Growth Report : FOMC

Tech Spending and Stop Losses

Ian Wyatt — Thu, 18 Dec 2008 23:12:00 GMT

Your Daily Profit

December 18, 2008

*****Tech Spending

*****Stop Losses

***** Stock Summit 2008: Profits After the Fall

Dear Investor,

Up 359 on Tuesday, down 99 on Wednesday. I can live with that. But I still have to wonder how long the relative optimism for stocks will last. General Electric (NYSE:GE) was downgraded and received a rare “sell” rating by Sterne Agee & Leach, and, as we saw with Honda yesterday, companies are starting lower 4^th quarter earnings estimates.

We’ve been expecting earnings estimates to come down for some time. But it remains to be seen how much is already priced in. For the financials, it could be argued that the worst is priced.

Consider Morgan Stanley (NYSE:MS). That company posted a $2.37 billion dollar loss during its 4^th quarter, which ended November 30. That worked out to a loss of $2.34 a share. A poll from Reuter’s showed analysts were expecting a loss of just $0.34 a share. A month ago, analysts were expecting a $0.30 profit.

The analysts missed by a mile. They were totally unprepared for such a weak quarter from Morgan Stanley. Sounds like a recipe for disaster, right? Well, after a somewhat rough start to the day, Morgan Stanley shares finished with a 2% gain.

The same thing happened over at Goldman Sachs (NYSE:GS). Goldman lost $2.1 billion, which was roughly in inline with expectations even though there were some wacky calls for losses as high as $6 a share. The stock jumped 14% Tuesday and added another 3.6% yesterday.

*****The Fed’s rate cut helped Goldman and Morgan Stanley out, for sure. But there’s also the mark to market accounting that each company has to use. That means the companies must price all assets every quarter. In the case of mortgage related assets, where the prices are effectively nil, they are forced to take steep write-downs.

Morgan Stanley took around $2.2 billion in write-downs as it re-priced damaged assets. At present, these are paper losses. But it goes to demonstrate the difficulty of earnings estimates. So what looks like a staggering surprise loss may not be quite as bad as it first appears.

Of course, there’s also the flipside, which would be that the assets could be subject to more write-downs in the future. But for now, the companies are getting the benefit of the doubt.

*****We’ve seen the bottom fall out of homes sales, commodity prices, retail sales and lending. Technology spending has remained fairly strong. You may recall I discussed IBM (NYSE:IBM)’s 3Q earnings in Daily Profit as a strong point of the earnings season when it reaffirmed its 2008 full year earnings back in October.

That was then. Now analysts are expecting tech spending to be the next domino to fall. A Citigroup analyst says the first quarter could be the worst ever for software companies. A Gartner analyst is saying “There’s going to be a period of reckoning that’s not going to be pretty…”

IBM and Sun Microsystems (Nasdaq:JAVA) are two companies that could suffer.

IBM sold off sharply in the Fall, dropping from 52-week highs around $130 to as low as $70 a share. A casual look at one- or two-year chart might make it look as though a downturn is priced in. But a look at a longer term chart gives a different perspective.

In late 1999, at the height of the technology bubble, IBM traded as high as $140 a share. Between 2003 and 2007, IBM was range-bound between $75 and $100. In 2007, the stock took off again and rallied to the $130 area in spring and summer of 2008.

Now, IBM is back in that $75-$100 zone. For us to start talking about IBM hitting 10-year lows, like we have with so many other stocks, we’d have to see prices drop to the $50-$60 range.

Sun Microsystems looks even more vulnerable than IBM. Sun was already in a downtrend when IBM was hitting highs in mid-2008. The stock currently trades just above $4 a share.

*****One stock that may be an attractive alternative to the high-end server and software companies like IBM and Sun is VMware (NYSE:VMW). VMware makes “virtualization” software that allows companies to get more bang for their buck from their networks.

The stock has been whacked pretty good this year (what hasn’t?) but may actually benefit from cuts in corporate IT budgets.

*****Finally, I want to address some of the stocks we’ve talked about here in Daily Profit. We’ve managed to get in some positions that are doing well. Both Graham Corp (NYSE:GHM) and Emergent Biosciences (NYSE:EBS) are up nicely since they were first discussed here. It’s time to protect those gains.

Shortly after I recommended a stop-loss on Questcor Pharmaceuticals (Nasdaq:QCOR), the stock started selling off. That stop loss should have taken you out of the position at $8.80, preserving your gains and keeping from suffering as the stock continued to fall.

Now is the time to put in stops on Emergent and Graham. Graham’s got support at $10, so a stop at $9.75 should keep you in on a routine sell-off but take you out if the stock is going to head back to its lows.

