SmartStocks - Page 4

The Airline sector (XAI) has been outperforming the broader market (as measured by the S&P) YTD (year-to-date). In fact, the airline sector (XAI) has yielded investors with 13.4% in gains so far this year, compared to the -7.8% the S&P has yielded investors YTD.

Take a step back and look at the yearly chart; you'll notice that the XAI has amassed over 90% in gains, compared to the 10%+ return the S&P has yielded investors in the same time period.

Now take five steps back; the XAI has underperformed the S&P by some 12%.

With these different time frames in mind, will the airline sector continue to be the darling of Wall St and outperform the broader markets, or will it start to roll over and match the S&P performance at best? So far, airline carriers have been able to nickle and dime themselves into profitability (most) (i.e. by charging $25 on luggage). They've also been able to lock in jet fuel costs for the next 3 years. Whats more, airline companies have been able to hedge potential higher energy costs by going long jet fuel contracts (most set to expire on 2012). It looks like the airline companies have costs for the foreseeable controlled, but what about revenues? These airline companies depend on a strong consumer to be profitable. With consumer sentiment a multi-month lows and with a budget strapped consumer, can airlines possibly earn profits when the unemployment rate is most likely to to remain above 8% for the next 2 years (according to government )?


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YTD (year - to - date)



1 - year chart:




5 - year chart:




Growing slowly but steadily! Thank for the support Art
Hope your doing well as well

With the "S&P Cumulative A/D Line" (a way to essentially measure market strength) trading at the highest level seen since mid-May, is there room for markets to rally, or are we nearing yet another inflection point?

Although price has been supportive of a breakout, volume has been abysmal for most of this summer. Are we seeing real, substantive buying or just plain short covering?



Furthermore, since the July lows, energy, industrials, materials and banks have led the way, while tech and consumer discretionary have lagged. Can this market continue to rally without tech? Better yet, is money set to transition out of basic materials and into tech?

With nearly 70% of the companies beating estimates, how cheap is the S&P?
Cash flow levels can bee goosed and played with, so one has to ask, how cheap stocks really are? Better yet, what is the quality of earnings? Sure, companies can beat easily on the bottom line, but is what the top line telling us about real earnings growth? More importantly, what if anything does guidance tell us of were the economy and market will head?

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The AAII sentiment survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.

The AAII long term bearish average indicator reads 30%
The AAII long term bullish average inidcator reads 39% and
The AAII long term neutral average indicator reads 31%.

However, the AAII bearish indicator currently reads 32.9%, up slightly from the historical average of 30%. Whats even more interesting is the fact that since markets bottomed in early July to this day, the AAII bearish sentiment indicator continues to make new highs (although it has come in by 2% or so). In fact, the indicator is trading near its July 2009 highs! Does this mean the smart money is betting on a bigger market correction, or does it mean to many bears are still trying to short the market, implying higher stock prices?

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Come join the SmartStocks group @ smartstocks.com
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Note: I'll be excluding trade set ups and predictions (of where markets and stocks we recommend are heading from this newsletter for obvious reasons - this is strictly reserved for subscribers).

Tuesday, August 10th, 2010

After yesterday’s mute response in equities, stocks gapped substantially lower following some cautious remarks by researchers at the San Francisco Fed. In the letter, researchers acknowledged the fact that there currently exists a higher probability the economy slips into a recession than entering into a self sustained economic expansion. For the day, the DJIA lost 0.5%, the S&P 500 lost 0.6%, NASDAQ shed 1.3% and the Russell took the biggest hit, closing down 2%. Volume was exceptionally low prior to the Fed announcement, but picked up late in the day with 3.9B shares trading hands on the big board and ARCA (above the summer average). Decliners outpaced advancers 2 to 1, with 56% of stocks in the S&P trading above the 150 DMA (remember that one of the prerequisites we at SmartStocks need to see for markets to head higher, is for XXXXXXXXXXXXXXXXXXXXX XXXXXXXXX XXXXXXXXX). Last but not least, the number of bulls as tracked by the % of bulls in the NYSE, slightly decreased by 0.1% to 55.8%, up 18 bps from its July lows, but still down 24 bps from the year-to date highs set in April.

