Wednesday, February 8, 2012

Stocks Due for a Breather After a solid run, the market is exhibiting signs of exhaustion

The stock market took a breather on Monday following its recent successes. Observers blamed the slower day on “fretting over Greece” again. But the euro overcame early weakness and closed higher against the U.S. dollar, which doesn’t fully support that thesis. From the viewpoint of technical analysis there are other reasons for the market to rest.

At the close, the Dow Jones Industrial Average was off 17 points at 12,845, the S&P 500 fell a point to 1,344, and the Nasdaq lost 4 points to close at 2,902. The NYSE traded 686 million shares and the Nasdaq crossed 420 million. Decliners led advancers by 1.4-1 on both exchanges.

On Monday, I mentioned[1] that the S&P 500’s break from a small inverse head-and-shoulders formation that appeared in November and December provides a short-term target of 1,378. But what about a long term target?

One publication quoted Bloomberg on Jan. 3: “Valuations for U.S. equities have been stuck below the five-decade average for the longest period since Richard Nixon’s presidency.”

That average evaluation is 16.4 times. Multiply that by the expected earnings of the S&P 500, which is $104.78, and the target is 1,718, which would be very nice, but with current world tensions it may be a bit optimistic.

At the present level of 1,344, with an assumption of $100 to $110 earnings (Jeff Saut’s estimate), the S&P 500 is trading at a very modest P/E of just 12.2x to 13.5x. My guess is that the index should trade at about 15 times earnings. There are so many factors that could influence the ratio (Greece, Iran, China, Syria, etc.) that we must admit that we live in abnormal times. But 15 times $105 = 1,575.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

Supposition: A breakout by the S&P 500 above 1,345 could be from a huge inverse head-and-shoulders formation. The formation has a double head at an average of 1,120. To calculate the target, take the distance between the head and the neckline and add it to the neckline. Thus, 1,345 – 1,120 = 225 + 1,345 = 1,570, just 5 points from 15 times earnings.

That target is a mere 16% from yesterday’s close, which is exactly how far the index has traveled since its August to October lows. Surely stocks are due for a rest following such a run and there appears to be signs of exhaustion.

UUP Chart
Click to Enlarge

The dollar via the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP[2]) seems to be oversold, and if Greece breaks from the EU, the dollar should strengthen. A strong dollar usually leads to lower stock prices, and so tomorrow we will examine what to expect in the way of a pullback or consolidation.

Tobacco Stocks Are Still Addictive : BJK, BK, BTI, C.MDG, ITYBY, LO, MO, PM, RAI, VGR

While their products may be controversial, sinful stocks have been some of the best wealth generators of all time. After all, people tend to continue to continue with their vices no matter what the economy is doing. Funds like the Market Vectors Gaming ETF (ARCA:BJK) have allowed investors to tap into the industries steady cash flows and 'addictive' nature. However, to find the best performing sub-sector investor need only to light a match.

Cigarettes Are Safe for Portfolios

If you can get over the fact the products could actually kill somebody, tobacco firms have been one heck of a place to put your money over the last few years. A new report by analyst at Bank of New York Mellon (NYSE:BK) shows that tobacco companies handed investors the best returns over the last decade when adjusted for volatility. The group, which includes firms such as Altria (NYSE:MO), gained more than 13% after taking into account price swings or about five times the increase of the MSCI World Index. The risk-adjusted return is calculated by dividing total return by volatility. While the Internet Retail sector outperformed tobacco stocks on total return measure, they did so with more than 50% volatility.

The reason for this outperformance: stable cash flows and big dividends. The average yield for global tobacco firms with a market cap of at least $1 billion is a hefty 5.1%. This compares to the meager 1.5% for non-cigarette firms. In addition, tobacco firm's gross margins are significantly higher and cash flows from operations have grown at more stable paces than at other companies.

The real gains for investors lie in the future. While there are some threats such as more regulation and a pending ban on menthol, global tobacco use is rising. Approximately four out of every five smokers can be found in the emerging world and the pace at which new emerging market citizens start smoking has been quite rapid. Pending declines in the developed world should be overshadowed by gains in the emerging. Smoking still has many of the perceived "cool" qualities in these markets and rising middle class incomes should help to support tobacco firm's cash flows.

