Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

September 27th, 2010

I have to say the current stock market breakout has been one of the weaker technical (chart) breakouts in terms of volume, momentum, and internals.

Let’s take a look at the current picture of Daily Chart market internals on the Dow Jones and NASDAQ Indexes year-to-date.

Let’s start first with the Dow-30 Index:

Let’s break it down by indicator.

First, we have the NYSE McClellan Oscillator (a smoothed measure of Advancers minus Decliners, also known as “Breadth”) and then we have the actual “Breadth” chart underneath.

Because the daily AD-Line (Advancers minus Decliners) is volatile (it’s light gray), I smoothed out the raw data with a four-day simple moving average which we’ll use as our indicator – it’s dark blue.

Ok so what do they say?

The Dow broke above the key resistance at 10,700, held above it, then ‘re-confirmed’ the breakout on Friday.  During the breakout, Volume, Momentum, and Breadth all declined.

You can see volume if you look closely above, but the glaring picture is clear when seeing the negative divergence – shown with red arrows – in both the McClellan Oscillator and Breadth.

First, the McClellan Oscillator registered a LOWER high in the indicator currently than it did at its chart peak in July.  Notice price is higher than its respective peak in July – that’s a longer-term (external) divergence.

We also have an immediate negative divergence – or an internal divergence – as Friday’s oscillator high was not as high as that not just on Monday’s breakout, but is not as high as the peak in early September when the Dow pushed to 10,500.  Strange.

The smoothed average of breadth shows the same, only the recent peak was earlier on the break above 10,300.  Really strange.

The picture is the same on the NASDAQ using NASDAQ-specific internals:

The picture is roughly identical – down to the internal and external divergences.

Notice that Breadth (blue) also is not making a higher indicator high than the peak reached in July or the chart indicator peak in June.  Very strange.

So we’re left with the conclusion that market internals do NOT support this recent breakout.

While that’s a fact, it does not logically follow that price is required to fall down just because internals are not supporting this rally.

It’s certainly a caution signal for bulls – but the recent ‘rally at any cost’ activity is also a warning for bears.

Unless you’re an intraday trader who can trade both directions without bias, it’s probably best to wait for a corresponding breakdown signal in price before trying to short this ‘breakout’ market.

And if you’re a swing trader, this is not the typical breakout pattern situation that would compel you to jump off the sidelines aggressively and go long – if you’re not already in after the immediate break.

In other words, we may have had a price break, but if we look under the hood at the strength of the breakout, it doesn’t look like a strong one.

Dow Price Resistance is nominally 10,900, while NASDAQ resistance is 2,425 (and S&P at 1,170) – all of which come from the price swing highs in May.

Watch the market extremely close and do not bias yourself too greatly in either direction – as in, the market MUST continue its rally because it broke out… or the market MUST decline because there are divergences.

Take a moment to read my prior updates:

Measuring Current S&P 500 Market Internals in a Strong Rally

SPX Breakout – Is this Really It?  Tips on Trading Breakouts

and

SPX Levels to Watch and Realities You Must Know

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

Uncategorized

3 Government Warnings of Financial Fiascos!

September 27th, 2010

Martin D. Weiss, Ph.D.

For my family, fiscal balance is not — and never was — a partisan issue.

My father, for example, had little interest in politics but was passionate about savings, hard work and avoiding waste.

When I was a toddler, he used to sit me on his knee, teaching me and my older brother that money is not a toy or a game; it’s to be valued, kept in a piggy bank, and treated with due respect.

And later, by the time I was a teenager, that same lesson had evolved into an equally serious discussion about sound banking, avoiding excess debt and balancing the government’s books.

Also at the time, Dad was fighting the greatest budget battle of the 20th century. He had just founded our nonpartisan Sound Dollar Committee. And with the blessing of friends like Democrat Bernard Baruch and Republican Herbert Hoover, he was busily rallying grassroots support for President Eisenhower’s extremely unpopular proposal to balance the budget of fiscal year 1960.

Dad taught us that when any country, family, or corporation lets its debts grow beyond reason, they follow one of three paths. —

  • They go bankrupt …
  • They cheat the system, or …
  • They do the right thing by tightening their belt and trying to work even harder.

Most of the time, Dad explained, most people and institutions do the right thing.

Some get the idea right away. Some take longer to figure it out. But sooner or later, voluntarily or involuntarily, they realize it’s the only real choice.

Households, start shunning credit, saving more, and spending less.

Banks that don’t go under move swiftly to cut back lending and build up cash reserves.

Politicians, he’d say with a laugh, are not nearly as smart. But even they eventually get it.

The tipping point, he estimated, comes when federal deficits grow beyond around 5 percent of GDP. Then, beyond that threshold, there are only three conceivable scenarios:

Scenario A — Bankruptcy. The government defaults on its debts and is promptly blacklisted by lenders, plunging the nation into extreme poverty and political upheaval.

Scenario B — The Cheating and Stealth. The government prints paper money to fund its debts, trashing its currency and leading to a calamity similar to the default scenario.

Scenario CAusterity. The government makes swift spending cuts, shrinks in size, and encourages the entire society to make similar sacrifices.

martinandirving 3 Government Warnings of Financial Fiascos!

Given the nature of politics, he admitted the austerity scenario might sound unlikely.

But given the hard realities, Dad insisted it was actually the ONLY viable option for the United States.

Why After Seven 50 Years of Wild Spending, Austerity Is Now Inevitable

Dad won the battle of the budget in 1960. It was balanced, and the country suffered a moderate recession as a result. But throughout the half century since, even in years when the federal government supposedly ran a “surplus,” government spending has continued to grow by leaps and bounds.

What’s different today? Simply this: Previously, the federal deficit rarely exceeded 3 percent of GDP.

Now, it is running close to 10 percent — DOUBLE the level that we felt would be the tipping point of a fiscal crisis … and it’s doing so year after year!

But here’s the key: While Washington continues to treat money like a game, and while Wall Street enjoys its final fling of fantasy, three government entities have issued major warnings or taken actions that harken back directly to Dad’s lessons.

Each foretells of financial fiascos ahead — and each has the potential to outweigh any stock market rally.

Warning #1
Fed: Consumers Shunning Credit

chart 3 Government Warnings of Financial Fiascos!

The folks in Washington and on Wall Street may still be in la-la land, but average American families are finally waking up to the real world …

The Federal Reserve has now released new, landmark data proving that consumer credit is in the deepest depression on record.

