SERVING GOD, FAMILY, AND COUNTRY!
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Gizmo
Thanks for keeping us up to date on this chart. I find it very helpful...
BW
Thanks for the posting. It's good background info to know.
NAMO SUGGESTING SELL
NAMO has a triple top formation along with a negative divergence with QQQ price. With the Bollinger Bands constricting around NAMO, I'm looking for a sharp drop in QQQ next week.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr...
OT: See/Hear the latest Swifty ad
http://www.swiftvets.com/
End of the Soft Patch?
September 16, 2004
The market is continuing its eight-month old pattern of lower highs and lower lows while any incipient signs of an ending to the “soft patch” require a microscope in order to be seen. Following the March high of 1163 in the S&P 500, two rallies failed to change the downward sloping trend, and now the third one may be on the verge of doing the same. The first rally ended in early April with a gain of 5.5%, and the second one in late June with a rise of 6.5%. The current rally showed an increase of 6.4% at yesterday’s intra-day top, and is showing signs of being overbought while volume has remained tepid and sentiment overly bullish. In addition the market has also factored in the correction in oil prices, and the Bush post-convention jump, as well as overly optimistic expectations for the economy and earnings.
Some observers have professed to detect an ending of the economic soft patch and resumption of growth, although it seems to us that they are basing their assumptions on some relatively minor up-ticks in secondary indicators. Meanwhile the real economy seems to be treading water without the impetus of tax cuts, massive mortgage refinancing and an unusually easy Fed. Chain store sales remain sluggish while General Motors and Ford are engaged in significant production cuts. Employment is still weak as it has been for all but three of the last 33 months, and wages continue stagnate. Major technology companies consistently report disappointing sales and rising inventories as back-to-school computer sales have been disappointing and corporations see little reason to spend on IT despite strong cash flow and robust liquidity. Today’s breakdown of long-term bond yields to new lows for this move may indicate that the bond market is already anticipating a continuation or further deterioration of the soft patch.
All of this is happening at a time when consumer savings rates are low, household debt at an all-time high relative to GDP, the trade balance at dangerous levels, and stocks still excessively valued. At the same time the Fed is highly likely to raise rates another quarter of a percent next week, not so much to slow down an already sluggish economy, but to create a cushion that enables them to lower rates later. In sum, it appears to us that the market has already discounted a rosy scenario that is unlikely to occur while ignoring some major factors that can derail stocks in the period ahead.
Weekend Update
Some of the indexes appear to have carved out Rising Wedge chart formations. These are typical of counter-trend rallies that quickly reverse. So, risk is high.
The stock market was quite choppy over the past week, and it made only slight net gains. After a surprisingly persistent five-week advance, it appears that Bullish Momentum is just about all used up.
Emphasize Money Management Rules.
The Energy Bull Market Still Has Legs
After a brief correction relative to the S&P 500 in August, the S&P energy index has rebounded back to its relative high. Odds are growing that the relative ratio will eventually break out to the upside. Based on our Energy Sector Economic Conditions Index, which includes refining margins and the real oil price, energy company earnings are primed to keep outpacing those of the broad market as high expected returns on capital entice ongoing investment activity. As such, and given pessimistic analyst earnings growth expectations, profit results should surprise on the upside in coming quarters forcing an upward estimate re-rating. Even if our expectation for a modest oil price correction unfolds, prices above $30/barrel are still consistent with solid upstream earnings results. Moreover, because finished petroleum product prices have not kept pace with surging crude oil prices, an oil price correction would ease the recent pinch on refining margins. Bottom line: stay overweight energy stocks.
Loyalty Helps, but Tech Spending Outlook Is Cloudy
DON'T CONFUSE A SATISFIED CUSTOMER with a loyal one. That's one of many intriguing conclusions drawn from a national survey of corporate information-technology users being released this week.
Walker Information, a 65-year-old Indianapolis research firm, has conducted a sophisticated and thorough study of brand loyalty among corporate IT customers that found about 84% of the 13,100 technology users queried were "satisfied" with their vendors. But only 44% of those same respondents said they were "truly loyal" to their hardware and software suppliers.
The distinction is a critical one for tech companies, says Walker's chief executive, Steven Walker. The research outfit started by his grandmother used to focus on customer satisfaction until realizing it did not translate into the type of critical information that helps companies keep their customers happy -- which in today's listless IT-spending environment is the name of the game. At a time when chief technology officers are looking for "fewer necks to choke," selling more products and services to existing customers is more important than ever.
"We think there is a strong link between customer loyalty and a company's performance," says Walker, whose firm is almost solely focused on studying loyalty and its ramifications.
Then it comes as little surprise that Walker's list of "loyalty leaders" in technology, consists of Cisco Systems, EMC, SAP, Oracle, International Business Machines, Dell Computers, Hewlett-Packard, Network Appliance and Microsoft. Most of these companies are considered leaders in their respective fields -- with some exceptions -- and they are the favorites to emerge stronger if the tech industry consolidates.
Absent from the list, sitting in what Walker calls "loyalty limbo," or worse, the land of "loyalty laggards," are such established brands as Apple Computer, Sun Microsystems, Symantec, PeopleSoft, Nortel, Hitachi Global Storage, four divisions of H-P and one division of IBM. (How can IBM and H-P can be "leaders" and "laggards" at the same time? Read on). Walker would not break out which brands were in "limbo" versus those that were less enviably tagged "laggards."
Apple would seem the most surprising name not to make the loyalty-leaders' list, as it is considered to have very devoted and rabid fans. But because this was a survey of business customers, Apple's core retail consumers were not included in the survey, and the company's reputation with corporate users is less than sterling.
Walker divided IT into five segments: Computer Software, Networking Equipment, Servers & Workstations, Storage Systems, and IT Services. The survey included 39 companies but 51 different entities because the behemoths, such as H-P, Dell, IBM, Cisco, Sun and IBM, were divided up into the categories in which they did business.
For example, H-P was surveyed for all five categories (as was IBM), but only H-P's IT Services business garnered great loyalty. Its other four business segments fell short. IBM, on the other hand, placed four of its tech businesses on the loyalty list, with only computer software not making the grade. Cisco (networking gear and software) and Dell (servers and networking gear) each placed both of their two respective segments on the list.
Most important, loyalty pays. It turns out that the loyalty leaders outperformed the laggards by several financial measures. The three-year operating income growth for the high-loyalty group, on average, outpaced the laggards by 71%. Three-year revenue growth was 45% higher; average operating margins were 23% higher and the change in average stock price for five years was 26% higher.
"Customer satisfaction is not a predictor of company profitability, [but] loyalty tends to be more profitable," Steven Walker says.
The survey, which was conducted between March and July, gauged the quality of loyalty. For example, corporate tech users could explain that their loyalty to a brand made them feel "trapped," for which the survey factored in a negative grade. The high cost of switching systems to a new vendor is a major barrier for tech companies trying to win new business.
The one area where the loyalty group faltered was "total cost of ownership," which means that most customers feel they pay too much for their software and gear from the loyalty leaders. Of course, what tech buyer is going to say they paid too little for something? But Walker suggests that it is definitely an area that warrants improvement from the leaders in tech. "The leaders have to explain or justify their value proposition better," he says.
Phantom Recovery
The significance of the loyalty findings was heightened, I think, by last week's dour tech spending forecast by Goldman Sachs. The brokerage's most recent survey indicates that in this "so-called year of recovery," the size of the pie isn't going to grow as much as originally expected. Goldman says that, according to the chief information officers polled, corporate tech spending is likely to increase only 0.4%, compared to the 2.3% projected just two months ago.
That said, those tech companies that can continue to sell to existing customers are going to do better than those smaller or mid-sized companies trying to grow their installed bases.
I have been a fan of Goldman's tech-spending survey since its inception about three years ago. What I liked most about it was that analysts Laura Conigliaro, Rick Sherlund and crew were soberly cautious after the bubble burst and were very reluctant to let wishful thinking cloud their view of the new reality. They were among the last to suggest that corporate demand for hardware and software was increasing even the slightest, and now they are among the first to admit that not all is rosy in Techland.
CIOs and other tech decision-makers continue to spend less than they thought they would. What's more, the survey shows that attitudes toward spending continue to trend downward. Goldman's adjusted forecast for tech-spending for 2004 is now between 3% and 4%.
The outlook for 2005 is "cloudier," with Goldman predicting an uptick in corporate tech spending of 4% to 5% next year. But they admit that their forecast is tenuous as corporate chieftains are proving to be very fickle when it comes to writing checks for new software and gear.
CIOs now say their 2005 capital-spending budgets are being revised to increase only 1.9%, down from 3.6% in August. Meantime, Wall Street estimates have enterprise-technology companies growing their 2005 sales somewhere in the neighborhood of 9%, which means there is a big gap between the Street's expectations and what the folks who buy the stuff are saying. Obviously, something has to give.
Doing his part, Goldman's Sherlund downgraded the enterprise-software companies he covers from Attractive to Neutral based on the pessimistic spending prognostications. Sherlund admits to being somewhat "torn" over his call because the fourth quarter is traditionally a big one for software concerns as companies "flush" their budgets, but there isn't a lot to be cheery about out there right now.
"On balance, drivers for the stocks are looking more anemic as we go into next year," Sherlund states.
Investors have been trained to pay up for technology at multiples to the rest of the stock market, but corporate demand for software and hardware is waning -- big time. And perhaps it is high time for investors to forget about the 'Nineties, and start adjusting their thinking about tech to the new reality.
