Today is Thursday, May 17, 2012

Fundamental Analysis

Bond markets predicting another 17% drop in industrial production and 7.8 million job loss in 2009

The bond markets are predicting the U.S. economy will see another 17% drop in industrial production by yearend.

And another 7.8 million jobs are likely to be lost. We’ve already lost 5.1 million.

Those predictions come from an econometric model based on the bond market’s pricing, which has been very accurate in forecasting the economy since 1973, The Wall Street Journal reports here.

Impact graphs from wsj.com:

Market looks very bearish; gold may be a buy

Technical indicators and a lot of bearish commentary over the weekend portend further weakness in stocks, but no one knows for sure.

These charts for the Dow Jones Industrials and exchange traded funds that track the major indexes and gold are here.

The major negatives:

 

Is Apple (AAPL) going up to $135 or down to $64?

Barron’s reports that a prominent stockpicker has cut his target price for Apple (AAPL) to $135, but the stock’s point and figure chart shows bearish price objective of $64. AAPL closed Friday at $82.33.

Who do you believe in a bear market that so far has taken Apple and virtually every other stock down with it since the market peaked back in October 2007?

Toni Sacconaghi of Bernstein Research is looking at a 12-month or longer time horizon. The point and figure chart shows what the current supply and demand for AAPL is. The charts show the market’s current trend and consensus. The analyst is looking at the anticipated earnings for AAPL and is using his own computer models to project prices. Both the analyst and the charts should be paid attention too, but neither are perfect.

You can’t predict prices very accurately, especially in this economy.

With the market sinking this morning in reaction to weak earnings from banks and dropping oil prices, it sure looks like it will be smarter to anticipate lower prices for other stocks, including AAPL. Until the market shows some signs of improvement, it doesn’t make sense to buy stocks.

I don’t own AAPL.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

How to not pick health and medical stocks

Some stockpicking gurus are worth following and some are not.

Don’t pay much attention to mutual funds’ portfolio managers who brag about outperforming the market even though their fund was down 28% last year and they charged their investors 0.83% of their assets to hold their money.

Barron’s Online today interviewed such a portfolio manager about his top health and medical stocks. While he had some interesting and spot on comments about health care stocks, I wouldn’t buy any of his biggest holdings at the moment. Their technicals are weak, and some of them have questionable fundamentals.

Never buy a fund’s top holdings just because the fund has a lot of shares of the stocks. You don’t know when the stocks were bought or at what price. And you don’t know whether the stocks have been sold since the list was compiled or whether they are on a list of stocks about to be sold. You need to look a stock’s current fundamentals and technicals before buying it.

Barron’s listed 10 of his top holdings: ALXN, AMGN, BAX, CEPH, DNA, GILD, MHS, TEVA, VRTX and WYE. Their daily charts are here.

Their point and figure charts are here.

Click on a chart to see a gallery of hourly, daily, weekly and point and figure charts.

As a result of the overall market’s declines since early last week, many of these stocks have weakening daily and weekly charts. A few have bullish price objectives on their point and figure charts, but they’re correcting.

And since the market is bearish long term, it pays to avoid all but the fundamentally and technically strong stocks. And there aren’t many to choose from because it’s almost impossible to forecast the economy or the stock market at this time.

Of these stocks, two present possible fundamental problems.

Genentech (DNA) is a takeover target. It’s price may be inflated because Roche is trying to buy the shares of DNA that it doesn’t own. Given the likely transaction price of $99 to $105 and the current price of $87.47, there’s not a lot of upside potential compared with the downside risk that the stock will plunge if the deal doesn’t go through as speculators expect.

Medco Health Services (MHS) is a middle man in the prescription drug business, and the new Congress and president may make its life very difficult. Also, some of its clients may try to take their business in house.

I’m also bothered by the fact that Wyeth (WYE) is the only stock in the group paying a decent dividend of about 3.25%.

What to do? Watch these stocks. If one that looks promising shows technical strength on its daily, weekly and point and figure charts, it may be a good speculation, assuming that the overall market looks fairly bullish.