Look. For decades, the U.S. economy was fueled and sustained by American consumers on a nonstop binge of borrowing and spending.

Indeed, in almost every year since World War II, consumers consistently borrowed more than they did in the prior year. The more consumers borrowed, the more they spent … and the more they spent, the bigger the revenues at the nation’s manufacturers and retailers.

But now, all that has changed! For the first time since the Great Depression, consumers are not only borrowing LESS, but they are also cutting back on prior borrowings — either because they’re defaulting and being FORCED out of the debt market or because they’re voluntarily trying to AVOID that outcome.

Ultimately, debt reduction in any form can help clean the slate for a future recovery. But right now, it means only one thing: Massive cutbacks in consumer spending!

The basic principle is very simple: No more easy credit; no more big spending! Instead, for the first time in at least two generations, we are witnessing a radical shift in consumer psychology — from splurging to cutting … from exuberance to prudence.

I repeat: In the long term, debt reduction is a good thing. But right now, it’s threatening to drive the U.S. economy into another tailspin.

Warning #2
NCUA Seizes Biggest Credit Unions

This warning comes in the form of stern action: On Friday, the National Credit Union Administration (NCUA) seized three wholesale credit unions that provide financing and investment services to more than 7,000 retail credit unions around the country.

The problem: Like the bailed-out banks and failed mortgage giants of recent years, these giant credit unions made big bets on commercial and residential mortgages. Their mortgages collapsed in value. They ran out of cash to cover the losses. And on Friday, regulators decided they were too far gone to save.

Result: All three will be shuttered … their executives will be fired … and their toxic assets will be scooped up by the government.

Moreover, this wasn’t the first time the government has been forced to act. All told, since March of last year, FIVE of the nation’s largest wholesale credit unions have gone under, representing a whopping SEVENTY percent of the assets among ALL of the nation’s wholesale credit unions.

Smaller retail credit unions, which deal directly with the public, are in better financial shape. But the large failed credit unions are at the core of the entire industry. They are the institutions that thousands of credit unions depend upon for financing and other services. And they are mostly in ruins, with the entire industry relying on yet ANOTHER government bailout to keep it running.

It’s a stark reminder of what happens when banks treat your money like a speculative game. And it’s one of many telltale signs that the financial crisis is NOT over. Quite the contrary, as Mike Larson has detailed here repeatedly, the housing bust, which triggered the crisis in the first place, is continuing — and so are its repercussions.

Meanwhile, banks that have not gone under are doing the only logical thing: They’re cutting back on lending, making it ever more difficult for consumers and businesses to get credit.

Warning #3
CBO: Deficit Armageddon!

The nonpartisan Congressional Budget Office (CBO), serving all of Congress regardless of party affiliation, is now raising the exact same alarms Dad raised years ago.

The CBO has announced that this year’s federal deficit will be the second largest in history.

It has disclosed data showing that, had it not been for some fancy accounting, this year’s deficit would actually be the LARGEST in history.

And it has issued the following very explicit warnings …

Rising probability of a fiscal crisis! The CBO writes: “In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates.”

My take: It is a vicious cycle that can spiral out of control. The more the government borrows, the more interest it has to pay … and the higher the government’s interest costs, the more investors would question the government’s finances.

Timing of crisis unpredictable! CBO: “Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”

My comment: Typically, some outside event tips the shaky balance of supply and demand in the global marketplace for U.S. government debt. It could be a collapse in the dollar. It could be a major Fed announcement of a new round of money printing (”QE2″). Or it could be the sense that America’s political leadership is in disarray. But regardless of the specific trigger, the result is the same: Surging interest rates and severe difficulties in raising funds.

Fiscal crises and recessions can happen at the same time! Typically, interest rates go down in a recession and up in a boom. But when deficits are out of control, the opposite can happen. The CBO writes: “Fiscal crises around the world have often begun during recessions and, in turn, have often exacerbated them. Frequently, such a crisis was triggered by news that a government would, for any number of reasons, need to borrow an unexpectedly large amount of money.”

My analysis: Right now, the official federal deficit (before adjusting for accounting gimmicks) is running at about $1.3 trillion, or 9.1 percent of GDP, despite the so-called “recovery.” If, due to sinking consumer spending and more bank failures, we see a double-dip recession, the deficit could easily explode to $2 trillion.

Worse than Greece and Ireland? Unlike smaller countries, the U.S. benefits from its status as a safe-haven nation. But, warns the CBO, “the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors.”

My view: As I explained here last week, this is the key factor that differentiates the U.S. from Japan. Japan’s savings rates are still very high, and they finance almost all of their debt from domestic savings. In contrast, America’s savings rates, despite some recent improvements, are still among the lowest in the world, and the U.S. finances most of our debts by borrowing from investors overseas.

Recession is actually the LESSER of the evils! Turning to the possible government responses to the problem, the CBO follows Dad’s logic almost to the letter, writing that …

  • Bankruptcy — defaulting on U.S. debt — would be a disaster, making it extremely difficult for America to borrow for many years to come.
  • Cheating and stealing (e.g., printing money) — which, as Mike Larson explained on Friday, now seems to be what Fed Chairman Bernanke favors — would also be a huge mistake, again making it much harder for the U.S. to borrow in the future.
  • In conclusion, the ONLY viable option, says the CBO, is … austerity. Yes, they admit, it would have negative consequences, driving the economy into a deeper recession. But, they say, a deeper recession would be the lesser of the evils.

This is the urgent dilemma America faces right now: Do we want to continue playing games with our money … or do we want to treat it with the respect it deserves?

If we do the wrong thing, we will doom future generations — and ourselves — to impoverishment. If we do the right thing, more economic pain is inevitable. But outside the fantasyland of Washington and Wall Street, it’s the only viable option.

Whether you agree or not, I warmly welcome your comments. Click here to join the lively debate now under way on my blog.

And no matter what you believe, please don’t be hoodwinked by the same old tricks that Wall Street and Washington have always played in this kind of crisis.

Good luck and God bless!

Martin


About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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Commodities, ETF, Mutual Fund, Uncategorized

Can Active ETFs Really Prosper?

September 27th, 2010

The debate on the prospects of actively-managed ETFs carries on and it continues to be a divisive issue. The latest discussions took place at the Morningstar ETF Invest conference held in Chicago from Sept 15-17th. An entire session was devoted to the discussion of actively-managed ETFs by a panel consisting of the portfolio managers behind several Active ETFs on the US market.

