Is the Market Going to Make a Tectonic Shift?
Technical
The smart money waits as the stock market attempts to prove it is ready to move higher before it moves lower. Sure there have been upside days on decent volume, yet the S&P500 remains below its 200 day moving average. Inertia becomes greater the longer the index stays below the 200 day line adding to upside resistance and increasing the chance that stocks will move lower in the near term. Today's action did not help as each time the market attempted to move higher it sold off, ending the day down on higher volume and stinking breath.
Over the last couple of weeks we began asking hard questions about this market and the apparent tectonic shift in progress. We believe that in order to be successful in 2006 fund managers will have to correctly postulate their portfolios around a new paradigm; one with higher rates, a new Fed Chief, an uncertain winter and a possible pandemic. Stay tuned to this blog as we identify the new wave of leaders and usher in opportunities not yet found by the mainstream.
Key Market Factors Begin Meaningful Changes
Capital Markets are being tested right now. The 10 year Treasury closed above 4.50% for the first time since late March. Will the yield continue to rise or will it fall like it did in April? Answer that question correctly and you will profit handsomely. Read on as I will give our perspective on interest rates and the market's other key factors.
First, in order to sum up our perspective and enable the reader to, with one glance, see how we view the current market climate we are adding a Key Market Factors Score to the blog. In short we are adding a number grade to each of the Key Market Factors, which when totaled will represent our perspective. For example, if Oil NYMEX is Negative +, we will assign a number of -1. If the 10 year treasury is Positive -, we will assign a score of +1. When totaled (-1 + 1=0) the result would mean we are neutral on the market. Got it, good, if not read on and it will become clear. For the record the scale is as follows positive + = 3, Positive = 2, Positive - = 1, Neutral = 0, Negative + = -1, Negative = -2, Negative - = -3. A total positive score will mean a corresponding positive perspective, likewise a negative score will mean a negative perspective.
Oil NYMEX - $60.80/barrel - (negative )[score = -2] - Oil prices have fallen from the Hurricane Katrina highs of $70/barrel, however, they are still high enough to tax the consumer. Although we like stable energy prices we feel the market would perk-up if the price was under $55/barrel in the short term. Within the last five trading days the price of oil dipped below $60 showing some promise of relief. Further, higher interest rates are likely to bring the price of energy down. That said, the potential exists for prices to stagnate if a cold winter ensues keeping heating oil prices high. For now we feel the market is impacted negatively from the current price of oil.
10yr Treasury - 4.57% - (Neutral) [score=0] - The yield on the 10 year Treasury note broke solid resistance this week when it crossed the 4.50% level and held. The question remains - is this a short term pop or will rates continue to move higher. Greenspan's "conundrum" may finally be solved as long rates look to be rising in concert with short term rates. On the positive side the yield curve is steepening signaling the economy is expected to grow. The other side of the coin says inflation is rising and growth must be slowed. Only time will tell the future of rates but for now the market is discounting a Bernanke Fed will raise rates and expand the economy.
3rd Quarter Earnings - 17% - (positive)[score=2] - 3rd Quarter earnings are turning out to be positive. In the S&P500 70% of companies reporting thus far have beat expectations with only 14% falling short. Prognosis for the 4th quarter is conservatively positive for the most part with many companies keeping estimates in line with previous guidance. Our surveys report that the economy is growing and companies remain strong with some even having difficulty finding enough qualified employees. Asia is growing ahead of forecast and Europe looks a little brighter than before. 4th quarter earnings show promise, however, other factors of the economy may hamper growth. For now we are positive on 4th quarter earnings.
The KEY MARKET FACTORS SCORE = ZERO, making us neutral on the market. We continue to be busy rebalancing our portfolios. We have started to shift out of interest rate sensitive issues and are looking for companies that will benefit from the changing environment. Airlines and some tech companies have caught our eye and more are in sight. Check our website at www.thesmartmoneyinvestor.com to see what we have added and what we have let go.
The smart money waits as the stock market attempts to prove it is ready to move higher before it moves lower. Sure there have been upside days on decent volume, yet the S&P500 remains below its 200 day moving average. Inertia becomes greater the longer the index stays below the 200 day line adding to upside resistance and increasing the chance that stocks will move lower in the near term. Today's action did not help as each time the market attempted to move higher it sold off, ending the day down on higher volume and stinking breath.