I don’t own any of these picks.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

 

10 stock picks from the Barron’s roundtable

Two professional stockpickers on the Barron’s roundtable picked 10 stocks and exchange traded funds (ETFs) for 2009.

Some of these picks were questioned by other members of the panel who will disclose their picks in the next two issues of Barron’s.

Since most of the panelists are very bearish on the market for the next five to six years or more, all of these picks probably will face strong resistance to significant rallies. 

Since they’re all depressed, if they do rally, they will face selling by current owners who will be trying to cut their losses on the rallies, which, again makes a good rally difficult.

Often, stocks picked in the Barron’s roundtable go up on the Monday after they’re announced and then settle down for awhile. It will be interesting to see what they do tomorrow morning.

Picks by Meryl Witmer, general partner, Eagle Capital Partners, New York

Kaiser Aluminum Corp. (KALU), $22.32.

Allegheny Energy Inc. (AYE), $33.32.

Assurant Inc. (AIZ) $30.15.

Discover Financial Inc. (DFS) $8.71.

Picks by Fred Hickey, editor, The High-Tech Strategist, Nashua, N.H.:

Microsoft (MSFT) $19.52.

Cadence Design Systems (CDNS) $4.29.

Mkt. Vectors Gold Miners ETF (GDX) $31.31.

Agnico-Eale Mines (AEM) $49.52.

PowerShares DB Agriculture ETF (DBA) $26.45.

iShares FTSE/Xinhua China 25 Index ETF (FXI) $27.71.

Daily charts for 10 of the picks are here.  Click on a chart to see a gallery of charts. It is important to look at weekly and point and figure charts as well as the daily charts.

As last week’s market action showed, bullish charts don’t always mean stocks will keeping up.

Seeking Alpha provides another summary of the Barron’s roundtable here.

I don’t own any of these picks.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

 

 

Barron’s roundtable stockpickers are very gloomy about 2009 and the next 5 to 10 years

Investors who are trying to make some basic assumptions about the economic outlook and the markets aren’t taking much comfort from the predictions that the Barron’s Magazine’s roundtable offered in this week’s issue.

What do you do with these assumptions? Be a stockpicker and trader. Don’t buy and hold.

Marc Faber, managing director, Marc Faber Ltd., Hong Kong: “The U.S. economy fell off a cliff between October and December, and will stabilize at a lower level of activity. Some indicators may look better than expected, which will justify the present rally. Stocks already are up 25%. If they go up 50% from the Nov. 21 low of 741 on the S&P, you’ll have the S&P at around 1,100. Afterward, reality will set in and in real terms the market will go much lower for much longer.”

Bill Gross, founder and co-chief investment officer, Pimco, Newport Beach, Calif.: Expects deleveraging of assets over the next 5 to 10 years will lead to lower profit margins and higher interest rates. He expects a global recession, “perhaps into 2010.”

Felix Zalauf, founder and president, Zulauf Asset Management, Zug, Switzerland: Predicts S&P average earnings per share, which peaked at about $100 per share, will fall to $20 to $40, compared with a Goldman Sachs estimate of $53 and a consensu of somewhere above $60. “Companies will repair their balance sheets instead of spending and expanding, and that’s why the deleveraging process will take years and years and years. Government and central-bank stimulus won’t have the multiplier effects we used to see. Economic growth will be much lower in the next five or six years.” He thinks that this year GDP could drop five percentage points, that returns on equity and price earnings ratios will fall into the single digits while dividend yields on much lower stock prices will be much higher.

Intuitive Surgical (ISRG) becomes a sorry story stock; red flag for medical device stocks

Story stocks like Intuitive Surgical (ISRG) often soar to $350 a share or better from less than $5 in a few years, making the stock pickers who got in early look like geniuses.

But by the time they top out, as ISRG did at $357.98 last spring, story stocks become groupie stocks. Their groupies never recognize the danger signs when they show up as they always do. ISRG’s problems became pretty obvious last spring, but some groupies are still hanging on and calling the stock a buy.

After announcing that its 2008 results would disappoint investors, ISRG closed Thursday at $110.54 a share.

Several firms downgraded the stock to a hold from a buy today. On Wall Street, “hold” means “sell.”

