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Your Daily Profit

July 1, 2009

*****Small-cap Update

*****Third Quarter Kicks Off

*****Foreclosures and Bank Profits

*****Prime Mortgages Next?

Fellow Investor,

The markets were up today sloughing off yesterday’s losses. The down closed up 57 points to 8,504. The Nasdaq gained 11 points to close at 1,845 and the S&P 500 gained 4 points to close at 923 after hitting resistance at 932 in morning trading and slowly sliding back down.

The Russell 2000, moved up just under 2% for the day to close at 517. The Russell 2000 represents the 2,027 small cap companies and contains well known companies like 1-800 Flowers.com (Nasdaq:FLWS), BankRate.com (Nasdaq:RATE), and Dominos Pizza (NYSE:DPZ). The Russell 2000 Index is up 50.7% since the market’s nadir on March 9, 2009.

Small-cap gainers were lead by Oshkosh Corporation (NYSE:OSK), up 27% after the Pentagon announced that the firm’s new blast resistant, off-road ground force vehicles were the “clear winners” in a multi-billion dollar competition. Oshkosh won the bid to build 2,244 vehicles for a deal worth $1.06 billion. The company beat out defense industry heavyweights including BAE Systems (LSE:BA.L) and General Dynamics (NYSE:GD).

A very exciting small-cap gainer today was LogMeIn (Nasdaq:LOGM), up 25% on it’s IPO. LogMeIn is an on-demand connectivity specialty service firm whose product allows computer users to access files and services on one of their computers from another computer across the Internet. For example, workers can access files resident on their office computers from home without having to attach to a corporate network or have their files stored on network servers. LogMeIn’s services are primarily directed to small and medium-sized businesses.

Other gainers included Ivanhoe Mines (NYSE:IVN), up 23%; Northeast Bancorp (Nasdaq:NBN), up 23%; and ShengdaTech (Nasdaq:SDTH), up 19% after being upgraded by Roth Capital to a Buy rating from a Hold.

Small-cap decliners were lead by CardioNet (Nasdaq:BEAT), down 41% on news that the company slashed its profit and revenue outlook for 2009. The Pennsylvania-based maker of wireless heart-monitoring devices revised its profits to a range of 30 cents to 35 cents from earlier forecasts of 69 cents to 73 cents. Investors punished the company by unloading shares started right the open and continuing through the day. Shares tumbled to $9.57 from Tuesday’s close of $16.32.

Rounding out the small-cap decliners were Repros Therapeutics (Nasdaq:RPRX), down 31% after being downgraded by Wedbush Morgan and Ladenburg Thalmann; Spartan Motors (Nasdaq:SPAR), down 27%, and Immersion Corporation (Nasdaq:IMMR), down 23%.

*****The Third Quarter is getting off to a rousing start. Economic data for the day is generally good – manufacturing shrunk less than expected and pending home sales rose more than expected. As of this writing (12:40 P.M. Eastern) the Dow is up 1.25%. Traders seem willing to forgive the larger than expected drop in private sector payrolls.

We’ll see how long that forgiving attitude lasts...

Earnings season is right around the corner. It seems that expectations are pretty low. I’ve read a few commentaries that suggest that estimates are low enough that companies should be able to meet them. Of course, what corporate America has to say about the future will be important.

Of course, I’ll be watching the banks closely.

*****A lot has gone right for the banks lately. Changes to accounting rules have allowed them enough breathing room to operate. Mortgage loan modifications have brought in fees. And trading activities have even helped some banks to boost profits.

Still, I believe there’s another banking shoe to drop.

As I reported yesterday, foreclosure sales are the majority of home sales these days. And when a bank sells a foreclosed home, it is a realized loss. That’s as opposed to a non-performing loan or a foreclosed home that has yet to be sold, which can be counted as an asset.

Further exacerbating this is that banks are not realizing as much profit on those sales of foreclosed homes as they’re all flooding the market with them and thus driving down prices.

So I expect to see higher losses affecting banks’ earnings in the future. These losses may not show up in the earnings season that’s about to begin, but they are looming.

*****It was reported today that mortgage applications fell 19% last week, another sign that foreclosures are driving the market. It also reinforces the point that once foreclosure sales slow, there may well be little demand for traditional home sales to pick up the slack.

Rising interest rates and still-falling home values are also impacting new mortgage applications. It’s a buyers market, and there’s no reason to rush in when prices are falling and loan costs are rising.

*****Bloomberg is reporting that 20 million of the 93 million homes, condos and co-ops in the U.S. are underwater as of March 31, 2009. Somebody will take these losses at some point, whether it’s the homeowner, the bank or the government/taxpayer or a combination of any or all of the three.

******We know that sub-prime mortgages were a major source of non-performing loans and foreclosures. Now, prime mortgages are in trouble. In his morning missive to his traders, TradeMaster Daily Stock Alerts’ Jason Cimpl had this to say:

Delinquencies on prime mortgages soared in the first quarter of this year. Delinquency rates on prime mortgages, the least risky category, were 661,914, a jump from 250,986 a year earlier. Two thirds of all mortgages in the U.S. are prime mortgages, so any percentage increase in delinquencies represents a huge absolute number of delinquent mortgages. Here is more proof that banks are in for a tough few years as they must monitor their loan portfolios even closer and suffer write-offs. If prime mortgages start going south in a big way, look for banks to stiffen lending standards even more. Either way, this will have a negative impact on their bottom line numbers

The evidence is building that the economy is nowhere near out of the woods. And we can also see that banks will be facing serious problems ahead. As I said yesterday, investors should be on their toes.

Also, we’re not recommending downside positions on banks – yet. But that time will come, and there will be a lot of money to be made.

*****I’m giving my staff the day off on Friday. There will be no Daily Profit that day. And I’ve cajoled Jason into giving us his video chart analysis tomorrow, so we have that to look forward to tomorrow…

If you can’t wait, check out Jason’s video from last week and get a special opportunity to try his TradeMaster service. Click here.

*****As always, please write and share your thoughts and comments: editorial@247investor.com. I’ll talk to you tomorrow.

Ian Wyatt

Editor

Daily Profit

P.S. Earlier I mentioned I’m not recommending shorting any U.S. banks yet, but there is one bank you should have in your portfolio as a long position. It’s an Indian bank that is immune to U.S. mortgage exposure and has seen exponential growth—economic turndown or not. Find out more about this bank in my new India stocks report. Click this link to get a copy.