Market Outlook and Ideas | August 31, 2009

Weekly Results: S&P 500 1,028.93 +.27%, DJIA 9,544.20 +.40%, NASDAQ 2,028.77 +.39%, Russell 2000 579.86 -.28% and MSCI Emerging Markets 36.08 -.10%

“In the field of observation, chance favors only the prepared mind”. Louis Pasteur (1822 - 1895)

Summer Assessment

Current conditions continue to support the case for a high risk appetite. Although, last week provided hints of big picture weakness. For example, GDP revised lower, Chinese markets closed down for the fourth week in a row and growing uncertainties regarding FDIC’s health. These worries resurface as part of the credit downturn. On the other hand, stocks such as AIG showcase a rapid strength and created hope of restoration in Financials. The debate lives on as economic data is mixed. Yet, any downside move is gobbled up by buyers. That said, new stock market highs confirm a bullish sentiment and the general mood states to simply “flow with the trend”.

September Mindset

The S&P 500 is up nearly 50% since its March lows. This makes it difficult to convince someone to take profits. Perhaps, markets reached this comfort zone in August. However, participants recall the summer days of 2007 in which a unified run-up ended ugly. Although, a different cycle point, one can not dismiss the chance of sharp sell-offs. An exciting part to this fall is the level of uncertainty and surprise element that’s greatly awaited. The theatrics of last fall were one for the ages given a series of bailouts and bankruptcies. Now, stabilization argument faces further tests ahead. Discussion of interest rate hikes, non-farm payroll results and level of profit taking should set the tone for an interesting autumn.

Stock Specific Ideas:

TCL (Tata Communication): Offers exposure to Indian’s growing telecom and internet market. Stocks present an attractive entry point given its recent expansion to African countries and reasonable pricing around $20.

ADM (Archer Daniels Midland): A play on the agriculture theme. Rotation out of hard commodities should benefit ADM especially with concerns over sugar supply. In addition, the stock price is well below annual highs of $48.

Article Quotes:

“Between 2003 and 2007 — prime years of the housing boom — the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody’s Economy.com. Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000.” (New York Times -August 28, 2009)

"The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of “problem banks” had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the “problem list” but said that total assets of that group had increased from $220bn to $299.8bn in the three months through June". (Financial Times – August 27, 2009)

Levels:

S&P 500 [1028.93] Reached an intra-day high for the year as momentum remains strong. Index is 17% removed from its 200 day moving average. Key near-term support around 950-960.

Crude [$72.74] Trading below June highs of $73.38 and attempting to reach yearly highs of $75. Upcoming weeks, should determine the magnitude of these pullbacks.

Gold [$955.55] Recent trading days lacked major action in price movement. Again, a significant strength above $960 serves a barometer in measuring buy interest.

DXY– US Dollar Index [78.36] Barely holding above 2009 lows of 77.48. Following sharp declines earlier this spring, the Dollar has moderately stabilized in these summer months.

US 10 Year Treasury Yields [3.44%] Trading in a tight range especially in the past 3 months. Currently, poised for a recovery around 3.40%.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | August 24, 2009

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Weekly Results:

S&P 500 1,026.13 [+2.20%] , DJIA 9,505.96 [+1.98%] , NASDAQ 2,020.90 [+1.78%], Russell 2000 581.51 [+3.12%]

and MSCI Emerging Markets 36.11 [+.22%]

When in doubt, predict that the present trend will continue. Merkin's Maxim

A simpler view:

Taking a step back, one can view a long-term chart of the S&P 500. Quickly, an observer realizes that below 800 participants were too negative. On the other hand, revisiting cycle peak of S&P at 1500 seems too ambitious. Meanwhile, the same pattern reminds us that 1200 is feasible. Keeping that in mind, it might be sensible to narrow big expectations. Now, adjusting to non-extreme markets requires fresh acceptance of new trends. Participants are trying to define ‘normal’ after periods of extremes of euphoric tops and crisis sell-off. Today, investors scramble to understand various messages from Federal Reserve, impact of housing data and company valuations. However, momentum is just momentum and hard to fight until a major shift in sentiment. That said, with the S&P 500 around 1000, latecomers feel compelled to add and participate in this rally.

Reality is merely an illusion, albeit a very persistent one. Albert Einstein (1879 - 1955)

Feels like Summer 2007?

A week ago, Chinese stocks tumbled and served as a quick reminder that markets are a bit extended. In fact, the Shanghai Index is down nearly 20% in the past two weeks. However, price performance alone fails to showcase a decline in risk appetite. For example, the S&P 500 is trading at annual highs. Of course, each upside move is supported by policymakers and optimists . In general, it has been costly to bet against these markets and too early to take profits. Some wonder if markets are fed up with bad news. Or simply, observers overdosed on negative news fueled by crisis discussions in 2008. It was only two years ago, where key asset classes appreciated in price. Interestingly, in the summer of 2007 real estate, stock market and commodities rose to new highs only to collapse rapidly in the fall. Awkwardly enough, global assets present similar feel of reaching an inflection point. Once again, a strong correlation exists between equities and Crude.

IDEAS:

Long:

ADM (Archer Daniels Midland), EMS (Emergent BioSolutions), CWT (California Water) MATK (Martek Biosciences) and RFMD (RF Micro), CREE (Cree Inc), LLTC (Linear Technology) and ONXX (Onxx Pharmaceutical).

Profit taking/ Short:

PTR (PetroChina), GG (Gold Corp), SCHN (Schnitzer Steel) and X (US Steel)

Article Quotes:

“S&P said 201 borrowers with $453.1 billion in debt have defaulted this year, exceeding the 126 defaults for all of 2008, which comprised debt worth $433 billion.” (Financial Times – August 19, 2009).