Buying Into Gloom
A Wall Street veteran's thoughts on Silas Marner and why gold remains golden
By SANDRA WARD
AN INTERVIEW WITH DAVID RICHARDS -- The weather in Stonington, Maine, this summer seemed a mirror image of the stock market: damp, fogbound and windless. That ruled out sailing as an excuse Richards might use to duck a request for an interview. But, as he has done twice in the past, the Wall Street veteran and former money manager at two of the most respected investment firms around, Capital Research & Management and PrimeCap, graciously agreed to sit down and share his insights into economic conditions and what they might mean for the market. And for lessons on market psychology from the George Eliot novel Silas Marner, read on.
Barron's: It has been two years since we last spoke. Has your outlook changed? Are you still waiting for financial disaster?
Richards: The short answer is yes. There are practices going on that aren't sound, and if conditions change, which they may well do, the change could be sudden and not very good for the stock market.
Former money manager Richards uses a literary reference to help explain the logic of his current stake in gold stocks.
Q: Practices such as what?
A: One set of issues is the balance-of-payments deficit and central-bank intervention and the dollar and the huge buildup in foreign central-bank reserves. Another set concerns housing, consumer debt, mortgage debt, derivatives and the tremendous growth in asset-backed bonds. There is the issue of political stability in the U.S. We have a divided country. It's divided between Bush and Kerry, obviously, but there's a huge difference of opinion about the Iraq war.
Q: Is there, though? I'm not so sure.
A: There is a feeling among some people that we were misled and this is a war that shouldn't have taken place. Lastly, long-term trends in the world point to the power and leadership of the United States diminishing in a way we haven't seen in our lifetime. There's a quote I'd like to read. It's from Silas Marner, a novel by George Eliot, a good female writer, by the way.
Q: Even though she had to use a man's name.
A: Right. Times have changed. It goes as follows: "The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent."
Q: Brilliant. How long did you search for that quote, or did it just come to you?
A: This is a quote I found many years ago during the Nifty-Fifty stock mania [of the early 1970s], when people were reluctant to sell high-priced stocks because they would then have to make a decision about something else to buy. Now, it brings to mind what's going on in the asset-backed bond market. The ultimate lender, who is the buyer of the bonds, has very little knowledge of the financial condition of the individuals who borrow the money. This is true of mortgages, of car loans, of credit-card loans and home equity loans. These loans are packaged by Wall Street and sold off to various institutions. There is a false sense of security on the part of the buyer, that because many of these loans are packaged by J.P. Morgan or Citibank or some other recognizable institution, that they are OK. The asset-backed bonds may have a default rider underwritten by MGIC Investment or some other company, and investors feel as if they are protected, but the system as a whole has become increasingly leveraged.
Q: This was a big concern of yours two years ago. Are you surprised we haven't seen really any major difficulties in the asset-backed market?
A: We haven't seen difficulties because Greenspan has kept rates low until recently. This has stimulated housing prices, and there hasn't been any decline in house prices that amounts to anything. There's been continued heavy buying of U.S. securities by foreign central banks, particularly China and Japan and Taiwan and Korea and most of the East Asian countries, but also India and Russia. They, in a sense, are the ultimate buyers. They're buying U.S. debt for political reasons and supplying this credit to borrowers who in other times would not be able to get a loan. The lending business is an incredibly competitive business and companies have come out of the woodwork and grown rapidly in it.
The risk comes to the fore when house prices level off. There are signs of that happening as inventories of unsold houses have gone up rather dramatically in the last two to three months in several parts of the country. People cannot sell houses as quickly and they are probably going to suffer some price degradation. Loans that were made recently may turn out to be under water very quickly since the down payments are very, very small in most cases. That can lead to a decline in prices. There's a sense house prices can't decline, but I live in Southern California, and in the early 1990s, prices went down 20% to 30%.
Q: So if foreigners stop buying the bonds...
A: The numbers are enormous. In the last 12 months, China's foreign reserves have gone up more than 30% and are now at $471 billion. The Japanese foreign reserves have gone up nearly 50%. They now have $800 billion in foreign reserves. Taiwan was up 25% to $230 billion. India has gone up 40% to $114 billion. East Asian reserves have gone up to $500 billion, or 35%, in the last 12 months. These countries are just collecting paper, and in exchange they're giving us Toyotas and TVs and socks and God knows what else. They're collecting all the bills, and at any time they could change their mind. Remember at the height of the bubble, when all the telecom companies were providing the financing to their customers to buy their products? Vendor financing. That's what these Asian countries are doing, providing vendor financing. And the customer is the American consumer.
Q: What's your sense of the health of the consumer?
A: Consumer spending, whether on houses or cars or retail sales, has grown from 10% to 12% more than personal incomes in the last dozen years. There are signs the consumer is tapped out. Interest rates have risen, and they're going to go up more. That's a potential problem. The problem could take the form of defaults. Also, because some in the financial markets are highly leveraged, playing the derivatives game, there could be an event along the lines of Long Term Capital Management that develops. These things come out of the blue. I have no idea who or when but the conditions are such that it makes me nervous.
Q: Is this soft patch the result of the slowdown in consumer spending?
A: If spending is growing faster than incomes, at some point the exceptional growth in consumer spending comes to an end. Now, who knows where that point is? This so-called recovery is very different from anything in the past. People are leveraged in a way they have never have been before. But when you have the inventory of unsold houses going up for the first time in many years, that's a change. When you see General Motors' car sales down despite big incentives and talk of production cutbacks, that shows the strain on their ability to continue to sell cars. Retail sales at department stores and Wal-Mart are soft. There are signs that the basic guy out there is under pressure.
Q: Is there any bright spot?
A: One huge change that's positive is the rapid growth of the Asian economies. People talk about China, but the whole of Asia, as well as Russia, which tends to get overlooked, and Eastern Europe have changed from socialist, totalitarian governments to market-driven and market-oriented -- albeit authoritarian -- governments. These economies are growing in the high single digits, with China growing a little faster than that. This isn't going to stop.
Q: How should investors factor this trend into their decision making?
A: These are material-intensive and energy-intensive developments. Many of these countries have to build roads, railways, sewer systems and real estate. In other words, there's strong demand for things we have already seen go up in price, whether it's steel, shipping, oil, gas, or copper or concrete. All these are in short supply because there is this tremendous new demand.
Consider oil. Oil is now priced well into the 40s. I don't know what the price of oil should be, but I know there is no excess capacity to produce energy. There must be a much greater effort to find and develop oil and gas than there has been. Spending must go up. I am very long energy -- oil and oil-service stocks -- because this is a very long-term play.
I also have some investments in Russia. Russia is blessed with excess energy. The costs of these materials and energy are likely to stay up. A lot of these costs haven't yet flowed through our inflation indices. There is a danger that inflation begins to show up as import prices go up, which, in turn, results in domestic prices being pushed up.
Q: What about a slowdown in China as the government tries to check inflation?
A: The Chinese inflation rate, its consumer-price index, is up about 5% year-over-year. That's despite lots of price controls. Recently, there have been reports of labor shortages in the Guangzhou area, and that's because agricultural prices have gone up in the hinterlands and the village people aren't as willing to leave to find work in the major cities. The assumption that China had an infinite supply of labor and could increase production without any increase in labor costs might not be true. There is talk they could slow down the economy by raising interest rates, which are now about 5.3%. But they can't do that, because capital from abroad keeps flooding in to take advantage of the low labor costs and high productivity.
The only way they really slow things down is to revalue the currency or suffer huge increases in inflation. Neither is very pretty to contemplate. If they revalue, the profit margins in a lot of factories that now export to, say, Wal-Mart are going to suffer. If they don't revalue, they are going to have a lot of inflation and that's potentially politically difficult.
Q: Revaluing is a choice they can control better than the other.
A: Revaluing is probably what they should do, but it is probably something they find scary. The point is, whether they revalue or not, we are going to see price increases on goods coming out of China. There are some signs that it's beginning to happen. When it happens, you are going to have higher inflation in goods and services in this country, pressure on the CPI and pressure on Greenspan to keep raising rates even though the economy may not be that great and housing could be punk. Rising interest rates are going to accelerate.
Q: Tie this into your concern about the balance-of-payments problem and foreign buying of dollars.
A: If the Chinese revalue, there would be a reduction in the amount of intervention, and that would probably have an upward impact on U.S. interest rates. The dollar could go down, and there could be a reduction in the holdings of dollars by central banks or, at least, a start of diversification out of dollars into other currencies or into gold. I've been buying gold stocks.
Q: Even since we last spoke?
A: I've built up the position in the last two years. It's quite sizable now, more than 20% of the portfolio.
Q: This hasn't been a great year to own gold stocks.
A: No, because nothing has happened yet. But remember Silas Marner.
Q: How about some picks?
A: Newmont Mining. AngloGold Ashanti. And Placer Dome.
Table: David Richard's Picks
Q: Is gold the biggest position you have in your portfolio?
A: No, energy is more than 40% of the portfolio. I have a total of 16 stocks: five oil-service companies and 11 oils.
Q: Do you own Yukos?
A: No, but I do own Lukoil and Tatneft.Transocean, Murphy Oil, Baker Hughes, ChevronTexaco and ConocoPhillips are also some of my holdings. I'm assuming the price is going to stay fairly high while the stocks and the industry are assuming the price will stay under $30.
Q: What do you make of oil companies refraining from investing in exploration?
A: They don't believe the oil price at $42 or $43 a barrel is going to hold. They're remembering 1998, when the price went to $10 from almost $25. An even more dramatic fall occurred in 1986, when oil prices fell to about $10 from well over $30, where they had traded through most of 1980 to '84 before starting to come down in 1985. Oil companies historically haven't been very good at forecasting the price of oil, and past experience makes them skittish about assuming that prices will stay well over $30. In the past, the price was driven higher because [the Organization of Petroleum Exporting Countries] was cutting production. They aren't cutting production now. They are running flat-out. Oil prices aren't high because there's been a cut in production.
