Thursday, March 29, 2012

Alpha Dogs Of The Dow: BAC, CAT, MSFT, NOK

What a difference one quarter can make. Last year, these stocks were at or near the bottom of the heap of the Dow Jones Industrial Average. Fast-forward three months and the landscape has changed completely. Here is a look at the current alpha dogs of the Dow and how they have managed to reverse their fortunes.

Bank Run
So far this year, Bank of America (NYSE:BAC) has been the lead dog of the Dow with its year-to-date return around 73%. Considering the 60.82% loss that the stock posted last year, it has been quite the turnaround story in the first quarter.

The company has continued to shore up its balance sheet with increased liquidity and lower debt levels. Bank of America has also seen a healthy increase in assets under management and associated asset management fees over the course of the past year. If the bank can maintain its revenue momentum, this stock may still have room to run.

Another Dow component that has torn the cover off the ball in 2012 has been JPMorgan Chase & Co. (NYSE:JPM). The stock has jumped roughly 38% since the beginning of the year. In 2011, shares of JPMorgan experienced a 23.70% haircut. The company is operating in a tough environment but is still enjoying some positive trends such as a decline in its net charge-off rate.

Windows of Opportunity
Shareholders of Microsoft (Nasdaq:MSFT) had to be wondering when the stock was going to breakthrough after years of stagnation. Last year's drop of 7.22% did little to instill confidence that the tide was about to turn. Amazingly enough, the stock is up around 25% this year.

It has recently been speculated that Microsoft is working with Nokia (NYSE:NOK) to develop a 10-inch tablet which will feature Windows 8. "DigiTimes" has noted that its sources expect such a tablet to hit the market no sooner than the fourth quarter. In the meantime, the company will be looking to boost its position in the Chinese smartphone market as its efforts in the United States have yet to make their mark.

One other Dow stock that has taken the market by storm in the early months this year is Caterpillar (NYSE:CAT). The construction equipment maker has seen its stock surge over 19% since the beginning of the year. The company has been the beneficiary of a resilient demand for its products from overseas markets.

The Bottom Line
The stock market rally that has led most equities higher this year has had an especially profound impact on last year's cellar dwellers in the Dow. Several of them have checked in with outsized gains that have surprised even the staunchest supporters of these companies. The returns from the alpha dogs of the Dow will likely be harder to come by as the year rolls on, but they are off to an impressive start.

Are You Ready for this Monster Move in Copper?

It’s going to happen.

The move is going to be big, it’s probably going to happen very quickly, and it should get going soon.

But in which direction?

Ahh yes – that is the question!

Let’s take a look at the Copper ETF $JJC. I want to apologize first for this kaleidoscope looking chart. I can’t stand charts like this with too much going on. But I’m going to try my best to make some sense of all these lines shapes and colors. Bear with me:

Alright, so the first thing we want to look at is my favorite ‘keep it simple stupid’ support/resistance connection. As we mentioned a month ago (Feb 27th – Dr. Copper Up Against Key Resistance), the important support levels from last May and again in August (green arrows) broke down in September. This critical breakdown via Gap lower turned into resistance in early February. The fact that this exact level is also the 61.8% Fibonacci Retracement from the 30% plus August-October decline makes this resistance all that more important.

Now, since this resistance was first tested about 6 weeks ago, Copper has been consolidating in a symmetrical triangle looking formation which is very typical of a security resting before continuing its current trend. In this case, this is a monster uptrend off the October lows. The presumption here is that the correction resolves itself in the direction of the trend and retests last summers highs up around $59.00.

As far as the moving averages go, we have a 50 (blue) and a 200 day (red) coming together with ‘golden cross’ type of behavior. The truth is that I don’t really care if the cross is golden or fuchsia (see my Pay No Attention to Golden Cross and How Bullish is the Golden Cross? via Barry Ritholtz). What I do care about is the security’s potential to trade higher above upward-sloping 50 & 200 day moving averages. This is the sort of behavior that you want to see in an strong uptrend. And if Copper does indeed break out of this triangle, then that is exactly what we’ll have here.

What is the Relative Strength Index (RSI) telling us? Only that it’s been in bullish mode since coming off that Bullish Divergence in early October (Orange line & circle). The overbought RSI conditions in late January and recent support found around 45 confirms just that. Chalk this one up as another positive.