Morningstar also did numerous interviews with key attendees at the conference. One of the interviews was with Matt Hougan, Editor of IndexUniverse.com. In response to a question about the need for actively-managed ETFs, Matt expressed his scepticism on the suitability of the “ETF wrapper” for active management. He suggested that many of the numerous prominent fund companies that have filed applications with the SEC to launch Active ETFs have done so to set up “placeholders” that can allows them to launch these products at some point in the future – if they want to – and does not really mean they have committed to entering the space.

Such a sentiment has also been hinted at by other leading professionals in the ETF space that we have spoken to. Many have pointed out that the biggest hurdle that’s discouraging widespread adoption of the Active ETF structure from active managers is the daily transparency required of actively-managed ETFs. That requirement results in many concerns such as front-running of trades executed by the portfolio manager and the dilution of the value-added decisions that the portfolio manager makes, once the holdings become public. One major step to work around this issue was taken by iShares, which filed with the SEC proposing actively-managed ETFs with reduced transparency requirements.

On the first day of the ETF Invest conference, Rick Genoni – Head of ETF Product Management at Vanguard, also voiced his opinions on actively-managed ETFs on a panel and said that, amongst Vanguard’s clients, “No one is asking for actively-managed ETFs”. Whether that reflects a fundamental lack of need for such a product or just the lack of awareness amongst investors of the benefits of actively-managed ETFs over active mutual funds, is the million dollar question. Considering passively-managed ETFs took more than a decade to achieve the recognition of their benefits and demand that they have today, we might well need to wait a few years before finding an answer to that question about Active ETFs.

ETF, Mutual Fund

Chart of the Week: Gold and the Miners

September 27th, 2010

From a technical perspective, the big event in the markets in the last week is undoubtedly the breakout in the S&P 500 index, but since I devote so much time to the SPX and its derivatives, I thought the time is ripe to recognize gold for hitting a new all-time high and bumping up against $1300 per ounce.

To put a slightly different spin on gold, in the chart of the week below I have elected to include the gold futures continuous contract (red line) and also two popular ETFs for gold miners: GDX, the large cap version (top holdings of ABX, GG and NEM), shown below in a blue line; and GDXJ, the junior gold miners ETF (green line.)

As the chart of 2010 performance shows, gold futures have been the least volatile of the group and have had about the same performance as GDX. While GDX and GDXJ track each other fairly closely, note that GDXJ has distinguished itself with superior performance over the course of the last month or so.

Predicting the future of gold is a daunting task, but if the bullish trend continues, GDXJ clearly has the potential to continue to deliver outsized returns – with commensurate risk, of course.

Related posts:

[source: StockCharts.com]

Disclosure(s): long GDXJ at time of writing



Read more here:
Chart of the Week: Gold and the Miners

ETF, Uncategorized

Chart of the Week: Gold and the Miners

September 27th, 2010

From a technical perspective, the big event in the markets in the last week is undoubtedly the breakout in the S&P 500 index, but since I devote so much time to the SPX and its derivatives, I thought the time is ripe to recognize gold for hitting a new all-time high and bumping up against $1300 per ounce.

To put a slightly different spin on gold, in the chart of the week below I have elected to include the gold futures continuous contract (red line) and also two popular ETFs for gold miners: GDX, the large cap version (top holdings of ABX, GG and NEM), shown below in a blue line; and GDXJ, the junior gold miners ETF (green line.)

As the chart of 2010 performance shows, gold futures have been the least volatile of the group and have had about the same performance as GDX. While GDX and GDXJ track each other fairly closely, note that GDXJ has distinguished itself with superior performance over the course of the last month or so.

Predicting the future of gold is a daunting task, but if the bullish trend continues, GDXJ clearly has the potential to continue to deliver outsized returns – with commensurate risk, of course.

Related posts:

[source: StockCharts.com]

Disclosure(s): long GDXJ at time of writing



Read more here:
Chart of the Week: Gold and the Miners

ETF, Uncategorized

SP500 Internals, Dollar & Gold Pre-Week Analysis

September 26th, 2010

After a fierce equities rally on Friday, which I figured would happen, just not that strong; I have to wonder if there is some event or major decision in the works we don’t know about?

Friday’s rally could be something simpler like window dressing by the funds. This is when the funds buy up all the top performing stocks for month end reporting. They do this so that their investors think they are on the ball and know what they are doing. Window dressing will end Monday and from there we could see some profit taking (selling) start. But for all we know Obama could be extending the tax cuts for everyone or cutting payroll taxes etc…

It would only take one of these events to trigger a sharp up move in the market and that could be what Friday’s move was anticipating. That being said volume has remained light and during low volume session the market has a tendency to move higher. Sell offs in the market require strong volume to pull the market down, so until volume picks up there could still be higher prices just around the corner.

Let’s take a look at some charts…

SPY – SP500 60 Minute Intraday Chart

Last week we saw the market reverse to the down side with a strong end of say sell off. That set the tone for some follow through selling and for any bounces to be sold into. That being said, the market always has a way of surprising traders and it did just that on Friday gapping above Thursday’s reversal high causing shorts to cover and the typical end of week light volume drift to help hold prices up.

NYSE Market Internals – 15 Minute Chart

I like to follow some market internals to help understand if investors are becoming fearful or greedy. It also helps me gauge if the market is over bought or oversold on any given day.

These three charts below show some interesting data.
Top Chart – This indicator shows me if the majority of shares traded are bought or sold. When the red line spikes up and trades above 5 then I know the majority of traders are buying over covering their shorts. I call this panic buying because traders are buying in fear that the market will continue higher and they will miss the train. When everyone is buying you know a pullback is most likely to occur.

Middle Chart – This is the NYSE advance/decline line. When this indicator is below -1500 then the market is over sold and bottom pickers/value buyers will step in and nibble at stocks. But when this indicator is trading over 1500 then you know the market is overbought and there should be some profit taking starting any time soon.

Bottom Chart – This is the put/call ratio and this tells us how many people are buying calls vs put options. When this indicator is below 0.80 level more traders are bullish and buying leverage. My theory is if they are buying leverage for higher prices, then they have already bought all their stocks and now want to add some leverage for more profits. When I see the majority of traders bullish then I an sure to tighten my stops (if long) as top my be forming.