Smoke 'Em if Ya Got 'Em
Combining high dividends, a recession resistant product and a value stock stint due to the perceived risks associated with their product, tobacco stocks maybe exactly what investor's need. While there isn't a tobacco/cigarette focused ETF yet, there are plenty of ways investors can add the firms to a portfolio.

For those investors looking for a truly global play, British American Tobacco (NYSE:BTI) could be a great bet. The firm has the largest emerging market exposure, receiving 60% it's of earnings and 72% of sales volume from developing economies. Shares of the firm sport around a 2.5% yield. In addition, fellow U.K. firm Imperial Tobacco Group (OTCBB:ITYBY) receives around 61% of its sales from developing markets. Both could make a great buy to play the global growth in tobacco use.

Industry giant Philip Morris (NYSE:PM) isn't just resting on its cigarette laurels. With the constant threat of legislation, the company has added tobacco projects outside the realm of smoking/chewing. The company has purchased a 40% stake in Canadian biotech company Medicago (TSE:C.MDG), which is developing influenza vaccines using tobacco leaves. While it'll interesting to see if the deal produces anything worthwhile, in the meantime, Philip Morris's bread-n-butter businesses produce ample cash flows to support the companies approximate 4% dividend.

Finally for those looking for shear yield, discount cigarette producer Vector Group (NYSE:VGR) provides investors with about a 9.1 dividend yield. That may seem high when compared to other firms like Reynolds American (NYSE:RAI), the landmark 1998 litigation settlements require only the three largest cigarette makers to pay the fees. This leaves Vector plenty of extra cash to return to shareholders.

The Bottom Line
The tobacco industry has been one of the top performing sectors over the last decade, proving there's a "win in sin." For investors, the group's stable cash flows, high dividends and growing emerging market demand will surely see more of the same in the future. The previous firms, along with Lorillard (NYSE:LO) make ideal plays.

Jay Taylor: Turning Hard Times Into Good Times



2/7/2012: Is Hyper Inflation Possible in the Age of Deleveraging?

The Housing Bottom is Here

There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view.

First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.

For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean.

Total Housing Starts and Single Family Housing Starts Click on graph for larger image.

For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

As the first graph shows, housing starts, both total and single family, bottomed in 2009 and have mostly moved sideways since then - with some distortions due to the ill-conceived housing tax credit.

New Home SalesNew Home sales probably bottomed in mid-2010 and have flat lined since then.

Back in 2009, when I first wrote about the two bottoms, I thought we were close on housing starts and new home sales - but that it was "way too early to try to call the bottom in prices." In real terms, house prices have fallen another 10% to 15% since I wrote that post according to the CoreLogic and Case-Shiller house price indexes.

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

The problem with using the house price indexes to look for a bottom is that they are reported with a significant lag. As an example, the recently released Case-Shiller index was for November and the index is an average of September, October and November - so it is a report for several months ago. The CoreLogic index is a little more current - the recent release was for December, and CoreLogic uses a weighted average for prices (December weighted the most) - but that is still quite a lag.

Both of those indexes will bottom seasonally around March, and then start increasing again.

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).

Of course these are national price indexes and there will be significant variability across the country. Areas with a large backlog of distressed properties - especially some states with a judicial foreclosure process - will probably see further price declines.

And this doesn't mean prices will increase significantly any time soon. Usually towards the end of a housing bust, nominal prices mostly move sideways for a few years, and real prices (adjusted for inflation) could even decline for another 2 or 3 years.

But most homeowners and home buyers focus on nominal prices and there is reasonable chance that the bottom is here.

This Precious Metal Could Rise 125% Over the Next 10 Months

Brett Eversole writes: You've probably never considered this precious metal before. But you should today...

The last time a trade like this set up, investors walked away with a double in just 10 months. And every similar trade in the last seven years was a winner.

Here's the story...