And finally the correlations. Some traders refuse to look at the ETFs and focus only on the futures. That’s fine. But as we can see in this chart, the ETF $JJC and Copper futures have a 0.99 correlation. To me, that means they do the same thing. Use whichever vehicle you want because the charts are identical.

When we have a series of lower highs above a series of higher lows we know for a fact that this cannot last forever. In a symmetrical triangle, by definition, one side needs to eventually win. There are no ties here like hockey or old school NFL. Think of it as a playoff game where they’ll keep battling it out until one team comes out victorious.

I’m going with the trend here so I’m on the side of the bulls. But two technicians can look at the same thing and come up with different conclusions. For example, I have a ton of respect for technician Peter L. Brandt, and he sees things differently here. And he’s been doing this a lot longer than I have. It’s all good. This is an art, not an exact science.

So let me bottom line it: We can be conservative with this one if that’s your game. You want to wait for confirmation? Fine, wait ’til we break out of the upper downtrend line resistance. Want to be ultra-conservative? Fine, wait ’til we take out February’s highs which is also the 61.8% Fibonacci retracement. Don’t want to trade it at all? Fine watch for a breakout or breakdown as a tell for equities as an asset class. We love copper as a leading indicator. Don’t want to watch Copper at all? That’s OK too ;)

But the point is that I think this consolidation is the real deal. I would expect a monster move in the direction of the breakout/breakdown. After a correction of this nature takes this long to resolve, the resolution is typically vicious.

Stay tuned…

Six simple ways to verify your gold and silver is real

With the current world economic situation, wise people understand that paper money is simply the illusion of money. It is a representation of wealth of which the value can be rapidly manipulated. The US Federal Reserve randomly prints off bills with no commodity backing them, making the only value of these bills the worth that is allowed by the banksters and the elite

So in light of this, how do we save for the rainy days to come?

Once you’ve established the basics of your survival preparedness, you can protect your personal wealth by investing in precious metals. There are many different ways to acquire gold and silver. Here are a few:

• Purchase the pieces from mints or exchanges
• Purchase old pieces of jewelry or coins from yard sales, estate sales, thrift stores and Craigslist
• From trusted sellers on EBay

Mints and exchanges offer a sure thing. These businesses are built on trust and integrity. However when you purchase from everyday people or take a gamble on buying something at the thrift store, you need to be able to identify and test the metals yourself.

1. Look for markings. Jewelry made from precious metals in the US was required to be marked for metal content in 1906. On silver pieces you are looking for the numbers “925” – this indicates that the piece is Sterling Silver or 92.5% silver. If the piece you are considering is gold, you are looking for 10K, 14K, 18K, etc. 24K is 100% gold, and is very soft, so the other numbers are indicative of the gold content that has been mixed with a harder metal to make it less pliable.

2. Inspect the piece carefully. Is it rough near the edges? Is it discoloured in places? Is the finish chipping or flaking? These are all indicators that the piece may only be plated with silver or gold. These items require further testing. (Note: Sterling Silver will “oxidize” and tarnish – don’t be put off by black discolouration. This should wipe off with a soft cloth.)

3. If the piece has been marked, then you will want to test it further. Carry with you a strong magnet. Precious metals are NOT magnetic, nor are the other metals that are used in jewelry to harden them. If the piece of jewelry or coin reacts to the magnet it is not gold or silver.

4. Test it with ceramic. You can purchase a small piece of unglazed ceramic tile at your local hardware store. If you have a piece of questionable gold, run the piece across the ceramic tile. If it leaves a blackish mark, it is not genuine gold.

Once you have performed these quick tests, you may want to go further. There are two more definitive tests – the “Archimedes Test” and the acid test.

Archimedes Test

Break out your physics hat and perform a density test to determine the content of the metal you have on hand. For this you will require a vial marked in millimetres in which you can submerge the item in question.

Do not fill the vial to the top, since you will be displacing water with the jewelry item. Note exactly the amount of water in your container.
Weigh your item on a digital jewelry scale, marking down your result in grams. This is the “mass” of your item.

Place your piece in the vial and note the new water level.

Calculate the difference between the two numbers in millimetres. This is the “volume displacement” of the item.

Use the following formula to calculate density:

Density = mass/volume displacement

Here is a sample calculation:

Your gold item weighs 38 g and it displaces 2 milliLITRES of water. Using the formula of [mass (38 g)]/ [volume displacement (2 ml)], your result would be 19 g/ml, which is very close to the density of pure 24K gold.

