Summary Notes:

TSG Weekly Market Watch August 29, 2008 Written by Matt Blackman

Full Article: http://tradesystemguru.com/content/blogcategory/34/68/

Highlights taken from Matt's Article:

• Normally, oil hits a seasonal high in mid-October
• Average earnings held steady at -39% (from -37% two weeks ago, -32% three weeks ago and -22% four weeks ago) versus Q2-07. Financial services were again the worst performers (-98%) followed (again) by consumer services (-37%).
• Case Shiller home price index is still showing prices falling with the 20 city index showing a year-over-year drop of 15.9% in June down from 15.8% in May
• year-over-year sales are down more than 35% and sales are off nearly 50% from their peak in December
• the Chicago Purchasing Manager’s Index jumped from 50.8 in July to 57.9 in August as a combination of the low dollar, strong export demand and a one-time tax rebate supercharged demand for American products (warning: PMI has been on a negative downtrend over the past 4 years)

A stock I've been monitoring is on the consumer side.

Hot Stock: Starbucks Corp.

Summary:
========
Starbucks is on a downward trend with few reasons to rally to previous glorifying highs. Until the stock reaches above $18, the stock should not be purchased.

Analysis:
======
Starbucks is burning its candle on both ends: fixed input costs are rising, and demand is falling. As a result, the stock is under significant pressure.

The company has responded by:
1) cutting jobs
2) closing locations
3) offering more than coffee i.e. breakfast

Closing locations has a double-edged sword effect: the company cannot grow if it does not increase its presence.

Technical Analysis:
================
Downward price trend established 11/2007 has not yet been broken. Until the stock trades above $18, investors should not place a large amount in this company. The stock might continue to trade lower, it might trend, or it may rally. Observe macroeconomic conditions and enter a position accordingly.

Conclusion:
=========
Hold Starbucks or average down in small amounts. Monitor store closure rates and promotions. Its recent $2 specialty coffee in the afternoon was successful and if it continues to come up with smart promotions, this would be a fundamental positive for buying into this company.

Let me ask you this: do you go to Starbucks or Tim Hortons (Canada)? How are the line ups?

Watch Technology Stock Leaders Who are Lagging in Performance

Dell's weak earnings do not concern me, but Google's relatively weak performance on the market does. Google is an industry leader in the Internet technology space. The other leaders that need to be closely monitored are those who rely on business or consumer spending. To measure the health of corporate spending, Research In Motion's performance must be closely monitored in the weeks ahead. To measure the health of personal spending, Apple's performance must be closely monitored.

Hot Stock: Google

Disclaimer: Google owns blogger.com, which hosts this blog. Google's AdSense is also a revenue source for this site. Notice the ads, top, right, and below? Were you compelled to click on it? Your reaction would be an indicator of the effectiveness of advertising for Google. (Go ahead though to click on the ads)

Summary:
========
Corporate Fundamentals for Google are healthy relative to Internet property stocks, but Google faces strong negative trading patterns. Target price is $400-$425 based on technical analysis.

Fundamental Analysis:
===============
Despite Wall street\'s love for the company, Google is still an advertising company. While iGoogle tools, new entrance to the mobile market, and Google applications make the headlines, its dominance in the search engine market allows the company to command most of its income in advertising.

Despite the strengths, Google will be succeptable to a weaker US and global economy. Organizations must reduce advertising spending under such circumstances, and Google will be faced with declining revenue. Investors must be cautious not to pay a p/e premium under such an environment.

Technical Analysis:
================
The uptrend that began in October 2005 was broken on February 2008. At that time, it was realized the U.S. was or would face a recession. In May 2008 the stock attempted to resume this uptrend, but this failed. The stock is now retreating and will possibly trade to the low $400 level. See below:

A breach below $400 isn't impossible, but does not appear to be likely. If that were to occur, look for the stock to trade to $300.


Seasonality:
==========
Nov 2008 - May 2009 is a period of seasonal strength for Tech stocks. A re-evaluation will be required when this period approaches.

Conclusion:
=========
Sell Google on strength, as risks remain that the stock will be at the the low $400 level.

Does Weakness in Dell Represent a Concern for Global Economies?

Dell reported earnings dropped to $616M (31 cents per share), from $746M (32 cents per share) in the same period last year. On closer inspection, earnings dropped because Dell was too aggressive in its pricing, especially in Europe, the Middle East and Africa.