Now, a lot of stocks are down 20% to 50% from their 52-week highs, but only a few are down 69.125% from their 52-week highs, which is where ISRG is.

While I’ve written about ISRG 14 times, I first questioned its value on March 1, 2008. It looked so over priced.

But the first real warning that ISRG’s fundamentals were changing came on April 11, 2008, when GE reported that its medical products division was hurting because hospitals were being hit by the financial crisis. “GE‚Äôs executives said they think funding will continue to be a problem for clinics and hospitals.” I suggested that this could portend trouble for ISRG and other medical device companies.

Since then, the financial crisis has gotten worse, and ISRG’s stock price has steadily worked lower.

At this point, the financial crisis is still severe. Hospitals and clinics still are hurting and curtailing capital expenditures. Patients still want their surgeons to use ISRG’s robot, which increases their precision and, in some studies, produces better outcomes for patients. The payback on the $1.3 million device for hospitals is relatively slow, however, making it a less than must have item for hospitals and clinics these days.

ISRG’s warning sends up a red flag for other medical device makers, just as GE’s results last spring sent up red flags for owners of ISRG.

Lesson relearned: If you’re riding a “story stock,” don’t become a “stock groupie.” Pay attention to the stock’s charts. And even more important, watch its industry and the overall market and economic environment. Even story stocks become sorry stories in a bear market.

One-year daily charts for ISRG, GE, DIA, SPY and QQQQ are here. Their point and figure charts are here.

Click on a chart to get a gallery of charts like this one for ISRG.

I don’t own ISRG or GE.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

 

Speculators are betting General Motors (GM) and Ford (F) won’t be forced into bankruptcy

Should General Motors (GM) and Ford (F) shareholders hold or sell?

If Bush Blinks again and bails out shareholders, the stocks may appreciate, unless the stocks are diluted somehow, which is a distinct possibility.

Bush could force GM and Chrysler into bankruptcy. That would force Ford (F) into bankruptcy and would wipe out GM and F shareholders. This is also a very real possibility.

At the moment, both GM and F are up on the day, suggesting speculators are betting that shareholders won’t be wiped out by Bush. GM is trading at $4.13 and F at $3.14.

Instead, taxpayers will be creamed, especially over the long term.

In the options markets, bullish buyers of GM January $5 strike calls think the stock will be over $5.55 when the options expire on Jan. 16. Bearish buyers of GM January $5 puts think the stock will be worth less than $3.60 when the options expire. That’s quite a spread in opinions.

Senate Republicans tried to force the automakers, their creditors, suppliers and the UAW to face reality and agree to restructure in ways that would make the companies viable over the long term. The UAW killed the deal, and so Bush is in a political corner.

He can back up the Senate GOP and force the players to deal with Senate Republicans. This seems unlikely at the moment.

Bush can play to the historians by keeping the automakers in business until he leaves office on Jan. 20. The markets and pundits are saying that’s the most likely scenario, but details of a Bush Blink won’t be released for a day or so.

As a result, uncertainty reins and speculators are placing their bets.

Ironically, nothing Bush does for the automakers will save his legacy. Conservatives always will criticize his spending and bailouts, and liberals always will despise him, regardless.

I own covered calls on GM.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

60 Minutes report on another wave of Alt-A mortgage foreclosures feeds housing bears

Anyone who’s been looking for housing prices to bottom soon certainly was disabused of that nation by tonight’s 60 Minutes, which warned that there is a “second mortgage crisis on the horizon.”

This won’t help the stock markets this week even though one person quoted on the program says he’s very bullish on stocks because “corporate America is on sale.”

One of the best guides to the danger ahead is Whitney Tilson. He’s an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.

“We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we’re probably about halfway through the unwinding and bursting of the bubble,” Tilson explains. “It may seem like all the carnage out there, we must be almost finished. But there’s still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.”

Search the web for “alt-a mortgages” and you’ll see this is old news, but how many speculators have been paying attention? After the 60 Minutes show, they’re probably paying attention now.