This isn't a false-supply situation. It's because 3½ billion people between Germany and the Pacific Ocean are suddenly buying cars. Of course, not all at once, but if an economy is growing by 4%, 5%, 6% a year, and suddenly the world needs two million to three million barrels more a day of oil every year in an 80-million-barrel-a-day market, you have to wonder, where is it going to come from.
Q: How long do prices stay high?
A: Oil stays high for at least two-to-three years. Psychology has got to change. The oil industry must become convinced oil prices are going to stay high in order for them to go down. Only when they are convinced prices will stay up will they invest enough to provide the extra production.
Q: Let's segue into the issue you raised of political stability.
A: Bush is taking the country in a direction that is very different than it had been going in for the last 50 years. The notion of pre-emptive wars and the pre-emptive war that we have in Iraq is a failed strategy. If [Deputy Defense Secretary] Paul Wolfowitz were a money manager, and he made the forecast about weapons of mass destruction and the Iraqis greeting the American forces with flowers, and then declared "mission accomplished," when in fact we were totally unprepared for the uprising we face there, he would have been fired for incompetence. No one responsible for these decisions has been fired. If you had a big money-management company with bad research and bad portfolio managers making bad judgments, that would be the end of that company.
Q: Yes, and I believe there's been a few examples of that.
A: These people are delusional. They are deluded by the apparent military power of the United States. There are three levels of military power, and we have a great advantage in one: the middle level. The top level is the ability to produce atomic weapons and missiles. Now the Chinese can do it. The Russians can do it. The Israelis can do it. The Indians can do it. The Pakistanis can do it. The British can do it. Nobody has an advantage, and these weapons cannot be used without blowing the world to smithereens. In that sense, they are useless. The middle level is about projecting force, and that's what we're good at. We have airplanes. We have aircraft carriers. We have guided missiles. We have electronics. We have all that in profusion. There we have an advantage. However, at the third level, we have no advantage at all, and that's in guerrilla warfare and in controlling territory. That's the problem in Iraq. We needed a multiple of the number of troops that we have there to control that country. Unlike the Russians and the Chinese and many of the European countries, we don't have a conscript army.
Q: Are you suggesting we'll reinstate the draft?
A: If Bush gets elected for a second term, and he's faced with an army that is overextended, there's going to be a draft. That will divide this country further. That's where the political crisis comes in. Because of the military overextension, you have some terrible decisions that have to be made. The draft is one. The second involves the budget. The war costs are much greater than they should have been.
Q: Bring this back to your point that our power in the world is diminishing?
A: The power diminishes because of this huge growth over the next 10-to-20 years of Asia. Also, our unilateral policies are angering the world, and it isn't unreasonable to consider Western Europe joining with the Russians and creating a huge power bloc against us.
Q: Describe your overall portfolio. Are you more long than short?
A: I'm more long than short. I'm net long about 15% to 20%. The shorts are mostly Standard & Poor's 500 futures, probably two-thirds of them, and some QQQs [Nasdaq 100 Tracking Stock]. The S&P is very heavily oriented toward retailing, finance and drugs. The oil sector, which I am long, is only 7% or 8% of the S&P. I am basically shorting the U.S. consumer.
Q: Thanks, David.
The Bigger Picture
Sector analysis points to continued gains for energy and health care, trouble for tech
By JACK ABLIN
MANY SAVVY STOCKPICKERS LOVE to brag about their greatest coups -- the 10-bagger they bought at bargain-basement prices, the fallen angel they sold at its all-time high. Sector allocators, on the other hand, rarely toast themselves for, say, presciently overweighting utilities or underweighting consumer-discretionary stocks.
Yet, 99%-plus of the performance of the Standard & Poor's 500 stock index owes to broad moves in the index's 10 underlying industrial sectors, while less than 1% can be explained by individual stocks.
For active money managers, the right sector bets also can be crucial. In the past 15 years, the average return differential between the best- and worst-performing S&P sectors has been around 50 percentage points.
In 2000, however, that gap became a chasm. While the S&P lost 10% of its value, the index's technology components plunged 41%. But utilities gained more than 51% in the year.
Identifying potential outperformers and underperformers is easier than one might think. Our methodology, which analyzes the impact of 80 variables on the relative performance of each S&P sector, points to gains for two defensive sectors: energy and health care. Since 1990, both have outperformed the market in every year in which the S&P delivered negative returns.
Technology, on the other hand, looks increasingly vulnerable. The sector's latest boom-and-bust cycle reinforced its close correlation with economic swings. These days the U.S. economy is sending mixed signals, from job growth to prices. Corporate-earnings growth has peaked, and the Federal Reserve is tightening credit.
In picking sectors most likely to outperform the S&P 500 over a sufficiently long time horizon, we consider five factors: First, and foremost, valuation. A sector needs to be cheap relative to either its historic valuation or the S&P; we chose the S&P.
Second, economic conditions must be ripe for the sector to outpace its peers. To determine this, we look at variables such as interest rates and the Fed's expectations.
Third, we analyze liquidity, or the flow of cash into and out of the market, which indicates the amount of money available to invest.
Table: Inside the S&P
Measuring fear and greed, or investor psychology -- our fourth factor -- has become a popular pastime on Wall Street. Some market-watchers use sentiment surveys, others options data, to gauge the prevailing level of bullish and bearish conviction. Measures of investor enthusiasm can suggest when a trend is or isn't ripe for a change. Cheap valuations and negative psychology both are necessary for an emerging bull market.
Momentum, our fifth factor, is key to confirming a trend. It's not enough to have a cheap market, but one that's also moving up.
By measuring momentum, an investor can stay with a winning market even when its relative valuation has moved from bullish to neutral. As long as the favorable trend continues, the allocation makes sense.
To illustrate our methodology, let's look at the energy sector.
Even though the S&P's 27 energy components represent subsectors as diverse as oil and gas, drilling, equipment and servicing, exploration and production, and integrated and industry distribution, the stocks tend to be homogeneous in their performance.
Most reflect the same fundamental factors, such as the price of crude, and no single company dominates the sector.
Typically, energy holds up when the rest of the market sags. For the past 15 years, during each quarter in which the S&P 500 lost more than 10%, the energy sector lost only half that amount.
Energy, which both influences and is influenced by many aspects of the economy, functions much like a tax: High prices rob investors of disposable income, and force shifts in corporate spending. Consequently, durable goods orders are a useful tool in determining the stocks' relative allure. As spending on durable goods increases, the outlook for energy dims.
In the spring durables orders were weak, but have been strengthening since. This bodes well for the business side of the economy, but casts a shadow over energy's continued outperformance.
Fundamentally, energy shares are fairly valued, especially when measured against the rest of the market. In 2000, the sector's relative price-to-sales ratio, which typically trades at a discount to the overall market, sat a full point below that of the broad S&P 500.
More recently, the gap has narrowed, but at current prices valuations aren't stretched.
Will the sector's outperformance continue? Momentum gauges suggest so. Most energy stocks continue to advance, unlike the S&P 500. This divergence paints a positive technical picture. Indeed, only a reversal in investor psychology is likely to change energy's currently bullish momentum.
One way to measure investor psychology is by studying gold. Fear and a weak dollar beget higher gold prices and boost the price of energy shares. Gold recently climbed above $400, another good sign for energy. We expect the sector to outperform the S&P 500 for the next 12-to-18 months, though we'll reevaluate if prices climb or investor psychology changes.
In spite of its recent weakness, the health-care sector also remains positioned to outperform the market. Recent weakness in big pharmaceutical stocks, in particular, has created favorable valuations.
The sector's price-to-earnings and price-to-cash flow valuations compare favorably with the S&P, based on historic norms.
Investor psychology also offers a somewhat positive signal. Health-care stocks typically thrive in uncertain times, and one way to measure uncertainty is through market volatility. Volatility now is at historic lows, and any increase would be bullish for the sector.
Since relative performance is a zero-sum game, some sectors must underperform the broad market.
Technology is the weakest link today. While tech stocks are not aggressively priced, the group takes its cues from durable-goods orders, as noted, and the shape of the Treasury yield curve.
Durables orders have been rising, but their growth could decelerate if energy prices climb and the Fed continues to tighten credit.
Meanwhile, tech-stock momentum has been negative. These stocks are likely to underperform until valuations become cheaper or investors throw in the towel after further disappointments.
Although we've plumbed the prospects for only three S&P sectors here, our methodology and general conclusions apply to all 10.
When relative valuation is favorable, the economic backdrop conducive to investing and momentum heading in the right direction, establishing an overweight position in a sector can be a low-risk way to add incremental value for the next 12 to 18 months.
We are what we repeatedly do. Excellence, then, is not an act, but a habit. Aristotle
The Dow Transports have raced ahead of the Industrials. Bad news for bulls?
Market Movers
The Dow Transports have raced ahead of the Industrials. Bad news for bulls?
By JACQUELINE DOHERTY
YOU'D THINK A SLOWING ECONOMY and rising oil prices to be a formula for woe to transportation companies. And this year, you'd be wrong. Transportation stocks have been speeding along in 2004 as the nation's shippers, truckers and railroads are working frenetically. Indeed, the industry suffers not from slack demand but a lack of capacity as labor shortages and congested docks and rail lines cause delays across the country. Such a tight environment has given transportation companies the power to pass along rising energy costs to their customers.