In contrast, HPQ faced no such earnings drop.

It is important to monitor computer hardware/software earnings. It gives insight to the spending patterns of both corporations and consumers. Since the earnings weakness was endemic, other indicators will be required to monitor any changes in the global economy.

Below is a chart for Dell, illustrating the rally was suspect. Notice the drop in volume on each rally, indicating a lack of conviction.

Sometimes the Best Action to Take is Inaction 

Claymore Investments held its first annual Claymore’s Next Top Model Summer ETF Competition.

Contestants would pick ETFs that could not be changed over an eight week period. I participated, but failed miserably for two reasons: my investment objective was to generate the greatest volatility and to be number one. I bet everything on energy and commodities, despite knowing the technical odds were great that energy prices would fall. 

It turns out that the winner of the contest invested 98% in cash, earning the $1,000 prize.

http://www.claymoreinvestments.ca/etftopmodel/portfolios.aspx

Sometimes inaction is the best action to take, especially under current market conditions. Cash is truly king for many reasons. Investors may quickly deploy cash, when the opportunity presents itself and it is risk-free (when held as treasury bills backed by the government). The downside of cash is that its value declines due to inflation.

On A Completely Different Note: Technology Stock Rally is Stalling 

Many technology stocks rallied nicely, but the rally is stalling. Does this mean that the next move is down?

To get an idea of the health of this sector, it is best to review the pricing of the semiconductors, and more specifically, DRAM pricing.

Taken directly from the August DRAMeXchange newsletter:

http://www.dramexchange.com/WeeklyResearch/Post/2/608.aspx

• DRAM supply bit growth is still expected to grow by ~65% YoY
• DRAM contract price remained flat in July and drop by a respective 10% in 1H and 2H of August, which is the largest range in the past six months
• Consumption of NAND Flash related product is being shadowed by the subprime woes, resulting in a weaker-than-expected sales growth in 2H08. But given that mainstream NAND Flash ASP has slumped by over 80% since 3Q07, a more favorable pricing stimulus thus is seen
• Buoyant sales of Apple 3G iPhone after its launch in mid July provide a positive sign for NAND Flash demand

Market watchers and investment analysts might argue that oil prices, raw material costs, housing markets, and unemployment levels will dictate consumption and therefore consumer discretionary stocks. I would argue that consumers don't always behave predictably, and investors therefore require better indicators to try to assess demand.

The hottest consumer non-essential goods use flash memory chips. These goods include cellular phones, LCD TVs, MP3 players, and computers/gaming consoles. Therefore,  the prudent investor ought to closely monitor the spot prices of flash memory. While over-supply levels are monitored, if demand improves, one may expect increased demand for other goods besides electronics.

Putting (Pretend) Money Where My Mouth Is

As of today's market closing, I am ranked 60th out of 333,300 participants on the FSX Fantasy Stock Exchange by making a return of 15% over a 3 month period, whilst the S&P 500 fell 10%. FSX is an application on Facebook that allows people to trade pretend money. I highly encourage investors to test their investment styles in this sort of simulated environment.

http://apps.facebook.com/hedgestop/

It does not cost anything to lose monopoly money, but making pretend money does has limited boasting rights.

Holdings:
Performance:

So Much for Cheap Oil

I am feeling the disdain for tracking wildly fluctuating trading signals plaguing today's market. When it is up one day and down the next, it is like watching fish swimming around a fish bowl: there is no prediction in direction for markets.

Today, for example, oil rose $6 to $121.88 or 5%. This is in contrast to the sentiment that the bubble has popped for energy prices, and that the US dollars' strength was its pin. Concurrently, gold prices fell too and was thought to keep falling.

None of the big moves taking place should be taken seriously, bullish or bearish. The reason is that the volatility index has not reached extreme levels. There has been no sell-off or accumulation yet, marking any beginning or end of major trends.

One thing that needs to be noted, though, is that the sell-off in oil might be complete, and that oil prices might resume its upward trend. See the chart below.

Source: http://stockcharts.com/charts/gallery.html?DUG

The UltraShort oil ETF (above) broke down its uptrend, and is danger of reaching pre-run up prices. Notice the increase in volume on the most recent sell-off. This would mean that a play world economies will be faced with energy-induced inflation against a backdrop of tighter credit conditions. Look for oil prices to potentially rise an additional 12%.