At DailyWealth, we love "contrarian" investing ideas. The more an investment idea is hated, the more we're ready to step up and buy. At the point of maximum pessimism, there probably aren't many people left to sell... and just a little bit of buying interest can turn things around.

That's exactly what's happening in "the precious metal you've never considered."

The chart below shows the price of this precious metal (in black) versus how many large speculators are making bullish bets on the metal through commodity futures (in blue). The lower the blue line, the more hated it is...


In short, traders hate this precious metal right now. The last time it was this hated was March 2009. Back then, the price increased 125% in just 10 months.

Looking farther back, to 2005, traders have only been this pessimistic four other times. Each of those times marked the start of a great nine-month trade. If you had bought this precious metal each time, on average, you would have made 62%. Every trade was a winner.

With traders this pessimistic, I think it's a great time to buy... especially because there's a big long-term "tailwind" behind this trade...

You see, this precious metal is in big demand by industries, especially carmakers. It's used in practically every gas-powered car you see on the road. And as of now, there is no viable substitute.

Over the next decade, worldwide vehicle demand is going to explode. Right now, India only has 12 cars per 1,000 people. China only has 28. The U.S. has 451. As the world "catches up" to the U.S., carmakers will need more of this precious metal to keep pace.

In 2011, the world's supply of this precious metal was 7.42 million ounces. But demand was over 1.5 million ounces more (8.89 million ounces, to be exact). Recycled scrap makes up the difference for now. But as demand increases over the next decade, supply will have a hard time keeping up.

Supply and demand are Economics 101. When demand is greater than supply, prices will rise. I don't expect it to be different with this precious metal...

I'm talking about palladium. It's a "sister metal" to platinum.

You can invest in palladium through physical bullion. Or you can easily buy it through the Physical Palladium Shares Fund (PALL). Importantly, PALL is fully backed by physical palladium, not financial contracts.

Based on supply and demand, palladium prices could go up by hundreds of percent in the long term. In the short term, we should see double-digit returns this year alone.

Even if you've never considered an investment in palladium before, you should now...

Good investing,

Brett Eversole

http://www.dailywealth.com

Should You Hold Gold or Dig for Miners? Don't buy miners on mean reversion hopes alone

What provides the better bang for your buck: gold or gold mining stocks?

While countless pundits continue to highlight the potential of gold stocks to experience positive mean reversion after several months of underperformance versus gold, the longer-term data shows that investors have been better off owning the metal more often than not. Consider the following:

  • In the 113 calendar quarters dating back to the first available data on the PHLX Gold/Silver Index (XAU), spot gold (using the London Afternoon, or PM, Gold Price Fix as the benchmark) has outperformed the XAU in 61 calendar quarters, and lagged in 52.
  • Gold has provided an average quarterly return of 1.4%, compared with 1.15% for the XAU.

What is the source of this outperformance? The simple answer is that the XAU delivers its best performance when both gold and the stock market are rising. Of the 113 quarters measured, both asset classes produced positive returns in 40 — or 35.3% of the time. In these quarters, the XAU rose 30 times and fell only 10 (a hit rate of 75%), providing an average return of 10%. In the remaining 73 quarters, the XAU finished in positive territory only 26 times, while losing ground in 47 — a hit rate of 35.6%. The average return in these quarters was -2.5%.

A prime example of how the impact of broader market returns can cause gold stocks to underperform occurred during the depths of the financial crisis in the second half of 2008. Gold held up exceptionally well during this time, returning -6.5% and outpacing the -30.4% return of the S&P 500 by a huge margin. In contrast, the XAU fell -37.9% in this six-month period. As a result, anyone that bet on gold through gold mining stocks would have found themselves in the unenviable position of being largely correct in their call on gold, but losing money nonetheless. There’s no doubt this is an extreme case, but it still serves to illustrate the potential danger of choosing gold stocks over gold at the wrong time.


