Daily Profit : Portugal

What We Know, and What We Suspect

Ian Wyatt — Thu, 13 Jan 2011 19:26:00 GMT

As we discussed yesterday, recent weakness was a dip to be bought. But we should also understand that anticipating more upside is really about anticipating the news flow, and investor reaction to that news.

Of course, I didn't know that Portugal would get a great response to a bond auction, thereby lessening worries that debt problems were spreading. I also didn't know that Wells Fargo would upgrade the financial sector on renewed dividends and "superior" earnings growth.

But at the same time, the conditions are in place for a constructive resolution to most of the problems facing the stocks market. We knew banks were getting close to dividend payments. And one look at the yield curve shows you that banks could/should be making money.

*****In terms of European debt, we've seen Greece, Ireland, now Portugal and possibly Spain come into focus. The reaction to Greece was the worst, for sure. But that's because it was first.

The reaction to Ireland's banks wasn't nearly as severe. It also wasn't a surprise. Portugal and Spain are even less of a surprise. They've been mentioned as potential problems since Greece nearly collapsed a year ago.

Ultimately, the willingness of Germany to lend, and other nations like Japan and China to buy indebted nation bonds has trounced the bears, eased the worries and left stocks in position for a relief rally.

*****Now, I don't want to sweep these debt concerns under the rug. Debt problems will hamper growth for years to come and that bailout money has to be repaid. And when you're talking about a country with very little growth, the funds to repay loans come at the expense of what little growth there is.

The Bank of Ireland (NYSE:IRE) alone needed a $114 billion bailout. Ireland’s entire GDP is $222 billion (in 2009). It's worthwhile asking how one bank could get indebted to the tune of 50% of GDP. (Just imagine Bank of America being $5 trillion in debt!) It's also worthwhile wondering how that money will ever get paid back.

Of course, these are long-term problems, much like inflation, Fed policy and unemployment. Right now, so long as these issues are being "managed" they are not weighing on the stock market.

*****The Producer Price Index (PPI) for December rose 1.1%. That's the biggest gain in 11 months. But of course, if you strip out the things we need most, food and energy, prices only rose 0.2%, which is in-line with expectations.

The Fed has suggested that companies are not able to pass on higher costs to consumers. The PPI number bears that out. Prices will not rise until we see wage inflation as the unemployment rate falls. That could take a while...

In the meantime, keep watching oil as a leading indicator for stock prices.

*****One final note. 2.87 million homes were served with notice of foreclosure in 2010. And it's estimated that foreclosures may jump another 20% in 2011. Sounds bleak, but this may actually mark the peak of foreclosures. No doubt, that would be a very good thing.

Let's also keep an eye on the homebuilders, REITs and commercial real estate stocks. These are about the last beaten down stocks and should have a pretty good year.

Someone's Calling B.S.!

Ian Wyatt — Wed, 12 Jan 2011 19:05:00 GMT

So how do we view a stock market that can’t hold its early highs, sells off to slightly negative territory mid-day, and then recovers roughly 50% of the decline by the close? Is that bullish behavior? Is it bearish? Or is it just plain weird?

While there’s certainly no shortage of weird out there – like the 7% rally for Lennar (NYSE: LEN) today when housing data appears to be getting worse – we have no choice but to see yesterday’s action as bullish. After all, the major indices finished in the green.

No we didn’t see new highs, and no we didn’t even see a close near the intra-day highs. But the bulls stepped in right when it seemed the market was about to roll over. That’s classic “buy the dips” action. And it shows that a 60-point drop on the Dow Industrials is nothing to fear, it’s an opportunity.

Now, we’ll need to see if the bulls can push stocks higher again.

That’s really the problem with the stock market. The battle may be won or lost, but the war will never end.

*****The S&P 500 broke above 1,260 on the first trading day of 2011. And it’s been finding support there ever since. Intra-day ranges have been wider than anything we saw in December.

As much as some might want to interpret the current action as bearish, that might be a mistake. The S&P 500 has yet to show any kind of reversal pattern. Volume is picking up. And today, oil rebounded to close above $91. Even gold and silver put in decent rallies.

Now, gold is a bit of a special case. It’s a fear trade. But when there’s no fear in the air, gold becomes a U.S. dollar trade. Lo and behold, the dollar was down slightly vs. the euro and the British pound yesterday.

*****Europe's efforts to help Portugal with its debt problems is giving the euro some temporary strength against the U.S. dollar. And pressure from the Obama Administration on China to revalue the yuan may also weigh on the dollar.

As we know, China is trying to reel in inflation. It's already raised interest rates and reserve requirements for banks. Letting the yuan appreciate would almost certainly be at least as effective in curbing inflation than these other methods, if not more so.