Highlights of TSG Stock Market Letter for Week of August 18, 2008
Full Article here: http://tradesystemguru.com/content/blogcategory/34/68/

I read this market letter regularly because the trading philosophy is congruent with my own. For example:

"Success in buying when there is blood in the streets depends on the market recovering in relatively short order. You are buying the premise that the bear market is the big lie but if you are wrong and the market is instead in a secular bear, it will prove to be an extremely expensive lesson. By the time you realize that you are wrong and are down 50%, you are faced with the daunting and nearly impossible task of generating a 100% return just to get your money back.

The moral? Be careful which lie you rely upon to invest. But more importantly, be quick to step off the trend the moment it looks like its being discredited. And from both a technical and fundamental perspective, it is far too early to tell if this bear market is a lie or the cruel truth in clever drag."

Of significance is a warning about U.S. Markets. Expect

We may have seen the large cap lows in mid-July (and maybe not) but failing a miracle, the charts are telling us that in lieu of some major buying volume, to expect more weakness ahead. And now emerging markets have joined the bear party.

The Simple Problem of Spiraling Tight Credit Conditions

The tight credit condition in the U.S. is akin to a consumer with a decent credit report asking for a loan. The consumer is more than likely to pay off his loan, but some unknown credit market equation, banks won't lend to him (I'll use him for simplicity) because they are afraid he and all others will default on their loan.

Herein lies the simple problem: The U.S. Federal Reserve lowered rates so low to improve liquidity and to loosen credits, but it is not reaching the consumer. The bank had to go as far as to stand behind the loads provided by Fannie Mae and Freddie Mac. Today, the market woke up to the realization that if the government steps in to take over these companies, shareholders would end up with nothing.

At least we now know where who will be holding the bag for some of those losses.

Technical charts are useless at this point for both companies when a company's future is in doubt. Will these two headliner stocks have to get bailed out, leaving shareholders with nothing? As usual, do your homework in September. Keep an eye on foreclosure rates, monthly resale prices, and new construction. My guess is that these numbers will be worse in August than it was for July. The downward spiral will simply lead to continued credit tightness in the U.S.

I lied. The one useful indicator in the chart below is that the stock closed below previous lows, a very bearish signal.

The same holds true for Fannie Mae.

The ongoing weakness in the U.S. is worrisome to me. It will invariable impact all other global economies (Globalization: if one major player falls, everyone else will fall with it, eventually). This will eventually hit Canada more significantly. A close review of monthly export figures will need to be made.

So Much for Canadians Shopping in the U.S.
Eye is on the US Dollar and Commodities

After a nice rally (and my self-praise to go along with it), gold prices fell $19.70 to $798, down 2% on the day, and 8% for the week. One day did not make a trend, and the lack of a follow-through for stronger gold prices is a concern for the commodities market.

The U.S. dollar has been on a surprising uptrend, and its strength runs counter to any of my fundamental reasons for otherwise: the government is in heavy debt due to over-spending, tax rebates, and very soon, the cost for keeping Freddie Mac and Fannie Mae afloat.

The market has often traded contrary to perceived logic, but it remains forward-seeing. If the USD strength holds, and I think it will, it is telling us that the US economy will stabilize and that the globalized nations (Europe, Canada, Asia). Further, commodities prices including oil and metals will continue to fall.


It will still be important to keep an eye on the rate of foreclosures. In short, the tug of war will be between falling home prices/foreclosure rates versus the rate of falling commodity prices (due to global slowdown).

Source: RealtyTrac

Watch Gold and Oil

It turns out yesterday's entry on gold proved timely. Gold rallied +$16.90 to close at $831.50. Barrick Gold rose almost 6%. Not a bad profit if one bought yesterday. It seems that bargain hunters are starting to place bets for a rally in the commodities market.


Next, again, for discussion is oil. Is lower oil a good indicator for higher stock prices? What about a stronger US dollar against the Euro? According to Business Week magazine, if oil prices fall, due to lower demand and the Euro weakens, it could only mean weakness in economies outside of North America: Europe and Asia. This is very bad news for international US companies.

