Growth Report

Will It Stick?

Ian Wyatt — Wed, 26 Nov 2008 18:36:00 GMT

Your Daily Profit

November 25, 2008

*****Will It Stick?

*****Stock Updates

*****Black Friday

Dear Investor,

*****You may recall the last time the market’s put in a gigantic rally, I was skeptical. The Dow had just launched 900 points, reversing 25% of October’s losses. The Dow closed at 9,065 that day (October 28) and went on to peak at 9,625 the day before the Presidential election.

Basically, it was a case of “too much, too soon.”

I don’t think we have that problem this time. Even though the Dow has jumped close to 1,000 points in two days, it now sits in the lower portion of the post-meltdown range between 8,000 and 9,500.

In my opinion, that’s sustainable. So if you bought any of the stocks we’ve discussed here in the Daily Profit since Friday, you’re probably looking pretty good.

*****For the record, we had Graham Corp. (AMEX:GHM), Emergent Bioscience (NYSE:EBS) and Questcor Pharmaceuticals (Nasdaq:QCOR) on the table as good buys from Friday’s Daily Profit.

Graham could have been had most of the afternoon for $7 and change. It closed Monday at $8.42. Emergent could have been had around $17.50 Friday and it was pushing $20 Monday afternoon.

Questcor has been the laggard. It traded in a wide range Friday. Friday’s entry could have been anywhere between $7.20 and $8. The stock spent most of Monday trying to work through two resistance points at $8.20 and $8.40.

I realize that both Emergent and Questcor have been mentioned in Daily Profit before Friday. If you’ve bought either of these, or Graham, and you have a minute, drop me a line and tell me your entry price editorial@247investor.com. It will help me track the stocks if I know where you got in.

*****Here’s a question I wanted to share about Questcor. Tim Writes: I looked at the Questcor web site. I do not see any products that would lead to optimism about its future. What is their pipeline? I fail to see the upside in terms of future products.

I’m going to be straight with you – I don’t know what’s in Questcor’s pipeline, either. And I only know that it has a drug for multiple sclerosis and another awaiting approval for some kind of central nervous system disorder.

But you know what? Everything I need to know about Questcor, I learned from my stock selection machine TRIGR. The company passed a rigorous fundamental and technical criteria to make it to the top of TRIGRs list.

Questcor has 6 months of revenue in cash and no debt. The company is profitable and is growing both revenues and earnings at a very impressive pace. And it expects to exceed its revenue guidance for the year.

So I may not know all the details of their products. But I know they’re selling them at record pace. And the company is using its cash flow to buy back stock.

I also know that Questcor was about the only stock around strong enough to make new 52-weeks in October, when stocks were getting creamed.

Finally, I know that my trading service TradeMaster Daily Stock Alerts recently made 15% on Questcor. Back in the summer, TradeMaster Daily Stock Alerts traded Emergent 4 times for gains of 12%, 19%, 17% and 12%.

For more about TradeMaster Daily Stock Alerts, click here.

*****I said I thought the gains of the last two days are sustainable. But that doesn’t mean it’s an all-clear signal. Unemployment is still on the rise. As much as Obama’s stimulus plans are welcome and necessary, they may not have a direct effect on the jobless rate until 2010.

And Black Friday is coming up fast.

I assume you know what Black Friday is. It’s the day after Thanksgiving and it’s one of the biggest shopping days of the year. It’s “black” because that’s the day retailers get back in the black.

Will that hold true this year?

It’s hard to imagine it will. But what’s more important are expectations. Black Friday is usually a day to see how much more people are spending than the year before. But some analysts are already calling for the first drop in holiday retail sales since 1992. So Black Friday certainly represents a downside catalyst for stocks.

End of year selling for tax loss and other reasons is another potential downside catalyst for stocks. I’d expect that most people have sold individual stocks they hold. Mutual fund and hedge fund holdings are the ones I’m a little worried about.

Best Regards,

Ian Waytt

Editor

Daily Profit

A Sea Change for the Consumer?

