Skip to main content

Posts

Showing posts from January, 2008

Shorting financials -- again

I woke up this morning thinking that the financials have had their run. The ProShares Ultra Financial ETF (UYG) has moved up about 20% from its recent bottom over the course of just a couple of weeks.

With the Fed decision looming, I thought it best to take profits. If the Fed only cut by 25 bps or didn't cut at all, I thought financials, and probably the rest of the market, would plunge. On the other hand, with a 50 bp cut widely expected, I felt there wouldn't be that much upside. Especially as it may signal that the economy is in worse condition than many thought.

In any case, after the Fed announcement, investors will be getting back to focusing on the economy and the financial state of those stocks making up the sector. And that may not be a good thing.

In terms of the economy, there are so many mixed signals that one can't be blamed for taking a cautious stance.

In terms of the financial companies themselves, most of the major names have reported earnings already. The an…

Graham posts good numbers - Cautionary note sinks stock

Graham Corporation (GHM) is a company located almost in my backyard, so to speak, so it was with interest that I reviewed their third quarter earnings announcement this morning.

Graham is a small-cap company in the industrial sector. They are an equipment manufacturer for the oil refinery, petrochemical, power generation, fertilizer and pharmaceutical industries, etc. Its products include steam jet ejector vacuum systems; surface condensers for steam turbines; vacuum pumps and compressors and various types of heat exchangers.

The numbers --

Sales were up $6 million over the previous year's quarter but down $3 million sequentially. Net income for the third quarter was $3.8 million, or $0.74 earnings per diluted share, compared with $666 thousand, or $0.14 earnings per diluted share, in the prior year's third quarter. On a sequential basis, earnings were down $600 thousand compared to the previous quarter.

Domestic sales were 52% of total sales for the third quarter of fiscal 2008 c…

New TradeRadar market scan turns up some surprises

I have been neglecting this blog lately and barely paying attention to the markets. Rest assured, though, I haven't been slacking.

I have been working on a new approach for using the TradeRadar software. I have developed a method of scanning practically the whole stock market and applying an automated version of the TradeRadar signal software. The tests involved have been beefed up and made more rigorous. Given that the process is automated, there is less left to interpretation.

How it works

I scan the AMEX, the NYSE and the NASDAQ. That amounts to over 8500 securities including stocks, ETFs and closed end funds. The most up-to-date list of symbols for each exchange is read in. Then the software sequences through each symbol in each exchange, pulling in a year's worth of daily data and looking for recent trend reversals. In addition to the basic TradeRadar signal, trend lines are calculated and analyzed for direction (up or down) and steepness of the angle. To help confirm the BU…

UYG - Time to nibble on a financial ETF

It was a gut feeling as much as anything, but it seemed to me that financial stocks were ready for a bit of a resurgence. Watching the UltraShort Financial ETF (SKF) jump and then proceed to plunge on Tuesday was the first tipoff. Seeing that behavior begin to repeat Wednesday morning convinced me that perhaps financials were ready to make a real move up.

Since I had no idea whether this would be a sustained move or not, I elected to open just a small position in the ProShares Ultra Financial ETF (UYG) in mid-morning. It was then a pleasant surprise to see the hard-charging financials lead the market upward in the late afternoon on news that New York State's insurance regulator was encouraging banks to support bond insurers. Combined with Tuesday's surprise rate cut and another rate cut expected when the Fed meets next week, it does seem like a few factors are now falling in line to support the financials after their long decent from their peak last summer.

Having gotten in at $…

Weekly Market Update - still waiting for an up week

The financials killed us again this week with Washington Mutual, Citigroup and Merrill Lynch announcing massive losses. This was accompanied by more gyrations among the bond insurers. Based on write-offs by Merrill and others, analysts figure most of ACA's guarantees for CDOs are close to worthless. Ambac and MBIA are flailing about in tatters with ratings agencies seemingly lowering their credit ratings every week.

It was a standoff in tech with bellwether Intel coming in light on fourth quarter earnings and providing cautious forward guidance offset by IBM beating analyst expectations in both Q4 and 2008 projections. AMD surpised by meeting their projections for 4Q07 but still reported a large loss. They are by no means out of the woods yet.

Despite generally positive results from GE, manufacturing took it on the chin when the Philadelphia Fed's reading on regional manufacturing activity came in stunningly below expections.

After all this, I expected a rally on Friday based on…

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios.

For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different.