A stop-loss at $22 will do the same for Emergent.

Chesapeake Energy (NYSE:CHK) is far more volatile and I also consider it more of a long-term holding. For that reason, I’m content to let it go, for now.

*****Monday’s landmark video investment conference, Stock Summit 2008: Profits After the Fall, was a huge hit. The turnout was phenomenal…thousands tuned in to watch TradeMaster Chief Trading Strategist Benson George give his blueprint for profits in 2009…and his top “breakout” stocks are already showing gains…

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Now, I want to show you how you start profiting with Benson and the TradeMaster system.

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Here’s what you do – go to www.TradeMaster.tv to check out the replay of Stock Summit 2008: Profits After the Fall. You’ll discover the secrets to Benson’s amazing trading strategy that’s consistently putting up double-digit gains while the markets collapse around us.

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Best regards,

Ian Wyatt

Founder and Publisher

TradeMaster Daily Stock Alerts

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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.

Inflation, The Fisher King and a Solar Stock

Ian Wyatt — Tue, 19 Aug 2008 21:12:00 GMT

Inflation, The Fisher King and a Solar Stock

And to think, investors cheered the Fed’s decision to hold interest rates unchanged.

Today, the Producer Price Index, a popular low-ball measure of wholesale inflation, came in twice as hot as expected at 1.2%. That 8.9% rise is the biggest jump since 1981. I don’t think anyone cares to hear the annualized number.

In case anyone is curious, the inflation rate for July of 1981 was 10.76%. A year later, Paul Volcker’s rate hikes had slashed inflation to 6.44%. Speaking of Volcker, his name is certainly being tossed around a lot lately. And not just for his endorsement of Presidential candidate Barrack Obama.

Apparently I’m not the only one invoking his name as a model for Bernanke. Larry Kudlow’s “Where's Bernanke's Inner Volcker?” takes a similar position as my “Princess and the Dragon” article here on August 5 – interest rates are too low and should be hiked.

The Fisher King?

At least there’s one member of the FOMC who seems to understand that inflation needs to be dealt with pronto. Dallas Federal Reserve Bank President Richard Fisher has dissented at every FOMC meeting this year. He has advocated smaller cuts to help the financial meltdown and he’s been on the side of higher rates lately.

Maybe I’ll start calling him the Fisher King. In the Arthurian legend, the Fisher King keeps the Holy Grail. But he has a lingering injury and cannot move of his own will. And so long as he is injured, there is a blight on the land. So he sits and fishes.

I’d say there’s enough connection there to make it an intriguing metaphor. The Fed’s Fisher can’t move rates on his own. And until rates are higher, inflation is likely to remain a blight on the U.S. economy.

In the week following the FOMC’s last meeting on August 5, the Dow put on an amazing 544 points. Amazing, because homebuilders and financials were leading the charge. It should be no surprise that the Dow has since given all that back. And then some.

A Keen Eye for the Obvious

The obvious reason is that it’s dawning on investors that the banking liquidity problems are far from over. Just the other day, bankruptcy specialist Wilbur Ross told CNBC that a thousand banks could fail. Of course, Wilbur would be in hog heaven with that much feed in his trough.

I see it a little differently when it’s the former chief economist for the IMF saying that …”we’re going to see a whopper…”. Now an economics professor at Harvard, Kenneth Rogoff side with the Fisher King in saying that the Fed shouldn’t have cut rates as much as it did to help the financial sector.

Still, the one item that stuck with me the most is the Freddie Mac bond sale from Monday, August 18. Apparently it was undersubscribed. Ya don’t say?

And stocks sold off as a result. Shocking. I’ve always had a keen eye for the obvious.

A Solar Stock

Well, just a few minutes ago, my senior analyst Benson George called me over to his office. Benson’s the mastermind behind my stock-trading machine, TRIGR. If you ever need someone to turn support and resistance points or moving average breakouts into mathematical formulas, he’s your man.

Apparently, Candian Solar (Nasdaq:CSIQ) jumped over 3,000 points in TRIGR’s ranking system to take the number 3 spot. The 3,000 points were awarded due to new analyst coverage and some recent increases in earnings estimates that leave Canadian Solar with a forward P/E of 7.3.

I can’t tell you whether thin-film or polysilicon technology will be the big winner in the solar energy sector. But I can tell you what happened the last time Canadian Solar rose to the top of TRIGR’s rankings.

It was April 10, 2008. the stock closed at $23.75 that day. Over the next month, it made it as high as $34.10 on May 12. The next day, Canadian Solar announced blowout earnings. The stock closed at $40.78 on May 13 and $44 on May 14.

