Archive for March, 2007

2007-03-17 :: Analysis of the DJIA

Monday, March 19th, 2007

I saw this great analysis of the DJIA by Jim Cramer online and thought you might like it.

The Sum of the Parts
By Jim Cramer
RealMoney.com Columnist

3/18/2007 3:58 PM EDT
With analysts believing that crummy undocumented loan problems have already seeped into less-crummy loans, with the bears contending that inflation is raging, with everybody arguing that the Fed is boxed in, the question isn’t how far the market’s going to go down, but why it hasn’t cracked already. Isn’t that the real question? What’s with the market anyway? Doesn’t it know that it is supposed to go down, either in the form of a series of down-100-to-200 days or in a straight line as it did in 1987, or 1997, or 1998 or 2001? What gives? Perhaps, at least when it comes to the Dow, there are peculiar factors buoying most of the index. It’s time for a special, end-of-quarter analysis of why the market is so resilient despite end-of-the-world pressures from residential mortgage-backed securities and collateralized debt obligations, a belief that Blackstone thinks it is the top, horrible CPI and PPI, a crippled president, rate hikes in China and the rest of the world and an overall belief that the smart money says were are going to crash. It’s time to figure out why we haven’t repealed the whole move from September and then some. I think the answer lies, as is so often the case, in the components themselves. So let’s look at them to see why we have that resilience, or at least, where we could stop if the market’s bears tag-team the ETFs to take the index below where the components want to go. 1. Alcoa (AA) stays stubbornly in the low $30s even though it was back at $26 in the fall. I think that’s because Alcoa is too much of a bargain for CVRD (RIO) , BHP (BHP) and Rio Tinto (RTP) , all of which at one time or another coveted this company. And why not? All of those commodities “arms” dealers are trying to have an armory of metals to service rest-of-world demand, and Alcoa fits in, even as aluminum seems to be the only metal not in short supply … for now. CVRD, BHP and RTP are doing well despite the alleged worldwide slowdown; all three have a currency. Would they let Alcoa go back to $26? Would speculators? 2. Altria (MO) : With a split-up coming and an even higher yield on the remaining stock (which company will be kept in the Dow? interesting question, no?), Altria’s not going much lower. You get 4.4% on the when-issued, which in 10 days will be full-fledged, and that can stop any barreling bear truck, given where yields are. 3. American Express (AXP) : Vulnerable. This stock has little in its favor other than low valuation, with a price-to-earnings ratio of 16 on a 12% growth rate. Can it go much lower on fears the consumer is done? I say yes, and I would sooner be short this component than long. 4. American International Group (AIG) : Reports a monster quarter, grows at 12% with a price-to-earnings ratio of 10, but has a bad seller who owns a ton of shares through lots of entities: Hank Greenberg. I believe that the valuation makes it less vulnerable, and its franchise is thought to have little in the way of exposure to “bad financials.” 5. AT&T (T) : Strong franchise that should be going up here as a safety play with a 4% yield. Not vulnerable. 6. Boeing (BA) : Owing to the implosion of BAE and the great orders it has on the books, Boeing’s been climbing throughout this period. Shares are always subject to a quick 2- or 3-point takedown, but the company’s order book makes it resilient. Buyers are likely to come in at the top of the $80 range as the bull market in aerospace remains totally intact. 7. Caterpillar (CAT) : I bought a little CAT on Friday for Action Alerts PLUS owing to the amazing performance of cohort players, Cummins (CMI) , Terex (TEX) and Manitowoc (MTW) . Caterpillar is always perceived as vulnerable to U.S. housing, but its buyback program and rest-of-world orders, plus the persistent high price of oil, make this company the one to buy on weakness. Shares are down 15% year over year, with 12% growth and a P/E of 11. Without a number cut, it seems like it will be supported by its near-52-week low status. 8. Citigroup (C) : With a 10 P/E on 10% growth, a 4.4% yield and the possibility that Chuck Prince will be fired, this stock is invulnerable here, in my opinion. 9. Coca-Cola (KO) : With vastly improved fundamentals, strong management, a big buyback program and its status as a big defensive play, this stock has held up better than any in the Dow save AT&T. I would buy it right here, as would everyone else. The weak dollar makes an upside surprise likely. Plus, the company could even preannounce to the upside. 10. Disney (DIS) : This is a gigantic beneficiary of the weak dollar, the year-over-year decline in gasoline and a hit TV schedule. Another stock coveted by managers on any decline. Like CBS (CBS) , it’s perceived as a go-to media play in an era where there aren’t many others. 11. DuPont (DD) : This is expensive after a big run, but agricultural exposure, lower raw costs and excellent pricing, plus its 3% yield and status as a weak-dollar play, will keep shares from going down more than 2 or 3 points, in my opinion. A probable Dow Chemical (DOW) restructuring makes companion DuPont seem even more exciting. 12. Exxon Mobil (XOM) : With a huge buyback program and its status as favorite defensive oil stock, Exxon will be perceived as the way to play oil for the next generation of managers. Very little vulnerability. Too loved for that. 13. General Electric (GE) : Yield, buyback and proximity to a 52-week low keep the stock aloft here, but it has done nothing for ages. The company is under-reserved, and a surprise from subprime can’t be ruled out. Three points down max, though, on any revelation that subprime was not accounted for and reserved properly. 14. General Motors (GM) : Its first profitable quarter in ages, plus the offloading of much of its subprime exposure, make this stock less vulnerable than would be expected. Down 2 or 3 points it will attract institutional buyers who respect the turnaround. 15. Hewlett-Packard (HPQ) : Just announced a gigantic, aggressive buyback plan and has little competition from Dell (DELL) . Seems just too cheap to get hammered, and it has a better quarter coming. 16. Home Depot (HD) : This is a private-equity put, plus it’s well off the highs. It should be lower, but the company buys back stock, and its stores are on the mend now that Bob Nardelli is no longer CEO. 17. Honeywell (HON) : Everyone recognizes the Dave Cote turn now in place, and it could still be busted up. Aerospace is making this one fly high, and if it goes down a dollar people will swarm for it as they have for the last year. 18. IBM (IBM) : A huge buyback and the possibility of a second upside surprise make this stock one that gets bought every time it approaches $90. Three points down, not much more than that. 19. Intel (INTC) : No one wants to sell this stock at the low at $19, with AMD (AMD) hurting so badly. No upside, but not much downside. 20. JPMorgan Chase (JPM) : Jamie Dimon has turned the earnings corner, but there’s not much dividend support. I think this one is vulnerable to $44-$45. 21. Johns
on & Johnson
(JNJ) : This is one of the worst-acting stocks in the Dow, with many miscues and a questionable pipe. But its rock-bottom valuation relative to historicals and its defensive nature should allow it to hug $60. It’s already been trashed! 22. McDonald’s (MCD) : Had better-than-expected earnings, plus it’s a gigantic beneficiary of a weak dollar. I suspect this company could preannounce to the upside and buyers will want in on any weakness. 23. Merck (MRK) : With earnings momentum, yield support, a defensive nature and the weak dollar, this is another coveted stock unlikely to get hammered here. 24. Microsoft (MSFT) : Can they hit this one any more than they have off of Vista? Can it really go back to $25? Anything’s possible, and the stock did hit $21 last year (and I hate tech), but I would buy this stock at $25 on its cash hoard and low valuation relative to growth. So would many others. Point and a half of downside. 25. Pfizer (PFE) : This company has low valuation, new management, good leverage to the dollar, a 4.61% yield, almost no downside and is prone to preannounce upside. 26. Procter & Gamble (PG) : This company is smoking and is a great weak-dollar play, plus it has defensive characteristics. It’s on everyone’s buy list as an antidote to subprime. 27. 3M (MMM) : Its buybacks are the most aggressive in the Dow, the company is perceived to be turning and it’s a weak-dollar beneficiary. Two points down, max, despite cyclicality as buyers circle on any down day. 28. United Technologies (UTX) : This is less levered to the U.S. than any other Dow stock, with great earnings diversity and fabulous Asian exposure. It also has exposure to aerospace and military bull markets. 29. Verizon (VZ) : This is a massively defensive stock with a bountiful 4.4% yield and a great buyback program. 30. Wal-Mart (WMT) : This never wants to go below $45, because of the possibility that one good month will send the stock higher, and because when the economy slows more people visit its stores. It didn’t really get hurt on the bank fiasco. Love down here. Amazingly, most of the Dow stocks are actually likely to be bought on any further subprime contagion, something that’s now taken pretty much as a given, despite the lack of evidence so. Think of it like this:

  • Altria, AIG, AT&T, Coca-Cola, Exxon Mobil, Johnson & Johnson, Merck, Pfizer, Procter & Gamble and Verizon are all considered classic defensive plays that money will flow into off of subprime. That’s more than a third of the Dow.
  • Citigroup has a 4.4% yield supporting it.
  • Boeing, Honeywell and United Technologies, while cyclical to some degree, are more levered to the aerospace market, which, like the agricultural market, remains in a tremendously bullish mode.
  • Alcoa has a private-equity put that makes it unlikely to go below $30 and is actually the favorite stock in the Dow from people who want to play private equity. Home Depot is the second fave.
  • Disney and McDonald’s, both weak-dollar plays, are suspected to be having much better than expected quarters. And of all the stocks in the Dow, they’re most likely to beat estimates.
  • 3M’s buyback program is so aggressive that it has actually walked the stock up here, and the stock barely has been hit by the downdraft. Weak dollar exposure is equal to Coca-Cola, Altria and United Technologies in the Dow.
  • H-P announced a buyback just Friday. It seems somewhat insulated.
  • GE shares do nothing, so no one has profits in it and there are no profit-takers. There is very little downside unless under-reserved subprime worries make the rounds.
  • Intel’s valuation is at historic lows, the company has a great buyback program, and, like Boeing, hobbled competitors. There are just way too many value buyers at this level.