Putting the charts together – When each of these charts are trading in the red zone know I must be cautious for any long positions because the market just may be starting to top. Or a short term correction may occur.

UUP – US Dollar Daily Chart

The US dollar has been under some serious pressure with all the talk about quantitative easing (printing money). Obviously the more the Fed’s print the less value the dollar will have. The chart below shows a green gap window which I think once it is filled should put the dollar in a oversold condition for a short term swing trade bounce before heading back down. A bounce in the dollar will put pressure on equities, gold and oil.

GLD – Gold Daily Chart

Gold continues to grind its way up. This move is looking very long in the teeth and pullback will most likely be sharp.

Weekend Trading Conclusion:

In short, equities and gold continue to grind their way higher while the US dollar continues its grind lower. When I say the market is grinding I am implying the market is over extended and a reversal any day should occur.

Financial stocks like Goldman (GS) which typically leads the market has been strongly underperforming over the past week. Insiders were selling GS very strongly which is strange and makes me wonder what’s up there? With the financial stocks underperforming it sure looks like a market reversal is just around the corner.

If Friday’s rally was simply window dressing by the funds then it should end on Monday and with any luck we will see a sharp reversal to the down side early this week.

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
SP500 Internals, Dollar & Gold Pre-Week Analysis




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF, OPTIONS

SP500 Internals, Dollar & Gold Pre-Week Analysis

September 26th, 2010

After a fierce equities rally on Friday, which I figured would happen, just not that strong; I have to wonder if there is some event or major decision in the works we don’t know about?

Friday’s rally could be something simpler like window dressing by the funds. This is when the funds buy up all the top performing stocks for month end reporting. They do this so that their investors think they are on the ball and know what they are doing. Window dressing will end Monday and from there we could see some profit taking (selling) start. But for all we know Obama could be extending the tax cuts for everyone or cutting payroll taxes etc…

It would only take one of these events to trigger a sharp up move in the market and that could be what Friday’s move was anticipating. That being said volume has remained light and during low volume session the market has a tendency to move higher. Sell offs in the market require strong volume to pull the market down, so until volume picks up there could still be higher prices just around the corner.

Let’s take a look at some charts…

SPY – SP500 60 Minute Intraday Chart

Last week we saw the market reverse to the down side with a strong end of say sell off. That set the tone for some follow through selling and for any bounces to be sold into. That being said, the market always has a way of surprising traders and it did just that on Friday gapping above Thursday’s reversal high causing shorts to cover and the typical end of week light volume drift to help hold prices up.

NYSE Market Internals – 15 Minute Chart

I like to follow some market internals to help understand if investors are becoming fearful or greedy. It also helps me gauge if the market is over bought or oversold on any given day.

These three charts below show some interesting data.
Top Chart – This indicator shows me if the majority of shares traded are bought or sold. When the red line spikes up and trades above 5 then I know the majority of traders are buying over covering their shorts. I call this panic buying because traders are buying in fear that the market will continue higher and they will miss the train. When everyone is buying you know a pullback is most likely to occur.

Middle Chart – This is the NYSE advance/decline line. When this indicator is below -1500 then the market is over sold and bottom pickers/value buyers will step in and nibble at stocks. But when this indicator is trading over 1500 then you know the market is overbought and there should be some profit taking starting any time soon.

Bottom Chart – This is the put/call ratio and this tells us how many people are buying calls vs put options. When this indicator is below 0.80 level more traders are bullish and buying leverage. My theory is if they are buying leverage for higher prices, then they have already bought all their stocks and now want to add some leverage for more profits. When I see the majority of traders bullish then I an sure to tighten my stops (if long) as top my be forming.

Putting the charts together – When each of these charts are trading in the red zone know I must be cautious for any long positions because the market just may be starting to top. Or a short term correction may occur.

UUP – US Dollar Daily Chart

The US dollar has been under some serious pressure with all the talk about quantitative easing (printing money). Obviously the more the Fed’s print the less value the dollar will have. The chart below shows a green gap window which I think once it is filled should put the dollar in a oversold condition for a short term swing trade bounce before heading back down. A bounce in the dollar will put pressure on equities, gold and oil.

GLD – Gold Daily Chart

Gold continues to grind its way up. This move is looking very long in the teeth and pullback will most likely be sharp.

Weekend Trading Conclusion:

In short, equities and gold continue to grind their way higher while the US dollar continues its grind lower. When I say the market is grinding I am implying the market is over extended and a reversal any day should occur.

Financial stocks like Goldman (GS) which typically leads the market has been strongly underperforming over the past week. Insiders were selling GS very strongly which is strange and makes me wonder what’s up there? With the financial stocks underperforming it sure looks like a market reversal is just around the corner.

If Friday’s rally was simply window dressing by the funds then it should end on Monday and with any luck we will see a sharp reversal to the down side early this week.

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
SP500 Internals, Dollar & Gold Pre-Week Analysis




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF, OPTIONS

Upside Fibonacci Price Projections for Silver SLV

September 26th, 2010

With Silver screaming to new price highs, it’s time to pull out the Fibonacci Price Projection tool to see where upper indicator price confluences exist.

Fibonacci Projection tools are a type of advanced analysis, but follow with me and we’ll walk through it together.

First, the chart:

(Click for full-size chart)

For detailed information on how I used the Fibonacci Price Projection Tool, see my post in the Education Center entitled:

Fibonacci Price Projections.”

The main idea is that you pick a key swing low, draw the tool to the next swing high, and then draw down to the next swing low (higher than the prior low).

The Fibonacci Tool then projects the appropriate price levels for you.

You can do that on a single swing to find likely price targets to play for (or overhead resistance levels to try to short into), or you can do what I’ve done above and draw multiple Fibonacci Projection Grids to find not one level, but where levels converge or form tight confluences.

These levels are often more important than single levels.

That being said, I’ve labeled each of the four Projection Grids above in different colors.

Cutting through all the levels, there are TWO upside Confluence Zones:

C1:  The First Confluence Target is just under $22.00 at the $21.80 level.

That’s not too terribly high from where we are now.  This is the confluence of the Blue Grid’s 100% projection and Green Grid’s 161.8% Projection.

C2:  The Second Confluence Target is just above $24.00 at the $24.50 level.

This confluence reflects the 261.8% projection of the Red Grid; 138.2% of the Blue Grid, and 138.2% of the Purple Grid.

