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  • JS Market Notes: Sunny with a Chance of Earthquakes
    This meat grinder of a market has something to confound everyone with a narrow-cast view.

    Those who focus only on the "top down" macro picture can't understand how Wall Street can be bullish when the U.S. consumer is in peril, austerity pressures loom, and sovereign debt problems are so severe.

    At the same time, those with a myopic "bottom up" focus don't understand why their earnings- and guidance-driven rallies keep getting interrupted by jagged bouts of white-knuckle panic.

    To understand the chasm between top down and bottom up, imagine a sunny tropical island where the weather outlook is most optimistic. Yet at the same time, the citizens of this tropical paradise are walking around nervous and afraid, because a random series of vicious earthquakes has shattered their normal calm.

    In this brief metaphor, the "sunshine" is the Wall Street focused earnings and guidance outlook for cash rich public companies. The "earthquakes," meanwhile, are the short, sharp shocks born of intractable macro problems that suggest failed stimulus, creeping deflation, and ominous deterioration in the "real" U.S. economy.

    On the positive side of the ledger, you have unexpected winners like Harley Davidson (NYSE:HOG) showing their ability to fashion a silk purse from a sow's ear, i.e. finding ways to increase profits even as revenues decline, along with talk of deep pocketed CEOs "getting ready to spend again."

    But on the negative side you have those pesky earthquakes -- the horrifying macro-related issues that seem to keep flaring up out of nowhere, but are actually tied to massive structural shifts as large and powerful as the grinding tectonic plates deep below the surface of the earth.

    As with an actual earthquake, everything is fine one minute, and then suddenly there is panic the next. Greece was never a problem -- until one day it was a massive problem. The euro was fine -- until it was in crisis. The paradox of thrift isn't a serious problem -- until suddenly it becomes one.  The same can be said of sovereign debt concerns, and the nature of sovereign debt crisis in general, for all the major western world players (plus Japan).

    Foresight vs Firepower

    To betray a touch of ursine bias, it appears at this juncture that the bears have foresight while the bulls have firepower. Meaning:
    • The bears are thinking three steps ahead in respect to deteriorating fundamentals for the U.S. consumer and U.S. housing market; the bulls are celebrating improved corporate earnings and notably strong earnings guidance here and now.
    • The bears are focused on sovereign debt issues and their inevitable impact on economic growth (as bolstered by Rogoff / Reinhart); the bulls are extrapolating better corporate earnings into a "normal" economic recovery scenario.
    • Most importantly, the bears have captured the attention of individual investors and macro-economic forecasters; the bulls, meanwhile, maintain a grip on the Wall Street professionals who actually invest most of the money.
    To wit, the Wall Street investing class -- mutual fund managers, large institutional investors and so on -- is more or less a long-only monolith. This influential group is paid to invest, not sit on the sidelines, which makes them far more susceptible to the optimistic, bottom-up driven view.

    Note the following from Bloomberg, which clearly highlights the "firepower" discrepancy:
    Mutual funds, pensions and endowments are spending more on stocks than at any time since the start of the bull market, just as individuals grow the most pessimistic in a year.

    Institutions pushed equities up to 68 percent of their holdings in July, the highest level in 15 months, from 63 percent in April, a Citigroup Inc. survey showed. The ratio of bullish to bearish respondents in a survey by the American Association of Individual Investors has fallen to 0.68, the lowest level since July 2009, based on a four-week average.

    The last time money managers and individuals were this far apart was at the beginning of 2009...

    - Bloomberg, Stock Buying Hits Bull Market Record at Mutual Funds
    The implied undertone to the Bloomberg piece is that institutionals are the "smart money" and small investors the "dumb money" -- but one should obviously take that hypno-suggestion with a very large grain of salt.