These businesses -- excluding the troubled airline industry, of course -- have enjoyed rising stock prices that have pushed up the Dow Jones Transportation Average to 3257, an 8.3% gain year-to-date. Yet, even as the Dow Transports are making 52-week highs, the Dow Jones Industrial Average has been unable to muster a new peak since February, when it stood at 10,738. Even after its recent uptick, the DJIA is off almost 2% this year.
The divergence in these two indexes is bad news for adherents of the Dow Theory, which looks to the action in the Transports and the Industrials to determine whether the markets are in a bullish or bearish stage. In a bull market, both indexes are supposed to make higher highs. The transports haul what the industrials make. So, the theory goes, a strong transportation index indicates a healthy industrial sector.
Richard Russell, scribe of the Dow Theory Letters, and frequent Barron's contributor, won't be convinced the broader market is in a bull phase until the DJIA has successfully made a new high. Over the years, there have been hundreds of times when the Dow Industrials have failed to rise in the wake of climbing Dow Transport shares, he points out.
"When the Industrials don't confirm [the movement in the Transportation index] it indicates there's a problem," notes Russell, whose indicators were bearish in September 1999, a few months before the market's bubble burst. "The longer it takes to confirm, the worse," he adds.
The market now could be beset by the myriad clouds hanging over it, from the slowing of corporate earnings growth as comparisons from a year ago get tougher, to the deteriorating situation in Iraq, uncertainty about the November election, growing problems with the federal deficit and unfunded government guarantees or concerns that the consumer is finally tapped out.
Russell remains concerned about the stock market's high valuation -- 20 times trailing earnings and a low 1.6% dividend yield -- and sees continued deterioration of the Dow until it falls all the way to 3,000 (no, that wasn't a typo) to bring price-earnings multiples down to five-to-10 times and dividend yields up to 5% or 6%.
"I'd be selling transport stocks and I'd be selling all stocks," says this unabashed bear. Neither index has managed to top their all-time highs. The Transports peaked in May 1999 at 3783 and DJIA's high of 11,723 occurred in January 2000, which feels like a very, very long time ago.
Certainly, not everyone agrees. Bulls aver that it's just a matter of time before the DJIA catches up. The rally in the Transports "is probably telling us that this economic expansion has legs and Greenspan is right in that the economy is undergoing a soft patch and not a collapse," says Anthony Chan, a senior economist at JPMorgan Fleming Asset Management, who expects the Dow to climb 8% by yearend.
Table: The Road Ahead
After examining economic expansions since 1960, Chan found that the Dow Transports traditionally outperform the broader market during growth phases. On average, the DJTA gains 9.9% per year of an economic expansion while the S&P 500 gains 7.2%.
Chan also broke down economic expansions into three stages and found that the Transports outperformed the S&P 500 by two-to-one in the first stage of an expansion, and it's not until the last stage that the broader market pulls ahead. The downside: Transportation shares fall harder during recessions. But Chan believes we're still in the first stage of the economic expansion, so he'd still buy transport and industrial names.
Certainly an economic slowdown isn't apparent in the transport industry. "We're moving a record volume of freight this year," says Tom White, spokesman for the Association of American Railroads, who notes that rail-freight volume is up 4.5% this year over last. "We can't move it if businesses don't produce it. The U.S. economy is doing better."
That helps to explain why the stock of Norfolk Southern is up 23% so far this year, and Burlington Northern Santa Fe shares aren't far behind with a 15% climb. The industry's strength ironically is also behind the weakness in the stock of Union Pacific, which is off 15% this year. That railroad company suffered for having underestimated the brisk pace of business and lacked the workforce and capacity to meet demand. (See Commodities Corner for more on how problems on the rails may affect this year's crop harvest).
Truckers boast a similar tale of prosperity, even in the face of soaring fuel costs. Truckers' earnings are soaring, constrained only by their ability to find drivers to put behind the wheel. Yellow Roadway shares have risen 25% so far this year and it rewarded shareholders earlier this month by raising its third-quarter earnings forecast to $1.30-$1.35 a share from an earlier projection of $1.20-$1.25 a share. In 2003's third quarter it earned 75 cents.
Behind the transportation boom lies the story of the industrial sector's revival, says Gene Huang, chief economist at FedEx, one of the largest members of the Dow Transports, which has risen 29% to date. While the economy may be cooling, real gross domestic product should still expand 4.3% this year and 3.4% next year, he estimates.
Huang notes that the Institute for Supply Management's manufacturing index remained at 59 in August, well above the 50 level that indicates an expanding the factory sector. But bears point out that the index appears to be rolling over from its January high of 63.60 and that the best of times have passed. If that's the case, the run in transport stocks may be getting long in the tooth. Edward Wolfe, a Bear Stearns transportation analyst, notes that the Dow Transports have outperformed the broader market, as measured by the S&P 500, for the past four years. The Transports fell 13% in 2002, versus the DJIA's 17% decline. Last year the DJIT gained 30%, topping the DJIA's 25% return, and this year the transport index continues its streak.
Most transportation companies are cyclical and perform best when the economy has bottomed and their stocks trade at high multiples of depressed earnings. Now, most of these companies trade at P/Es below or at their average earnings multiple of the past 10 years as earnings soar. Norfolk Southern shares trade at 13 times next year's earnings, below their five-year P/E range of 14 to 54 and below their 10-year average of 20. Shares of trucking company J.B. Hunt Transportation sport a P/E of 16, compared to its five-year range of nine to 47.
"It just feels like 2005 or 2006 will be close to peak earnings," notes Wolfe. "There is going to be more capacity a year from now, and as capacity comes in that's generally not good" because competition will increase and pricing will suffer.
Given those prospects, Wolfe suggests passing on most trucking and railroad stocks and instead buying what's known in the industry as "non-asset" names. These are companies that don't own trucks or rail cars but instead play a middleman role, arranging transportation for customers on other's rails, ships or trucks. By moving huge volumes of goods, they get better pricing and can pass it on to their customers.
Wolfe has Outperform recommendations on global players UTI Worldwide, which is not in the Dow Transports, and Expeditors International Washington, which is. He's also a fan of CH Robinson Worldwide and Landstar System, which arrange transportation domestically on others' trucks.
These companies do have above market earnings multiples (Expeditors has a lofty 30 P/E on 2005 earnings and UTI a 25 multiple), but Wolfe sees earnings growing by more than 20% annually over the next three-to-five years. These names also manage to increase their earnings during transportation industry downdrafts because they are able to get better pricing, which bolsters their margins.
Some new dynamics in the world economy and in the indexes themselves may also explain the divergence between the performances of the Transports and the Industrials. Transportation companies are benefiting from the increase in Americans' consumption of goods made abroad, particularly in China. While transporting such goods may help the bottom line of railroads and truckers, it doesn't help U.S. manufacturers.
"An increasing portion of our consumption needs are imported from overseas. So increased trade volumes are an indicator of how much we're spending, not how much we're making," warns Gary Gordon, UBS's U.S. equity strategist.
Adjustments in the DJIA may also have changed the relationship between it and the DJTA. In recent years industrial names like Goodyear Tires & Rubber, Union Carbide and International Paper were supplanted by the likes of Microsoft, Intel and Verizon Communications. As a result, some argue that the correlation between the Industrials and the Transports may be breaking down because the DJIA isn't the smoke-stack indicator of years past. The Dow has a 16% weighting of tech and telecom names, such as Intel and Hewlett-Packard, which have dragged it down this year.
It's also important to point out that the 12 companies in the Dow that have fallen this year have had a proportionately larger impact on that index than have the decliners in the Transports. The 12 Dow names, or 40% of the members, have a 36% weighting in the index. Meanwhile, the biggest losers in the Transports are the depressed airlines, AMR, Northwest Airlines, Continental Airlines and Delta Air Lines, each of which have fallen by more than 20%. The five declining airlines in the 20-member index only have a 6% weighting, so their impact is muted.
Richard Russell, however, believes the Dow Theory is alive and well. The Dow Industrials and the Dow Transports both made 52-week highs earlier this year, but until they surpass their old peaks, he remains ever cautious.
The Perfect Storm
http://www.bigtrends.com/document.jsp?documentid=357
Good stuff Gizmo. Thanks for sharing...
Bob3
Get use to it if they don't: 1) run around 50% of their offensive plays. 2) put in more screens and roll outs to protect their QB.
Got to keep the defense off balance and they weren't doing it last night. Perhaps the loss of key offensive lineman from last year's team is a contributing factor too?
thanks for sharing Frank...
Right on, shoreco. It's very easy to take our freedom and our prosperity for granted - and to just look the other way when others suffer oppression of one form or another. But we cannot. Many have died to make us free, and many more continue to give their lives to keep us free. And they ask nothing of us - other than that we appreciate that freedom, use it for good purpose, and do our best to preserve it.
Let us never forget. Thank you for the reminder.
OT: 911--Let's Never Forget
Greetings Friends,
This URL, http://www.cfbisd.edu/schools/per/911tribute.htm, is a tribute and memorial to the heroes and victims of that tragic day of September 11, 2001. I often think of the men, women, and children who lost their lives that day, to the innocent victims as well as the members of all the FDNY, NYPD PAPD, and everyday people that put their lives on the line so unselfishly to save the lives of others. I was not in New York, Washington, or Pennsylvania that fateful day, but heard and watched it unfold as many other people around the world did on TV.
It effected me very deeply and drives my behaviors and support of our President who will prosecute the pure evil people and states responsible for this attack. It was a very sad day not only for our nation, but the world as a whole. My goal in sending you to this website is to keep the memory alive. I hope that you will visit that site often, even if it is just to reflect on that awful day.