Longer-term Grids often hold more importance than shorter term grids – if you have to pick a level of most importance (sort of like longer-term trendlines hold more importance than shorter-term trendlines).

Anyway – the key will be watching what happens at $21.80 or $22.00 (which translates to the $21.50/$22.00 level in the SLV ETF).  If we start to see reversal candles or other sort of sell signals there, it might be wise to take profits.

If Silver does not stop at $22, then the next upside target becomes $24.50.

Keep these levels in mind in the weeks or even months ahead.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Upside Fibonacci Price Projections for Silver SLV

ETF, Uncategorized

Are Americans Seeking Wealth Distribution More Like Sweden?

September 26th, 2010

New research on perceptions of wealth in the US — from Michael Norton and Dan Ariely at Harvard Business School and Duke University, respectively –  is worth a closer look. At first blush, it would seem that 92 percent of respondents rather live in a quasi-socialist economy more resembling Sweden than the US. The explanation they offer is that the gap between the rich and the poor has become far greater than surveyed Americans both think it is and would like it to be. Here are the findings, according to The Raw Story:

“…the study also found that respondents preferred Sweden’s model over a model of perfect income equality for everyone, ‘suggesting that Americans prefer some inequality to perfect equality, but not to the degree currently present in the United States,’ the authors state. Recent analyses have shown that income inequality in the US has grown steadily for the past three decades and reached its highest level on record, exceeding even the large disparities seen in the 1920s, before the Great Depression. Norton and Ariely estimate that the one percent wealthiest Americans hold nearly 50 percent of the country’s wealth, while the richest 20 percent hold 84 percent of the wealth.

“But in their study, the authors found Americans generally underestimate the income disparity. When asked to estimate, respondents on average estimated that the top 20 percent have 59 percent of the wealth (as opposed to the real number, 84 percent). And when asked to choose how much the top 20 percent should have, on average respondents said 32 percent — a number similar to the wealth distribution seen in Sweden.

“‘What is most striking’ about the results, argue the authors, is that they show ‘more consensus than disagreement among … different demographic groups. All groups – even the wealthiest respondents – desired a more equal distribution of wealth than what they estimated the current United States level to be, while all groups also desired some inequality – even the poorest respondents.’”

The main issue appears to be that people in the US, rich and poor alike, are not fully aware of how pronounced income inequality has become. It’s probably a stretch to say that Americans want a system more like Swedes simply because the wealth distribution in Sweden is more similar to what respondents expect in the US.

That said, it’s no surprise the average citizen doesn’t estimate offhand that the wealthiest 20 percent of Americans hold 84 percent of the nation’s wealth. It’s a huge chunk of prosperity in a very few hands… and it shows how over recent decades the US has become quite the lopsided nation, much more so than most people expect. You can read the details in The Raw Story’s coverage of the new study on how most Americans want wealth distribution similar to Sweden.

Best,

Rocky Vega,
The Daily Reckoning

Are Americans Seeking Wealth Distribution More Like Sweden? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Are Americans Seeking Wealth Distribution More Like Sweden?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Are Americans Seeking Wealth Distribution More Like Sweden?

September 26th, 2010

New research on perceptions of wealth in the US — from Michael Norton and Dan Ariely at Harvard Business School and Duke University, respectively –  is worth a closer look. At first blush, it would seem that 92 percent of respondents rather live in a quasi-socialist economy more resembling Sweden than the US. The explanation they offer is that the gap between the rich and the poor has become far greater than surveyed Americans both think it is and would like it to be. Here are the findings, according to The Raw Story:

“…the study also found that respondents preferred Sweden’s model over a model of perfect income equality for everyone, ‘suggesting that Americans prefer some inequality to perfect equality, but not to the degree currently present in the United States,’ the authors state. Recent analyses have shown that income inequality in the US has grown steadily for the past three decades and reached its highest level on record, exceeding even the large disparities seen in the 1920s, before the Great Depression. Norton and Ariely estimate that the one percent wealthiest Americans hold nearly 50 percent of the country’s wealth, while the richest 20 percent hold 84 percent of the wealth.

“But in their study, the authors found Americans generally underestimate the income disparity. When asked to estimate, respondents on average estimated that the top 20 percent have 59 percent of the wealth (as opposed to the real number, 84 percent). And when asked to choose how much the top 20 percent should have, on average respondents said 32 percent — a number similar to the wealth distribution seen in Sweden.

“‘What is most striking’ about the results, argue the authors, is that they show ‘more consensus than disagreement among … different demographic groups. All groups – even the wealthiest respondents – desired a more equal distribution of wealth than what they estimated the current United States level to be, while all groups also desired some inequality – even the poorest respondents.’”

The main issue appears to be that people in the US, rich and poor alike, are not fully aware of how pronounced income inequality has become. It’s probably a stretch to say that Americans want a system more like Swedes simply because the wealth distribution in Sweden is more similar to what respondents expect in the US.

That said, it’s no surprise the average citizen doesn’t estimate offhand that the wealthiest 20 percent of Americans hold 84 percent of the nation’s wealth. It’s a huge chunk of prosperity in a very few hands… and it shows how over recent decades the US has become quite the lopsided nation, much more so than most people expect. You can read the details in The Raw Story’s coverage of the new study on how most Americans want wealth distribution similar to Sweden.

Best,

Rocky Vega,
The Daily Reckoning

Are Americans Seeking Wealth Distribution More Like Sweden? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Are Americans Seeking Wealth Distribution More Like Sweden?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade

September 26th, 2010

Welcome to the DR Video Series. A few times a month, we will post interviews, video shorts and insights from today’s top minds. As a Daily Reckoning reader, you’ll have first crack at these exclusive videos — we’ll let you know each time one is posted.

In the first part of this two-part interview, the Daily Reckoning’s own Eric Fry sits down with Bill Bonner at the Agora Financial Investment Symposium in Vancouver to discuss a multitude of topics: what the speakers had to say at this year’s event, Bill’s thoughts on the credit deleveraging cycle, why he remains anti-Treasury…and why his “Trade of the Decade” still looks like a great bet. Enjoy!

Bill Bonner on Deflation, US Treasury Bonds and the Trade of The Decade

Eric Fry: Hello.  I’m Eric Fry.  I’m here with Bill Bonner.  And Bill, I just wanted to check in with you after the recently concluded investment symposium in Vancouver – you were there –

Bill Bonner: I was there.