Today, productivity for Q2 fell to a reading of -0.9%, off 1.0% from consensus expectations of a 0.1% increase, and to its lowest levels since Q4 in 2008 (at the height of the financial crisis). We also saw a 0.2% increase in unit labor costs, the highest seen since Q2 in 2009, falling short of the 1.4% consensus expectation. Because of lower productivity, firms are likely to remain lean on both inventory and employment. The reason for this is because firms must (and are) trying to do everything they can to remain profitable in and otherwise unstable economic landscape (i.e. weak sales environment). One way firms can achieve profitability in this tepid environment, is to keep inventories relatively low and keep current employees working longer hours and with a slightly better marginal pay (thus the higher productivity); as such, firms are in no need to hire new labor, putting a “floor” on unemployment near these high levels. Tomorrow, the trade balance for the month of June and the Treasury budget will be released.

In other news, the FOMC (Federal Open Market Committee), today announced that it would continue to support asset prices by keeping its current policy(-ies) on hold for an “extended period” of time, implying that it will not raise rates anytime soon and that it is going to continue to buy MBS (increase the size of its balance sheet), to essentially monetize the Federal government debt (i.e. treasury bonds (debt)). Now, if you think about it, the Fed is really promoting what has not become a ponzi scheme, because it is now publicly making it clear that it is insuring Federal notes (bonds). In an attempt to keep our newsletters as impartial as possible, I’ll leave my far out opinion at that . Below I present just a few of the highlights from the meeting.

-Household spending is increasing but constrained by unemployment.
-Fed voting: 9-1 voting with Hoening voting for a rate increase.
-Housing starts remains depressed and bank lending is contracting (thanks in large part to a higher TED spread).
-Fed Funds remains UNCH at 0%.
-Discount rate (rate of interbank lending) remains UNCH at 0.75%.
-Fed will continue to roll over holdings onto maturity.
-Fed intends to keep rates low for an “extended period”
-Pace of recovery has slowed in recent months as showed by the beige book report.
-Inflation likely to be subdued; deflation is poses a higher risk right now.
-Purchases of these” assets” set to begin on August 17th

Our views: Essentially, the fed has now insured government treasuries, as it is looking to re-invest the proceeds of expired mortgage backed securities (MBS) (i.e. MBS that have been left to maturity) into long – term U.S treasuries. Why is the Fed doing this? Because it (the Fed) is trying to manipulate the long end of the curve in an attempt to a) lower rates on the 10 year note to bolster home demand. Remember that home loans are teed off the 10 – year rate. If the 10 – yr rate is lower (although the term low is really can be used arbitrarily), it is easier (technically speaking) for first time home buyers to buy a home and for existing homeowners to refinance at a lower rate (cost), and b) perhaps more importantly, the Fed is attempting to narrow the spread between 10’s and 30’s (long end of the curve) in an attempt to curb deflation, a phenomenon the Fed is trying to avoid at all costs.

Today the SmartStocks portfolio had a very good day. 2 out of the 2 stocks in the portfolio yielded subscribers with 5% in cumulative gains or with a 2.5% gain per stock. We did not buy XXXXXXXXXXXXX-XXXXXXXXXX-XXXXXXXXXXX, since the stock did not hit our desired entry price of XXX.XX. We are no longer interested in buying the stock. Tomorrow, we are looking to XXXXX another name instead and continue to trade the markets from the XXXXX side. Below is the trade set up.

XXXXXXXXXXXX
XXXXXXX
XXXXXXX
XXXXXXx
XXXXXXX
XXXXXx

With money continuing to transition out of equities and pouring into the fixed income market, are corporate bonds still the place to be, or is the bond market in its late stages of a bubble?