Most recently, GDP figures were reported but did not indicate the U.S. was in a recession. Those numbers were supported by strong export demand. Investors will now have to worry about the impact of a weak European economy for US large cap internationals.

Let's Make Money
It is important to avoid making comments and observations in short-term directions for stocks. It has been great for day-trading, but the goal of this site is to identify longer term fundamental and technical trends. The site is not there yet.
The trends that can be identified may be summarized as follows:

• Oil and Gold prices have corrected, but it is uncertain which way they will move
• Avoid home builder, homes, REITs and anything that has to do with the housing sector
  
• Avoid U.S. banks, mortgages finance providers and insurance

It will soon be time to start imagining where the sentiment for consumers will be after the Olympics and during the U.S. presidential elections. Again, I point back to the August 18th issue of Business week. There was an informative article that argued that neither candidate had the power to follow through with election promises (due to the U.S. government debt levels).

Canadian Housing - Part 3

The news release was taken Directly from CMHC. Since I am work part-time in Toronto real estate, my interests are greatest for Ontario. Note that these figures weaken my previous two arguments about the health of Ontario real estate relative to the other Canadian provinces.
http://www.cmhc.ca/en/corp/nero/nere/2008/2008-08-11-0815.cfm

Housing Starts Down in July

OTTAWA, August 11, 2008 — The seasonally adjusted annual rate¹ of housing starts was 186,500 units in July, down from 215,900 units in June, according to Canada Mortgage and Housing Corporation (CMHC).

“After a strong first half of the year, the volatile multiple segment is now readjusting itself.” said Brent Weimer, Senior Economist at CMHC’s Market Analysis Centre. “This brings activity since the start of the year closer in line with our 2008 forecast of more than 200,000 housing starts for the seventh consecutive year.”

The seasonally adjusted annual rate of urban starts decreased by 14.8 per cent in July compared to June. Both urban multiples and singles moved down, with a drop of 20.2 per cent for multiples to 91,600 units, and a 6.6 per cent decline for singles to 69,800 units.

The seasonally adjusted annual rate of urban starts went down in Ontario and to a lesser extent in the Prairies, where housing starts decreased by 38.8 per cent to 47,800 and by 1.6 per cent to 30,600 in July, respectively. Urban starts increased slightly by 2.2 per cent to 41,200 units in Quebec, by 2.4 per cent to 8,700 units in Atlantic Canada, and by 5.1 per cent to 33,100 units in British Columbia. While single starts decreased in all regions in July, with the exception of the Atlantic Canada where they remained unchanged, multiple urban starts only registered a decline in Ontario.

Rural starts were estimated at a seasonally adjusted annual rate of 25,100 units in July².

For the first seven months of 2008, actual starts in rural and urban areas combined were up an estimated 2.3 per cent compared to the same period last year. Year-to-date actual starts in urban areas have increased by an estimated 2.4 per cent over the same period in 2007. Actual urban single starts for the January to July period of this year were 15.5 per cent lower than they were a year earlier, while multiple starts were up by 19.0 per cent over the same period.

Is Correction in Gold a Buying Opportunity?

Gold plunged to an 8 month low this morning, touching $801.90 from $820 the day previously. The sell-off has been fast and furious. Is it time to buy?

Gold prices cannot be assessed in isolation from the US dollar. The US dollar index spiked through moving averages recently.

Gold stocks have corrected more quickly than gold prices. Barrick Gold, for example, is down 33% from a recent peak posted just last month. See below:

US Dollar:

Barrick Gold still has further to fall, as long as the US dollar rally holds. The dollar faces resistance at current levels. I believe that the debt taken on by the US government is too significant. Long-term, I do no expect the US dollar to remain strong. However, the third unknown variable is the price of oil. Should oil prices fall even lower, this will provide some much-needed support for a stronger US dollar.

The Health of Canadian Housing - Part 2

June StatsCan figures confirm housing weakness in the West, but not so much so in the Central region i.e. Toronto. As I correctly stated in my last entry, housing prices in Canada will be affected in places where ties with the U.S. economy are strong.

New Housing Price Index
June 2008


New housing prices increased at their slowest pace in over six years in June, continuing a slowdown that started in September 2006. This was a result of a softening housing market in Western Canada.