Click to Enlarge
The chart below provides an illustration of the impact of weak stock market performance on gold mining stocks using the ETFs[1] SPDR Gold Trust (NYSE:GLD[2]) and Market Vectors Gold Miners ETF (NYSE:GDX[3]):

Other factors also come into play in the longer-term gold vs. miners debate. Gold stocks can be affected not just by the performance of the broader equity market, but also the direction of energy prices (since rising fuel costs can crimp their profit margins). Individual mining stocks also have the potential to be hurt by one-off surprises, such as floods or the expropriation of resources by foreign governments.


Click to Enlarge
The bottom line: The talk about the “conversion” trade between gold and gold mining stocks persists, since the recent performance disparity is at levels that have preceded periods of outperformance for miners in the past. But it might pay to keep the historical data in mind when making trading decisions.

This is especially true now, given that GDX is experiencing lower highs, weaker volume and a 200-day moving average that has been headed lower for more than two months.

Country Default Risk (Bespoke)

Below we highlight the current sovereign debt credit default swap (CDS) prices for 39 countries around the world, as well as their year to date changes.

As shown, every country except one (Portugal) has seen its default risk decline in 2012. European countries have mostly seen the biggest drops in default risk, with Belgium leading the way with a drop of 31.6%. Greece – while it still has by far the highest default risk – has seen its default risk fall the third most in 2012 with a decline of 25.5%. (France ranks second at -25.7%.) The US currently has the lowest default risk out of all the countries shown by a wide margin.

Matthew McLennan: Where He’s Finding Value Now, with Less Volatility

Dow approaches 13,000, and maybe a record to come

It was just last summer that the Dow Jones industrial average shed 2,000 points in three terrifying weeks. Investors had a host of things to worry about, including the possibility of another recession.

Now the Dow is within reach of the rarefied 13,000 mark — a level it hasn't seen since May 2008, four months before the financial system almost came apart.

A strong one-day rally — caused by a deal on bailout money for Greece, perhaps, or an unexpectedly positive economic report — could put it over the top.

What's more, the average is just a 10 percent rally from an all-time high. And 10 percent rallies can happen fast these days.

The stomach-turning summer is a bad memory. Europe appears to be getting its act together, last summer's downgrade of the U.S.' credit rating was quickly forgotten, Washington is mostly behaving, and recession fears are gone.

"There are signs that the economy is getting back on its feet and the market is reacting to that," says John Prestbo, executive director of Dow Jones Indexes. "The mood is just better in this country than it has been for a while."

On Wall Street, too. The Dow traded Tuesday at 12,878, a 21 percent rally from Oct. 3, its low point for last year. In January, the average rose more or less in a straight line and added 3.4 percent, its best start to a year since 1997.

From here, the record is tantalizingly close — 14,164.53, reached Oct. 9, 2007, when the investment houses Bear Stearns and Lehman Brothers still existed and the unemployment rate was 4.7 percent.

A 10 percent surge may seem like a lot, but it's really not. The Dow has gained almost 15 percent since Nov. 25, just 10 weeks ago.

Though there's a long way to go to get the country back to economic health, there are pockets of encouragement. Unemployment is still 8.3 percent, but it's the lowest since February 2009. Economic output grew every quarter last year.

Corporate earnings growth has slowed, but analysts think it will pick up again later this year. Investors, always wary of uncertainty, may even be encouraged by some clarity in the Republican presidential nominating race.

Investors are no longer just trying to stem their losses, says Mark Lehmann, president of JMP Securities in San Francisco: "They're playing a little offense. Six months ago, they were playing defense."

There's evidence that the rally has room to run. In a popular measure of how expensive stocks are, the 30 companies that make up the Dow are trading at an average of about 13 times their annual earnings per share.

The last time the Dow was at 13,000, in May 2008, stocks were trading for about 15 times earnings. Stock-market research firm Birinyi Associates estimates Dow stocks have traded at an average of 16 times earnings over the past two decades.

The fire-sale discounts have already come and gone, though. Those were back in early 2009, when the Dow bottomed at 6,547.05, its Great Recession low — a little more than half the level now. Back then, Dow stocks traded at nine times earnings.

Not everyone believes the rally will last. Joe Gordon, managing partner at Gordon Asset Management in North Carolina, is dubious. He cites the unresolved European debt crisis, the U.S.' historically high national debt and the millions of people who have given up looking for work, part of the so-called underemployed.