 

ETF hedge portfolio is beating the Dow Jones, but it’s losing money

My pretend exchange traded fund (ETF) hedge portfolio, which I’ve been paper trading since Oct. 30, is down 4.05%, barely beating the Dow Jones Industrials, which are down 5.94% in the same period.

The pretend account started with $100,000 and has $97,013.95. Basically, I’ve been in cash, which is the best place to be in this market.

It’s not good enough to beat the benchmark market index. I’ll only be successful if I make money.

But paper trading this ETF hedge portfolio over the last few weeks already is giving me a better feel for the market and for how various ETFs trade.

One reason I’m losing money at the moment is that my only two small positions are shorts. I’m short the iShares S&P North American Technology fund (IGM), which was up 3.86% today with the overall stock market. I have a 0.75% loss on IGM. Its daily chart just turned moderately bullish, but the weekly and point and figure charts are still bearish. So I’ll hold my short position.

And I’m long the Proshares Short QQQ (PSQ), which was down 3.83% today. I have a 2.94% loss on PSQ. Its daily chart turned bearish seven days ago, but it’s weekly chart is bullish. PSQ closed tonight at $80.58 share, and it has a bullish price objective of $113 on its point and figure chart. So I’ll hold on to this one, too.

Fundamentally, I’m bearish on the overall market and the economy, which reinforces my decision to hold on to these short positions even though the market is trying to bounce a bit.

If my loss on either position reaches 8% or the technicals tell me to close a position, I’ll close the position.

Links: The annotated charts I use to track these positions and some others as well as things I’m watching are here. Some of my position notes on the ETFs shown in the charts but not mentioned here are out of date. I’ll fix them tomorrow.

A gallery view of IGM’s daily, weekly and point and figure charts is here.

A gallery view of PSQ’s charts is here.

I don’t own any ETFs.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

Forbes Magazine’s 2009 stock pickers are bullish on 12 stocks and bearish on 5

Forbes Magazine’s 2009 stock picking contestants are recommending 12 stocks as buys and 5 as shorts. The players are highly regarded securities analysts who are putting their reputations on the line, and their choices should be taken seriously. The 17 stocks in the 2009 contest are shown here.

The 12 bullish picks are DGIT, ERES, ZLC, OMCL, SPG, WAT, ENDP, CSCO, CPRT, HOTT, NCI and NOV. The five shorts, which speculators would sell expecting to buy them back at lower prices, are PH, LAMR, VLKAY, CAT and LVS.

Daily charts for this year’s bullish picks are here and here. Charts for the short sellers’ bets are here. Stockcharts doesn’t show a chart for Volkswagen, but Marketwatch.com has one here. (Forbes isn’t the most reader friendly pub. It doesn’t provide the stock symbols for the stocks it lists.)

But know that even professional analysts have their good and bad years. Of the 17 contestants this year, only one bull picked a winning stock, which was up 50%, another broke even and the other 10 picked big losers. The short sellers all were big winners, thanks to the huge drop in the overall market in Black 2008. The 2008 Forbes contest stocks are shown here.

If I were playing these stocks right now, which, except for CAT, I’m not, this is what I would do:

1. Look at the charts. Click on the ones that look bullish to see whether the weekly and point and figure charts also looked bullish.
2. Research each stock on Morningstar.com. Standard & Poor’s, http://www.finance.yahoo.com, http://www.reuters.com and on your online broker’s site. Make sure you like the fundamentals.
3. I’d favor the stocks that pay dividends, if possible.
4. I’d favor the stocks that offer good returns on covered call options trades, but I might speculate on some of them without hedging them.
5. Look at the overall market. At this point, it favors the shorts, and being bearish, I’d focus on the shorts more than the longs at this time.
6. If any of the picks looked attractive, I’d trade them.
7. In this volatile market, I’d put a 7% to 10% stop on any positions. That is, if the stock went 7% to 8% against me, I’d close it and take my loss. If the position worked, I’d be most likely to take a 15% or 20% profit on a long position and a 20% profit on a short position.

Just one person’s approach. What’s important is to have a trading plan.

Of the stocks mentioned above, I own CAT.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

Pension fund obligations will hurt earnings at hundreds of companies

Black October combined with the chances that there will be more losses before the end of the year could wind up costing the 350 companies whose stocks are in the S&P 500 more than $300 billion. If employers have to make up these losses by refunding their pension plans, as required under the Pension Protection Act of 2006.