Nationally, contractors' selling prices rose 3.5% between June 2007 and June 2008, compared with the 4.1% year-over-year increase in May. This was the slowest rate of growth since March 2002 when year-over-year prices increased by 3.4%.

On a monthly basis, prices edged up 0.1% between May and June this year.

Homebuyers in the census metropolitan area of Regina continued to experience the largest gains in new home prices. Contractors' prices in Regina increased by 28.5% from June 2007, with continuing labour shortages and increased costs of materials likely playing important roles.

The metropolitan area with the second largest increase, at 22.2%, was St. John's, Newfoundland and Labrador, which is now showing a larger increase than Saskatoon for the first time since December 2005. Builders reported that higher costs for labour and land helped push prices up.

In Saskatoon, the year-over-year price increase was 16.3%, down substantially from 30.2% in May. Contractors reported costs of labour and materials were increasing. However, prices fell 2.8% between May and June because of a softening market.

In Winnipeg, contractors' prices were 11.5% higher than in June 2007, with contributions likely from higher material costs and continuing strong demand for new housing.

New housing prices were up only slightly from June 2007 in Edmonton (+1.6%) and in Calgary (+0.1%), Alberta's two principal metropolitan areas. Contractors in both areas cited a soft market as the main factor.

In British Columbia, year-over-year prices in Vancouver were up 1.8%, while those in Victoria declined by 0.4%.

Higher material costs pushed prices in Québec up by 5.4%. In Montréal, prices were up 5.6%.

In Toronto, homebuilders increased prices by 3.8% from June 2007. Prices in Ottawa were up 4.4%.

Available on CANSIM: table 327-0005.

Definitions, data sources and methods: survey number 2310.

The second quarter 2008 issue of Capital Expenditure Prices Statistics (62-007-XWE, free) will be available in October.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Client Services (613-951-9606, fax: 613-951-1539; prices-prix@statcan.ca), Prices Division.
_____________________________________________________________
Note: View the census subdivisions that comprise the metropolitan
areas online.

US Dollar Rally, Gold, Oil Down -Is this a Trend?

The US dollar strengthened considerably last weak, as a result of weakening oil prices. Investors had placed money in oil as a hedge against the dollar. They also do the same with gold. Gold corrected sharply, down 12% from its peak.

If you are a believer of the Elliot Wave Theory, read this article: http://www.kitco.com/ind/Field/aug062008.html

The author suggests that the observed price decline is a part of a corrective wave Large II, and gives a target price of $1,500 for gold.

Gold stocks have been hit harder than the price of gold.

From DV Tech Talk:

Technical action by gold and gold stocks remains negative. Several key stocks in the sector broke support last week including Barrick Gold, Goldcorp and Kinross. Gold has fallen below its 200 day moving average where recoveries frequently have occurred during the past seven years. However, short term technical signs of a bottom have yet to appear.

...

However, short term momentum indicators show that the U.S. Dollar now is substantially overbought (thanks mainly to declining commodity prices) and is unlikely to move significantly higher in the short term. Indeed, if demand for commodities by China recovers after the Olympics when temporarily shut down plants resume production, weakness in commodity prices and the U.S. Dollar likely will be short-lived. Meanwhile fabricators in India and South East Asia report that recent weakness in the price of gold has triggered a surge in demand for gold jewelry. As noted last Monday, another seasonal entry point is expected to surface shortly, but technicals are not there yet. Please continue to be patient.

Until the Volatility Index reaches ~30, no reversal from a rally or sell-off should be taken with full conviction.

Canada: What Real Estate Slow down?

1. Toronto Real Estate Board

In Toronto, the supply of homes increased. The number of sales, however, declined. Since I am also a licensed Real Estate agent for the Toronto area, I have the resources to review sales activity by area.

General Highlights:

• Demand: 7,806 sales of single family dwellings took place in July, down 12% over 2007
• Supply: 26,543 active listings, a 28 per cent increase from a year ago.”

Read more here:

http://communications2.torontomls.net/newstand/news/2008/mn0808/newsrel080608.htm

2. StatsCan released Construction figure activity in Canada:

Building permits, June 2008

In June, the total value of building permits fell 5.3% from
May to $6.3 billion, as construction intentions decreased in
both the residential and non-residential sectors and in
several provinces. In constant dollars, the decline was about
the same magnitude at 5.5%.

