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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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  • We're Number One... For Now By: Charles Payne 0 comments
    Aug 16, 2010 2:06 PM | about stocks: LOW, HD, WMT, TGT
    The market is meandering, and that's good news. After opening with the Dow off 50 points, this could have been a bloodbath. Of course, it's early in the session; heck, it's early in any session these days until 3:59 pm. Be that as it may, the market is hanging tough, and I like that tech is leading the way. There is a report out today stating China will be the number two economy in the world this year, knocking Japan off, and with only one more nation in its sights. It might not feel like a big deal to some considering we are still about $10.0 trillion ahead, but the rate of growth almost guarantees China eclipses the U.S. in ten to twenty years.

    It all boils down to one nation that has embraced the notion of self-improvement, and one that is recoiling from risks and the idea that personal and economic damage can happen in an effort for self-improvement. For America, we are being sold a bag of goods that the status quo is good. Ironically, we need to look no further than Japan at how things like propping failed banks and letting government intertwine with business could backfire. In Japan, they are taking the news bitterly; pointing out their per capita GDP is $37,800 while China's is $3,600. I doubt that really makes Japanese feel better, just as Americans shouldn't feel good that China has us in their crosshairs.

    This news is a call to the White House to get tougher on China, get them to participate in real free trade, stop allowing them to steal intellectual property, and to find a way to get Americans to make education a priority. I don't see the latter happening as long as a top agenda item is to protect union jobs. It's time for a real wake-up call instead of rationalizing like the Japanese are this morning. It's time for leadership that says Americans must stop fighting Americans, because we are losing. China is going to gain more respect and at some point, buy less of our Treasuries. China will become stronger, developing great weapons for war and a thirst for leadership.

    Afternoon Notes
    By: Brian Sozzi, Equity Research Analysts

    Turnaround to Start the Week

    The market has made an about face today. Coming into the session, stocks caught a selling cold as data on Japan GDP growth was light years away from consensus and concerns lingered regarding global growth trends. I, for one, do not find the Japan GDP number as out of the blue; companies within my coverage universe have noted consistently since the first quarter that deflation and sluggish consumption are continuing to be major items to the Japan story.

    Nevertheless, the market remains unclear on what the next direction of equities should be. On the one hand, we are concluding a second quarter earnings season chock full of companies beating earnings estimates and bringing to the fore strong double-digit earnings increases. Guidance for the remainder of 2010 has not been that bad, by and large. However, in taking the bear case, soft revenue figures from corporate America, in addition to the fact that demand trends slowed as 2Q10 progressed, suggest risk to earnings estimates later this year and the first half of 2011. Talk about a conundrum!

    That being said, there is increasing value in this market. There was a great article on Bloomberg today noting that $33 billion has flowed out of funds owning U.S. shares this year. About $185 billion was sent to bond funds through July 31. So, the herd is parking their money into bonds and government debt which tells me it's coming to a point where stocks will be viewed as attractively valued by the masses. And, how can they not be viewed as enticing? Free cash flow for American companies, excluding banks, equals 6.8% of their market value, the highest level compared with corporate debt yields since 1960 according to a Credit Suisse report.

    In my opinion, the favorable market reaction to the earnings report from Lowe's (LOW) this morning is interesting. The home improvement retailer missed on earnings but the stock is higher, indicating value investors may be starting to appreciate the investment story.

    Where is the Value in the Retail Sector?

    I received a very valid question from one of my reporter friends this morning. Stated simply, she asked "where is the value right now in the retail sector?" The answer all but flew off my tongue; the value is within the big box retail sector. As I see it, the likes of Target (TGT), Wal-Mart (WMT), Home Depot (HD), and Lowe's (LOW) have strong outlooks for free cash flow generation in 2010 and 2011. For example, Lowe's is expected to ring the free cash flow register to the tune of $2.3 billion in 2010, resulting from a work down of inventory, higher cash earnings, and a reasonable capex budget. The free cash flow outlooks for the other companies I just mentioned are equally, if not more, rosy. So where does the value come into play? Shares of Target, Home Depot, Lowe's, and Wal-Mart are trading under 12.0x forward earnings estimates for 2011, well shy of historical averages, and in spite of earnings growth having the potential to exceed 15% this year and next (exception being Wal-Mart). The decline in equity prices of each company has made the dividend yield appear very attractive (it's attractive because the dividend is safe and is likely to be raised). Home Depot shares, for example, yield close to 3.5%, while Lowe's is closer to 2%.

    In the end, it's the big box retailers that are becoming share gainers from specialty stores, have maintained lean inventories, have the cash flow to invest in technology that localizes inventory, and the higher probabilities for shareholder friendly actions. These are attributes that certainly capture my attention.

    Cap on Crude
    By: Conley Turner, Research Analyst

    Crude oil is exhibiting a significant amount of volatility in the session as economic data continues to weigh on investor sentiment. The most recent release was the New York Empire State Manufacturing Index that showed a slight increase in the month of August. However, the result still trailed market expectations, and served to stymie any rally attempt. This report follows other data releases showing that the economies of China and Japan are also suggesting some degree of weakness. As such, market participants are discounting any expectation that there will be an increase in demand for black gold. The current action also underscores projections by OPEC in the past week of a slowdown in the world economy in the second half of 2010.

    At this juncture, a combination of economic statistics, and the fact that stock prices are trending lower, are putting the lid on any sustained rise in oil prices.

    Techs Stocks Bouncing Back?
    By: Carlos Guillen, Research Analyst

    Although tech stocks had been declining for most of last week as a result of fears of a weakening world economy, this week it appears that tech stocks are making a modest recovery. For the past three-months, the Philadelphia Semiconductor Index (SOX) has been on a rollercoaster, and at the moment it appears the index might be on its way up again. On a technical basis, the SOX looks to be bouncing off long-term support, and the room to the upside looks very favorable with the next resistance level around the 350 level.
     

    So far during today's trading session, the market pulled back after it received worse than expected results on New York Fed Empire Manufacturing. Also news that Japan was now demonstrating signs of slowing growth contributed to the market's decline. The combination of these reports continued to alarm investors, and increase their fears that world growth will be much slower than expected.

    As we can observe over the last three-month, the SOX has been rather erratic. This is more than likely driven by frequency trading rather than by true long-term investors as these appear to be running for the hills. This scenario will likely continue, and will drive the market higher today. Unless there are more convincing data that point to stronger economic growth, long-term investors will remain scared. At the moment, it is clear that the most significant driver of tech stocks is the economy and jobs. Great companies are getting hit not because of poor product or ineffective management, but because of resurging fear of a double-dip recession. Consumption represents approximately 70% of GDP, and with continuing high unemployment levels, investors are finding it difficult to see strong consumption growth in the near future, and now investment spending may also be at risk.


    Disclosure: None
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