    Prevailing market conditions now are night and day in comparison to what they were at the beginning of 2009, as anyone with half-open eyes can see. And mutual fund managers, by dint of their "fully invested" mandates, are pretty much stopped clocks in respect to their need to be "all bullish, all the time." Circa Q209, that was a good thing to be. Right now? Maybe not so much.

    The broader point remains, though, that the firepower discrepancy is very strong. Individual investor participation in markets, relative to institutional participation, is miniscule.

    This reality exacerbates the great top down / bottom up divide and further increases the likelihood of bulls using their firepower advantage to press hard, when they can, on evidence of sustained sunshine in between "earthquake" periods.

    Technical Shift Favors The Bulls -- For Now

    On another important note, the general technical picture, which previously favored the bears, has now changed.

    The chart montage above offers a quick snapshot of four major bellwethers: the S&P 500 (large caps), the Russell 2000 (small caps), the MSCI Emerging Markets ETF, and continuous copper futures (the "metal with a PhD in economics").

    As the charts clearly show, all four of these bellwethers have broken out of their various downtrends and sideways churn patterns. What the charts do not show (for the sake of space) is that all four have also cleared their major exponential moving averages (50, 100, 200 day).

    In football terms (American football that is), the bears failed to make use of their fourth down... and the ball has now shifted to bullish hands.

    Could "Summer Reruns" lead to 'Fall Spectacular?"

    With all the above noted, I find it very hard to get truly excited about the bullish prospects for this market. Those cheering the loudest now are precisely those who, historically, have shown the least regard for risk control in terms of preserving investor capital.

    I have thus covered my partial position trend shorts -- taking some very solid swing gains in vehicles like  the S&P Retail ETF (NYSEARCA:XRT), Lowe's (NYSE:LOW), and Home Depot (NYSE:HD) -- and now have a few opportunistic longs in place with very modest exposure.

    At this juncture my spidey sense says that, while the markets could trend higher in a classic late summer rally, the "earthquake potential" remains high, and hope jags are not to be trusted. Those who choose to participate may wish to do so with a close eye on the exits.

    The really enticing scenario, at this point, would be a sort of Soros-style "false trend" broad market rally that gets itself good and extended headed into the fourth quarter -- giving time and room for delusions to dissipate and harsh reality to reassert itself most fully from overbought levels.

    That could make for a "Fall spectacular" indeed...


    Disclosure: Positions in stocks mentioned
    Tags: XRT, LOW, HD, EWM, EEM, JJC, SPY
    Jul 28 2:25 PM | Link | Comment!
  • New Wave for Shipping Industry?
    The shipping industry appears to be emerging from one of the most difficult storms in decades...

    Three years ago, capacity was expanding exponentially while day rates for dry bulk and container ships rose to clearly unsustainable levels.  Shipping stocks realized triple digit returns several times over while IPO and secondary offerings were snapped up by buyers at nearly any price.

    Of course the tide swiftly changed during the recession, and investor attention turned from how to capture the rise in day rates, to whether or not to simply scrap ships for the value of the steel.  (of course the value of the steel plummeted too so there were no easy solutions).

    The stock price for most of the shipping companies have declined to levels that are not only low compared to earnings, but are also well below book value.  For many of these firms, book value is still a questionable term because many of the vessels are being carried on the books at an inflated purchase price less only a couple years of depreciation.  Still, there are a number of stocks in the industry that appear to be exceptionally cheap - especially given the pricing and demand dynamics which are beginning to revive.

    Demand Meets Reduced Supply

    In addition to taking ships off the market during the economic crisis, many shipping companies have also decided to operate their fleet at fuel efficient speeds which further decreases the available capacity.  During strong economic times, it made more sense to get containers moved quickly and charge a higher day rate to account for the fuel costs.  But cost cutting measures are now in question as demand picks up.
    Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year's freight rates - in some cases, the highest rates in five years.  And  still, many are getting merchandise weeks late.  ~Retailers Pay More to Get Cargo - NYT
    The article goes on to say that companies with existing contracts with shipping firms are more likely to secure shipping capacity which is a major problem for smaller-niche retailers.  With the expectation for an improving economy and the necessary inventory restocking, container ship capacity could be an issue for a number of quarters - if not years.