According to index providers, fixed-income hedge strategies have done better than equity hedge funds. On a pro-month basis, fixed-income hedge strategies have outperformed equity hedge funds by about 4.8%. The combination of wide spreads, attractive yields, slowing defaults, and improving balance sheets, have made the high yield not only attractive, but highly liquid for big traders to get in and out. Also important to note is the fact that hedge funds now control about 20% of trading volume in the U.S government bond market, from just 3% last year though still below a 2007 peak of around 30%. In corporate bonds and credit derivatives, they have a 26% share in trading volume, up from 16% in 2009.

So, with possible future rate hikes, are bond prices selling for too rich of a valuation if compared to the state of the credit markets?

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According to Thomson Reuters, insider buying increased this past month. However, the bigger-dominant trend remains by in large neutral. With no future rate hikes in sight (at least until 2011), will insiders redeploy "fresh" cash into their own company stock or will they remain hesitant of investing in their own company? What if anything can this tell us about where mrkets are heading?

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I want to thank each and every subscriber that took the time to write their testimonial(s) on HSM

With markets hovering just above some critical support (i.e. 1050 on the S&P), are markets set to break lower (i.e. break below the 2-month rising H&S neckline around 1050), or are markets going to hold the 1050~ support level, break north of the bearish flag markets are currently consolidating in and test some overhead resistance points (i.e. S&P 1075 - 1085)?

Furthermore, if we were to look at the bigger picture, will markets be able to break above the rising wedge formation come October/November?

* What is interesting to note is that since the market peaked back in April, short interest as a percentage of float for the S&P 1500 has barely budged. Does this mean investors are not only fearful of a possible market correction, but also about a possible market melt up and have therefore decided not to short? It is obvious that the recent market correction has been driven by selling, not short selling. So with technicals acting weak, why aren't more short piling on? What if anything can this tell us about market participation rates and equity inflows and outflows?

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http://bigcharts.marketwatch.com/cha...956&mocktick=1

I'll leave it at $24.99, that's a 16.7% discount!

Part of being a successful investor/trader involves being able to correctly read and interpret (measure) market sentiment. Part of correctly reading and interpreting market sentiment deals with the individuals ability to define in what part of the trend (or better yet, in what part of the cycle) we find ourselves in. It is then necessary to identify what a convergence or divergence between bullish and bearish sentiment indicators imply about a stocks valuation (relative "cheapness" to the market) and prices in general.

Below I present a chart that shows the levels of emotion that a typical investor faces when buy or selling stock. We at SmartStocks track these "sentiment trends" for you, and tell you in plain English what they mean, hoe to interpret them but more importantly, how to trade around it.




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As a consequence of the shenanigans committed by Wall St, Washington and the Fed over the past century (specifically in the last 10 years), some people (myself included) have proclaimed the retail investor is dead. Others however, contend that the retail investor is alive and well, their just not as involved as they were before. Whatever camp you fall into, one thing is for sure; the market landscape has changed for ever (and let me tell you one thing, its not for the better. You have to remember that markets are a function of people. Without an an active retail investor, markets are more privy to risk in general).

Today's intricate and dare I say unfavorable (or unequal) financial system has made it hard for anyone to grow their assets by investing. The low volume and volatility readings we've been witnessing since May gives credence to the apathy that the average investor has towards equities and investing in general. The massive inflows of capital into bonds (something I don't understand why people would do when economic conditions (not just market conditions) remain unfavorable) is further evidence of this lack of participation by the retail investor.

Below I present a chart of "stocks as a percentage of household financial assets(adjusted per pension funds). As you can see, the retail investor is still largely involved in this market. In fact, currently 35%~ of a household net worth is tied to financial assets, 6%~ better than the 29.1% mean over the pas half century. The real argument here is not whether or not people are still involved in the markets, the real argument is that people are not putting more capital to work, in order to grow their investments. In other words, the investment pie is holding constant (to slightly decreasing).