Ian Wyatt — Tue, 04 Nov 2008 18:50:00 GMT

*****Happy Halloween

*****A Sea Change for the Consumer?

*****Chesapeake’s $2.85 Billion Surprise

*****The rally that started Tuesday and continued on Thursday might have investors feeling like the worst is past. But I can’t help but think we haven’t seen the last of the declines.

I don’t mean to sound like a perma-bear. Just yesterday, I was noticing that some stability has returned to the stock market. And today’s nice move higher came after we saw some bad news on U.S. GDP.

Yesterday’s GDP number clearly shows that the economy went into recession during the last quarter (July – September). And given the complete business standstill in October, there’s no doubt the 4^th quarter GDP will be another negative number.

But then, we knew that.

Stocks wouldn’t be rallying if investors didn’t believe that stocks were priced for the slowdown.

*****GDP declined 0.3% in the last quarter. Expectations were for a 0.5% decline. I suppose you could say today’s number was good news. Or at least you could say it was be not-as-bad-as-we-thought-it-would-be news.

But this drop in GDP involves the first decline in consumer spending in 17 years. And at 3.1%, it was the biggest drop in spending in nearly 28 years. That’s significant.

The U.S. economy was in recession in 2001-2002. But that recession was marked mostly by a huge cut in corporate spending. Consumer spending slowed, but it didn’t shrink. Now, the consumer is leading the decline.

*****People can’t spend what they don’t have. The 3^rd quarter GDP report showed that Americans discretionary income fell 8.7%. That’s the biggest drop since they started tracking discretionary income in 1947.

And job losses are mounting. American Express (NYSE:AXP) is laying off 7,000 employees. And the proposed merger between Chrysler and GM (NYSE:GM) is expected to cost 75,000 jobs. That could lead to another 50,000 jobs lost in the auto parts industry. Throw in advertising and shipping and we could be talking 200,000 jobs.

As I’ve noted, unemployment could hit 8%-9% next year. Numbers like that don’t suggest a quick turnaround for discretionary income or consumer spending.

I’m now seeing 4^th quarter GDP estimates of -1% to -5%. Again, given what we’ve seen in October, the first month of the quarter, investors expect a negative number. -1% might even seem like good news.

But -5%? It’s hard to imagine investors shrugging off a number that big.

*****It’s pretty clear that investors aren’t looking too far ahead. Stocks may be priced properly for the next couple of months. I can’t help but wonder if we might be in the midst of a true sea change for consumer sentiment.

My grandfather grew up in the tail end of the Depression. He was tight like no one I’ve ever met before. I remember he would stand outside the bathroom and time your showers so you didn’t use too much water. A dinner out was a trip to the S&S Cafeteria. He never shook the spendthrift habits he learned when he was young.

It’s often said that you should never underestimate the strength of the American consumer. We’ll spend like there’s no tomorrow. Massive credit expansion over the last 15 or so years has certainly helped perpetuate that image of the American consumer.

But now, Americans have $900 billion in credit card debt. 6.8% of credit card balances are being written off by banks. And believe it or not, some banks are now begging the U.S. government to allow them to forgive up to 40% of some customers’ debt, just to keep those customers making monthly payments. Those banks are afraid these customers might just walk away from their obligations.

Take staggering debt, throw in 9% unemployment, impossible to get credit, falling home values and more stock market declines, and you just might start to see the kind of environment that forces us Americans to permanently change our spending habits.

Of course, it would take a few quarters for any such trend to show itself. I’ll be watching retail sales numbers just as closely as I watch unemployment numbers.

*****Don’t let my pessimistic analysis make you think that there won’t be any good profit opportunities in the stock market. If anything, difficult economic times make good research even more rewarding.

For some good news, it’s nice to see that companies still know how to use derivatives. Chesapeake Energy (NYSE:CHK) reported a massive earnings gain due hedges it placed on its natural gas and oil sales.

Including the derivatives gains, Chesapeake earned $3.25 billion in the 3^rd quarter, compared with $346 million a year ago. Without the phenomenal one-time gain, Chesapeake still earned an impressive $486 million. That missed estimates by 3 cents, but investors seem to be focused on the $2.85 billion profit form the hedging activity.