"This is like drinking a lot of coffee in the afternoon," says Gordon. "It perks you up, then once it fades 45 minutes later you're even more tired."

Another wrinkle is that the Dow tracks just 30 companies, so it doesn't take the full pulse of the market. The Standard & Poor's 500, with its much larger roster, is still 16 percent away from its all-time high.

"It's 30 stocks," says Rob Leiphart, an analyst at Birinyi. "It doesn't give you a representation of anything."

But despite its size, the Dow is the market gauge that penetrates the public consciousness, generating headlines and water cooler buzz more than the less publicized S&P.

That's important because the stock market, even if it has no direct bearing on the fundamentals of the economy, is a psychological motivator of spending because of something known as the wealth effect.

Even people with no stock investments will let their decisions be influenced by swings in the Dow. When it's up, we tend to feel richer and spend more. When it's down — think back to the 500-point daily declines of 2008 — we tend to feel poorer and spend less.

There's good reason the Dow has pull over the financial mood of the country. Its 30 stocks account for 25 to 30 percent of the market value of all U.S. public companies, and about 40 percent of the dividends, Dow Jones Indexes estimates.

"Nothing of substance can happen in this economy without these companies feeling it," Prestbo says.

A handful of companies have an outsized impact on the index. The Dow is a price-weighted average, which means companies with more expensive stocks have more power to drive the average higher or lower.

If you invest $30 in a mutual fund tracking the Dow, you don't have a dollar riding on each company. Four times as much of your money would end up on Home Depot, which is trading around $45, than Alcoa, trading around $11.

IBM, the highest-priced stock in the Dow, had a giant influence last year. The Dow rose 5.5 percent in 2011, but without IBM it would have risen only 3.4 percent, according to Leiphart's calculations.

If you were to cut out the next three stocks on the list, McDonald's, Chevron and ExxonMobil, then the Dow would have finished down 0.25 percent for the year.

The flip side is that stocks like Chevron, Exxon Mobil, Microsoft and Intel trade well below the 13 times earnings for the full Dow. If they catch up, it could be enough to power the average to a record.

Chart of the Day - Verisk Analytics (VRSK)

The "Chart of the Day" is Verisk Analytics (VRSK), which showed up on Monday's Barchart "All Time High" list. Verisk on Monday posted a new all-time high of $41.18 and closed up 1.21%. TrendSpotter has been Long since Jan 11 at $40.23. In recent news on the stock, Verisk on Jan 11 announced a additional $300 million stock buyback. On Dec 2, Susquehanna reiterated its rating of Positive and raised its target to $45 from $40. Verisk Analytics, with a market cap of $6.4 billion, is a leading provider of risk assessment solutions to professionals in insurance, healthcare, mortgage lending, government, risk management, and human resources.

vrsk_700_01

Banking Fraud - Synchronicities - Coast to Coast AM - 2012.02.06



Banking Fraud - Synchronicities - Coast to Coast AM - 2012.02.06 with George Noory and Guests: author Jerome Corsi, and Dr. Kirby Surprise In the first half, author Jerome Corsi reported on a banking fraud scandal, HSBC Under Investigation, yeah right... just like MF Global ,and he also discussed a possible war looming between Israel & Iran. Whistleblower John Cruz , a former employee of HSBC,"I found many accounts through which hundreds of thousands of dollars were being flowed as a conduit on a monthly basis," whistleblower John Cruz, an account relationship manager who worked in the HSBC southern New York region. told WND. John Cruz has accused the banking giant he worked for of being involved in an international money laundering scheme involving billions of dollars. The bank used a series of fake accounts based on stolen identities to funnel money back to clients such as drug trade criminals, Corsi explained. The complicit nature of the management of the bank running the scheme suggests that someone in government-- like the CIA or Federal Reserve must have been aware of the wire transfers, he added. For more on this, see Corsi's recent articles for WND: 1, 2, 3. The Justice Department's money-laundering probe against banking giant HSBC Holdings Plc is looking at possible prosecution of individual bankers