The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag.

What approach should the average 401K investor take?

Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask:

1. Should I stop putting the regular contribution into stocks?

My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets recover, as the…

IBM beats -- but is it representative of entire tech sector?

The other day IBM pre-announced their fourth quarter earnings. The NASDAQ and the entire tech sector jumped on the good news that was presented. Today after the close, they provided positive forward guidance, saying 2008 profit would rise in the neighborhood of 15% to 16%. This exceeded analyst expectations and gave the stock a nice bump up in after hours trading.

The positive outlook on 2008 may provide an excuse for a market-wide rally or at least a tech sector rally. But really, can it be said that IBM is a fair representation of the market or the entire tech sector?

I'll try to answer this question by reviewing IBM's business segments, organization, workforce and customer base.

Business Segments --

Looking at IBM's business segments, it can be seen that they offer far more coverage of the technology space that those of the typical tech company:

Global Services - this is the segment responsible for installing technology-based solutions at client companies. Within Global Serv…

FXI -- China ETF breaks down

We saw a hint yesterday but today we got the confirmation. The iShares FTSE/Xinhua China 25 Index ETF (FXI) has been carving out a wedge-shaped chart pattern for weeks but it has now broken to downside.

On October 31, 2007, FXI established its peak closing price at $218.51. At today's closing price of $151.81 it is now down about 30%.

With huge gains in Chinese stocks over the prior year, China has been referred to as an equity bubble. For some months, however, it has appeared that Chinese stock markets were getting tired. On the charts, it could be seen that the price action in FXI has been increasingly compressed into the wedge mentioned above. As we got to the end of the wedge, expectations have grown for the ETF to finally break out one way or the other.

The situation may have been resolved today and it appears to have been resolved in favor of the bears. Two days with downward gaps have taken FXI from the top of the wedge to clearly below the bottom of the wedge. These moves hav…

Intel disappoints - tech will feel the pressure

Intel announced their fourth quarter 2007 earnings after the close today. Here are the headline numbers:

2007 Operating Income $8.2 Billion, up 45 Percent
• Fourth-Quarter Revenue $10.7 Billion, up 10.5 Percent Year-over-Year
• Gross Margin 58 Percent, up 8.5 Points Year-over-Year
• Operating Income $3 Billion, up 105 Percent Year-over-Year
• Record Microprocessor and Chipset Units and Revenue
• Net Income $2.3 Billion; EPS 38 Cents

Sounds great. So why did the stock drop over 13% in after hours trading? Q1 is always seasonally weak but this year the company sees weakness somewhat beyond mere seasonality. Many investors are taking this as another sign of economic weakness, another bellwether stock throwing in the towel even as management contends that the company is still a growth story.

Below I have provided my quick notes from listening to the conference call. Take a look and you can decide whether Intel's guidance is a disaster or merely a modest slowdown while still in growth mode. I …

Expectations for China

I recently took a small position in the UltraShort FTSE/Xinhua China 25 ETF (FXP). This is the inverse fund corresponding to the FTSE/Xinhua China 25 ETF (FXI). After peaking in October, FXI has been moving down. It now appears to be forming a wedge-shaped chart pattern (see chart below). Price action on FXI has been narrowing as the ETF begins to get close to the point where the downtrend line meets the horizontal line. It has seemed like we are overdue to find out whether FXI was going break out to the bullish side or to the bearish side. On Thursday of this past week, it looked like the outcome had been resolved in favor of the bulls. Then on Friday, the ETF fell back inside the wedge. We remain waiting for the breakout.


Well, I'm no expert on China so I have been relying on the charts. What are others saying about the economic outlook in China?

According to academics from Wharton, China's economic situation is fairly positive though it is harder to predict the direction of s…

Markets bounce -- is it for real?

Markets have been up two days in a row now. The charts show that we are bouncing off a support level. Are the fundamentals in place to support a real rally? Or will we end up with another lower high?

It sometimes helps me to create a list of recent news items and try to interpret their impact on the markets and their meaning in terms of the economy. I look to see whether the evaluation changes anything in my current outlook or investment strategy. Does positive news outweigh negative news? Is the sun about to shine on the markets?

Herewith is a selection of recent news items I've been thinking about.
WalMart reported an increase in same-store-sales but most other retailers didn't. Is this an indication that consumer spending is slowing down? That consumers can only afford to shop at bargain retailers?The Consumer Electronics Show has been going on in Las Vegas. It has been a complete bore. There are no killer applications or products in sight. What does this say about the health …

Weak demand for oil? Maybe not...

