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MARKET OVERVIEW
Index started week Thursday Close 3 day change 4 day change % ytd
DJIA 10199.24 10359.3 160.06 1.57% -0.68%
NASDAQ 2194.12 2249.08 54.96 2.50% -1.98%
RUSSELL 2000 627.64 634.62 6.98 1.11% 1.04%
S&P 500 1077.23 1096.48 19.25 1.79% -1.80%
SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E Ratio
MReturn
Basic Industries 0.05% 6.51% -7.57% 2.85% undervalued 42.72% 24.23
Capital Goods -0.54% 5.43% 4.94% 2.97% undervalued 35.48% 19.78
Consumer Durables -1.03% 5.20% 33.70% 5.13% undervalued 48.39% 23.52
Consumer Non-Durables -0.67% 3.33% 8.45% 6.03% undervalued 22.00% 17.72
Consumer Services -0.08% 4.62% -4.14% 6.33% undervalued 19.58% 17.41
Energy -0.37% 5.48% 0.30% 6.67% undervalued 38.02% 17.71
Finance -0.59% 4.96% 2.93% 7.85% undervalued 35.51% 20.87
Health Care -0.52% 4.87% 2.87% 10.76% undervalued 37.95% 21.33
Public Utilities -0.77% 4.92% 5.21% 11.61% undervalued 40.90% 27.7
Technology -0.31% 5.55% 1.58% 13.23% undervalued 53.39% 17.56
Transportation -0.20% 1.92% 1.75% 15.62% undervalued 24.48% 20.54
Sector Talk--Finance
There was a lot of big finance news this week. Congress finally passed the
reform bill despite GOP machinations. House Minority Leader John Boehner made
statements vis-a-vis a repeal if the GOP takes back Congress, but for now the law will
stand. In other news, Goldman Sachs admitted wrongdoing in its SEC civil case and
settled for a whopping $550 million. This is one of the the largest settlements on record
for Wall St. malfeasance. Also, Citigroup reported lower profits-- but they were still
above expectations.
Below, we present various top-five lists for the Finance Sector from our
Institutional software package (VEI). We included liquidity or share price
requirements of 100k shares/day and $2 share in our screen and we only included
results that had full data--forecast and valuation figures present.
Top-Five Finance Sector Stocks--Long-Term Forecast Returns
Mkt Last 12-M
Ticker Name Valuation(%)
Price Retn(%)
WTNY WHITNEY HOLDING COMPANY 8.27 -26.09 -11.83
FAF FIRST AMERICAN CORPORATION 13.5 6.89 N/A
GGAL GRUPO FINANCIERO GALICIA 6.17 -20.52 80.41
KFN KKR FINANCIAL HOLDINGS LLC 7.96 -51.42 688.12
RDN RADIAN GROUP INC 8.49 -50.84 289.45
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Richard Suttmeier's FREE Four-in-Four Daily Newsletter!
A critical portion of this report is the ValuEngine List of Problem Banks. Problem
banks are publicly traded FDIC insured financial institutions who are overexposed to
Construction & Development Loans and/or Nonfarm nonresidential real estate loans,
with “1-Engine”--Strong Sell, or “2-Engine”—Sell. The report also includes a listing of all
other engine-rated banks-- and those with “n/a” ratings but forecast figure data
points according to our models-- in violation of FDIC guidelines vis-a-vis loan
exposures.
Our latest ValuEngine FDIC Report UPDATE is now posted. The report contains loan
exposure and/or ValuEngine datapoints on valuation, forecast, and ratings for all of the
institutions on our List of Problem Banks.
Others interested in the report may find out more on our website by clicking the image
below.
Catching Up with TK Ng
Editor's Note: The Following was published by TK Ng on July 10, 2010. The
predictions provided apply to the market's activity for the past week.
This week, we continue our exercise with ValuEngine and our Viscovery SOMine
Software.
NOTE: For a summary of our terms, theory, and practice, see HERE.
The basic method for using Beta calculations and visual finance to gauge
market sentiment/direction is this: a SOM of the component stocks of the S&P500 is
constructed. This SOM represents the basic topology of the market. We also create
six stock portfolios based on the Long and Short sides of the three ValuEngine
benchmark portfolio strategy screens. Remember that the VE Standard Strategy=
Valuation; VE Forecast Strategy= Growth, and VE Star Strategy= Quality.* We then
plot our initial basket against the backdrop of the S&P500 component stocks and
examine the clusters of the resultant SOM.
*NOTE: Subscribers can run their own screens for the long sides of the
benchmark portfolio strategies HERE
Prior to overlaying on the SOM, each of our ValuEngine picks is labeled with
their benchmark strategy, the sector they belong to, and whether they are Long or
Short positions. The position of a label is approximately the position of the node on the
SOM that the stock occupies. The S&P500 component stocks are not labeled and the
empty spaces represent the nodes on the SOM that they occupy.
