...the onslaught of selling this past week brought the March lows in to play for the major indices.
The Dow dropped below its March low on Thursday after the 358-point drop.
The S&P is still 20 points above its March low and the Nasdaq is still 160 points from its March low.
Monday, June 30, 2008
Sunday, June 22, 2008
Energy Panic Trigger#1:
Saudi Arabia is the biggest exporter of oil in the world, and it is the only OPEC producer with any significant spare production capacity. It's also the #2 supplier of U.S. imported oil.
Problem: It supplies mostly the heavy oil that, regardless of any production increases, will have little impact on the market that matters the most for U.S. consumers.
I'm talking about gasoline, which is refined mostly from light crude: And light crude supplies are not only tight; the premiums over heavy crude are soaring to their highest levels of all time.
Most important: The Saudis aren't motivated to pump enough oil to bring down prices even if they could! Why should they? They're making money hand over fist - hauling in huge, historic profits - with each new surge in oil prices!
Problem: It supplies mostly the heavy oil that, regardless of any production increases, will have little impact on the market that matters the most for U.S. consumers.
I'm talking about gasoline, which is refined mostly from light crude: And light crude supplies are not only tight; the premiums over heavy crude are soaring to their highest levels of all time.
Most important: The Saudis aren't motivated to pump enough oil to bring down prices even if they could! Why should they? They're making money hand over fist - hauling in huge, historic profits - with each new surge in oil prices!
Friday, June 20, 2008
12,000 held...
...as major support for the Dow yesterday. But will it hold today? With the market as oversold as it is, there could be a bear market rally. But don't get sucked in. The economy is getting weaker all the time. Eventually, the Dow should drop far under 12,000.
Thursday, June 19, 2008
CEOs expect to lay off employees
Business Roundtable found that nearly a third of CEOs expect to lay off employees this year because of energy prices and after shocks of the mortgage crisis.
However, they also expect sales to remain good as now or get better.
Moral of this story?
Buy shares in your company; they may pay off when your employer doesn't.
However, they also expect sales to remain good as now or get better.
Moral of this story?
Buy shares in your company; they may pay off when your employer doesn't.
Wednesday, June 18, 2008
The Inflation Monster
Reared its ugly head again yesterday with the Producer Price Index for May coming in 1.4 percent higher.
Even worse is the 7.2 percent that producer prices went up since May of last year. It's obvious that the Fed needs to fight inflation.
But with growth slowing, the chances of the Fed drastically raising interest rates is virtually nill.
That means precious metals should do very well over the next few months.
Even worse is the 7.2 percent that producer prices went up since May of last year. It's obvious that the Fed needs to fight inflation.
But with growth slowing, the chances of the Fed drastically raising interest rates is virtually nill.
That means precious metals should do very well over the next few months.
Tuesday, June 17, 2008
Inflation Gone Global
The market went down partly on inflation fears last week before staging a much-needed recovery on Friday.
But inflation is not only an American problem. Europe is also fighting the specter of inflation.
And inflation in China is running at about eight percent. In India, it's feared inflation could go over 10 percent.
Food, energy and commodities are feeding the inflation monster worldwide. Global credit tightening seems inevitable.
And with it, global economic growth will take another serious body blow.
But inflation is not only an American problem. Europe is also fighting the specter of inflation.
And inflation in China is running at about eight percent. In India, it's feared inflation could go over 10 percent.
Food, energy and commodities are feeding the inflation monster worldwide. Global credit tightening seems inevitable.
And with it, global economic growth will take another serious body blow.
Monday, June 16, 2008
Technology Play
ETF (exchange traded fund) - which is laden with some of the biggest names in technology - is set to offer outstanding returns once the economy recovers. I'm talking about the technology SPDR (XLK), and it allows you to own a "who's who" of the technology industry, including Microsoft, Google, Intel, Hewlett-Packard, and Apple.
The blue-chip companies amongst XLK's holdings are at the forefront of developing new industry-leading technology. And for most of them, it is a matter of when, not if, they will develop the next cutting-edge, "must have" software application or product and see their stock take off and produce huge returns. With XLK, you don't have to guess which one of those companies will be next, because you can own a share of all of them.
XLK's holdings are very well diversified. So if one or two of the companies fall, the overall effect on the ETF is muted.
XLK is currently trading at the $25/share level, and I expect it will climb toward the $30/ share level in the next 12 months. That would be a nice gain of 20 percent. And if things really get going, I don't think $35/ share is out of the question. The support level seems to be around $22/share, so the downside is only around 12 percent.
Adding XLK to your portfolio could provide great returns while giving you diversity in the technology sector.