“And while imagining a return to 2007 S&P 500 returns is pleasant, Hussman points out that investors should remember that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings”. (Moneynews.com- August 17, 2009)

Levels:

S&P 500 [1026.13] Making new annual highs and stabilizing around 1000 range. Friday marked intra-day highs as investors look to sort out option expiration volume vs. bullish buying.

Crude [$73.89] Marking yearly highs similar to equity markets. The 200 day moving average stand at $68 which suggests a key near-term support. Poised for minor pullbacks but uptrend is in full gear.

Gold [$952.50] Lacking strong evidence of a recovery. Struggling to reach above $960. This displays lack of major buying demand despite ongoing US Dollar weakness.

DXY– US Dollar Index [78.04] Holding above August 7^th lows and deeply oversold. Anticipation grows for a trend reversal but anxiously seeking a catalyst.

US 10 Year Treasury Yields [3.57%] Normalizing at current levels, especially between 3.40-3.80%. A break above or below these ranges can send an alarm or hint of emerging trends.

Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook & Ideas | August 17, 2009

Weekly Results: S&P 500 1,004.09 -.63% , DJIA 9,321.40 -.52% , NASDAQ 1,985.52 -.74% , Russell 2000 563.90 -1.49% and MSCI Emerging Markets 36.03 -1.11%

Early hints of pullbacks:

Global markets begin to cool off as summer days begin to wind down. Chinese markets hit an early peak on August 3^rd and few days later the US Dollar stopped its downside bleeding. Yet again, we're reminder of a slowing appetite for risky assets. At the same time, observers await for further downside confirmation. Somehow, sentiment feels upbeat in the search of a promising finish to 2009. This is showcased by increasing number of pundits and economist declaring an “end” to the recession.

In weeks ahead, skepticism is poised to increase along with perceived volatility. At this stage, cheerleading stock market returns may dangerously reflect hope than substance. For example, a simple S&P 500 Price-Earnings Ratio currently stands at 18.35. At the start of the recovery in March the P/E ratio equaled 10. (Bespoke 8/14) Therefore, the index is a bit pricey for investors seeking bargains at attractive entry points. Beyond price performance, markets seem mysterious for one to figure out key drivers of this recent rally. At this junction crafting a buy pitch for prudent investors is a tough sell.

That said, impact of government spending is too powerful and biased towards the upside. Therefore, it remains a key part of the bullish equation.

Narrow focus on innovation

Crude is moderately retracing, markets are pausing, and plenty of speculative calls for currency reversals. In addition, message from the Federal Reserve is ambiguous similar to economic data results. However, these times require ambitious investors to focus on innovative ideas. Basically, innovation is desperately needed given adjustment and consolidation to traditional industries such as Auto’s and Financials. Therefore, finding niche growth areas is challenging but can be rewarding especially in Technology and Biotechnology. For example, two public offerings last week (CPIX Cumberland Pharmaceuticals and EM Emdeon) demonstrate developing strength in Healthcare.

Actionable Trends:

Case for soft commodities

At this point,Hard Commodities are becoming extended. Gold, Crude and Steel are likely to see shrinking demand and increasing inventories. Investor expectations in the long Crude and China trade might disappoint given high expectations. Importantly, supply shortage of softer commodities such as Sugar and Grains can continue to create higher demand. For example, commonly followed Sugar #11 Index is trading at all-time highs. Therefore, money managers might consider reshuffling and reaction to shortage in food supplies.

Profit taking or Short:

PTR (PetroChina) : Twice this summer,stock failed to get above $120. Investors link risky assets with stocks exposed to China and Crude. Poised to decline closer to $100 range where more buyers will potentially take a closer look.

Appealing buys on pullbacks:

ADM (Archer Daniels Midland): Company stands to benefit from increasing agriculture demand including wheat, corn, protein and other food ingredients. Add on weakness given a promising longer-term outlook and healthy balance sheet.

· EMS (Emergent BioSolutions): For aggressive investors seeking exposure in Healthcare. The company demonstrated strong sales in vaccine related products and recent FDA approval. Interestingly, fundamentals are attractive given the company's dominance in the vaccine space. Additionally, attractive chart pattern provides positive flow for this small cap stock.

Ideas from previous post:

Profit taking / Short: GG (Gold Corp), SCHN (Schnitzer Steel) and X (US Steel)

Longs: CWT (California Water) MATK (Martek Biosciences) and RFMD (RF Micro)CREE (Cree Inc), LLTC (Linear Technology) and ONXX (Onxx Pharmaceutical).

Article Quotes:

“Copper inventories monitored by the London Metal Exchange surged 14 percent since July 14. U.S. industrial output rose in July from June, the first month-to-month gain since October, Federal Reserve data showed today in Washington. “ (Bloomberg, August 14, 2009)

“The financing gap turned sharply negative at the end of last year. This negative financing gap indicates that the business sector as a whole is generating enough cash to purchase capital expenditures without borrowing. This supports the claims of banks that demand for business loans has declined. But that isn't necessarily good news for the economy.” (Clusterstock, August 11, 2009).

Levels:

S&P 500 [1004.09] Stabilizing and poised to hold around 1000. Early indication of a pause following a brief declines from August 7^th highs.

Crude [$67.51] Failed to reach above $74 (200 day moving average). Establishing a wide range between $70-60. In the short-term, downside momentum is building.

Gold [$953.50] Index floating between a multi-month trading range between $850-950.

DXY– US Dollar Index [78.88] Slightly holding above annual lows. The dollar index remains deeply oversold but noteworthy intra-day bottom on August 5. This sets the stage for a long awaited turnaround.

US 10 Year Treasury Yields [3.56%] Since June, Treasury yields failed to climb above 3.80%. This suggests that additional catalysts are required for a convincing rise in yields.

Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.