That leaves the following stocks as potential candidates for real declines:

  • American Express: Even though it could see a real decline, the weak dollar could counteract any slowdown in consumer spending resulting from the subprime mess.
  • Caterpillar: A misunderstood play on subprime that therefore makes it attractive to knowledgeable buyers.
  • DuPont: Clearly vulnerable down to when dividend matters.
  • GM: Clearly vulnerable, but with its first profitable quarter in ages, so it might have takers if it goes to $25-26.
  • IBM: Simply underowned and just reported a good quarter.
  • JPMorgan Chase: Vulnerable with no yield backstop.
  • Microsoft: Vista weakness might be priced in.
  • Wal-Mart: Very hated, and although I can’t stand it, I recognize the defensive nature of Wal-Mart’s earnings going into a recession.

There’s just not that much vulnerability in this index to see it decline more than 200 to 300 points. I think that’s why it hangs in. And that’s my reasoning why we haven’t been clocked yet. In fact, when you look at it like this, with two-thirds having little vulnerability, you have to question whether it couldn’t go higher here?

2007-03-07 :: Energy and Cyclicals Power Ahead

Wednesday, March 7th, 2007


As you can see from the graph above of Schlumberger (the oil services giant) the correction last week never happened for this company. Similar graphs can be found in many of the cyclical stocks that are closely tied with the economy – see Foster Wheeler or General Cable for examples of companies that are also powering back quite nicely. Conversely, the defensive stocks appear to be in quite a freefall – see McDonalds, Procter & Gamble and Colgate Palmolive.

I’ve been writing over the last several months that any company that would benefit from a stronger economy and falling interest rates will begin to outperform the large cap defensive stocks that were winners last year. It sure looks like we have that shift happening right now. Fortunately, these are also the stocks that are the foundations of our portfolios, so today is a nice “up” day for us when the broader market is barely treading water.

If you look at the interest rate futures charts, you’ll see that the market is pricing in a Fed rate cut significantly sooner than anyone believed a few weeks ago. With the prospect that the Fed will cut rates sooner rather than later, the sectors that benefit from rate cuts (including Utilities) are on fire today. This much interest in these sectors looks like we have some hedge fund buying going on…but after last week, we’ll take all the positive news we can get!

More later!

Mark

2007-03-05 :: The VIX Says Rally Time

Monday, March 5th, 2007

The chart above shows the VIX, or the volatility index. You can see that we have spiked way up on volatility chart after a whole lot of complacency over the past several months. The higher the volatility, the more likely it is that we are going to get a rally, even if it is just a short-term rally. Remember, the computer-based buy and sell programs are tied to charts like this one, so be prepared for a bounce up sometime soon. That will be a good day to reposition portfolios to take advantage of the sectors and sub-groups that should outperform the balance of the year, things like semi-conductors and oil drillers.

More later!

Mark

2007-03-01 (Entry #2) :: Strength in Oil Drillers

Thursday, March 1st, 2007

The drillers are one of the few bright spots in the market right now. The drillers and refiners are up nicely (> 1% for SLB) but the service stocks are down. Logic says that the companies that provide support to the drillers should also be going up, but given the market psychology over the last couple of days, logic dictates nothing.

More later!

Mark

2007-03-01 :: Another Bumpy Ride

Thursday, March 1st, 2007

The market opened in negative territory this morning, down 200 points, but has struggled back to down 67. Its going to be an interesting day as the bears are going to see if the bulls have any conviction and if they are willing to buy into the swoon.

The talk on Wall Street is that all of the hedge funds that were borrowing in Yen and investing in US stocks were selling to pay back their Yen loans. That news sent the futures and the open down significantly, but it looks like cooler heads prevailed and the market came back to its current level.

More later!

Mark