    Demand for Dry Bulk capacity is also increasing as emerging economies like China are once again importing coal, iron ore, re-bar and other industrial goods.  From the US, to Russia, to India, to China - it appears that demand is supporting shipping pricing.

    This transition has only recently begun to be reflected in the stock prices of major shipping companies.  With investors more willing to buy into the bullish case, a few shippers are beginning to look interesting and are approaching the top of my watch list. 

    Potential Shipping Trades

    Over the past week, Genco Shipping & Trading Ltd. (GNK) has completed a major financing transaction and also took delivery of a Handysize vessel.

    The company was able to raise $160 million by offering $3.1 million shares of common stock at $16.00 plus an additional $110 million of convertible senior notes (Reuters).  The capital was then used to take delivery of the Genco Ocean - a 35,000 dwt Handysize newbuilding.

    It's encouraging to see the liquidity in the market allowing for this transaction - and the delivery is actually the first of five vessels under contract.  The Genco Ocean will immediately be put into service under a 35 to 37 month time charter which helps add visibility into GNK's future earnings and cash flows.

    The stock has remained above the price of the secondary offering, indicating strong investor demand and appears to have put in at least a temporary bottom at $14.20.

    Diana Shipping Inc. (NYSE:DSX)
    is also in the process of adding additional vessels to its fleet.  With a manageable debt load and expectations for an increase in earnings this year, fundamental analysts can make a decent case for owning the stock.

    According to the company's fleet employment sheet, the majority of the vessels are on charters which expire mid to late 2011 or in 2012.  So for the next few quarters, earnings should be fairly predictable, but if pricing remains robust, DSX could begin to see an increase in revenue and earnings as new agreements are inked at higher day rates.

    Just for kicks, check out Diana's Fleet Position Map which tracks the global position of each vessel...

    Other shippers worth keeping on the watch list include Teekay Corp (NYSE:TK), Frontline Ltd. (NYSE:FRO) and Seaspan Corporation (NYSE:SSW)

    Disclosure: positions in stocks mentioned
    Tags: OQ, DSX, TK, FRO, SSW
    Jul 27 11:02 AM | Link | Comment!
  • View From the Turret: Along for the Ride
    After spending some time looking through the charts and data over the weekend, it appears that the broad indices have begun a bit of a shift into more bullish territory.  Since the major top in April, we have seen a series of lower highs and lower lows.  The fundamental data has soured, and institutional investors have been cutting back risk significantly.

    But after slipping below the key 1040 line in late June, the bulls did in fact make a stand, and with Friday's action, the pattern of lower highs and lower lows has at least temporarily been broken.

    Friday, the S&P 500 closed above the 1100 level which had proven to be resistance two weeks ago, and it's interesting to note that the action is now above all three major Exponential Moving Averages (the 20, the 50 and the 200 EMA).

    Of course, one day does not a trend make - and there are still significant challenges to deal with on a fundamental (as well as technical) basis.  But from an agnostic Mercenary perspective, I don't hold too tightly to either the bear or the bull argument.  The key for me this week is to position my trading book to make money and not to determine the long-term direction of the market.

    Evidence of a Bullish Undertow

    Sometimes, evidence for a shift into a bullish "path of least resistance" can actually come from a major stock that posts a loss.  Such was the case with (NASDAQ:AMZN) during Friday's trading session.  As I mentioned in Friday's Market Notes, the AMZN report disappointed investors and the stock gapped sharply lower.

    However, by the end of the day, the loss was paired from $14.00 early in the morning to only 67 cents at the close.  Volume was the strongest seen since the stock gapped higher in October of 2009, and the major retail barometer is now sitting right on a confluence of moving averages.

