of a couple of minutes. That tells me traders are in control, either adding to "short" positions while other traders who were long are getting taken out due to margin calls, all of this action revolving around "technicals" .

    (click to enlarge)

    I ran across this chart and it is telling, in that the price of crude did in fact retrace to the $73.61 level before finally stabilizing and moving back up to above $75 on Friday.

    The S & P has now decoupled from the "oil" trade" with new highs for the averages and new lows being put in almost every day in the "crude oil trade". In my view, that is a signal that the equity market is little concerned about the demand for oil in the global economy and supports my claim that what is going on now is purely trader driven 'technical" action.

    Whether one buys into my theory or not, the fact and reality for those of us who own oil stocks is that the price of Oil has plummeted. It now remains to be seen if that $73 level will now hold.

    While I was watching the price of Oil fall to new lows, I also noted that many E & P oil stocks that I have mentioned (CXO,PXD,WLL) did not violate their recent lows as the price of Crude fell. A possible sign that those names may have indeed bottomed. We will need a bit more evidence, but I believe it bears watching as there could be huge gains from these stocks in 2015. Year end tax selling and portfolio positioning by money managers in these oil names may be weak to year end. Many money managers simply wont want to show exposure to the sector and will clear cut their holdings "en masse". IF oil stabilizes , and they are weak because of tax selling, etc, it could set up nicely for late Dec early Jan. positioning to the long side.

    F has had a nice move off of the bottom with a run to close over 15 this past week. positive news about the new F 150 and good reports out of Europe were the catalysts. Ford is an add or initiate on any weakness in the mid 14 area.

    GILD has been weak lately and is one to watch. With the price at $102, any weakness presents a buying opportunity..

    Best of Luck to all !!

    Disclosure: The author is long F, GILD, CXO, PXD, WLL.

    Additional disclosure: I am long numerous equity positions - all of which can be seen here on my SA Instablog. It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.

    Nov 15 6:50 PM | Link | 1 Comment
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