Oil fell today on concerns that demand for crude would drop if the economy slows down. And certainly there are fears that, with recession a distinct possibility, that scenario may be playing out right now.

Lower demand should yield lower prices - this is known as elasticity, if I remember my economics classes correctly. With the current oil sector fundamentals as the backdrop, will prices actually fall very much? What have we seen during previous economic slowdowns?

I thought I would investigate by plotting oil imports against the performance of the SPDR S&P 500 ETF (SPY). I will assume that SPY more or less mirrors the performance of the economy. I look at oil imports as a direct proxy for oil demand. The oil numbers exclude what goes into the Strategic Petroleum Reserve. This should shed some light on how demand for oil changes as the economy rises and falls.

As can be seen in the chart above, oil imports (the dark blue line) vacillated in a range between 8.5 and 10 million barrels…

Intel at support already - what's next?

I wrote a post just a couple of days ago reflecting on the recent downgrade of Intel (INTC). The title of the post was "Intel downgrade may set up buying opportunity but not right away."

My premise in that post was that now that Intel had started falling it would have to drop to the $22 to $23 level before it became attractive. I didn't expect to see that happen by the end of this week. Intel closed the week at $22.67. What do we do now?

The swiftness of Intel's plunge and the fact that it has happened on much higher than average volume calls for caution. Take a look at the chart below. The stock is now well below its 200-day moving average. Sure, it appears to be oversold but MACD confirms Intel has taken a turn for the worse.

With the whole market backdrop looking uncertain now, it is best to let Intel ride for a while. It it breaks much below the $22 level it could be a long way down. Keep in mind, Intel was a $17 stock as recently as summer of 2006.

Disclosure: aut…

Weekly Market Update - bears in control, time to short tech?

A tough week for stocks closed with a thud Friday. The new year got off to a bad start with a weak ISM Manufacturing report. That was followed up by a weak non-farm payrolls report that caught the market's attention and prevented investors from appreciating the reasonably decent ISM Services report. Note that rising prices were a theme in both ISM reports. This has investors worried that inflation will prevent the Fed from freely doling out rate cuts to save the economy. It was all too much for market participants and they sold stocks with abandon.

As for the TradeRadar model portfolio, we were stopped out of our position in SanDisk (SNDK). But the carnage in the NASDAQ encouraged us to move from neutral on tech to a bearish stance. Accordingly, I initiated a small position in the ProShares UltraShort Technology ETF (REW). Here's the background on this decision.

I have written a couple of posts on how the Durable Goods report over the last couple of months has led me to believe …

Fed minutes reveal dismal outlook on 2008

The Federal Reserve's FOMC Minutes for the December 11 meeting were released today and bloggers and analysts have been enthusiastically commenting. Many have said there is nothing we didn't already know, to wit: economic growth is slowing, inflation is moderate but worsening, the housing market is weak and there is still trouble in credit markets.

I was struck, however, by the number of times the year 2009 was mentioned. It was as if the FOMC members had already written off 2008 as a lost cause and were looking forward to 2009. Note the following quotes forecasting a weak 2008.

"Real GDP was anticipated to increase at a rate noticeably below its potential in 2008."
"Conditions in financial markets... were expected to impose more restraint on residential construction as well as consumer and business spending in 2008 than previously expected. In addition, ..., higher oil prices and lower real income were expected to weigh on the pace of real activity throughout 200…

Intel downgrade may set up buying opportunity but not right away

Intel (INTC) was downgraded by Bank of America and the stock was under pressure all day. The BofA analyst feels that, despite Intel's current situation being nearly ideal, upside is limited. With competition from AMD wilting, the things holding Intel back could be slowing demand due to seasonal weakness and rising costs. After today's ISM numbers, I would add to that the threat of a slowing economy.

From the SIA Global Sales Report for November, however, we have the following:

"Microprocessor sales increased by 5.8 percent month-on-month and by 7.4 percent from November of 2006. Strong PC unit demand contributed to a 2.6 percent sequential increase in microprocessor unit shipments and a 3.2 percent increase in ASPs." In this usage, ASP means average selling price.

What the SIA is saying is that in the microprocessor sector, sales are doing well and manufacturers are able to pass higher prices on to customers. This is not the case in many other semiconductor sectors, esp…