Eric Fry: You saw the speakers.

Bill Bonner: I was there, yes.

Eric Fry: So who was right, who was wrong, who was just plain nuts?

Bill Bonner: Oh, boy.  That’s a loaded gun you’ve given me there.

Eric Fry: I know.  I want to elicit an answer here.

Bill Bonner: Well, I think the thing was – I found myself agreeing with just about everybody, but not necessarily coming to the same conclusion.  And, I think what I saw is that there is very good evidence and lots of documentation for the credit deleveraging cycle that I think everybody sees, and beyond that there’s a lot of speculation about what that means. I mean, in terms of the government response to it, in terms of investor response, and as you know, the bond market and the dollar rests on confidence.  So there’s a lot of worry that confidence will give way when they see the federal government continuing to run huge deficits year after year.

I personally came to the conclusion that that was probably not a worry for the near term.  In fact, you know, I feel myself being much more optimistic than most analysts and I see ourselves working our way through this in the classic Japanese way, which just happens to be the worst possible way.

Eric Fry: Right.  Okay.  Well, that suggests the kind of lengthy deflation or disinflationary period.  Is that what you’re looking for?

Bill Bonner: That’s what I see.  Now, I told the audience myself that that’s all you can see, and it’s important to remember just because you don’t see something doesn’t mean it’s not coming and from what we’ve  seen and what we’ve experienced over the last few years is a realization that the unintended consequences of government actions are sometimes very sudden and very powerful, so we could see a crisis at any moment.  And I told the people in the audience that even though I personally do not see a blow-off in the gold market, for example, I would sure want to hold some gold just in case.

Eric Fry: Right.  Right.  Well, a lot of the speakers also seem to want to have it both ways on the question of deflation and inflation and many of them were saying, yes, I think there’s going to be a deflation so I want to buy Treasuries, but only for two-and-a-half years and then there’s going to be inflation.  Now, you are on record as being relatively anti-Treasuries as a Trade of the Decade.

Bill Bonner: I’m totally anti-Treasury.

Eric Fry: How does that coincide with your expectation for a deflationary environment?

Bill Bonner: Well, this expectation has evolved over the last six months, and six months ago if you had asked me, I would have been more anti-Treasury than I am today because now what I see — which I didn’t see before, which didn’t exist before — was the ability of the world to finance Treasuries over a long period of time. Before we weren’t in the Japan situation because we didn’t have the savings to finance all those deficits.  We’re talking about deficits of 1.5 trillion dollars a year over the next 15, next 10 years. And anybody would have said a year ago, maybe six months ago, ‘Well, that’s impossible, you can’t finance that much.’  I think I did say that.

But now, what we’re seeing is that there’s a huge increase in savings that the savings, even of the Japanese, are still going to the U.S. Treasury market and then, if we’re right, generally about the bear market in stocks, bear markets in equities, generally it’s going to mean that investors are scared and they’re going to look for safety in the safest credit in the world.

You know that – and I made this point too – that printing press, that Bernanke’s famous printing press, the technology that it’s got, is that they can always guarantee inflation.  Well, the thing is, they can’t always guarantee inflation, not in a credit deleveraging cycle, and that’s what we’re seeing.  They cannot get it.

They’re getting lower and lower rates and now they’re getting uncomfortably low rates of consumer price inflation, even to the point of absolute deflation, which seems to be coming, seems to me will be here next quarter or quarter afterwards.

Eric Fry: Right.

Bill Bonner: But that printing press thing, it works both ways because on the one hand, people say, well, I don’t want Treasury bonds because I know they’ve got that printing press and they can just print up dollars at will.  But in a fear situation, people say I want Treasury bonds because I know they can print up dollars at will.

Eric Fry: Right.  Well, and does that mean that your Trade of the Decade, then, is not a trade of the next five years, or should we restart the Trade of the Decade here in August and –

Bill. Bonner: Now, look, a Trade of the Decade is a Trade of the Decade.  You stick with it and you –

Eric Fry: And dance with the one you brought in.

Bill Bonner: Yeah, that’s right.  You just stick with – you go home with the one you came with.

Eric Fry: Right.

Bill. Bonner: And besides, it’s too early to know, but I’d say that as the trade, it still looks pretty good.  You know I modified that trade, by the way.  I said, buy Japanese small cap stocks and sell Japanese bonds.  I changed it from U.S. bonds to Japanese bonds just to get the currency thing out of the way.

Eric Fry: Neutralized?

Bill Bonner: Neutralize the currency problem and so now I still feel pretty good about that.

Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

How to Manage Risk in Your Portfolio

September 25th, 2010

There are many strategies for making money in the market. Very few of them work all of the time. Put another way, the vast majority of them work almost none of the time. Or, to put it still another way, many of them work…until the time comes when they don’t.

Of course, we only know which ones don’t work (or, more precisely, when exactly they stop working), with the benefit of hindsight. It’s all well and good to advocate a healthy skepticism toward loading up on toxic, mortgage-backed securities (MBS) now, for instance. But before they blew up in 2007-’08, too few investors even realized that skepticism was healthy. Investing in MBS made a few people very rich…until it made a lot of people very poor.

One investor who did warn (and quite loudly) about the build up of excessive debt and the increasing complexity of a derivative-laden system was Nassim Nicholas Taleb, author of Fooled by Randomness, and, later, The Black Swan. Taleb specializes in what he calls “low probability, high impact” events; events such as those the financial world witnessed during and after the collapse of Lehman Bros., a seemingly rock-solid institution that had survived the Great Depression and a couple of World Wars before a series of apparently “mathematically implausible” events conspired to take it down.

Of course, few listened to Taleb before the events he predicted took place. More strikingly, the remedies he publicly advocates were not only NOT implemented in the wake of the crisis but, in many cases, the exact opposite course of action was prescribed. The US system now has vastly more debt than when it started – and a lot of that new debt hangs around the necks of taxpayers. Meanwhile, most of those individuals who are most responsible for creating the crisis remain in critical decision-making positions. And that’s to say nothing of the increased scope and power subsequently granted to the embarrassingly inept regulatory bodies…but that’s a subject for another day.