Residential: Decline in multi-family intentions


Municipalities issued $1.3 billion worth of permits for multi-family housing in June, down 13.8%, a second consecutive monthly decrease. Most of these declines occurred in Ontario and Alberta.

At the same time, single-family permits edged up 1.8% to $2.3 billion. In the last four months, the value of single-family permits has remained between $2.2 billion and $2.3 billion.

Municipalities approved 17,309 new residential dwellings in June, down 9.3% and lower than the 2007 monthly average of 19,817 units.

Permits down in several provinces


The value of building permits decreased in six provinces.

The most significant decrease occurred in Ontario (-7.9% to $2.3 billion), due mainly to a 15.8% decline in intentions for non-residential buildings. The decline in the residential sector was a slight 1.7%.

British Columbia and New Brunswick also experienced declines in both the residential and non-residential sectors.

Alberta posted a 7.5% decline to $1.2 billion, due to a 19.6% decrease in the residential component.

In contrast, intentions rose 3.5% in Quebec, with gains in both the residential and non-residential sectors.


Metropolitan areas: London and Kingston show large declines


Of the 34 census metropolitan areas, 18 recorded reductions in the value of building permits in June.

The largest decrease occurred in London, with declines in the residential and non-residential sectors. Kingston followed closely with a decline mostly in the institutional component.

In contrast, the total value of permits in the census metropolitan area of Québec rose in June, due to increases in both the residential and non-residential sectors.

_________________________________________________

For more information, or to enquire about the concepts, methods or data quality of this release, contact Evelyn Park (613-951-3506; fax: 613-951-6696; evelyn.park@statcan.ca), Service Industries Division.

Despite this modest decline, real estate stocks have actually rebounded.

Why then, are Real Estate stocks not falling?

Two stocks that are of interest to investors: Home Capital Group and Brookfield Properties.

HCG.TO is a secondary lender in the mortgage market. Contrary to banks in the U.S., this lender adhered to strict lending practices. Therefore, any possible weakness in Canadian housing will come from weakness in the job market. So far, the only way real estate will weaken north of the border will be directly correlated with U.S. companies. That is:

1) Canadian companies who rely on American demand and

2) U.S. companies downsizing in Canada

Watch for weakness for communities where homeowners are heavily employed in the automobile sector.

A large percentage of revenue (about 40%) for Brookfield Properties is derived from commercial real estate in New York. Nevertheless, the stock is trending and is showing signs of relative strength.

Further Reading, Part 2.

TSG Stock Market Letter is Another essential newsletter that I have found to be useful in analyzing the stock market. The August 1st newsletter can be summarized as follows, in the context of commodity prices:

• Oil prices had previously held up because investors wanted to park their money in oil instead of the US Dollar. Now that the US dollar is strengthening, oil prices have begun to unwind.
• The strong emerging markets is contrary to the performance of these stock indices. As a result, there is a strong likelihood that the demand for oil in these markets is declining or is on the way to decline:

• Falling CRB Index is good for the DJIA:

Charts taken from: http://tradesystemguru.com/content/blogcategory/34/68/

With oil now trading at a low of $118, it may be possible for energy prices to violate my support target prices. In my posting on July 29th, I had called for additional downside of 11.9%. However, should the sell-off accelerate, I will need to establish new support downside prices for oil.

Essential Reading: ChartWatchers - The StockCharts Newsletter

It is essential that traders monitor leading indicators, economic measures, and general development in politics. The first two are very well-covered by stockcharts.com.
In the most recent newsletter (August 2), the following key important points may be summarized:

• Monthly reversal in oil suggests a downside target for oil at $70 (crude oil breaks is in danger of breaking the head & shoulders pattern to the downside)
• S&P 500 rally was not convincing: trading volume was not convincing
• Nasdaq has failed several times to break resistance
• A play for the consumer discretionary sector may be emerging
  

Subscribe here: http://stockcharts.com/help/doku.php?id=support:chartwatchers

Interestingly enough, SBUX was featured as a trading play.

"At Invested Central, we trade stocks, we don't invest for the long-term. However, the technical picture of Starbucks (SBUX) is quite compelling for a longer-term investor. The name brand is obvious and on the heels of a horrible quarter, you can pick it up on the cheap."

Chart Source: http://stockcharts.com/commentary/archives/20080802/