*****The financials continue to lead this market. Bank of America (NYSE:BAC) is pushing $15 a share. That's a nice move from the $11-$12 level where I was recommending it here in Daily Profit.

Financials and energy are excellent leaders for this rally. Commodities, too. In a perfect recovery, banks should lend, things should be built, and it should take energy to build them.

My colleague at Wyatt Investment Research, Jason Cimpl, had some interesting thoughts for his TradeMaster Daily Stock Alerts readers this morning.

On Commodities:

Of course we know it's all bs. Not just oil either. All commodities, with the exception of soft assets, which have a fundamental story behind them, although the 100% rally for a few is probably excessive. That leaves the oils, coals, irons, and coppers of the world. And how do we know this run is bs? Well, look no further than the dry bulk index. When oil, iron, copper or coal are actually being used for production, the commodities are shipped from point A to point B in bulk ships. With record high industrial commodity prices one would also expect a similar increase in shipping rates, which would be tied to the increase in demand for shipping. But bulk shipping rates are at a decade low. And that lack of demand for shipping shows us these goods are not heavily transported, which likely indicates they are not being used traditionally.

Before my inbox floods with unsavory emails, I am bullish on commodities. No one else is selling so why should I, but put a little time in research and learn the caveats to commodity trading.

Jason is a firm believer that the commodity rally is a function of the weak dollar and asset-price inflation. And you can probably read between the lines and see that his a bit bearish right now, even though he has been leading his TradeMaster Daily Stock Alerts members to a sweet string of profits on the long side (22 of his 33 trades have been winners with gains like 40%, 21%, 19%, 18% 16%, and 15%).

This is probably one of the best investment lessons we can learn. Jason is skeptical. But he's also reading the market's signs, and not letting his personal bias get in the way of making money. When the market does turn, and heads for a correction, I'm sure Jason will be among the first to start profiting.

And I'll be the first to let you know what he's thinking...

Portuguese Debt

Ian Wyatt — Tue, 11 Jan 2011 13:32:00 GMT

The week is not getting off to a good start for European stocks. Portuguese bonds ticked above the “bailout threshold” of 7%. Readers may recall that both Greece and Ireland requested aid once their bonds breached 7%.

For its part, Portugal says it doesn’t need to tap into the EU’s emergency fund. But it’s not always about need. Sometimes it’s about appearance. That was the motivation behind the Treasury’s force-feeding of TARP funds to U.S. banks. And if Portugal can get its rates down, and ease fears that its problems will spread to Spain by taking some loans, it will do so.

The euro was getting sold this morning, and that’s the best explanation for the weak start for U.S. stocks. But we could also look ahead to 4Q earnings season, which kicks off tonight with Alcoa (NYSE:AA)…

*****Reuter’s is reporting that 4Q earnings estimates are little-changed since Spring, even the economy is doing much better. Year over year earnings gains are expected to be 32% on average. Way back in April, the forecasts were calling for 31.5% earnings growth.

That’s a set up for some significant earnings beats this earnings season.

Analysts are saying that financials and energy are the best places to look for strong earnings. I would add technology to the list.

Given the good retail sales we saw over the holidays, I expect technology did well. And the fact that hiring hasn’t improved significantly, it’s reasonable to expect that companies are still turning to technology to keep productivity moving forward.

I’m also going to be watching the commercial real estate stocks and REITs. These are among the last of the beaten down sectors. But with continued economic improvement, and lessening risk that these companies are on the verge of failure, these stocks could out in a great year.

If you’ve been reading Daily Profit for a while, you know MPG Office Trust (NYSE:MPG), formerly known as Maguire Properties, is among my favorites. You might check out RAIT Financial Trust (NYSE:RAS) and Strategic Hotels & Resorts (NYSE:BEE) as well.

*****Natural gas is another area that has potential for a rebound. I know, every year, even every few months, somebody makes the call the natural gas is ready to rebound.

But given the relentless supply, natural gas prices are never able to advance.

Many traders rely on weather reports to make the case for gas. Colder weather means more use, which means higher prices.

Personally, I’d rather look at production levels. Commodities are called “cyclical” because price and production tends to run in cycles. It goes like this…

Higher demand leads to higher prices and more production. Then when demand slackens, prices fall. That’s when companies will cut back on production and adjust for lower demand. Eventually, demand picks back up, and the lower production levels lead to higher prices.

Natural gas companies have been taking production offline to stop the price slide for a couple years at this point. Production this year is forecast to be essentially flat over last year.

At some point, less production and steady/rising demand will affect natural gas prices. 2011 could be the year. Sandridge (NYSE:SD) could have significant upside is natural gas finally turns around.