Two weeks ago, I predicted that the selling had abated and there would be a
mild rebound. Well, maybe I was wrong in using the word 'mild'. The S&P500 increased
by 5 % or so for the week ending July 9. Let's see how we do this week.
Here is our initial SOM:
B=Basic Industries, C=Capital Goods, D=Consumer Durables, ND=ConsumerNonDurables, S=Consumer Services, E=Energy,
F=Finance, H=HealthCare, T=Technology, TP=Transportation, U=Public Utilities. V=Valuation, G=Growth, Q=Quality.
S1 holds the S&P500 stocks, S2 most of the Short (S) stocks and S3 most of the
Long (L) stocks. This is the same order as last week. Last week the ratio of L stocks/ S
stocks that are in the S1 cluster which holds the S&P 500 stocks was 28/21=1.33. This
week it is 42/29= 1.44. This is an indication of increased Bullishness. S3, the cluster
which has Bullish characteristics holds only 6.14 % of our stock Universe for this SOM
while S2 the cluster with the Bearish characteristics holds 17.33 % . This point somewhat
tempers the Bullishness.
Here are the individual Cluster stats:
The length of the bars denoting our Model variables above measures the
deviation of the cluster Mean from the Mean of the entire data set. Thus, the longer
the bars, the more those stocks in the cluster with those bars will differ from the
performance of the Index as represented by S1 bars. The longest bars in S3 with the L
stocks are Beta (first Green bar) Momentum [12-m return%] fourth bar Mauve color
and Volatility (Red bar). In a Bullish market, high momentum, high Beta and high
volatility means a sharp run-up. Also take a look at the Purple bar next to the Red
Volatility bar, which measures EPS surprise % in the stock's history. Note its length in S3
as well as S2. EPS surprise will be an important factor in a stock's movement for the
coming week. Thus the sharp run-up is based on fundamentals, particularly EPS
surprise.
Here is the SOM with the top BETA figures highlighted:
B=Basic Industries, C=Capital Goods, D=Consumer Durables, ND=ConsumerNonDurables, S=Consumer Services, E=Energy,
F=Finance, H=HealthCare, T=Technology, TP=Transportation, U=Public Utilities. V=Valuation, G=Growth, Q=Quality.
Here are our SOM BETA stats:
The average Beta of S2 stocks was 1.60 last week and is now 1.50. The average
Beta of S3 stocks was 1.98 and is now 2.62. There is more 'sensitivity' to the Index on
the upside than on the down side.
Let's take a look at some selected VE screening results that we find plotted in
S3:
Mkt Valuation P/E
Ticker Company Name Beta Sector
Price (%) Ratio
AIG AMERICAN INTERNATIONAL GROUP 37.38 -75 N/A 3.78 FINANCE
AIV APARTMENT INVESTMENT& MANAGEMENT 20.88 55.41 14.74 2.33 FINANCE
CONSUMER
DDS DILLARD INC 21.86 -39.56 13.41 2.6
SERVICES
UFS DOMTAR CORP 49.68 -48.77 8.51 3.05 ENERGY
CONSUMER
DYN DYNEGY INC 3.69 -61.36 1.66 1.4 NON_DURABL
ES
EK EASTMAN KODAK CO 4.73 -60.55 3.47 1.56 FINANCE
FFG FBL FINANCIAL GROUP - CLASS A 21.2 -39.27 6.69 2.58 FINANCE
CONSUMER
FCE.A FOREST CITY A 12.19 -47.29 6.82 2.89
SERVICES
GCI GANNETT INC DEL 15.11 -34.42 6.84 2.67 FINANCE
BASIC
KFN KKR FINANCIAL HOLDINGS LLC 7.96 -51.42 5.63 2.87
INDUSTRIES
SLG SL GREEN REALTY CP 57.07 -21.55 14.51 2.63 ENERGY
SGY STONE ENERGY CORP. 11.67 -51.39 3.83 2.51 FINANCE
BASIC
UTR UNITRIN INC 26.25 -29.41 7.98 1.51
INDUSTRIES
RHAYY RHODIA SA 19.95 -38.51 6.82 2.91 FINANCE
Based on this exercise, the market outlook is decidedly more Bullish this week as
compared to last week. But only a few stocks will move significantly. The stocks will be
those with good fundamentals and the run-up will be speedy.
Suttmeier Says
--Commentary and Analysis from Chief
Market Strategist Richard Suttmeier
If you have any comments or questions, send them to Rsuttmeier@Gmail.com
Treasury Yields
The 10-Year is at 2.974. After holding my daily pivot at 3.111
the 10-Year yield is back between my annual pivot at 2.999 and
my annual risky level at 2.813. Today’s neutral zone is between my
daily pivot at 3.110 and my semiannual pivot at 2.999. Semiannual
and quarterly value levels are 3.479 and 3.486 with annual,
quarterly and semiannual risky levels at 2.813, 2.495 and 2.249.