It could fairly be argued, therefore, that there is far more reason to be cautious today than there was even before the crisis began. The optimistic corollary to this grim assessment, however, is that, historically speaking, periods of extreme volatility often produce highly profitable opportunities. It’s just that the rewards tend to be concentrated around a much smaller group of investors…investors who took the “other side” of the larger group’s insane bets. When markets are calm, the majority of investors generally muddle along, making “OK” returns and sleeping pretty well for it. The big money is often made during what is sometimes referred to as the “mania” stage of the cycle, when prices reach mega-bubble proportions on the way up, and burst spectacularly on the way down.

In such an environment, it probably doesn’t hurt to learn a little from Mr. Taleb, a man who specializes in “expecting the unexpected”…or at least attempting to prepare for it.

Taleb has long been advocating what he calls “The Barbell Strategy.” He explained his thinking, once again, at The Russian Forum Debate earlier this year, where he appeared alongside Dr. Marc Faber and a host of other “doomsday” investors.

Put simply, Taleb suggests allocating the majority of your portfolio to low-risk or “no-risk” investments. (“No risk” investments imply using options to hedge against even incremental moves in the market, much like putting a dollar on red and a dollar on black at the roulette wheel. In reality, of course, there is no such thing as an absolute “no risk.”) This, he says, is primarily for the purpose of capital preservation.

The smaller portion of your portfolio (and exact ratios will differ from one investor to another), according to Taleb, should be at “maximum risk.” These are the kind of investments that, as he explains, “I know I’m going to lose money on…but boy, if you get it right, it’s going to be big.” The kind of speculative plays where, if you are on the money, “you’d never see a public [commercial] plane again.”

In other words, as the theory goes, you want to expose a small portion of your portfolio to the maximum upside potential of “low probability, high impact events” – those events Taleb refers to as “Black Swans” – while protecting the majority of your portfolio from the associated downside risk.

As Doug Casey, founder of Casey Research explains, “Most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return.”

Speculating, it is important to note, is not the same thing as gambling. “They’re very different,” says Doug. “Speculation is the art of capitalizing on politically created distortions in the market.”

As individual investors, there’s little we can do to influence the level of risk in the overall market. After all, politicians will be politicians and their decisions, boneheaded as they almost always are, will usually reflect that. We can, however, manage the risk within our own portfolios, both to protect our capital and, with a bit of luck, help it grow.

Regards,

Joel Bowman
for The Daily Reckoning

How to Manage Risk in Your Portfolio originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
How to Manage Risk in Your Portfolio




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

How to Put a Stronger Yuan to Work for You

September 25th, 2010

Jeff Manera

China has perpetually managed its currency, the yuan, to be undervalued. Estimates range from 30 percent to 40 percent on the amount the currency would appreciate if it was allowed to freely float with market forces.

This “management” has given China’s exporters an unfair advantage over other export-driven countries, such as Japan and South Korea, and has provided much of the rocket fuel that made China’s incredible expansion and growth possible.

Until recently China had been extremely stubborn about keeping its currency weak. But of late it has allowed the yuan to start ticking higher, although it’s clear the currency is still being managed.

A stronger yuan gives China a buyer's advantage over weaker currencies.
A stronger yuan gives China a buyer’s advantage over weaker currencies.

Don’t think for one minute, though, that this turnaround is because the U.S. and other world governments have finally worn China down with repeated requests for appreciation — or that China has suddenly decided to be nice and play fair in the global marketplace.

You see, China is beginning to shift from a pure “low-cost” exporter to a more balanced society, with rapidly growing domestic consumption and a burgeoning middle-class. These factors drive up the country’s need for imports. And those imports will cost less if the Chinese are purchasing them with a stronger currency.

But there is more than consumer consumption to the China story. China must also import an immense amount of raw materials. For example:

  • Fuel to feed its voracious energy appetite.
  • Construction supplies and materials to build its massive expansion and infrastructure projects.
  • Raw materials to produce the finished goods it ultimately exports.
chart How to Put a Stronger Yuan to Work for You

China Is Setting Itself Up to
Become the Dominant M&A Player

Another benefit of a strong yuan would be China’s purchasing power clout in foreign mergers and acquisitions (M&A) …

China has been buying up key companies across the globe, even though it has effectively been paying much more than the stated value due to its discounted currency.

According to an August report by accounting firm PricewaterhouseCoopers, 99 deals were announced in China foreign M&A, representing a 50 percent spike during the first six months of 2010. Seven of these were valued at more than $1 billion. The biggest was the $4.7 billion deal by China Petroleum & Chemical Corp. or “Sinopec,” of ConocoPhillips.

Natural resources remain the main focus of these acquisitions. This multi-year buying spree by China’s state-owned companies of metals companies and oil fields helps ensure the country’s continuing industrial and economic growth.

And as China allows the yuan to appreciate, you can bet it will start to ramp up acquisitions of key foreign natural resource companies.

China's demand for uranium will be like the world has never seen before.
China’s demand for uranium will be like the world has never seen before.

However, there is one natural resource China requires that isn’t being as widely discussed as much as the others. And that is uranium.

As the country slowly starts to shift from dirty energy, such as coal and oil, there are big plans for nuclear energy and a growing requirement for uranium to fuel those reactors.

Nuclear energy only accounts for about 2 percent of China’s installed energy capacity. But that’s expected to grow substantially in the coming years …

Right now China has 11 reactors up and running. Twenty-four more are under construction and a whopping 120 more proposed. So you can easily understand why China’s demand for uranium is bound to skyrocket!

Where will China get all this uranium? I expect we’ll see some strategic acquisitions to supplement the agreements China already has with Kazakhstan and other uranium producing countries.

Who are the big players in uranium mining that could profit most?

Areva SA and Cameco Corp. are the world’s largest, with Rio Tinto Group the next in line. Of the three, I think Cameco (U.S. symbol CCJ) offers the best potential as a Chinese takeover target.

Best wishes,

Jeff


About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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Commodities, ETF, Mutual Fund, Uncategorized

One of Most Undervalued Sectors of the Market is Beginning to Rebound

September 24th, 2010

One of Most Undervalued Sectors of the Market is Beginning to Rebound

In tough economic times, a high debt load can cripple a company. But when business is good, that debt can actually be a real benefit. That's because equity comprises just a small part of the company's total enterprise value (market value plus debt minus cash) and profits can become quite large relative to that small equity base. But investors remain wary of debt-laden companies, recalling that these were among the stocks that appeared to be headed toward bankruptcy when the economy started heading south two years ago.