Remember that different gold and silver purities will have a different g/ml ratio:

o 14K – 12.9 to 14.6 g/mL
o 18K yellow – 15.2 to 15.9 g/mL
o 18K white – 14.7 to 16.9 g/mL
o 22K – 17.7 to 17.8 g/mL
o 999 Silver – 10.49 g/mL
o 925 Silver – 10.2 to 10.3 g/mL

Nitric Acid Test

This is the most definitive way to test the metal in question. This test is where the saying “passing the acid test” originated.

WARNING: Nitric Acid is highly corrosive. Wear safety eyewear and protective gloves when working with this product. Protect all surfaces that could come into contact with the acid.

To perform an acid test, you will require Nitric Acid, a non-reactive dropper, and a stainless steel container in which to perform the test.

Place your item in the stainless steel container. Using the dropper apply a very tiny drop of acid on a non-exposed part of the item in question. (Remember: If the item is not gold or silver, the acid may permanently mar the finish.)

If you suspect that the item was merely plated, you can make a small scratch in a hidden place in which to test the item.

The acid will turn different colors in reaction to different metal contents:

Cream: 90 to 100% silver
Gray: 77-90% silver
Green: less than 75% precious metal content
No reaction: Gold

Test kits containing the chemicals and instructions can be purchased through Amazon for less than $10.

Finally, when purchasing gold or silver, always trust your instincts. You may not always have access to your testing kit when an opportunity arises. If an item looks suspicious or the price seems too good to be true, it probably is.

The Latest Sprott Newsletter

The [Recovery] Has No Clothes
By: Eric Sprott & David Baker

“I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”

- Bart Chilton, Commissioner, U.S. Commodity Futures Trading Commission (CFTC), October 26th, 2010

What a difference a month makes. Now that Greece has been papered over, the bulls are back in full force, pumping up the equity markets and celebrating every passing data point with positive exuberance. Let’s not get ahead of ourselves just yet, however. Very little has actually changed for the better, and it’s certainly too early to start cheerleading a new bull market. (more)

McAlvany Weekly Commentary

Germany: Winning Europe by Default

About This Week’s Show:
-“Crises” in the EU propelled the rise of Berlin
-“Crises” is propelling big government in the U.S.
-Fixing “Crises” in this way leads to inflation

VIX Up 25% After Falling to 5-Year Low - What Does This Mean?

On March 15 the VIX (Chicago Options: ^VIX) fell to 13.66, the lowest reading since June 20, 2007. Since then the VIX has spiked as much as 25%.

What's particularly interesting is that not only have investors become complacent about any type of risk, the media has become complacent about investors complacency. I don't recall reading a single high profile article suggesting that such a low VIX reading could be troublesome.

While not an absolute short-term indicator, lack of publicity of a bearish indicator usually increases the potency of its message. Does this mean the stock rally is about over?

There are no absolutes at investing, but low VIX readings have proven to be a good sell signal. Since July 2007 the VIX dropped below 15 only twice in April 2011 and a few days ago..

We know that last Aprils VIX low led to a swift 20% across the board decline, but to get a larger sample size, lets relax the parameter to VIX readings below or close to 15. This gives us a few more hits. The chart below plots the S&P 500 against the VIX.

The horizontal red line is drawn at the 15 level while the red arrows mark the corresponding S&P level. It doesnt take a Ph. D. in statistics to decipher the implications of a sub-15 VIX reading.

Versatile VIX

In addition to its correlation to stocks, the VIX viewed in tandem with the upper or lower Bollinger Band provides actual buy/sell signals (a buy signal for the VIX translates into a sell signal for stocks).

A close below the lower Bollinger Band followed by a close above triggers a VIX buy signal (sell signal for stocks).

The ETF Profit Strategy Newsletter alerted subscribers of a stock sell signal on January 12, 2010, April 13, 2010 and April 25, 2011. As illustrated by the chart, each such sell signal was followed by a decline ranging from 10 30% in the major indexes a la Dow Jones (DJI: ^DJI - News), S&P (SNP: ^GSPC - News), Nasdaq (Nasdaq: ^IXIC - News) and Russell 2000 (Chicago Options: ^RUT).

A buy signal for stocks was triggered on October 4, 2011, which was two days after the ETF Profit Strategy Newsletter issued a strong buy-signal and described the ideal scenario for a major market bottom as follows: The ideal market bottom would see the S&P dip below 1,088 intraday followed by a strong recovery and a close above 1,088.