The low yield for the move was 2.879 set on July 1st, and was a failed test of my 2.999
and 2.813 annual risky levels.
Nymex Crude--It’s amazing how strong my annual pivot has been at $77.05. The
chart trading range has been $67.15 to $87.15 with $77.05 right in the middle. My
quarterly value level is $56.63 with my annual pivot at $77.05, and monthly and
semiannual risky levels at $79.36 and $83.94.
The Euro--The euro is stronger than I expected and today’s pivot is 1.2900. My
weekly value level is 1.2422 with a daily pivot at 1.2900, and the 200-day simple
moving average at 1.3691. Monthly and quarterly value levels are 1.2035 and 1.1424.
Major Indices
The Dow--
Daily: The Dow traded above my annual pivot Tuesday through Thursday
without a daily close above. Weakness on Thursday held the 50-day simple moving
average at 10,244. My weekly value level is 9,635 with my annual pivot at 10,379, and
semiannual, daily and monthly risky levels at 10,558, 10705 and 10,891. My annual risky
level at 11,235 was tested at the April 26th high at 11,258, which marked the end of
the bear market rally that began in March 2009. We are in the second leg of the
multi-year bear market that began in October 2007 targeting 8,500 before 11,500.
The NASDAQ--
A bearish cross-over where the 50-day simple moving average crossed below
the 200-day was confirmed and tested at 2251 and 2254 on Wednesday as my
semiannual and annual pivots provide magnets at 2223, 2242 and 2250. All of these
levels could not be taken out even with Intel reporting its best quarter in a decade.
Today’s risky level is 2311.
Financial Reform
The bill's proponents claim that it ends “too big to fail” but in my opinion does
not. The big banks are bigger and if a problem arises where is the funding to break up
a big bank in trouble?
It’s now up to the banking regulators to implement this law, but how can they
be trusted when they did not see “The Great Credit Crunch” coming? Remember
that the US Treasury, Federal Reserve and FDIC ignored their own guidelines set in
December 2006 with regard to concentrations by community banks to Construction
& Development Loans and Non-farm Non-residential real estate loans, with the
combo called Commercial Real Estate loans. Community banks are failing today
because of this lack of regulation.
Resolving this dilemma is a problem and it is being hidden by fancy accounting
foot work. The FDIC has new powers among a still to be determined Systemic Risk
Council. If they think that a “too big to fail” institution such as AIG can be unwound
using the FDIC broad authority to use receivership powers start now! AIG owes US tax
payers $47.5 billion. How about unwinding Fannie Mae and Freddie Mac which owe
taxpayers $144.9 and counting through the end of 2012 at least.
If the FDIC provided a macro view back in 2003 and 2004 they would have
identified the heavy concentration of C&D and CRE loans before community banks
became overly concentrated to these real estate loans. If they did we would not
have more than half or them at risk today.
Regulators will provide much needed oversight of the derivatives markets. If the
FDIC was concerned about that Notional Amount of Derivative Contracts why would
they allow them to continue to increase throughout “The Great Credit Crunch”? They
total $218 trillion today, up 32.3% since the end of 2007.
The FinReg Bill strengthens the capital requirements of the US banking system
with bank holding companies subject to the same standards as insured banks for Tier
1 capital. Too much leverage and thin capital cushions were a factor during the
financial crisis, but unfortunately for community banks this stress has intensified while
Wall Street was bailed-out.
Jobs will not be created on Main Street until the problems among Main Street
community banks are cleaned up. Perhaps the FDIC will put pressures on the “too big
to fail” to pay higher deposit insurance fees to bring the Deposit Insurance Fund back
to regulatory ratios by mid-2013. This will require banks with assets above $50 billion to
raise capital, which could slow lending and result in higher rates for consumer and
small business loans.
As I have been saying; you can’t prevent another crisis until “The Great Credit
Crunch” ends and in my opinion, the FinReg bill just makes it more difficult to end “The
GreatCredit Crunch."
--The ValuTrader Model Portfolio Newsletter
The ValuTrader Model Portfolio Newsletter is based on ValuEngine Chief Market
Strategist Richard Suttmeier's proprietary market analytics. Suttmeier combines his
technical analysis expertise with ValuEngine's proprietary valuation, forecast, and
ratings data for more than 4000 equities trading on US markets to come up with a 20
stock portfolio tailored to current market conditions. With ValuTrader, subscribers
access Suttmeier's "Buy and Trade" strategy with a portfolio designed to function well
in both up and down markets.
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