Not only is that $2.95 billion a nice boost to the bottom line, it shows that management is paying attention. They apparently foresaw falling natural gas prices and took steps to insulate the business. Well done.

I first discussed Chesapeake on October 16. The stock closed at $18.35 that day. Yesterday, the stock finished at $22.07. It’s up 20% in two weeks. And it looks like more gains are on the way.

Best Regards,

Ian Waytt

Editor

Growth Report

Greenspan: Shoocked Disbelief

Ian Wyatt — Fri, 24 Oct 2008 18:04:00 GMT

Alan Greenspan was in Congress yesterday. Congress is digging through Wall Street’s rubble to find out who was responsible for the financial crisis. Of course, the old “Orient Express” conclusion – that everybody, from borrowers, to lenders, to Congressmen, to Greenspan, “did it” – won’t satisfy the need to hang somebody up by their thumbs.

While the culprits are many, I’ve been calling out Greenspan for his part in the debacle for years. Whether you believe that Greenspan should have been able to see into the future and change the course of history or not, there’s no question that he created the risk-ignorant environment that led to the crisis.

After all, interest rates are all about risk. If a loan is risky, you charge more for it. If the borrower is upstanding, you’ll charge less because you know your money’s coming back.

So when Greenspan left interest rates at an all-time low for a year, and then spent another year normalizing them in virtually unnoticeable quarter-point hikes, he was telling the market loud and clear to forget about risk.

And that’s exactly what the market did.

But now Greenspan is back-tracking. How could he have known the mortgage industry, borrowers and the debt-insurance industry would go nuts?

As Greenspan himself said yesterday “Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief…"

I don’t know about you, but when I read such a naïve statement coming from the man who was once the most powerful banker in the world, I’m the one who’s in a state of shock and disbelief.

Greenspan is saying he expected the lenders to police themselves. And now he’s “shocked” that they didn’t. You mean Wall Street will put profits and bonuses above the interest of faceless shareholders? No! Say it ain’t so!

Unfortunately, Greenspan’s wide-eyed disbelief at human nature in action isn’t that much of a surprise. I always thought his post-adolescent fascination with Ayn Rand’s objectivist philosophy had been tempered at least a little by the realities he most certainly witnessed in his years as an economist and Fed Chief.

After all, Greenspan witnessed first hand the “irrational exuberance” of the late-90s Internet bubble. He saw point blank how investment banks would outright lie in an analyst research reports to attract investment banking business. Guess not.

How he can say with a straight face that he seriously believed lending institutions would police themselves is absolutely beyond me.

Actually, I know quite well how he could make such a statement. In his youth, Alan Greenspan became infatuated with Ayn Rand’s Objectivist philosophy. In Rand’s view, unregulated capitalism was an ethical system because participants would act in their own best interest.

In other words, if you’re a banker, and depend on depositors to stay in business, then you’ll take good care of those deposits. It’s in your best interest to do so.

Of course, Rand’s utopian vision totally ignores a little thing called human nature. Unfortunately, some people are greedy, selfish and short-sighted. And there are enough of them to totally undermine unregulated capitalism.

If American capitalism went unchecked, we’d probably have a King Vanderbilt or Emperor Rockefeller running the country right now. No, it’s thanks to Teddy Roosevelt, the Trust Buster, that we have some semblance of a free market today.

Greenspan continues to say that there’s no way anyone could have seen the current financial problems coming. And maybe nobody really knew how much damage the credit-swap market could cause, but there were plenty of warnings that our economy was headed for trouble.

On July 19, 2005 chief economist for Standards & Poor's, David Wyss offered up some solutions to Greenspan. He said that the Fed could control mortgage rates by increasing interest rates, and could also place restrictions on banks to get them to stop providing mortgages with no money down.

Wyss said these types of loans place risks on the economy by providing owners with houses "that they can't afford." "What do you do when [the owner] mails the key back to the bank?"

Well, we’re finding that out right now. And it’s not good.