Over the last couple of weeks we began asking hard questions about this market and the apparent tectonic shift in progress. We believe that in order to be successful in 2006 fund managers will have to correctly postulate their portfolios around a new paradigm; one with higher rates, a new Fed Chief, an uncertain winter and a possible pandemic. Stay tuned to this blog as we identify the new wave of leaders and usher in opportunities not yet found by the mainstream.
Key Market Factors Begin Meaningful Changes
Capital Markets are being tested right now. The 10 year Treasury closed above 4.50% for the first time since late March. Will the yield continue to rise or will it fall like it did in April? Answer that question correctly and you will profit handsomely. Read on as I will give our perspective on interest rates and the market's other key factors.
First, in order to sum up our perspective and enable the reader to, with one glance, see how we view the current market climate we are adding a Key Market Factors Score to the blog. In short we are adding a number grade to each of the Key Market Factors, which when totaled will represent our perspective. For example, if Oil NYMEX is Negative +, we will assign a number of -1. If the 10 year treasury is Positive -, we will assign a score of +1. When totaled (-1 + 1=0) the result would mean we are neutral on the market. Got it, good, if not read on and it will become clear. For the record the scale is as follows positive + = 3, Positive = 2, Positive - = 1, Neutral = 0, Negative + = -1, Negative = -2, Negative - = -3. A total positive score will mean a corresponding positive perspective, likewise a negative score will mean a negative perspective.
Oil NYMEX - $60.80/barrel - (negative )[score = -2] - Oil prices have fallen from the Hurricane Katrina highs of $70/barrel, however, they are still high enough to tax the consumer. Although we like stable energy prices we feel the market would perk-up if the price was under $55/barrel in the short term. Within the last five trading days the price of oil dipped below $60 showing some promise of relief. Further, higher interest rates are likely to bring the price of energy down. That said, the potential exists for prices to stagnate if a cold winter ensues keeping heating oil prices high. For now we feel the market is impacted negatively from the current price of oil.
10yr Treasury - 4.57% - (Neutral) [score=0] - The yield on the 10 year Treasury note broke solid resistance this week when it crossed the 4.50% level and held. The question remains - is this a short term pop or will rates continue to move higher. Greenspan's "conundrum" may finally be solved as long rates look to be rising in concert with short term rates. On the positive side the yield curve is steepening signaling the economy is expected to grow. The other side of the coin says inflation is rising and growth must be slowed. Only time will tell the future of rates but for now the market is discounting a Bernanke Fed will raise rates and expand the economy.
3rd Quarter Earnings - 17% - (positive)[score=2] - 3rd Quarter earnings are turning out to be positive. In the S&P500 70% of companies reporting thus far have beat expectations with only 14% falling short. Prognosis for the 4th quarter is conservatively positive for the most part with many companies keeping estimates in line with previous guidance. Our surveys report that the economy is growing and companies remain strong with some even having difficulty finding enough qualified employees. Asia is growing ahead of forecast and Europe looks a little brighter than before. 4th quarter earnings show promise, however, other factors of the economy may hamper growth. For now we are positive on 4th quarter earnings.
The KEY MARKET FACTORS SCORE = ZERO, making us neutral on the market. We continue to be busy rebalancing our portfolios. We have started to shift out of interest rate sensitive issues and are looking for companies that will benefit from the changing environment. Airlines and some tech companies have caught our eye and more are in sight. Check our website at www.thesmartmoneyinvestor.com to see what we have added and what we have let go.
- BIDU - Baidu.com reported earnings that crushed their previous year's results. The only problem is that they fell way short of what a "Chinese Google" should be. BIDU lifted 4th quarter guidance by about 30%; which normally would be good. However, the increase amounts to only a few million dollars and is chump change when compared to $100 million type increases more worthy companies produce. I would have been excited by a 200%+ increase in earnings, so the 30% was, well disappointing. Baidu.com is apparently China's number one search engine and most visited website. As far as I can tell from the numbers they are mere mortals with a me too product and adding an old school name to their board only makes matters worse. I will have to see more than so, so before I will be willing to pay the premium put on the stock at the moment. At this point $27/share looks like a fair buy point.
- MESA - Mesa Air continues to look good even in the face of a negative market. MESA is set to report earnings next week tipping its hand about its latest investments and growing ASM (average seat mile) numbers. Its competitor RJET reported strong earnings today 63% ahead of last year. RJET stock rose 0.06% on solid volume. For comparison RJET has a PE of 9 while MESA's PE is only 7. We see promise for both of these small caps especially MESA and can see $14 a share in the short term based on peer multiples.
posted by Burton Hess at 6:30 PM
0 Comments:
Post a Comment
<< Home