I'm pleased to announce that Wall Street Strategies has won Best Bearish Stock Selection First Quarter 2011 award from Jaywalk, which maintains coverage of 1,500 stocks from 150 independent research providers for our institutional research work. Congratulations to the research team.
Wow, what a close. Stocks came on strong into the closing minutes of trading as volume surged on what could be described as a good old fashioned buy signal. This pattern has been evolving for a few sessions now, and suggests hot money parked on the sideline for a while is champing at the bit. Overall volume wasn't too great but winning stocks were often up on better-than-average volume. It's not unusual to have one big session ahead of the monthly jobs report, and it's also not unusual to have one rotten down day, too. Technically, the session could prove to be an important turning point. The month of May saw market bias shift to the downside.
Yesterday, the S&P 500 finished above its exponential 50-day moving average (see green circle), a bullish development.
Don't look now but the index could form a double-top this week at 1,370, and breaking out could carry it toward 1,400. The week could be a real barnburner for sure, and started with the kind of gusto missing for several weeks. This is a necessary head of steam into a historically tough month.
Another Ugly Truth
There are a lot of ugly truths out there that don't need conspiracy-spinning or an ideological bent.
The World Health Organization (WHO) released a report saying smoking will kill 8 million people a year by 2030. This is a shocking number, and yet it feels like governments may not be at all unhappy. I'm not an advocate for government intervening to outlaw smoking as much as I hate cigarette smoke (I like cigars and pipes, however), I just think governments are fine with the number. The United Nations reports there will be 1,000,000,000 deaths from smoking in the 21st century, up from 1,000,000 in the 20th century. I suspect a giant chunk of these deaths will occur in China, which has seen millions die from wars, natural disasters, and famine.
In fact, the Great Leap Forward engineered by Mao from spring 1959 to 1961 saw 30.0 million starve to death and another 2.5 million beaten and tortured to death.
So in addition to population control, why haven't cigarettes ever been given the alcohol or drug treatment? Money!
In a report from UBS titled "10 reasons to stay bullish on tobacco", the firm pointed out how powerful cigarettes are for the retail sector. Apparently a Marlboro buyer makes an average of 10 trips per month to gas stations or convenience stores, spending $17 each trip, according to Altria (NYSE:MO). A lot of businesses, including the government, ring the register when people drop in to pick up a pack of cigarettes.
* 82% of these consumers buy beverages
* 63% buy food
* 56% buy gas
* 36% buy lottery tickets
This makes cigarettes a powerful centerpiece to these retailers. Couple this with the size of the market, which is now $661.0 billion worldwide for tobacco, of which cigarettes are 91%. With all the food police running around Capitol Hill and this Administration, there must be an irresistible urge to ban cigarettes, but of all the other actions, including the war on banks (after bailing them out), such action would crush the aforementioned retailers, food and beverage companies, and states. In addition to the lottery scam, states make a ton of money from taxing cigarettes. The average state tax on a pack of cigarettes is $1.45; in tobacco states $0.485, in non-tobacco states $1.57. For your state tax rate on cigarettes:
And don't forget Uncle Sam's 18.2% tax on that pack of cigarettes. (By the way, the federal government through taxes and fees hits you up as much as 5% for beer, 10% for a gun, and 20% on your airline tickets.)
The fact of the matter is that 8 million deaths a year is simply the cost of doing business…and as they say "business is good."
Gaining Props at Dinnertime from Friends
By: Brian Sozzi, Equity Research Analyst
Selling stocks in May was generally a wise decision. The month saw stocks lower to end each week, the first time that has happened since June 2008. Indeed the old school investment adage of "sell in May, and go away" lived up to its billing. A multitude of concerns sparked the flee from risk last month, including disappointing 1Q reports/outlooks from consumer cyclicals, Greece debt drama reawakening and triggering contagion fear, and naturally the lack of a conclusion to solidifying our debt limit.
That being said, investors enter June yearning for a renewed strengthening of macro trends in the U.S. in order to be comfortable putting cash to work ahead of 2Q earnings releases. There is also a sustained debate that relative to Treasuries, stocks look like a good wager from a valuation perspective. The relative investment thesis, whether stocks to bonds or stocks to stocks within similar sectors, has long frustrated me. For example, although stocks may currently be cheaper than Treasuries, are stocks overvalued based on net profit margins nearing or declining from post recession recovery peaks? Conversely, are Treasuries overvalued as the perceived flight to safety trade, which has pushed yields way down, is too much in a world of elevated U.S. debt, a potential credit rating cut, and a plunging dollar?
Nevertheless, if past is prologue than June for stocks could mirror the swings of May, most acutely for names in the financial and consumer discretionary arenas.
* Since 1896, June on average ranks as the fourth worst month of the year for the Dow.
* Since 1928, June on average ranks as the fifth worst month for the S&P 500.
* Since 1971, June on average ranks as the sixth best month for the NASDAQ.
I got the license plate of that truck that just smacked equities ahead of the open, it read…ADP. Actually, upon closer inspection it reads this economy is a muddled mess. Yet, politicians continue to crow about mediocrity, and the masses debate if they should take the bait and be baby chicks in a nest allowing the government to feed, clothe, and house them or if they should soar like the symbol of the United States. It has been confirmed the housing market is in a double-dip, and now that question is returning with respect to the broad economy. The ADP report says only 38,000 jobs were created last month.
The Street was looking for the ADP report to come in at 190,000 total job creations, with 200,000 being created in the private sector. By the way, the April number was revised from 200,000 to 177,000.
Last night the "clean vote" on the debt ceiling fell short of raising the amount the nation can borrow another $2.4 trillion to $16.7 trillion. The vote of 318 - 97 showed a united GOP front joined by many Democrats to send a message that at least they get part of the message. Of course, these folks are good at reacting to poll numbers, too, and maybe that motivated some to say "nay." A recent Gallup Poll shows this to be a serious election issue. The good news is fear-mongering doesn't always work. Americans believe more and more it's possible to live responsibly.
Raising Debt Ceiling (Gallup)
* Support: 19%
* Opposed: 47%
* Not Sure: 34%
They say no guts no glory, and you could also add…no jobs. This is a scary number and will pressure stocks today. Of course, the government number could be different (read: better) but now we have to take a wait and see approach.