On August 29, 2005 Paul Krugman wrote in a New York Times editorial what Greenspan apparently couldn’t see “…we're going to have an economic slowdown, and possibly a recession.”

In 2004, Alan Greenspan gave his blessing to the sub-prime mortgage industry: ''American consumers might benefit if lenders provided greater mortgage product alternatives (read: no interest loans and adjustable rates) to the traditional fixed-rate mortgage.''

In 2005, Greenspan said "There do appear to be, at a minimum, signs of froth in some local markets…the apparent froth in housing markets may have spilled over into the mortgage markets."

Also in 2005, he said “…history has not dealt kindly with the aftermath of protracted periods of low-risk premiums (interest rates).''

In these statements, it’s clear that Greenspan was ever the optimist. He never thought sub-prime lending would get predatory. He thought a warning that housing was “frothy” would halt the real estate bubble in its tracks.

Wrong. That’s what interest rates are for.

OK, enough about Greenspan. You can probably tell I don’t think he did a very good job at the Fed. Now let’s move on to the stock market.

It’s pretty clear that people are buying stocks right now. Even though we’ve seen plenty of nasty sell-offs, we’ve also seen days like Monday’s 400-point advance for the Dow Industrials and yesterday’s impressive rally out of the hole.

What we’re seeing is two cross-currents: investors with cash are buying stocks because of the historically low valuations; and investors fearful about their cash are selling. Much of this selling is coming from mutual funds and hedge funds.

Now, I know things look bad. And they are. But I believe now is not the time to be cashing out your mutual funds. The idea with investing is to buy low and sell high. Right now, if you cash out, you’re selling low.

I can’t tell you that stock prices will be higher next month. But I do know there are some very low valuations that are almost certainly great investment opportunities out there right now.

Best Regards,

Ian Waytt

Chief Investment Strategist

Growth Report

Is Anybody Out There?

Ian Wyatt — Wed, 15 Oct 2008 14:17:00 GMT

Something’s bothering me.

I’ve been writing a weekly column here at Investors Insight since July. In my very first article, I mentioned the burgeoning bull market for biotech stocks. That was July 23. Emergent Biosciences (NYSE:EBS) was one of the stocks I mentioned.

Even despite the recent carnage, it’s up 15%.

On August 19, I mentioned a solar stock, Canadian Solar (Nasdaq:CSIQ), that ran 16% in the two days after that article.

Last week, I said it was time for a surprise interest rate cut. The very next morning, Bernanke obliged.

I’ve made a couple bad calls, too. Now that we’re in a global recession, inflation isn’t the problem I thought it would be.

But right or wrong, I’ve managed to elicit a grand total of 2 comments from you, dear reader.

I know there are people out there. I can see that my articles have been read 4,217 times. I know from the interactive chat I hosted on the Discussion Forum that there’s an intelligent, savvy group of readers here at Investors Insight.

So I can’t help but think, that after 4,217 views, someone must have walked away from one of my articles thinking “Hmm. That’s a good idea” or “Wow, that Growth Report guy’s about as smart as a box of hair.”

But you’d never know it from the comments I get. I promise, if you leave a comment, I’ll read it and respond. (Though I’ll warn you in advance, if you say I’m smart as a box of hair, my response will probably be nonsensical gibberish.)

Glad I got that off my chest.

“We Should Chat More Often…”

OK. So two things are bothering me.

Since I last wrote with that perfectly-timed call for a rate cut, the Dow Industrials peeled off 700 points, made a wild 1,019 point swing and then launched 936 points.

Clearly, we should stay in touch more. And I’ve got just the way to do it.

I just started writing a daily e-letter called Daily Profit. Plus, I launched a new website to support the letter called 24/7 Investor. (the URL is a clever www.247investor.com.) All together, it’s 24/7 Investors Daily Profit.

So this week, I’m going to reprint yesterday’s letter and give you the opportunity to sign up for it if you like it. I don’t need your social security number or shoe size to sign up. Just an email address to send it to you is fine. The Daily Profit is so new, we don’t yet have a sign up box available at 24/7 Investor. But you can get on the mailing list here www.bigideainvestor.com.