God Bless America and the Free World!
OT: 911--Let's Never Forget
Greetings Friends,
This URL, http://www.cfbisd.edu/schools/per/911tribute.htm, is a tribute and memorial to the heroes and victims of that tragic day of September 11, 2001. I often think of the men, women, and children who lost their lives that day, to the innocent victims as well as the members of all the FDNY, NYPD PAPD, and everyday people that put their lives on the line so unselfishly to save the lives of others. I was not in New York, Washington, or Pennsylvania that fateful day, but heard and watched it unfold as many other people around the world did on TV.
It effected me very deeply and drives my behaviors and support of our President who will prosecute the pure evil people and states responsible for this attack. It was a very sad day not only for our nation, but the world as a whole. My goal in sending you to this website is to keep the memory alive. I hope that you will visit that site often, even if it is just to reflect on that awful day.
God Bless America and the Free World!
OT: 911--Let's Never Forget
Greetings Friends,
This URL, http://www.cfbisd.edu/schools/per/911tribute.htm, is a tribute and memorial to the heroes and victims of that tragic day of September 11, 2001. I often think of the men, women, and children who lost their lives that day, to the innocent victims as well as the members of all the FDNY, NYPD PAPD, and everyday people that put their lives on the line so unselfishly to save the lives of others. I was not in New York, Washington, or Pennsylvania that fateful day, but heard and watched it unfold as many other people around the world did on TV.
It effected me very deeply and drives my behaviors and support of our President who will prosecute the pure evil people and states responsible for this attack. It was a very sad day not only for our nation, but the world as a whole. My goal in sending you to this website is to keep the memory alive. I hope that you will visit that site often, even if it is just to reflect on that awful day.
God Bless America and the Free World!
OT: 911--Let's Never Forget
Greetings Friends,
This URL, http://www.cfbisd.edu/schools/per/911tribute.htm, is a tribute and memorial to the heroes and victims of that tragic day of September 11, 2001. I often think of the men, women, and children who lost their lives that day, to the innocent victims as well as the members of all the FDNY, NYPD PAPD, and everyday people that put their lives on the line so unselfishly to save the lives of others. I was not in New York, Washington, or Pennsylvania that fateful day, but heard and watched it unfold as many other people around the world did on TV.
It effected me very deeply and drives my behaviors and support of our President who will prosecute the pure evil people and states responsible for this attack. It was a very sad day not only for our nation, but the world as a whole. My goal in sending you to this website is to keep the memory alive. I hope that you will visit that site often, even if it is just to reflect on that awful day.
God Bless America and the Free World!
OT: 911--Let's Never Forget
Greetings Friends,
This URL, http://www.cfbisd.edu/schools/per/911tribute.htm, is a tribute and memorial to the heroes and victims of that tragic day of September 11, 2001. I often think of the men, women, and children who lost their lives that day, to the innocent victims as well as the members of all the FDNY, NYPD PAPD, and everyday people that put their lives on the line so unselfishly to save the lives of others. I was not in New York, Washington, or Pennsylvania that fateful day, but heard and watched it unfold as many other people around the world did on TV.
It effected me very deeply and drives my behaviors and support of our President who will prosecute the pure evil people and states responsible for this attack. It was a very sad day not only for our nation, but the world as a whole. My goal in sending you to this website is to keep the memory alive. I hope that you will visit that site often, even if it is just to reflect on that awful day.
God Bless America and the Free World!
10 Reasons to be a Short-Term Bear
1. Past selling pattern developing on Nasdaq.
http://www.investorshub.com/boards/read_ms...sage_id=3980993
2. NAMO in nose bleed area.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr....
3. Insider selling picking up.
http://insider.thomsonfn.com/tfn/tearsheet...nHeader=insider
4. Big boys selling short while small specs long on S&P 500.
http://www.vtoreport.com/sentiment/cot.htm
5. Fund buying continues to slow.
By John Spence
Last Updated: 9/2/2004 6:45:00 PM
BOSTON (CBS.MW) -- Investors committed a net $700 million to stock mutual-funds in the five trading days ending Sept. 2, slightly less than the $900 million reported in the previous week, research firm TrimTabs said Thursday.
Buying interest is slower than at any time in the last decade, TrimTabs noted.
"They sold in May and went away," said Carl Wittnebert, director of research at TrimTabs. "Except for the bear market years of 2001 and 2002, the May-August period had the lowest equity inflows since 1992."
The closely watched figures, a measure of bullishness in stock and bond funds, showed domestic stock funds collected $800 million in new cash for the second week in a row.
Meanwhile, investors pulled $100 million from funds that hold international stocks, reversing inflows of $100 million the prior week.
Bond funds had outflows of $500 million, continuing last week's exodus of $900 million from these offerings. Hybrid funds, which invest in both stocks and bonds, experienced inflows of $900 million, following up on an inflow of $500 million the week before.
6. Economic Cycle Peaking.
September 02, 2004
The persistence of the economic soft spot we discussed in Tuesday’s comment was confirmed even further in the last two days. Despite desperate incentive offers, August auto sales dropped to an annualized rate of 16.6 million units from 17.2 in July, and General Motors and Ford announced significant manufacturing cutbacks to pare excess inventories. August chain store sales were up only 1.1 percent, the weakest showing in 17 months, while Wal-Mart sales came in at the low end of a range that they only recently downgraded. The economy.com Risk of Recession index climbed to 32.7 in August from 25.7 in July and only 7.6 as recently as May. Economy.com says that, as a rule of thumb, a reading of 40 or higher for three consecutive months indicates the probability of recession within six months. We note, however, that the current level is about where it was in early 2000.
In addition, after today’s close, Intel sharply slashed its third quarter revenue range to $8.3-to-8.6 billion from a previous $8.6-to-9.2 billion, a 5 percent reduction in the mid-point of the range. They also reduced their projected gross margin for the quarter to 58 percent from 60, blaming slack demand in computer microprocessors and communications chips as customers were attempting to reduce bloated inventories. Intel’s downgrading of its outlook was far greater than the reduction expected by the Street, although the handwriting was already on the wall as a result of previous comments by managements at leading technology companies.
So now we have excessive inventories in both autos and technology following a second quarter GDP that showed meager growth in final sales and higher inventories. Does anyone see a pattern here? Knowing what we already know about the extremely low consumer savings rate, excessive consumer debt, a poor employment picture and a huge trade imbalance, we think it’s time to stop thinking about the current economy as being in a soft spot, and time to start thinking that this cycle is already peaking at a time when the monetary and fiscal authorities can do very little about it. This remains so no matter what tomorrow’s payroll employment number looks like. We pointed out in our June 28 comment that the economy was 9.4 million jobs short of where it should be if this were an average post-war cycle, and nothing that is reported tomorrow can put more than a minor dent in this number. Just to keep pace with past economic expansions we needed an average of increase of 323,000 per month, and only two months have exceeded 300,000. Even if we get a third one tomorrow, the difference is negligible.
The market rally of the past three weeks doesn’t disrupt the pattern of lower highs and lower lows that has been in existence since March. Successive rallies have peaked on the S&P 500 at 1163, 1150 and 1146, while lows have bottomed at 1087, 1076 and 1062. The current rally is apparently expressing relief over lower oil prices, the defusing of a crisis in Iraq, and the absence of a terrorist incident during the Republican convention. In our view the market remains highly vulnerable, and the rally is likely to peter out when strategists and economists are forced to mark down their overly optimistic economic and earnings projections.
7. Economy rolling over.
http://www.#########.com/dollarbear2k3/ISM.html
8. The chips are down.
The semiconductor industry is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
9. Market probabilities point south.
http://www.gold-eagle.com/editorials_04/mchugh090404.html
10. We are over a barrel.
http://www.safehaven.com/article-1920.htm
10 Reasons to be a Short-Term Bear
1. Past selling pattern developing on Nasdaq.
http://www.investorshub.com/boards/read_ms...sage_id=3980993
2. NAMO in nose bleed area.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr...
3. Insider selling picking up.
http://insider.thomsonfn.com/tfn/tearsheet...nHeader=insider
4. Big boys selling short while small specs long on S&P 500.
http://www.vtoreport.com/sentiment/cot.htm
5. Fund buying continues to slow.
By John Spence
Last Updated: 9/2/2004 6:45:00 PM
BOSTON (CBS.MW) -- Investors committed a net $700 million to stock mutual-funds in the five trading days ending Sept. 2, slightly less than the $900 million reported in the previous week, research firm TrimTabs said Thursday.
Buying interest is slower than at any time in the last decade, TrimTabs noted.
"They sold in May and went away," said Carl Wittnebert, director of research at TrimTabs. "Except for the bear market years of 2001 and 2002, the May-August period had the lowest equity inflows since 1992."
The closely watched figures, a measure of bullishness in stock and bond funds, showed domestic stock funds collected $800 million in new cash for the second week in a row.
Meanwhile, investors pulled $100 million from funds that hold international stocks, reversing inflows of $100 million the prior week.
Bond funds had outflows of $500 million, continuing last week's exodus of $900 million from these offerings. Hybrid funds, which invest in both stocks and bonds, experienced inflows of $900 million, following up on an inflow of $500 million the week before.
6. Economic Cycle Peaking.
September 02, 2004
The persistence of the economic soft spot we discussed in Tuesday’s comment was confirmed even further in the last two days. Despite desperate incentive offers, August auto sales dropped to an annualized rate of 16.6 million units from 17.2 in July, and General Motors and Ford announced significant manufacturing cutbacks to pare excess inventories. August chain store sales were up only 1.1 percent, the weakest showing in 17 months, while Wal-Mart sales came in at the low end of a range that they only recently downgraded. The economy.com Risk of Recession index climbed to 32.7 in August from 25.7 in July and only 7.6 as recently as May. Economy.com says that, as a rule of thumb, a reading of 40 or higher for three consecutive months indicates the probability of recession within six months. We note, however, that the current level is about where it was in early 2000.