Short-term Outlook

On March 12 the VIX dropped below the lower Bollinger band once again. This market the closing low for the VIX.

Despite the buy signal for the VIX, this didn't quite yet look like a sell signal for stocks. The ETF Profit Strategy Newsletter pointed out that a strong seasonal bias going into triple witching (March 16) and end of quarter window dressing tend to keep a bid under stock (NYSEArca: VTI - News) prices.

Nevertheless, there are warning signs. Apple seems to be carving out a rare topping pattern seen in gold and silver last year. Apple accounts for 18.44% of the Nasdaq-100, the index that has led the market and is the biggest component of the S&P 500. If Apple catches a cold, the market will get the flu (and perhaps pneumonia).

Its too early for conservative investors to trade based on any of that information (aside from scaling down long positions), but there's strong evidence that any weakness that pulls stocks below important support will no doubt awaken sellers.

This Explosive Growth Stock Just Went on Sale

Despite what any financial academic or index fund [1] advocate tells you, the market [2] isn't perfectly rational. If it were, then it would be impossible to identify a stock that is meaningfully undervalued.

There would literally be no way for an active stock picker to beat the market -- other than blind luck.

But, as I was saying... that's not the case. The market is good, but it's not perfect -- it makes mistakes.

And we should all be thankful for that. Otherwise, there'd never be any exceptional buys. You can't get ahead by paying full price all the time. And we only get to buy stocks at attractive discounts of 50% or more because the market goofs up from time to time.

That said, I think the market is making a big mistake with Patterson-UTI Energy (Nasdaq: PTEN [3]) right now. Here's the story...

Patterson-UTI is a leading provider of land-based contract drilling services. The company also assists with other critical tasks such as hydraulic fracturing and well cementing. The firm has a large fleet of 350 drilling rigs at its disposal, which are dispatched all across North America.

Demand for drilling rigs tends to rise and fall along with the peaks and valleys of oil and gas prices.

Like most of the companies in the energy drilling space, the company got hammered in 2008 when oil prices nosedived from around $150 to $40 a barrel.

The company's drilling business was essentially cut in half over that difficult stretch. The stock followed suit, plunging from a high of $37 a share to a low in the single digits.

But Patterson made a remarkable comeback in 2011. The company caters mainly to small- and medium-sized independent producers -- and those customers ramped up their drilling activity in a big way last year.

The company started the year with 194 rigs working in the field and ended with 232. Aside from the stronger fleet utilization, customers were also willing to pay higher rates. In fact, each of the firm's rigs raked in an average of $21,980 for every day on the job in the fourth quarter -- up from $19,090 a year earlier.

All told, the company boosted drilling revenue 70% in 2011, rebounding from $1.0 billion to $1.7 billion. More important, net income [4] zoomed 175% to reach $322 million, or $2.06 a share.

And there's been even more progress thus far in 2012. As of February, the active rig count has risen to 240. About half of those are locked up under long-term contracts that will throw off $1.8 billion in guaranteed future revenue. Those fixed contracts should help insulate against any temporary decline in onshore drilling rates.

Yet despite triple-digit growth rates and insulation from falling rates, PTEN shares [5] have still retreated from $34 to $18.

Much of the decline can be traced back to weak natural gas prices, which have slowed activity in places such as Louisiana's Haynesville Shale. But investors are missing the point. Customers aren't cutting back -- they're just shifting the focus from gas-directed drilling to oil-directed drilling.

The natural-gas rig count has fallen consistently for several weeks, but the oil-rig count has exploded. Back in 2009, there were fewer than 200 rigs drilling for oil in the U.S. By this time last year, that number had quadrupled to 800.

Right now, there are about 1,272 rigs working in places such as the Bakken Shale -- the highest since Baker Hughes (NYSE: BHI [6]) started tracking this statistic a quarter-century ago.

So these rigs aren't idle, they have just moved to wetter plays with better economics [7].

Risks to Consider: Of course, with investing nothing is 100% certain. Any sustained drop in oil prices could bite into exploration and production expenditures and thus drilling activity. Patterson still has many outdated rigs that will need to be retired and replaced. The regulatory environment for hydraulic fracturing is also still something of a wild card.

Action to Take -->
But with shares trading close to their 52-week low [8], PTEN may be approaching its bottom. And with the company trading at just seven times earnings [9] and at a PEG [10] ratio of .30 -- now could be a good time to gain exposure to this fast-growing energy company.