The blue-chip companies amongst XLK's holdings are at the forefront of developing new industry-leading technology. And for most of them, it is a matter of when, not if, they will develop the next cutting-edge, "must have" software application or product and see their stock take off and produce huge returns. With XLK, you don't have to guess which one of those companies will be next, because you can own a share of all of them.
XLK's holdings are very well diversified. So if one or two of the companies fall, the overall effect on the ETF is muted.
XLK is currently trading at the $25/share level, and I expect it will climb toward the $30/ share level in the next 12 months. That would be a nice gain of 20 percent. And if things really get going, I don't think $35/ share is out of the question. The support level seems to be around $22/share, so the downside is only around 12 percent.
Adding XLK to your portfolio could provide great returns while giving you diversity in the technology sector.
Volatility Index Behaving Oddly
The CBOE Volatility Index is designed to be a measure of volatility in the overall market. Without getting too technical, it is based on the volatility of S&P 500 options. The options are rotated in and out, as one month's options expire and then a new month is added on.
Under normal circumstances, the VIX goes up when the market declines and goes down when the market rises.
Over the past week though, the VIX has been behaving rather oddly. On Friday June 6, the VIX jumped over 26 percent as the market took its nosedive. Then, this past Wednesday when the Dow dropped another 200 points, the VIX was only up four percent.
On Thursday, the Dow was up 57 points and the VIX was down 3.3 percent.
As you can see this is not a perfect inverse relationship between the VIX and the overall market. I know I am comparing it to the Dow rather than the S&P, but the differences in the percentage movements are not that great.
Personally, I think the problem stems from the options on the VIX. A few years ago, the CBOE started offering options on the VIX. To my knowledge, only the hardcore traders are trading the VIX options.
I can say that since the introduction of VIX options, the VIX itself has become a less reliable indicator for me. I always thought of the VIX as a good gauge of overall fear in the market. When puts were being bid up more than the calls, the fear level was increasing and the VIX was rising.
Under normal circumstances, the VIX goes up when the market declines and goes down when the market rises.
Over the past week though, the VIX has been behaving rather oddly. On Friday June 6, the VIX jumped over 26 percent as the market took its nosedive. Then, this past Wednesday when the Dow dropped another 200 points, the VIX was only up four percent.
On Thursday, the Dow was up 57 points and the VIX was down 3.3 percent.
As you can see this is not a perfect inverse relationship between the VIX and the overall market. I know I am comparing it to the Dow rather than the S&P, but the differences in the percentage movements are not that great.
Personally, I think the problem stems from the options on the VIX. A few years ago, the CBOE started offering options on the VIX. To my knowledge, only the hardcore traders are trading the VIX options.
I can say that since the introduction of VIX options, the VIX itself has become a less reliable indicator for me. I always thought of the VIX as a good gauge of overall fear in the market. When puts were being bid up more than the calls, the fear level was increasing and the VIX was rising.
Saturday, June 14, 2008
Why do small-cap companies rebound better than bigger companies?
Small caps do well emerging from a bear market because they get pounded during a bear market.
With less financial and market muscle than bigger companies, they have the reputation of not faring as well when the economy slows.
Investors consequently flee to bigger and supposedly safer companies.
So when the economy and market begin to look up, these maligned small companies need - and get - a bigger bounce just to get back to "normal" valuations.
With less financial and market muscle than bigger companies, they have the reputation of not faring as well when the economy slows.
Investors consequently flee to bigger and supposedly safer companies.
So when the economy and market begin to look up, these maligned small companies need - and get - a bigger bounce just to get back to "normal" valuations.
Friday, June 13, 2008
Unhealthy Sector
As a result of the legal issues big-name companies like Pfizer (PFE) and Merck (MRK) have been dealing with, the pharmaceutical sector is among the worst performing sectors so far in 2008.
Several ETFs provide exposure to this sector, but the two that see most of the trading volume are the Pharmaceutical HOLDRs Trust (PPH) and the Select Healthcare Spyder (XLV). The performance of these two ETFs has been abysmal over the past year, with the PPH down 17.24 percent and the XLV down 11.13 percent. During this same time period, the S&P 500 was down only 6.54 percent. So you can see how the pharmaceutical sector has been lagging behind the rest of the market.
Is it time to start looking at pharma as a value play and buy some shares? I don't think so. The legal issues are still piling up for these companies, and it could be a while before they are in the clear.
Another thing that will have a huge impact on this sector is the November presidential election. If a Democrat is elected, you can look for a healthcare reform push - which will certainly affect the drug companies. They may lose control over what they can charge for their products.