    I can't tell you exactly where AMZN is going to head at this point.  I've got a stop at breakeven for the remainder of my position and am likely to kick it out early in the week.  The trading prospects for AMZN are a little hazy at this point, but the major recovery in Friday's action points to a significant bullish tint to this market.

    On the other side of the spectrum, Chipotle Mexican Grill, Inc. (NYSE:CMG) gapped higher Friday after its earnings report and
    continued to add to its gain
    throughout the day.  The movement indicates that investors are more willing to buy into speculative growth stories - a sign of optimism that could propel great "story names" over the upcoming weeks.

    Similar to AMZN, I'm not particularly interested in trading CMG from the long side at this point.  There are too many fundamental issues - some of which were mentioned in the recent Restaurant Strategic Intelligence Report...  (You can receive Strategic Intelligence Reports in your inbox 48 hours before they are posted on MercenaryTrader)

    But once again, the action in CMG points to a more bullish tone to the market and has me interested in nibbling on some long positions which have more attractive fundamental features and actionable inflection points.

    Solar Continues to Look Bright

    The solar industry has come a long way from its speculative days in 2007 - as well as its dark period in 2008 and 2009 when it appeared all but the most conservative companies would go out of business.

    Today, there are a number of healthy solar companies competing for investor capital as well as for orders from municipalities, utilities, corporations and individuals.

    If investors are going to turn a blind eye to Europe's troubles for some time - and at the same time begin to adopt a more bullish stance on China, solar stocks become one of the natural places to park capital. Friday I mentioned that I was watching Canadian Solar Inc. (NASDAQ:CSIQ) and today I will point out that Renesola Ltd. (NYSE:SOL) is working its way through a key inflection point.

    The stock has been turned away at $8.00 at two major points since hitting rock bottom in April of 2009.  With a single digit PE, and the potential to surprise analysts with stronger earnings (remember, most analysts are still working on shifting their perspective from a horrible Europe situation to potential for additional demand from other market participants), SOL could quickly see both multiple expansion as well as higher expected earnings.

    So watch this stock carefully as it once again attempts to break above this key inflection point.

    China Internet and Gaming - Legitimate Business or Speculative Story?

    Ok, maybe it doesn't matter...  The Chinese internet / gaming companies could wind up being a "yesterday's story" or they could turn out to be legitimate businesses for years to come.  Honestly, I really don't care...

    The point is to take advantage of the best trading opportunities and right now it looks like China in general - and some internet companies specifically - could be setting up for a new bull run... Inc. (NASDAQ:SOHU) is reporting earnings as I write this - and Friday the stock pushed decidedly through the 50 EMA on relatively strong volume.  This morning's movement is likely to break a major trendline which has been in place since the October high - and SOHU is rebounding after losing more than 40% of its market value.

    Sales continue to increase despite some profit margin contraction, and if SOHU is able to give strong guidance, the bulls could latch on to the information.  When the bulls are allocating capital to speculative issues - this sector has a history of making some violent swings higher as shorts cover and gullible investors buy into a white-hot growth story...

    Another name in the sector is Inc. (NASDAQ:NTES) which has already broken above it's 200 EMA and has had less of a decline than SOHU.  NTES continues to post earnings growth and during the last two quarters it saw revenue increase by more than 50% year-over-year.  The company doesn't report earnings until mid-August, but the stock could get a lift based on the SOHU report this morning.

    Nibbling...  Not Gorging

    As I tentatively make the shift to a more bullish trading stance, my trades will likely be small and measured.  There are still a number of fundamental issues that just don't feel right.  We could still see an air pocket lower based on economic developments, earnings reports, or simple trader sentiment.

    But the probabilities are looking better for a decent move higher and I want to at least participate and make a few basis points along the way.  I'll be back to you as more information surfaces throughout the week....

    In the meantime, book those profits and manage that risk,

    Disclosure: Short and long positions in names mentioned
    Jul 26 10:38 AM | Link | Comment!
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