Weekly Hotline Update
Weekly hotline Update #48 - 12-11-07
12/11/2007 9:14:48 AM
Today the FOMC is expected to cut interest rates by either ¼ point or ½ point. Ben Bernanke's recent speech seemed to suggest a 50bp cut and the market responded with a second upsurge. In the mean time, new economic data has come out suggesting a ½ point cut would be a bit aggressive at this time. Even when it easy to read the Fed's intensions, it still isn't very clear. So, at 2:15 PM on Tuesday the Fed will make their announcement on interest rates. Traders should expect a typically volatile reaction to the hype whether it is a quarter or half point move.
While market anxiety rests on the rate cut, the big news is the Government sponsored sup-prime rate freeze. Will it work? The consensus seems that while it is cause for hope, implementation seems like a long shot due to conflicting points of interest within the multiple parties involved. Whether it works or not, well, there are probably a few home owners that will benefit from it.
The key to successful resolution of the Freeze Plan is whether investors prefer an altered yet still working loan vs. a loan in default resulting in a foreclosure. Legal issues aside, the key is which investors will prefer. Their alternatives are not very attractive, but that is usually the case with a bad investment. They can take an assured lost in the near-term or they can allow alteration of their investment giving it another five years to recover. Odds are there will be greater value several years from now vs. the currently depressed values, which are expected to persist in the months ahead without the plan.
And now for a psychological perspective relative to the market: I have often stated the best way to gauge a major news story is where you hearing it. If the story is on a National News broadcast, then the story is the news, and is made aware of it. If Jay Leno can make a successful joke about it on the Tonight Show then everyone already knows about it. From a news stand point, it is history. That doesn't mean the problem has been fixed or will quickly be gone, but by the time Leno is making jokes about it, many have "discounted" the news. Finally, by the time government gets involved, (note: government is not the Calvary) the private sector is in the process of implementing a working solution, which the government plan often interferes with. The point being, by the time government shows up the private sector often has a handle on the solution to the problem. Whether this particular government plan helps or not is somewhat less important than the fact working solutions are being implemented. Solutions restore confidence in the system.
Monday Pending Home sales for October were reported up 0.6% vs. expectations for down 1.0%. September's reading was revised higher to 1.4% from 0.2%. While preliminary, the data appears in accordance with our analysis. The issues are waning and confidence is being restored. The Fed is cutting rates while the economy remains somewhat healthy. This should further stimulate stock prices. In the People and Price Movement piece last Friday, I discussed the tendency of the Dow to be a couple of percent higher one and two months after the third FOMC rate cut.
Over the next several months we should expect improved returns. The 6-month PRS Time Plane metrics remain compressed. Despite the dramatic improvement over the past week, the PRS time Plane has significant room for improvement. Our near-term work suggests a price peak after the FOMC meeting, likely later in the week. From there we will be looking for a pullback low on or around the 18th of December, which should be followed by strength into the end of the year. Odds remain high that a very important low was reached in late November.
The bearish crowd hasn't given up on their chronic doom and gloom scenario. The problem for the bears is the market is doing the worst thing for them that it can do, it is continuing higher.
We have an emotionally charged beaten down market with an abundance of negativity. Two weeks ago I called it a stealth bear market. Today everyone has become aware and that is a psychological condition needed to mark an important low. If our overall assessment is correct, we should be able to confirm the importance of the November low within another one to three weeks.
December New Entries: In December, so far we have three new stocks: OIIM (O2 Micro); Cubic Corp (CUB); Dawson Geophysical (DWSN.)
DWNS (Dawson Geophysical Co) provides onshore seismic Data Acquisition services primarily to oil and gas companies in the US. On November 14 DWSN reported earnings of $1.15, $0.12 above consensus. Revenue rose 46.7% yr/yr to $75.53 mln vs $73.85 mln consensus. It was a very strong quarter. According to management, the company is booked solid well into 2008. The company continues to grow their resources which should result in continued earnings and revenue growth.
With an IBD EPS rank of 98, DWSN has one of the strongest earnings records relative to all other companies. IBES earnings: 2007a $3.54; 2008e $4.47; 2009e $4.59.
DWSN has gone through a very normal looking pullback over the past two months. It found support at $66 and is now positioned for an upward move. Its 3-month PRS Rank has fallen to 37 while its longer-term performance remains remarkably strong, in the top 10% of all stocks at six and twelve months. Seeing DWSN clear $73 on a closing basis will break its near-term consolidation pattern setting the stage for a return to its 52-week highs.
While we expect oil prices to trend flat to lower in the weeks and months ahead, oil stock in general are poised to recover after their recent normal looking consolidation. We are adding DWSN to the #2 Portfolio today.
The following stocks have been removed from the Open Active Table:
PVG, CYCL, AZZ, and CCOI.
Stocks, which if weaken further, may be removed from the open active table:
NETC, and BITI.
The Table below lists fifteen of our favorite Open Active Recommendations:
Additional Stocks to watch: ARGN, ATLS, IRIS, SBS, MPWR, and CTRP.
In Portfolio #1 we are adding CLB as a new long. CLB is in the oil and gas field service group. We owned CLB earlier this year. Since we exited CLB peaked and traced out a healthy consolidation pulling back over 20% from its high. CLB has found support at the 115 level and is set to resume its uptrend.
Buy CLB @ 122.67
Our 11/20 buy of BGC is up over 12% in two weeks.
We have exit points for CCBL @ 13.25; SBGI @ 12.20;and ANAD @ 16.50
Buy DWSN @ 72.06
We are set for an FOMC rate cut on Tuesday. While the market remains divided on the size, the key is this is the third cut. Historically the market is higher one and two months after the third Fed Funds rate cut. That points towards general market strength into the first of the year. Sub-Prime issues have been discounted. With overall market returns compressed the downside is limited. We expect a better market in the weeks and months ahead.
You never will get where you're going
If you never get up on your feet
Come on, there's a good tail wind blowing
A fast walking man is hard to beat
Put one foot in front of the other
And soon you'll be walking cross the floor