Fifteen trade associations that represent employers that are caught in the pension squeeze have asked Congress “to help companies avoid having to freeze or end pension plans that may be inadequately funded because of the financial crisis,” Reuters reports.

Note the scare tactic being used by the employers that are seeking help from Congress. Help or pensions will be frozen or suspended. That would be a radical move, and General Motors, Ford and Chrysler might very well have to suspend or freeze their pensions due to the financial crisis regardless of whether Congress bails them out.

But most employers would suck up and refund their pension plans rather than get in trouble with their employees, retirees and unions.

For investors, it’s important to know which companies are most at risk. Here are names mentioned this week in the financial press that are varying degrees of risk:

• Lockheed Martin (LMT)
• General Motors (GM)
• Dow Chemical (DOW)
• Unisys (UIS)
• Qwest Communications (Q)
• AT&T (T)
• Consolidated Edison (ED)
• New York Times (NYT)
• Ryder Systems (R)
• Burlington Northern (BNI)

Daily charts for these stocks are here. Click on a chart to see more charts for a given stock.

I doubt that many analysts have factored the pension fund problem into their earnings forecasts for these companies, which makes their forward price earnings ratios and PEG ratios (PE/projected earnings) more suspect than usual.

A big rally before yearend would help reduce the severity of this problem.

I own GM and have covered calls on it.

For educational purposes only. Investigate before you speculate.

Markets down because McCain or Obama will make things worse

If Obama has panicked the markets with his tax and spend and wealth redistribution plans, McCain’s scape goating of Wall Street and corporate America has hardly given speculators much confidence in the future.

While the financial crisis deserves most of the blame for the recent declines in stock prices, our “lousy candidates” obviously are making matters worse.

George Newman lays out the dreary future in an op-ed piece in Wednesday’s edition of The Wall Street Journal.

Here’s a sample of the market’s concerns:

If you don’t believe me, please answer a few questions:

- Have you thought of what a gradual doubling (and indexation) of the minimum wage, sailing through a veto-proof and filibuster-proof Congress, would do to inflation, unemployment and corporate profits? The market now has.

- Have you thought of how easily a Labor Department headed by a militant union boss would push through a “Transparency in Labor Relations” law that does away with secret ballots in strike votes, and what this would do to industrial peace? The market now has.

- Have you thought of how a Treasury Secretary George Soros would engineer the double taxation of the multinationals’ world-wide profits, and what this would mean for investors (to say nothing of full-scale industrial flight from the U.S.)? The market now has.

- Have you thought of how an Attorney General Charles J. Ogletree would champion a trillion-dollar reparations-for-slavery project (whittled down, to be fair, to a mere $800-billion, over-10-years compromise), and what this would do to the economy? The market now has.

Read the whole thing and speculate accordingly.

 

 

Experts are no better forecasters than college students

Studies of forecasts by experts show that they are no better at predicting the outcomes of complex situations such as the current financial crisis than anybody else, according to J. Scott Armstrong and Kesten C. Green.

They published a summary of their findings at the Heartland Institute.

This is no surprise to experts, of course. They know they can predict about anything and nobody will remember their predictions or hold them accountable.

But we all have a right to our opinions.

 

Spicy Pickle (SPKL) restaurant shares don’t even make a decent tip

Spicy Pickle (SPKL) restaurants are one of my favorite lunch-time places to get a great tuna salad, but if I left one of the Denver-based company’s shares as a tip, I’d be considered an el cheapo.

The penny stock sells for only 31 cents a share on the bulletin board over the counter market, after trading at a 52-week high of $2 and low of 27 cents.

Chuck Jaffe calls SPKL the “Stupid Investment of the Week.” The company is under capitalized, and its franchisees can’t get loans in the frozen credit markets. His column is here.

His key point is that the company is more likely to go out of business than to give speculators a decent return on their bets. This is just another example of how a low-priced stock is not cheap.

I don’t own SPKL.

For educational purposes only. Investigate before you speculate.