BNN: Top Picks

John Hood, President & Portfolio Manager, J.C. Hood Investment Counsel, shares his top picks.

click here for video

A Tale of Two Housing Recoveries

Believe it or not: The housing market is recovering in most states. Home price indexes for 38 states ended 2011 above their early-year lows. And while prices aren’t yet up to prerecession levels, 30 states had more than two quarters of growth under their belts by the end of 2011, according to data from the Federal Housing Finance Agency.

But the national index is still falling, dragged down by pricing drops in the worst-hit states. It’ll drop another 2% in the next six months before starting to climb in the second half of the year. There are just a handful of states dragging down the national average…Arizona, California, Florida, Michigan and Nevada…all of which saw home prices drop by more than 50% from 2006 levels. These five states are home to 46% of the inventory working through the foreclosure process.

Furthermore, “almost half of the shadow inventory [homes which could come on the market in the near future because owners are in default on their loans] is not yet in the foreclosure process,” says Mark Fleming, chief economist at data analysis firm CoreLogic. “Also, shadow inventory remains concentrated in states impacted by sharp price declines and states with long foreclosure timelines,” he says.

The pace of a state’s housing recovery depends largely on how it handles foreclosures. Twenty-four states require a judicial review, calling for a judge to sign off before a house can be transferred to the lender. The foreclosure backlog clogging the pipeline in states with judicial review is 2.6 times larger than in states without judicial review, says Florida mortgage analysis firm Lender Processing Services.

And states without judicial review are selling off foreclosed homes faster -- up to three times faster in January than those with judicial review. “In January, you could have had some seasonal impact,” says Herb Blecher, vice president of LPS Applied Analytics. “But if it continues, it really is a resolution of this pipeline issue we’ve seen for some time.” In late 2010, several large banks, including Bank of America, J.P. Morgan, Wells Fargo and Citigroup, halted foreclosures in some states because of improper documentation. Afterwards, states without judicial review saw the resolution of foreclosures pick up relatively quickly, while foreclosures in “states with judicial reviews have been largely flat for well over a year,” Blecher says.

In many cases, home prices are already ticking up in states where foreclosures work through the process faster. Texas, for example, has the shortest foreclosure timeline, 90 days, and it saw home prices climb 1.2% in the fourth quarter of 2011, according to the FHFA. In Delaware, the time between missing a mortgage payment and foreclosure averages 106 days, and prices grew 0.6% in the fourth quarter. In New York, however, where judicial reviews and mortgage mediation requirements stretch the foreclosure time to a whopping 1,019 days, prices fell 1%.

Even where there is a huge overhang of housing inventory, there is a big difference. Take Florida and Arizona, two states bearing the brunt of the housing bubble burst. It takes an average of 806 days to complete foreclosure in the Sunshine State, which requires judicial review. In the Grand Canyon State, which doesn’t, it takes less than 200 days. As a result, Arizona’s market is already turning the corner. Phoenix home prices, for example, gained 2.7% in the fourth quarter of 2011, after plunging a staggering 55% from the 2006 peak. In Florida, prices are still falling.

That’s not to say some delays aren’t justified. The robo-signing fiasco and other cases validate the need to be diligent in the foreclosure process. Mediation is justified if there is an actual chance the homeowner can afford to make future payments on a house. But if not, the faster inevitable foreclosures can be concluded, the faster prices can rebound, because foreclosed-upon homes are often listed at a 40%-50% discount to comparable houses and vacant, blighted homes depress the prices of those nearby.

Florida is trying to cut damaging foreclosure delays with legislation to let lien holders request an expedited process. But it appears the move will be put off until next year. Although a bill passed in the state House of Representatives this year, it did not clear the state Senate. Odds are it will come up again in the next legislative session. Other states, though, are headed in the opposite direction, imposing new requirements for mediation between homeowners and lenders, which will add more months of delay. New York’s required mediation, for example, adds about one year to the process, according to one estimate.

Nationally, there is some movement to help clear excess inventory. Lenders’ recent agreement with state attorneys general will provide relief for about 500,000 homeowners, keeping many of them from going into foreclosure. And a pilot program at Fannie Mae to sell off foreclosed-upon homes in bulk, with the requirement that they be rented out for five years, is getting a warm reception from the market. Fannie Mae is selling 2,500 homes in the hardest-hit areas, such as Atlanta, South Florida, Phoenix and Las Vegas. Look for the government-sponsored entity to expand the program later this year and for other mortgage holders, including Freddie Mac, to follow suit.