My advice is to steer clear of the pharmaceutical sector for the remainder of the year. Once the election is settled, you can reevaluate to see if pharmaceutical companies are a bargain then.
Several ETFs provide exposure to this sector, but the two that see most of the trading volume are the Pharmaceutical HOLDRs Trust (PPH) and the Select Healthcare Spyder (XLV). The performance of these two ETFs has been abysmal over the past year, with the PPH down 17.24 percent and the XLV down 11.13 percent. During this same time period, the S&P 500 was down only 6.54 percent. So you can see how the pharmaceutical sector has been lagging behind the rest of the market.
Is it time to start looking at pharma as a value play and buy some shares? I don't think so. The legal issues are still piling up for these companies, and it could be a while before they are in the clear.
Another thing that will have a huge impact on this sector is the November presidential election. If a Democrat is elected, you can look for a healthcare reform push - which will certainly affect the drug companies. They may lose control over what they can charge for their products.
My advice is to steer clear of the pharmaceutical sector for the remainder of the year. Once the election is settled, you can reevaluate to see if pharmaceutical companies are a bargain then.
Thursday, June 12, 2008
Stock Pickers Are Failing Their Test
Chances are your actively managed mutual fund is disappointing you. You'd probably get better returns investing in an index fund that charges lower fees.
An index fund goes up and down with the index it follows. If it's a large-cap growth fund, for example, it follows an index made up of large companies in traditionally high-growth sectors like tech and health care. A managed fund picks its own big growth companies. If it picks them well, it does better than an index fund. If it doesn't, it does worse.
For a managed fund to stand out, all it has to do is perform better (or less poorly) than its related index. It doesn't necessarily have to make a profit. For example, if the index falls 10 percent and the managed fund drops "only" 7 percent, that fund is considered to have done well.
It seems that the bar has been set pretty low, doesn't it? Maybe we should set it even lower...
So far this year, in only three of nine categories have the majority of funds managed to beat their index. If you have invested in a large blend fund (blend incorporates both value and growth), a small blend fund, or a small value fund, congratulations. More likely than not, your fund is outperforming its related index. (More than 50 percent of these funds do.)
But if you have invested in a growth fund, your investment could be in trouble. Less than 30 percent of those funds are beating their index.
Does that mean you should switch to a large or small blend fund or a small value fund? No. These three fund categories are beating their indexes by a mere half-percent or less. It's hardly worth the effort.
But when considering funds in the future, remember that the higher fees you pay for actively managed funds don't necessarily get you better results when the market goes down. Index funds do just as well - or just as poorly.
By Andrew M. Gordon
An index fund goes up and down with the index it follows. If it's a large-cap growth fund, for example, it follows an index made up of large companies in traditionally high-growth sectors like tech and health care. A managed fund picks its own big growth companies. If it picks them well, it does better than an index fund. If it doesn't, it does worse.
For a managed fund to stand out, all it has to do is perform better (or less poorly) than its related index. It doesn't necessarily have to make a profit. For example, if the index falls 10 percent and the managed fund drops "only" 7 percent, that fund is considered to have done well.
It seems that the bar has been set pretty low, doesn't it? Maybe we should set it even lower...
So far this year, in only three of nine categories have the majority of funds managed to beat their index. If you have invested in a large blend fund (blend incorporates both value and growth), a small blend fund, or a small value fund, congratulations. More likely than not, your fund is outperforming its related index. (More than 50 percent of these funds do.)
But if you have invested in a growth fund, your investment could be in trouble. Less than 30 percent of those funds are beating their index.
Does that mean you should switch to a large or small blend fund or a small value fund? No. These three fund categories are beating their indexes by a mere half-percent or less. It's hardly worth the effort.
But when considering funds in the future, remember that the higher fees you pay for actively managed funds don't necessarily get you better results when the market goes down. Index funds do just as well - or just as poorly.
By Andrew M. Gordon
Wednesday, June 11, 2008
Gas
The national average price of regular gasoline topped $4 a gallon (3.79 liters) for the first time, AAA, the largest U.S. motoring club, reported yesterday.
"At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
The lifestyle of the exurban commuter may be one casualty.
Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.
"It was drive until you qualify" for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. "You can't do that anymore. Your cost of transportation will spike too much."
The 38-year-old Marino, an archeologist for the U.S. Fish and Wildlife Service, is among those feeling the pinch. "Eating out and discretionary income are a thing of the past for us," he says.
"At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
The lifestyle of the exurban commuter may be one casualty.
Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.