In addition, after today’s close, Intel sharply slashed its third quarter revenue range to $8.3-to-8.6 billion from a previous $8.6-to-9.2 billion, a 5 percent reduction in the mid-point of the range. They also reduced their projected gross margin for the quarter to 58 percent from 60, blaming slack demand in computer microprocessors and communications chips as customers were attempting to reduce bloated inventories. Intel’s downgrading of its outlook was far greater than the reduction expected by the Street, although the handwriting was already on the wall as a result of previous comments by managements at leading technology companies.
So now we have excessive inventories in both autos and technology following a second quarter GDP that showed meager growth in final sales and higher inventories. Does anyone see a pattern here? Knowing what we already know about the extremely low consumer savings rate, excessive consumer debt, a poor employment picture and a huge trade imbalance, we think it’s time to stop thinking about the current economy as being in a soft spot, and time to start thinking that this cycle is already peaking at a time when the monetary and fiscal authorities can do very little about it. This remains so no matter what tomorrow’s payroll employment number looks like. We pointed out in our June 28 comment that the economy was 9.4 million jobs short of where it should be if this were an average post-war cycle, and nothing that is reported tomorrow can put more than a minor dent in this number. Just to keep pace with past economic expansions we needed an average of increase of 323,000 per month, and only two months have exceeded 300,000. Even if we get a third one tomorrow, the difference is negligible.
The market rally of the past three weeks doesn’t disrupt the pattern of lower highs and lower lows that has been in existence since March. Successive rallies have peaked on the S&P 500 at 1163, 1150 and 1146, while lows have bottomed at 1087, 1076 and 1062. The current rally is apparently expressing relief over lower oil prices, the defusing of a crisis in Iraq, and the absence of a terrorist incident during the Republican convention. In our view the market remains highly vulnerable, and the rally is likely to peter out when strategists and economists are forced to mark down their overly optimistic economic and earnings projections.
7. Economy rolling over.
http://www.#########.com/dollarbear2k3/ISM.html
8. The chips are down.
The semiconductor industry is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
9. Market probabilities point south.
http://www.gold-eagle.com/editorials_04/mchugh090404.html
10. We are over a barrel.
http://www.safehaven.com/article-1920.htm
10 Reasons to be a Short-Term Bear
1. Past selling pattern developing on Nasdaq.
http://www.investorshub.com/boards/read_ms...sage_id=3980993
2. NAMO in nose bleed area.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr...
3. Insider selling picking up.
http://insider.thomsonfn.com/tfn/tearsheet...nHeader=insider
4. Big boys selling short while small specs long on S&P 500.
http://www.vtoreport.com/sentiment/cot.htm
5. Fund buying continues to slow.
By John Spence
Last Updated: 9/2/2004 6:45:00 PM
BOSTON (CBS.MW) -- Investors committed a net $700 million to stock mutual-funds in the five trading days ending Sept. 2, slightly less than the $900 million reported in the previous week, research firm TrimTabs said Thursday.
Buying interest is slower than at any time in the last decade, TrimTabs noted.
"They sold in May and went away," said Carl Wittnebert, director of research at TrimTabs. "Except for the bear market years of 2001 and 2002, the May-August period had the lowest equity inflows since 1992."
The closely watched figures, a measure of bullishness in stock and bond funds, showed domestic stock funds collected $800 million in new cash for the second week in a row.
Meanwhile, investors pulled $100 million from funds that hold international stocks, reversing inflows of $100 million the prior week.
Bond funds had outflows of $500 million, continuing last week's exodus of $900 million from these offerings. Hybrid funds, which invest in both stocks and bonds, experienced inflows of $900 million, following up on an inflow of $500 million the week before.
6. Economic Cycle Peaking.
September 02, 2004
The persistence of the economic soft spot we discussed in Tuesday’s comment was confirmed even further in the last two days. Despite desperate incentive offers, August auto sales dropped to an annualized rate of 16.6 million units from 17.2 in July, and General Motors and Ford announced significant manufacturing cutbacks to pare excess inventories. August chain store sales were up only 1.1 percent, the weakest showing in 17 months, while Wal-Mart sales came in at the low end of a range that they only recently downgraded. The economy.com Risk of Recession index climbed to 32.7 in August from 25.7 in July and only 7.6 as recently as May. Economy.com says that, as a rule of thumb, a reading of 40 or higher for three consecutive months indicates the probability of recession within six months. We note, however, that the current level is about where it was in early 2000.
In addition, after today’s close, Intel sharply slashed its third quarter revenue range to $8.3-to-8.6 billion from a previous $8.6-to-9.2 billion, a 5 percent reduction in the mid-point of the range. They also reduced their projected gross margin for the quarter to 58 percent from 60, blaming slack demand in computer microprocessors and communications chips as customers were attempting to reduce bloated inventories. Intel’s downgrading of its outlook was far greater than the reduction expected by the Street, although the handwriting was already on the wall as a result of previous comments by managements at leading technology companies.
So now we have excessive inventories in both autos and technology following a second quarter GDP that showed meager growth in final sales and higher inventories. Does anyone see a pattern here? Knowing what we already know about the extremely low consumer savings rate, excessive consumer debt, a poor employment picture and a huge trade imbalance, we think it’s time to stop thinking about the current economy as being in a soft spot, and time to start thinking that this cycle is already peaking at a time when the monetary and fiscal authorities can do very little about it. This remains so no matter what tomorrow’s payroll employment number looks like. We pointed out in our June 28 comment that the economy was 9.4 million jobs short of where it should be if this were an average post-war cycle, and nothing that is reported tomorrow can put more than a minor dent in this number. Just to keep pace with past economic expansions we needed an average of increase of 323,000 per month, and only two months have exceeded 300,000. Even if we get a third one tomorrow, the difference is negligible.
The market rally of the past three weeks doesn’t disrupt the pattern of lower highs and lower lows that has been in existence since March. Successive rallies have peaked on the S&P 500 at 1163, 1150 and 1146, while lows have bottomed at 1087, 1076 and 1062. The current rally is apparently expressing relief over lower oil prices, the defusing of a crisis in Iraq, and the absence of a terrorist incident during the Republican convention. In our view the market remains highly vulnerable, and the rally is likely to peter out when strategists and economists are forced to mark down their overly optimistic economic and earnings projections.
7. Economy rolling over.
http://www.#########.com/dollarbear2k3/ISM.html
8. The chips are down.
The semiconductor industry is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
9. Market probabilities point south.
http://www.gold-eagle.com/editorials_04/mchugh090404.html
10. We are over a barrel.
http://www.safehaven.com/article-1920.htm
10 Reasons to be a Short-Term Bear
1. Past selling pattern developing on Nasdaq.
http://www.investorshub.com/boards/read_ms...sage_id=3980993
2. NAMO in nose bleed area.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr...
3. Insider selling picking up.
http://insider.thomsonfn.com/tfn/tearsheet...nHeader=insider
4. Big boys selling short while small specs long on S&P 500.
http://www.vtoreport.com/sentiment/cot.htm
5. Fund buying continues to slow.
By John Spence
Last Updated: 9/2/2004 6:45:00 PM
BOSTON (CBS.MW) -- Investors committed a net $700 million to stock mutual-funds in the five trading days ending Sept. 2, slightly less than the $900 million reported in the previous week, research firm TrimTabs said Thursday.
Buying interest is slower than at any time in the last decade, TrimTabs noted.
"They sold in May and went away," said Carl Wittnebert, director of research at TrimTabs. "Except for the bear market years of 2001 and 2002, the May-August period had the lowest equity inflows since 1992."
The closely watched figures, a measure of bullishness in stock and bond funds, showed domestic stock funds collected $800 million in new cash for the second week in a row.
Meanwhile, investors pulled $100 million from funds that hold international stocks, reversing inflows of $100 million the prior week.
Bond funds had outflows of $500 million, continuing last week's exodus of $900 million from these offerings. Hybrid funds, which invest in both stocks and bonds, experienced inflows of $900 million, following up on an inflow of $500 million the week before.
6. Economic Cycle Peaking.
September 02, 2004
The persistence of the economic soft spot we discussed in Tuesday’s comment was confirmed even further in the last two days. Despite desperate incentive offers, August auto sales dropped to an annualized rate of 16.6 million units from 17.2 in July, and General Motors and Ford announced significant manufacturing cutbacks to pare excess inventories. August chain store sales were up only 1.1 percent, the weakest showing in 17 months, while Wal-Mart sales came in at the low end of a range that they only recently downgraded. The economy.com Risk of Recession index climbed to 32.7 in August from 25.7 in July and only 7.6 as recently as May. Economy.com says that, as a rule of thumb, a reading of 40 or higher for three consecutive months indicates the probability of recession within six months. We note, however, that the current level is about where it was in early 2000.
In addition, after today’s close, Intel sharply slashed its third quarter revenue range to $8.3-to-8.6 billion from a previous $8.6-to-9.2 billion, a 5 percent reduction in the mid-point of the range. They also reduced their projected gross margin for the quarter to 58 percent from 60, blaming slack demand in computer microprocessors and communications chips as customers were attempting to reduce bloated inventories. Intel’s downgrading of its outlook was far greater than the reduction expected by the Street, although the handwriting was already on the wall as a result of previous comments by managements at leading technology companies.