Thanks for reading.

Your Daily Profit

October 14, 2008

******Record Day for Stocks

******Global Recession?

******Earnings, Part 2

Dear Investor,

*****Now that was a good old-fashioned rebound. The Dow Industrials jumped a record 936 points, or 11%. The NASDAQ was up 195 points.

Of course, with the bond market closed for Columbus Day, stocks pretty much had a free pass yesterday.

Despite the nice point totals, I still have to wonder if these gains will stick over the long term. Volume wasn’t particularly heavy.

Like I pointed out yesterday, the emergency G-7 meeting over the weekend failed to produce any concrete plans of action. And Paulson is still mulling what to do.

Buying bank stocks is a start. But the U.S is still far behind England when it comes to moving quickly to restore some semblance of stability to financial markets.

Recall that the U.K. has guaranteed inter-bank loans, set interest rates for such loans, made cash available to banks and is even taking majority stakes in three troubled firms.

Meanwhile, Paulson is “seriously considering” a few things. All I can say is they better hurry. Monday’s euphoria will fade.

*****Even if Paulson follows the U.K.s lead to the letter, it doesn’t mean the U.S. economy returns to growth. There are a number of headwinds that will likely keep the pressure on the economy and stock prices.

As you know, my number one worry is unemployment. The unemployment rate is currently 6.1%. And since it’s pretty much a consensus that the U.S. is in a recession. Estimates for unemployment are rising to between 7% and 8%.

Obviously, those numbers would be the worst since the early 90s. And there’s no way stocks will stage a comeback so long as unemployment is rising.

Forecasts for commodity prices are coming down. One analyst notes that copper is still three times higher than it was in 2001. And Goldman Sachs analysts are now saying that oil prices could drop into the $50s. Steel prices are also coming down.

And that’s not all. One analyst says corporate IT spending will fall 5%, or $170 billion in 2009. That’s not a good sign for tech stocks. If you remember the Nasdaq bear market from 2000-2002, that’s exactly what happened then, too.

Corporations cut spending and the likes of Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT) get killed. Intel reports earnings this afternoon, and what the company says will be very important for the future direction of the Nasdaq.

It will be interesting to see how consumer oriented tech stocks like Apple (Nasdaq:AAPL) fare.

*****Most economists are calling for the worst global recession since 1982. The IMF puts growth at 3% for 2009. Harvard Economics professor and former chief economist for the IMF Kenneth Rogoff says we should knock 2 points off that estimate.

So while stocks may look like a bargain right now, there’s plenty of reason to think earnings estimates for 2009 are coming down. S&P 500 analysts are currently expecting record 3^rd and 4^th quarter profits.

Profits dropped 7.5% in the second quarter. But analysts are still expecting a 22% jump to a record $222 billion for the third quarter and to post another record $241 billion for the 4^th quarter.

Needless to say, a lot of market strategists say those numbers are too high. And with lower earnings, stocks won’t look as attractive as they do right now.

*****I’m still a bit haunted by what Lehman CEO Richard Fuld said in his Congressional testimony last week.

“Until the day they put me in the ground I will wonder," Fuld said. "I do not know why we were the only one.”

He means Lehman Brothers was the only investment bank that was left to fail. AIG, Freddie Mac and Fannie Mae were rescued. The Fed stepped in to broker deals for Bear Stearns and Morgan Stanley.

Only Lehman was left to fail. Yesterday, Germany’s financial regulator said Lehman’s bankruptcy cost $300 billion outside the U.S. Apparently, Paulson didn’t think those losses were worth protecting against. Sounds to me like he had a personal vendetta with Lehman’s Fuld. And that’s clearly no way to run financial policy.

Best Regards,

Ian Waytt

Editor

Daily Profit

Gurus Ring the Bell

Ian Wyatt — Tue, 07 Oct 2008 20:13:00 GMT

Gurus Ring the Bell

Ahh, the newsletter crowd is getting bullish. My inbox is full of stock-picking gurus saying now’s the time to be bold and buy stocks. Fear is rampant, they say. Distant relatives are calling in the wee hours asking for advice. The VIX is at an all time high. 59% of respondents to a CNN poll feel a depression is either very likely or somewhat likely.