"It was drive until you qualify" for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. "You can't do that anymore. Your cost of transportation will spike too much."
The 38-year-old Marino, an archeologist for the U.S. Fish and Wildlife Service, is among those feeling the pinch. "Eating out and discretionary income are a thing of the past for us," he says.
Tuesday, June 10, 2008
The point of no return.
We're importing inflation by the barrel load from the Middle East (with oil prices surging). But don't forget about China, who just lifted bank reserve requirements in yet another measure to slow down inflation.
But if they are really serious, they'll start strengthening their currency faster than the snail-like pace they have employed.
While that may cut down the overall amount of imports we get from China, these imported items will cost more. And we're already seeing more manufacturers pass price increases on to retailers.
Inflation is seeping into the U.S. economy from seemingly every direction. If the Fed doesn't raise rates soon, it may be too late to put a lid on inflation.
But if they are really serious, they'll start strengthening their currency faster than the snail-like pace they have employed.
While that may cut down the overall amount of imports we get from China, these imported items will cost more. And we're already seeing more manufacturers pass price increases on to retailers.
Inflation is seeping into the U.S. economy from seemingly every direction. If the Fed doesn't raise rates soon, it may be too late to put a lid on inflation.
Monday, June 9, 2008
Double Trouble
The market got hit by a double dose of bad news on Friday.
First was the May employment report, which showed the biggest jump in the unemployment rate in 22 years.
The rate jumped from 5.0 percent to 5.5 percent.
The second dose of bad news was a ten-dollar jump in oil prices.
Between these two things, the market didn't stand a chance.
First was the May employment report, which showed the biggest jump in the unemployment rate in 22 years.
The rate jumped from 5.0 percent to 5.5 percent.
The second dose of bad news was a ten-dollar jump in oil prices.
Between these two things, the market didn't stand a chance.
Thursday, June 5, 2008
Crude Oil
West Texas Intermediate crude is testing support at $123/$122.
A fall below this level would signal a secondary correction that would test support at $110 (the 50% retracement level) and possibly $100 (70% retracement of the advance from $85 to $135).
Respect of support at $122 remains as likely, however, and reversal above $130 would signal another rally.
A fall below this level would signal a secondary correction that would test support at $110 (the 50% retracement level) and possibly $100 (70% retracement of the advance from $85 to $135).
Respect of support at $122 remains as likely, however, and reversal above $130 would signal another rally.
Wednesday, June 4, 2008
The dollar gets much needed love...
...when Fed Chairman Bernanke said that he would "carefully monitor developments in the foreign exchange market". Could it be that Bernanke realizes that a dropping dollar is god awful for inflation?
It seems that Bernanke may put his money where his mouth is, because he signaled that interest rate cuts have come to an end.
In fact, he talked about how rates may need to go up faster than most expect, just to keep inflation at bay.
Expect dollar strength in the months ahead.
It seems that Bernanke may put his money where his mouth is, because he signaled that interest rate cuts have come to an end.
In fact, he talked about how rates may need to go up faster than most expect, just to keep inflation at bay.
Expect dollar strength in the months ahead.
Tuesday, June 3, 2008
"Defensive" Stocks
Integral Systems (ISYS): Forward P/E 17, PEG 0.75, revenue growth last quarter of 55 percent, operating margin of 17 percent.
Curtiss-Wright (CW): Forward P/E 16, PEG 1.2, revenue growth last quarter of 30 percent, operating margin of 11 percent.
Orbital Sciences (ORB): Forward P/E 24, PEG 1.6, revenue growth last quarter of 30 percent, operating margin of 8 percent.
Esterline Technologies (ESL): Forward P/E 15, PEG 0.6, revenue growth last quarter of 45 percent, operating margin of 9 percent.
Doing a little math by dividing their forward P/E by the PEG, you can see that future earnings growth for these companies is projected at annual rates of 13 percent to 25 percent. And a recession isn't going to cut into military spending. That means these companies should continue to fly high.
Curtiss-Wright (CW): Forward P/E 16, PEG 1.2, revenue growth last quarter of 30 percent, operating margin of 11 percent.
Orbital Sciences (ORB): Forward P/E 24, PEG 1.6, revenue growth last quarter of 30 percent, operating margin of 8 percent.
Esterline Technologies (ESL): Forward P/E 15, PEG 0.6, revenue growth last quarter of 45 percent, operating margin of 9 percent.
Doing a little math by dividing their forward P/E by the PEG, you can see that future earnings growth for these companies is projected at annual rates of 13 percent to 25 percent. And a recession isn't going to cut into military spending. That means these companies should continue to fly high.
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