So now we have excessive inventories in both autos and technology following a second quarter GDP that showed meager growth in final sales and higher inventories. Does anyone see a pattern here? Knowing what we already know about the extremely low consumer savings rate, excessive consumer debt, a poor employment picture and a huge trade imbalance, we think it’s time to stop thinking about the current economy as being in a soft spot, and time to start thinking that this cycle is already peaking at a time when the monetary and fiscal authorities can do very little about it. This remains so no matter what tomorrow’s payroll employment number looks like. We pointed out in our June 28 comment that the economy was 9.4 million jobs short of where it should be if this were an average post-war cycle, and nothing that is reported tomorrow can put more than a minor dent in this number. Just to keep pace with past economic expansions we needed an average of increase of 323,000 per month, and only two months have exceeded 300,000. Even if we get a third one tomorrow, the difference is negligible.
The market rally of the past three weeks doesn’t disrupt the pattern of lower highs and lower lows that has been in existence since March. Successive rallies have peaked on the S&P 500 at 1163, 1150 and 1146, while lows have bottomed at 1087, 1076 and 1062. The current rally is apparently expressing relief over lower oil prices, the defusing of a crisis in Iraq, and the absence of a terrorist incident during the Republican convention. In our view the market remains highly vulnerable, and the rally is likely to peter out when strategists and economists are forced to mark down their overly optimistic economic and earnings projections.
7. Economy rolling over.
http://www.#########.com/dollarbear2k3/ISM.html
8. The chips are down.
The semiconductor industry is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
9. Market probabilities point south.
http://www.gold-eagle.com/editorials_04/mchugh090404.html
10. We are over a barrel.
http://www.safehaven.com/article-1920.htm
10 Reasons to be a Short-Term Bear
1. Past selling pattern developing on Nasdaq.
http://www.investorshub.com/boards/read_ms...sage_id=3980993
2. NAMO in nose bleed area.
http://stockcharts.com/def/servlet/SC.web?c=$NAMO,uu[w,a]dhlaynay[dc][pd20,2!a-55!a30!f][iut]&pr...
3. Insider selling picking up.
http://insider.thomsonfn.com/tfn/tearsheet...nHeader=insider
4. Big boys selling short while small specs long on S&P 500.
http://www.vtoreport.com/sentiment/cot.htm
5. Fund buying continues to slow.
By John Spence
Last Updated: 9/2/2004 6:45:00 PM
BOSTON (CBS.MW) -- Investors committed a net $700 million to stock mutual-funds in the five trading days ending Sept. 2, slightly less than the $900 million reported in the previous week, research firm TrimTabs said Thursday.
Buying interest is slower than at any time in the last decade, TrimTabs noted.
"They sold in May and went away," said Carl Wittnebert, director of research at TrimTabs. "Except for the bear market years of 2001 and 2002, the May-August period had the lowest equity inflows since 1992."
The closely watched figures, a measure of bullishness in stock and bond funds, showed domestic stock funds collected $800 million in new cash for the second week in a row.
Meanwhile, investors pulled $100 million from funds that hold international stocks, reversing inflows of $100 million the prior week.
Bond funds had outflows of $500 million, continuing last week's exodus of $900 million from these offerings. Hybrid funds, which invest in both stocks and bonds, experienced inflows of $900 million, following up on an inflow of $500 million the week before.
6. Economic Cycle Peaking.
September 02, 2004
The persistence of the economic soft spot we discussed in Tuesday’s comment was confirmed even further in the last two days. Despite desperate incentive offers, August auto sales dropped to an annualized rate of 16.6 million units from 17.2 in July, and General Motors and Ford announced significant manufacturing cutbacks to pare excess inventories. August chain store sales were up only 1.1 percent, the weakest showing in 17 months, while Wal-Mart sales came in at the low end of a range that they only recently downgraded. The economy.com Risk of Recession index climbed to 32.7 in August from 25.7 in July and only 7.6 as recently as May. Economy.com says that, as a rule of thumb, a reading of 40 or higher for three consecutive months indicates the probability of recession within six months. We note, however, that the current level is about where it was in early 2000.
In addition, after today’s close, Intel sharply slashed its third quarter revenue range to $8.3-to-8.6 billion from a previous $8.6-to-9.2 billion, a 5 percent reduction in the mid-point of the range. They also reduced their projected gross margin for the quarter to 58 percent from 60, blaming slack demand in computer microprocessors and communications chips as customers were attempting to reduce bloated inventories. Intel’s downgrading of its outlook was far greater than the reduction expected by the Street, although the handwriting was already on the wall as a result of previous comments by managements at leading technology companies.
So now we have excessive inventories in both autos and technology following a second quarter GDP that showed meager growth in final sales and higher inventories. Does anyone see a pattern here? Knowing what we already know about the extremely low consumer savings rate, excessive consumer debt, a poor employment picture and a huge trade imbalance, we think it’s time to stop thinking about the current economy as being in a soft spot, and time to start thinking that this cycle is already peaking at a time when the monetary and fiscal authorities can do very little about it. This remains so no matter what tomorrow’s payroll employment number looks like. We pointed out in our June 28 comment that the economy was 9.4 million jobs short of where it should be if this were an average post-war cycle, and nothing that is reported tomorrow can put more than a minor dent in this number. Just to keep pace with past economic expansions we needed an average of increase of 323,000 per month, and only two months have exceeded 300,000. Even if we get a third one tomorrow, the difference is negligible.
The market rally of the past three weeks doesn’t disrupt the pattern of lower highs and lower lows that has been in existence since March. Successive rallies have peaked on the S&P 500 at 1163, 1150 and 1146, while lows have bottomed at 1087, 1076 and 1062. The current rally is apparently expressing relief over lower oil prices, the defusing of a crisis in Iraq, and the absence of a terrorist incident during the Republican convention. In our view the market remains highly vulnerable, and the rally is likely to peter out when strategists and economists are forced to mark down their overly optimistic economic and earnings projections.
7. Economy rolling over.
http://www.#########.com/dollarbear2k3/ISM.html
8. The chips are down.
The semiconductor industry is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
9. Market probabilities point south.
http://www.gold-eagle.com/editorials_04/mchugh090404.html
10. We are over a barrel.
http://www.safehaven.com/article-1920.htm
Excellent observation. Thanks for posting...
OT: Advice to Bottom Fishers: Cut Bait
By ERIC J. SAVITZ
RACKING MY BRAIN FOR A GOOD STORY idea recently, I recalled a conversation I'd had with a portfolio manager about Credence Systems, a leading player in test equipment used by semiconductor makers. Credence looked insanely inexpensive: With the stock around $7, and estimates for the company's October 2005 fiscal year averaging north of a buck, the P/E stood in single digits. Cheap, right?
But on the very day I started my research on the company, it announced earnings for its fiscal third quarter ended July 31... and unveiled a disturbingly gloomy forecast for its fiscal fourth quarter, putting earnings at 5 to 10 cents a share, versus the Street consensus at about 25 cents. The crux of the matter was a sudden and sharp slowdown in orders from Taiwanese contract chip manufacturers. No matter, I thought, the stock will go down, and look even cheaper. Then I checked in with my portfolio manager friend. Turned out, he'd already dumped his shares. So I did more checking, and abandoned ship.
The clincher came from Jim Covello, Goldman Sachs' outspoken chip-equipment analyst. For starters, he blew away any fantasies I had about Credence's earning a dollar in fiscal '05: He now expects profits of just a nickel a share. More importantly, Covello makes a sobering case that the equipment sector, though already depressed, is headed for another down leg.
The Chips Are Down: The Nasdaq Composite dropped 0.9% for the week, to 1844.48. Intel slashed its third-quarter forecast, overshadowing better-than-expected jobs data. Chip maker Altera also cut its quarter sales outlook.
The semiconductor industry, he says, is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
Think he's wrong? Then re-read what Intel said at its mid-quarter earnings update last week. The big chip maker dropped its revenue and margin forecasts for the quarter, citing weak end demand and rising inventories. The news prompted a Friday selloff in chip stocks. And Intel's problems aren't all company-specific; Altera issued a mid-quarter warning Thursday afternoon.
The question is how long -- and how severe -- the downturn will be. At least for the equipment makers, Covello says, it "will either be more severe or last longer" that the Street generally expects. He notes that every chip-equipment downturn since 1982 -- there have been four -- has lasted two years.
So if you're tempted to bottom-fish, Covello has some advice: Resist. "We would avoid overweight positions in the group," he says diplomatically. So would he own any of the equipment stocks? "Not if I didn't have to," he replies.
Many analysts feel the same way about chip stocks, too. Merrill Lynch's Joe Osha observed in a Friday morning research note that, while Intel is suffering from overcapacity, it isn't likely to slow its construction of new cutting-edge chipmaking plants. Rather than mothball older but still viable factories, he figures, Intel will go after non-microprocessor markets. Concludes Osha: "The prospects for the graphics, chipset, and flash-memory companies hoping to compete with Intel look grim in 2005."
OT: Advice to Bottom Fishers: Cut Bait
By ERIC J. SAVITZ
RACKING MY BRAIN FOR A GOOD STORY idea recently, I recalled a conversation I'd had with a portfolio manager about Credence Systems, a leading player in test equipment used by semiconductor makers. Credence looked insanely inexpensive: With the stock around $7, and estimates for the company's October 2005 fiscal year averaging north of a buck, the P/E stood in single digits. Cheap, right?