The stock eventually peaked at $51 in mid-June. Now, it’s almost back to where it started in April. Support looks good at $25. Just thought you’d like to know.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

PS – The last time Canadian Solar (Nasdaq:CSIQ) made it to the top of TRIGR’s rankings, it went on to post a 102% gain. Find out how high it goes this time with TradeMaster Daily Stock Alerts .

The Hero's Dilemma: Kill the Dragon or Rescue the Princess?

Ian Wyatt — Tue, 05 Aug 2008 20:47:00 GMT

The Hero's Dilemma: Kill the Dragon or Rescue the Princess?

Our previous experiences with "stagflation," as the double economic whammy of slowing growth and rising inflation is known, occurred in the '70s and early '80s.

Market veterans still recount the Legend of Former Fed Chief Paul Volcker as if it were a cautionary tale for children -

"...and then, Volcker held interest rates aloft (to a now unthinkable 20%) and vanquished the foul worm (inflation rates of 13%)."

Volcker made his heroic choice. He fought the dragon first. Once that threat is no more, living happily ever after with the princess is no problem.

But if we understand the true nature of this Hero's Dilemma, we see that stagflation isn't really a double whammy. In the modern era (the only era that matters), stagflation is caused by one thing: high oil prices.

Sure, one could argue that the condition of stagflation is exacerbated by several factors, like a bombed out housing market, a weak U.S. dollar or a financial crisis. But ultimately, it's rising oil prices that both slows economic growth and causes prices to rise.

Volcker really had no choice at all.

Any attempt to invigorate the economy with lower interest rates would only push oil prices higher. In other words, if you rescue the princess first, then the dragon eats you both.

Memo to Bernanke: The Dragon's Breathing Down Your Neck

So another FOMC meeting has come and gone. And as expected, the Fed did nothing to surprise the financial markets. Most of the time, it's good monetary policy to give the market what it wants.

But we're quickly getting to the point where Fed Chief Ben Bernanke has to make a heroic choice. At least, that's how it seemed a week ago, before oil prices dropped 20%.

It would appear that Bernanke is keeping his sword in its sheath, hoping that falling oil prices will render the necessity of choosing between the princess and the dragon moot.

Stocks rallied strongly today in reaction to Bernanke's non-decision. The average investor can usually be counted on for hope. But ultimately, I don't think many investors are comfortable with a Fed relying on luck to take care of the problem.

The meteoric rise of oil prices could have been a bubble. And we could be seeing that bubble deflating right now. But there's one way Bernanke can be sure: raise interest rates, strengthen the dollar and actively force oil prices lower.

That might put the princess through the ringer for another few quarters, but princesses have a way of coming out of tough situations looking pretty good.

For my money, I'd rather see Bernanke deal the dragon a mortal blow.

Time to Live Happily Ever After?

I'd like to think that the oil "bubble" is popping. I'd like to think that the effects from that main driver of inflation will soon be reversed. But I just don't see the current economic problems having a fairy tale ending without a fight.

That's probably why interest rates rose on T-bills after the Fed's statement. Investors might like the news. But the bond market seems to think that higher rates are coming. And that's probably not good news for stocks.

So what's an investor to do? Well, my stock picking machine (which, by the way, is called TRIGR) is still turning up some great stocks to short. In fact, on July 29, one of its Top Shorts was WCI Communities. Yes, that WCI Communities, the one that filed for bankruptcy on August 4.

Actually, TRIGR's been pulling up WCI Communities regularly since May 8. Of course, it also targeted IndyMac on May 12, 2008, and we all know how that turned out.

We also closed two other short positions yesterday - Western Refining (NYSE:WNR) for 17% since July 31 and Accuride (NYSE:ACW) for 16% since July 30.

Today, TRIGR turned up Hansen Medical (Nasdaq:HNSN) as a Top Short. In light of the decent gains TRIGRs pulled up with its Top Long Biotech stocks, the sight of a medical devices company on the Top Short was worth another look.

I'm not sure how Hansen Medical ever commanded a $1 billion market cap on $16 million in revenues. And I suspect it'll have difficulty holding on to its current $300 million market cap without a massive jump in revenue. Judging by the ever-widening loss estimates from the covering analysts, such a jump in revenue isn't forthcoming.

You might want to give this stock a look as a potential short opportunity while Bernanke tries to figure out what to do about that pesky dragon.

Ian Wyatt

Chief Investment Strategist

Growth Report

TRIGR is an electronic stock-picking machine that selects long and short opportunities for the TradeMaster Daily Stock Alerts service. For more information on how you can have your profits powered by TRIGR, click here.