As a result, shares of companies that buy and then lease airplanes to the major airlines, all of which carry lots of debt, are among the cheapest in the stock market. Yet if the global economy stays aloft and can finally grow, then these companies could see impressive profit and dividend growth.

Right now, the stars are aligning for this industry. Airline traffic is up +10% from a year ago, banks have become very supportive by providing very low interest rates for asset-backed loans for airplanes, and the key players are generating strong cash flow that is helping to reduce debt levels. Most importantly, a glut of unused airplanes that sat idle are returning to service, and with fewer airplanes available, lease rates are rising.

The industry is dominated by the finance arms of GE (NYSE: GE) and AIG (NYSE: AIG). But investors can play the sector through smaller players such as Aercap Holdings (NYSE: AER), Aircastle (NYSE: AYR), FLY Leasing (NYSE: FLY) and Willis Lease Finance (Nasdaq: WLFC). And as this table shows, all of these stocks appear quite cheap on a price-to-earnings basis:

Company Recent Price Market Cap Enterprise Value Price/
Book
Div. Yield 2010 P/E 2011 P/E Est.
Aercap
(NYSE: AER)
$11.93 $1,420M $4,811M 0.8 none 6.3 6.1
Aircastle
(NYSE: AYR)
$8.32 $661M $2,860M 0.5 4.7% 9.1 9.1
FLY Leasing (NYSE: FLY) $12.48 $353M $1,468M 0.7 6.5% 7.8 10.1
Willis Lease (NYSE: WLFC) $9.83 $92M $742M 0.5 none 28.9 5.6

But these stocks are also inexpensive relative to their assets. For example, the value of Aircastle's fleet of planes, even after subtracting the company's debt, is around $1.02 billion, more than 50% above the company's $661 million market value, according to analysts at Citigroup. They think shares should reflect that value and trade up to about $13 from a current $8.40. In a recent note to clients, they wrote that “with its share price trading as almost half of book value, and given more demonstrable evidence of a rise in aircraft market values, it is possible that Aircastle could spend surplus cash on buying back shares or raising the dividend.”

As long as these stocks remain below book value, share buybacks make plenty of sense. And that's what FLY Leasing is doing. The company's fleet of planes (minus its debt) is worth more than $17 a share, well above the recent $12.50 share price. Of course, any weakening in the economy would change that equation. (In 2008, when the economy was sliding, airline lease rates fell sharply, dragging down the value of planes, so FLY Leasing's book value then was just $12 a share.)

Action to Take –> If the economy weakens anew, then these debt-laden stocks would be especially vulnerable. But all signs now point to a healthier airline industry. Lease rates should continue to rise as demand for new and used planes exceeds production from Airbus and Boeing (NYSE: BA). If you're in search of dividend yields, then Aircastle and FLY Holdings should hold great appeal, as these firms look set to hike their dividends further in 2011 as cash flow rises. Aercap is likely the most stable name in the group due to its relative size, which helps it to arrange special banks loans on especially favorable terms.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Read more here:
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Uncategorized

One of Most Undervalued Sectors of the Market is Beginning to Rebound

September 24th, 2010

One of Most Undervalued Sectors of the Market is Beginning to Rebound

In tough economic times, a high debt load can cripple a company. But when business is good, that debt can actually be a real benefit. That's because equity comprises just a small part of the company's total enterprise value (market value plus debt minus cash) and profits can become quite large relative to that small equity base. But investors remain wary of debt-laden companies, recalling that these were among the stocks that appeared to be headed toward bankruptcy when the economy started heading south two years ago.

As a result, shares of companies that buy and then lease airplanes to the major airlines, all of which carry lots of debt, are among the cheapest in the stock market. Yet if the global economy stays aloft and can finally grow, then these companies could see impressive profit and dividend growth.

Right now, the stars are aligning for this industry. Airline traffic is up +10% from a year ago, banks have become very supportive by providing very low interest rates for asset-backed loans for airplanes, and the key players are generating strong cash flow that is helping to reduce debt levels. Most importantly, a glut of unused airplanes that sat idle are returning to service, and with fewer airplanes available, lease rates are rising.

The industry is dominated by the finance arms of GE (NYSE: GE) and AIG (NYSE: AIG). But investors can play the sector through smaller players such as Aercap Holdings (NYSE: AER), Aircastle (NYSE: AYR), FLY Leasing (NYSE: FLY) and Willis Lease Finance (Nasdaq: WLFC). And as this table shows, all of these stocks appear quite cheap on a price-to-earnings basis:

Company Recent Price Market Cap Enterprise Value Price/
Book
Div. Yield 2010 P/E 2011 P/E Est.
Aercap
(NYSE: AER)
$11.93 $1,420M $4,811M 0.8 none 6.3 6.1
Aircastle
(NYSE: AYR)
$8.32 $661M $2,860M 0.5 4.7% 9.1 9.1
FLY Leasing (NYSE: FLY) $12.48 $353M $1,468M 0.7 6.5% 7.8 10.1
Willis Lease (NYSE: WLFC) $9.83 $92M $742M 0.5 none 28.9 5.6

But these stocks are also inexpensive relative to their assets. For example, the value of Aircastle's fleet of planes, even after subtracting the company's debt, is around $1.02 billion, more than 50% above the company's $661 million market value, according to analysts at Citigroup. They think shares should reflect that value and trade up to about $13 from a current $8.40. In a recent note to clients, they wrote that “with its share price trading as almost half of book value, and given more demonstrable evidence of a rise in aircraft market values, it is possible that Aircastle could spend surplus cash on buying back shares or raising the dividend.”

As long as these stocks remain below book value, share buybacks make plenty of sense. And that's what FLY Leasing is doing. The company's fleet of planes (minus its debt) is worth more than $17 a share, well above the recent $12.50 share price. Of course, any weakening in the economy would change that equation. (In 2008, when the economy was sliding, airline lease rates fell sharply, dragging down the value of planes, so FLY Leasing's book value then was just $12 a share.)

Action to Take –> If the economy weakens anew, then these debt-laden stocks would be especially vulnerable. But all signs now point to a healthier airline industry. Lease rates should continue to rise as demand for new and used planes exceeds production from Airbus and Boeing (NYSE: BA). If you're in search of dividend yields, then Aircastle and FLY Holdings should hold great appeal, as these firms look set to hike their dividends further in 2011 as cash flow rises. Aercap is likely the most stable name in the group due to its relative size, which helps it to arrange special banks loans on especially favorable terms.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
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