And you know what? I agree. About being bullish, not about depression.

My trading guru, Benson George, the man behind TradeMaster Daily Stock Alerts saw a silver lining to Monday’s gut-wrenching decline. Namely, the 800 point sell-off came on relatively light volume.

I know, it’s a little difficult to call an 800 point drop orderly, but if there ever was an orderly decline, that was it.

Then there was the substantial recovery off the lows. Clearly, buyers are seeing value at current prices. Now, how long it will take for the buyers to gain the upper hand remains to be seen.

I do know that if Bernanke is trying to prep the market for a rate cut at the upcoming FOMC meeting on October 29^th, he should save his breath. We’re ready. Do it. Do it now.

Victor Sperandeo, of Trader Vic fame, maintained in one of his books that the key to making an interest rate move effective was surprise. Fed moves work best when they are a surprise. And any action that comes during a FOMC meeting is not a surprise.

Bernanke should pull another fast one and cut rates 20 minutes before the market opens tomorrow. That’ll help certain companies’ balance sheets immediately. Bill Gross over at PIMCO wants a full point rate cut. Sounds good to me. At this point, it’s about investor confidence. A big rate cut would definitely help.

A Bottom or THE Bottom?

Of course, I have to hedge my rally call. I do think we’re set for some kind of a rally. But I’m not, repeat not, ringing the bell at the bottom. I’m on record saying that employment has to show improvement before there’s sustainable upside for stocks. And the U.S economy is on pace to lose a million jobs in 2008.

No economy can lose that many jobs and still manage to grow significantly. And don’t forget, consumers don’t have the extra refi cash they used to fuel the last bull market.

In other words, there’s upside for stocks in terms of valuation. But growth? I’m not sold on that one just yet. Still, every one knows the story of how Warren Buffett made his fortune buying beaten down stocks in the 70s.

Earnings Season

I wonder if all the newly bullish realize that earnings season kicked off today with Alcoa (NYSE:AA)? With so much going on, it would be easy to miss. But there’s no way earnings are good. And there may be a few nasty surprise waiting in 10Qs. Because what the heck, when news is already bad, you might as well get it all out there, right?

That’s probably why Bank of America (NYSE:BAC) chose to announce a secondary offering to raise cash at the same time it announced a 68% drop in earnings. You might think investors would be glad that BofA even had earnings.

I can only guess that, somehow, the $10 billion stock offering put a damper on the enthusiasm. And the fact that offering was only two-thirds subscribed probably didn’t help. Neither did the 50% cut in dividend. (Of course, it’s only polite to rein in your own spending when you’re begging for cash, but that doesn’t mean investors have to like it.)

BofA got whacked for better than 24%. And by my rough calculations, that accounts for 20% of the Dow’s drop today.

Here are some stocks I’m targeting for a valuation-based bounce:

General Electric (NYSE:GE) jumps to mind. That stock has hit an 11-year low. It’s important to note that GE has to access the credit markets to fund operations, which could be problematic. But on the other hand, GE’s already done a secondary, and Buffett added some liquidity as well. Earnings are October 10.

Intel (Nasdaq:INTC) quickly recovered from these levels back in 2002. Before that, you’d have to go back to 1996 to find the last time it was under $17. Earnings are October 15.

And Verizon (NYSE:VZ) has hit support at $30 that dates back to 1995. They report on October 27.

I’m sure there are some more speculative stocks that might fare better in a liquidity driven bounce. But for short-term trading opportunities, I favor the blue chips. And for the record, I’d rather buy AIG than anything emerging market related. And I’m not buying AIG.

Best regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

PS – I’m launching a new daily e-letter Monday, October 13, 2008. It’s called 24/7 Investor’s Daily Profit. The website is in place. Feel free to check out the new website, www.247investor.com, and sign up for Daily Profit.