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The Dollar Index peaked early June at $88.16. Since then, the dollar index has retraced 9.7% and the S&P has rallied 7.4%. YTD (year-to-date), the Dollar Index is still up close to 3.5% while the S&P 500 is slightly down less than a 1% for the year. Whats important to note here is the relationship between the Dollar Index and the S&P. In theory, a stronger dollar paves way to a lower market, because cyclically sensitive sectors such as basic materials and industrial goods get hit hard. Why is this? In practice, a stronger dollar makes inputs costs more expensive for producers since the price of imports get more expensive (essentially, America's good get more competitive overseas). In retrospect, a weak dollar paves way to a buoyant market for the same reasons (i.e. a lower dollar means America's goods are less competitive overseas, and a result, the price of imports going down, making the cost of capital (measured in dollars), cheaper. The cheaper to access capital, the lower it is to finance various inputs costs).

So with all of that in mind, below I want to point out some points of divergence and convergence between the Dollar Index and the S&P 500. Below I present a YTD chart of the S&P 500 vs. the U.S Dollar Index. As you can see (and as we explained above), both of these indexes are inversely correlated. If you haven't noticed already, each time both one of these indexes intersect (i.e. converge to then diverge), a major inflection point is reached, that is, we tend to see major market rallies/correction and correspondingly, major Dollar correction/rallies. We saw this happen 2 times so far this year:

- In Late January, both the Dollar Index and the S&P 500 overlapped (i.e. converged to then diverge). When these indexes converged, we saw the USD Index rise by 5% before it peaked and we saw the S&P 500 Index correct about 7.5% before it bottomed.

- In early May (prior to flash crash incident), both of these indexes converged once again. The dollar index coincidentally rallied by another 9%~ and the S&P corrected by 14% before it bottomed.

- Currently, the Dollar Index and the S&P 500 are close to converging for the third time this year. Does this imply a major inflection point ahead? You betcha (only if they converge though).

As can be clearly seen, the relationship between the S&P 500 and the USD index is a powerful one. Being able to correctly read it and measure in both dollars and time (t) terms is challenging however. We at smartstocks tell you how to read it and what it implies not just for the markets, but for our stocks (trades) as well.

YTD S&P 500 vs USD Dollar Index




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*Peaks and troughs were measured in t, years, not in p, price.

Very good read. Recommend everyone read it.

Another Paradox of Thrift
http://www.economist.com/node/17043652

Excerpt taken from the article:

A long period of low rates has profound consequences for savers. Take pensions. Whether pension schemes are funded by the public or private sector, or are structured as defined-benefit (final-salary) or defined-contribution plans, the fundamental principle is the same. Schemes try to build up a capital pot, which is used to buy an income in retirement, for example in the form of an annuity.

Low rates increase the liabilities of pension schemes. Or, put another way, you need a much larger capital pot to buy a given level of income. According to Nick Horsfall of Towers Watson, a consultant actuary, British liabilities have risen by 15% over the past three years, thanks to lower nominal government-bond yields.

In addition, deflation is a hidden risk for pension schemes. If it occurs, it will cut the nominal incomes of those (companies, public-sector bodies) that have to fund future pensions, creating another potential gap between assets and liabilities. It is possible for pension funds to insure themselves against deflation in the derivatives market. But the cost of this has risen sharply in recent years, as deflation has become more likely.

However pensions are funded, the consequences are clear. More money will have to be put aside to pay for them. In other words, savings will have to go up.

Some will argue that pension schemes will simply cut benefits instead. But that would still leave the individual with an expected pension shortfall, to which the rational response would be to save more.

My thoughts:

For a few months now, I've stated how keeping rates low for an 'extended period of time' will ultimately encourage people to save more and spend less, simply because people will continue to expect to earn a 0% return on their 'risk-free' investment (i.e. cash). As economic headwinds persist however, people will not have the choice of saving, spending or investing, but rather, they will be forced to save because deflationary forces have now cut their (in this case a family of 4) income by at least 1/4 (people will want to save today, to be able provide for the future). In a practical sense, this is why the Fed is creating another bubble and in the process, a prolonged economic slump. If the savings rate reaches 8% in this country, we are back to square one!

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