But on the very day I started my research on the company, it announced earnings for its fiscal third quarter ended July 31... and unveiled a disturbingly gloomy forecast for its fiscal fourth quarter, putting earnings at 5 to 10 cents a share, versus the Street consensus at about 25 cents. The crux of the matter was a sudden and sharp slowdown in orders from Taiwanese contract chip manufacturers. No matter, I thought, the stock will go down, and look even cheaper. Then I checked in with my portfolio manager friend. Turned out, he'd already dumped his shares. So I did more checking, and abandoned ship.
The clincher came from Jim Covello, Goldman Sachs' outspoken chip-equipment analyst. For starters, he blew away any fantasies I had about Credence's earning a dollar in fiscal '05: He now expects profits of just a nickel a share. More importantly, Covello makes a sobering case that the equipment sector, though already depressed, is headed for another down leg.
The Chips Are Down: The Nasdaq Composite dropped 0.9% for the week, to 1844.48. Intel slashed its third-quarter forecast, overshadowing better-than-expected jobs data. Chip maker Altera also cut its quarter sales outlook.
The semiconductor industry, he says, is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
Think he's wrong? Then re-read what Intel said at its mid-quarter earnings update last week. The big chip maker dropped its revenue and margin forecasts for the quarter, citing weak end demand and rising inventories. The news prompted a Friday selloff in chip stocks. And Intel's problems aren't all company-specific; Altera issued a mid-quarter warning Thursday afternoon.
The question is how long -- and how severe -- the downturn will be. At least for the equipment makers, Covello says, it "will either be more severe or last longer" that the Street generally expects. He notes that every chip-equipment downturn since 1982 -- there have been four -- has lasted two years.
So if you're tempted to bottom-fish, Covello has some advice: Resist. "We would avoid overweight positions in the group," he says diplomatically. So would he own any of the equipment stocks? "Not if I didn't have to," he replies.
Many analysts feel the same way about chip stocks, too. Merrill Lynch's Joe Osha observed in a Friday morning research note that, while Intel is suffering from overcapacity, it isn't likely to slow its construction of new cutting-edge chipmaking plants. Rather than mothball older but still viable factories, he figures, Intel will go after non-microprocessor markets. Concludes Osha: "The prospects for the graphics, chipset, and flash-memory companies hoping to compete with Intel look grim in 2005."
OT: Advice to Bottom Fishers: Cut Bait
By ERIC J. SAVITZ
RACKING MY BRAIN FOR A GOOD STORY idea recently, I recalled a conversation I'd had with a portfolio manager about Credence Systems, a leading player in test equipment used by semiconductor makers. Credence looked insanely inexpensive: With the stock around $7, and estimates for the company's October 2005 fiscal year averaging north of a buck, the P/E stood in single digits. Cheap, right?
But on the very day I started my research on the company, it announced earnings for its fiscal third quarter ended July 31... and unveiled a disturbingly gloomy forecast for its fiscal fourth quarter, putting earnings at 5 to 10 cents a share, versus the Street consensus at about 25 cents. The crux of the matter was a sudden and sharp slowdown in orders from Taiwanese contract chip manufacturers. No matter, I thought, the stock will go down, and look even cheaper. Then I checked in with my portfolio manager friend. Turned out, he'd already dumped his shares. So I did more checking, and abandoned ship.
The clincher came from Jim Covello, Goldman Sachs' outspoken chip-equipment analyst. For starters, he blew away any fantasies I had about Credence's earning a dollar in fiscal '05: He now expects profits of just a nickel a share. More importantly, Covello makes a sobering case that the equipment sector, though already depressed, is headed for another down leg.
The Chips Are Down: The Nasdaq Composite dropped 0.9% for the week, to 1844.48. Intel slashed its third-quarter forecast, overshadowing better-than-expected jobs data. Chip maker Altera also cut its quarter sales outlook.
The semiconductor industry, he says, is expected to expand current production capacity 13% in 2005. But semiconductor unit sales, Goldman estimates, will rise only 7% in 2005. (And revenues will go up by less than that, given expected price declines.) The inevitable conclusion, Covello says, is that capacity-utilization rates in chip making are headed south. The decline is already under way, he adds, but will likely worsen in the next few quarters. Now running a little north of 90%, Covello figures capacity utilization will drop to the mid-to-high 80s. And when that kind of thing happens, orders for semiconductor manufacturing and test equipment inevitably go south.
Think he's wrong? Then re-read what Intel said at its mid-quarter earnings update last week. The big chip maker dropped its revenue and margin forecasts for the quarter, citing weak end demand and rising inventories. The news prompted a Friday selloff in chip stocks. And Intel's problems aren't all company-specific; Altera issued a mid-quarter warning Thursday afternoon.
The question is how long -- and how severe -- the downturn will be. At least for the equipment makers, Covello says, it "will either be more severe or last longer" that the Street generally expects. He notes that every chip-equipment downturn since 1982 -- there have been four -- has lasted two years.
So if you're tempted to bottom-fish, Covello has some advice: Resist. "We would avoid overweight positions in the group," he says diplomatically. So would he own any of the equipment stocks? "Not if I didn't have to," he replies.
Many analysts feel the same way about chip stocks, too. Merrill Lynch's Joe Osha observed in a Friday morning research note that, while Intel is suffering from overcapacity, it isn't likely to slow its construction of new cutting-edge chipmaking plants. Rather than mothball older but still viable factories, he figures, Intel will go after non-microprocessor markets. Concludes Osha: "The prospects for the graphics, chipset, and flash-memory companies hoping to compete with Intel look grim in 2005."
QQQ's Long-Term Trend
QQQ closed this month at 34.02 and the final action limit using my long-term investing model is 33.99. Therefore, QQQ is in a long position relative to my long-term investing model--but it's hanging by a thread. I don't trust this model long-term bullish position since the weight of the technical evidence suggests otherwise. Stepping back from the model and reading the tea leaves, let's examine five key technical clues. First, we are trading in the lower half of the Bollinger Bands which implies a target at the lower band and resistance at the 13 month EMA inside the bands. Second, QQQ has not held support at the 23.6% retracement level from the Jan 04 high. A breach of a retracement level forecasts a move to the next retracement level before support is expected. Third, the price trend during the last seven months is down as indicated by the Raff Regression Channel's negative slop. Fourth, this is the second consecutive month the Parabolic SAR dot is above QQQ's monthly closing price suggesting to be short the market. Fifth, price support is not showing until the Nov 03 monthly high around 28.80. My conclusion is high near-term price volatility with a strong bias in the negative direction.
http://img8.imgspot.com/u/04/244/03/QQQmonthly083104.jpg
QQQ's Long-Term Trend
QQQ closed this month at 34.02 and the final action limit using my long-term investing model is 33.99. Therefore, QQQ is in a long position relative to my long-term investing model--but it's hanging by a thread. I don't trust this model long-term bullish position since the weight of the technical evidence suggests otherwise. Stepping back from the model and reading the tea leaves, let's examine five key technical clues. First, we are trading in the lower half of the Bollinger Bands which implies a target at the lower band and resistance at the 13 month EMA inside the bands. Second, QQQ has not held support at the 23.6% retracement level from the Jan 04 high. A breach of a retracement level forecasts a move to the next retracement level before support is expected. Third, the price trend during the last seven months is down as indicated by the Raff Regression Channel's negative slop. Fourth, this is the second consecutive month the Parabolic SAR dot is above QQQ's monthly closing price suggesting to be short the market. Fifth, price support is not showing until the Nov 03 monthly high around 28.80. My conclusion is high near-term price volatility with a strong bias in the negative direction.
http://img8.imgspot.com/u/04/244/03/QQQmonthly083104.jpg
QQQ's Long-Term Trend
QQQ closed this month at 34.02 and the final action limit using my long-term investing model is 33.99. Therefore, QQQ is in a long position relative to my long-term investing model--but it's hanging by a thread. I don't trust this model long-term bullish position since the weight of the technical evidence suggests otherwise. Stepping back from the model and reading the tea leaves, let's examine five key technical clues. First, we are trading in the lower half of the Bollinger Bands which implies a target at the lower band and resistance at the 13 month EMA inside the bands. Second, QQQ has not held support at the 23.6% retracement level from the Jan 04 high. A breach of a retracement level forecasts a move to the next retracement level before support is expected. Third, the price trend during the last seven months is down as indicated by the Raff Regression Channel's negative slop. Fourth, this is the second consecutive month the Parabolic SAR dot is above QQQ's monthly closing price suggesting to be short the market. Fifth, price support is not showing until the Nov 03 monthly high around 28.80. My conclusion is high near-term price volatility with a strong bias in the negative direction.
http://img8.imgspot.com/u/04/244/03/QQQmonthly083104.jpg
QQQ Long & Intermediate-Term Update
Need a close on 31 Aug 04 greater than 34.03 to keep my long-term model on a buy for QQQ. The intermediate-term view is still on a sell unless QQQ closes on 3 Sep greater than 35.30.
http://img8.imgspot.com/u/04/240/21/QQQmonthly082704.jpg
QQQ Long & Intermediate-Term Update
Need a close on 31 Aug 04 greater than 34.03 to keep my long-term model on a buy for QQQ. The intermediate-term view is still on a sell unless QQQ closes on 3 Sep greater than 35.30.
http://img8.imgspot.com/u/04/240/21/QQQmonthly082704.jpg
QQQ Long & Intermediate-Term Update
Need a close on 31 Aug 04 greater than 34.03 to keep my long-term model on a buy for QQQ. The intermediate-term view is still on a sell unless QQQ closes on 3 Sep greater than 35.30.
http://img8.imgspot.com/u/04/240/21/QQQmonthly082704.jpg
Steve
Thanks for your comments.
A moving average that's been working well on the QQQs as of late is the 15-day exponential using typical price. Plot this on your TA software and look at the results....