Wednesday
May072008

DCR Net Asset Value Now at Zero

In early April, we pointed out the DCR/UCR trade to Bespoke readers, noting that if oil closed above $111 for three consecutive days, the two notes would hit termination at the end of the quarter at wherever their NAVs were trading.  UCR is the "oil up" note and its NAV is calculated by dividing the price of oil by three.  DCR is the "oil down" note and it is calculated by subtracting UCR's NAV from 40. 

Once oil closed above $111 for three days in a row (seems so long ago), the termination triggered, so at the end of this quarter, the notes will be distributed to holders at their NAVs.  But now that oil is trading above $120, DCR has no NAV [40-(120/3)=0].  Surprisingly, DCR's price is still trading at a premium to its NAV, and if oil is above $120 at the end of the quarter, owners will lose all of their money, effectively making it an option play on oil's decline at this point.  UCR, on the other hand, will distribute $40 per share if oil is above $120, even though its price is trading at $37.26. 

Ucrdcr

The image above is from MACROshares' website.

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Wednesday
May072008

The US Dollar: A Marathon, Not A Sprint

The US Dollar has come in favor to many Wall Street participants in recent weeks.  As shown in the charts below, the short-term action of the currency has been bullish, but the longer-term technical picture remains bleak.  Using one of the oldest sports cliches in the book, Dollar bulls need to treat this as a marathon and not a sprint.

At its current level of 73.54, the US Dollar index is trading just off the bottom of its long-term downtrend.  The next level for bulls to watch is the top of that downtrend at 77.  If the currency can break above there, the marathon for a strong Dollar will be about 10% complete.

Usdollarchart

Wednesday
May072008

Bespoke On CNBC Wednesday at 2:00 PM

Street_signs_4Paul Hickey will appear on CNBC's Street Signs today at 2:10 PM ET to discuss the current market environment.

Wednesday
May072008

Market Volatility Drops

In late March, the average absolute daily change of the S&P 500 over the last 50 days got all the way up to 1.29%.  That means the market was averaging gains or losses of more than 1.25% every day.  Since its peak, the average daily change of the index has dropped to 1.03% and looks to fall below 1% in the coming days.  While the pickup in volatility was extreme, it was amplified by the fact that volatility had been so low for the years leading up to 2007.  As shown in the first chart below, the average absolute daily change was at or above the 1.29% peak in March multiple times from 1998 to 2002.   

Abschange

We also provide a chart of the more widely followed VIX volatility index below.  After peaking at 32.24 on a closing basis on St. Patrick's Day, the VIX has fallen back below 20 to 18.21, signifying a definite calming of the markets.

Vix507

 

Tuesday
May062008

NYSE April Month End Short Interest

After the close Tuesday, the New York Stock Exchange released its updated short interest figures for the end of April.  Since April 15th, short interest actually increased fractionally, and still remains only 2.4% below its all-time high which was reached right before the Bear Stearns collapse.  In the chart below we show the historical short interest for the NYSE since 2003.  As you can see, short interest has steadily risen through the entire period.  While rising short interest is typically interpreted as a sign of increased pessimism towards the market, the increased popularity of hedge funds and long/short mutual funds has caused short interest to have a constant upward bias.  However, looking at the trends of overall short interest is still useful to gauge investor sentiment.

For example, in the chart below the red dot represents the levels of short interest when the S&P 500 hit its all-time peak.  While short interest was not "low" in absolute terms, the fact that it had declined steadily over a three-month period indicated that sentiment was becoming increasingly bullish.  Unlike the October peak, however, short interest during the most recent rally has barely budged.  This indicates that there is more skepticism towards the market today than there was back in October.

Nyse_short_interest_043008

Looking at short interest of individual stocks, rather than measuring total short interest, a more useful indicator is short interest as a percentage of a company's float.  With that in mind, in the table below we highlight the NYSE listed S&P 1500 stocks with the highest short interest as a percentage of float.  As the table illustrates, even though the Consumer Discretionary sector has been the third best performing sector in 2008, most investors still have doubts about the stocks.  Of the 20 companies with the highest short interest as a percentage of float, 15 of them come from the Consumer Discretionary sector.  HOV tops the list with 63% of its float sold short.  While the backdrop for homebuilders seems bleak, we would note that HOV is up 65% year to date and has seen significant buying by insiders.

Sp_1500_043008_short_interest_2

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Tuesday
May062008

Bespoke's Country Snapshot

Below we highlight our trading range charts for 21 major country indices.  The red zone is between one and two standard deviations above the index's 50-day moving average (and vice versa for the green zone).  When prices move in or above the red zone, the index is considered overbought.  Every county except for China, Mexico, Malaysia and Taiwan is currently in overbought territory.  Even Japan, which has been in a perpetual downtrend, is overbought and now trending higher.  As we highlighted last week, Brazil has been on fire, and it is currently one of the most overbought equity markets.

After bottoming in March along with US markets, indices worldwide have settled down and formed short-term uptrends. 

Intl1

Intl2

Intl3

Intl4

Intl5

Intl6

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Tuesday
May062008

2008 Recession Odds Plummet

Ever since initial readings of first quarter GDP came in at 0.6%, the odds for a recession over at Intrade have plummeted.  The Intrade contract defines a recession as two consecutive quarters of negative GDP growth.  The current price of the Recession in 2008 contract is 15, which means traders are putting the odds at 15%. 

Recessionodds

While the unofficial definition of a recession is two consecutive quarters of negative GDP growth, it doesn't have to occur to be an official recession as defined by the NBER.  And judging by the decidedly negative comments by NBER chief Martin Feldstein, it's highly likely that there will be an official recession at some point in the near future (even though his personal comments aren't supposed to affect the NBER's calls).  Below are the returns from a Google search for "NBER Feldstein."

Feldstein

We don't like to get into whether or not we're in an official recession, but we do think that Mr. Feldstein should keep his personal beliefs to himself if the NBER is supposed to give an unbiased reading of an indicator that affects numerous things including sentiment.

Tuesday
May062008

Yahoo! (YHOO) Ex-Microsoft

Below we provide charts of Yahoo!'s price since the start of 2006.  The top chart includes closing prices for all days, while the bottom chart shows closing prices without the period during the MSFT takeover period.  Either way, the charts looks pretty bad, but at least Microsoft added a couple bucks to Yahoo!'s share price even if they didn't buy them out.

Yhoo

Yhooexmsft

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Tuesday
May062008

Sector Relative Strength

Below we have updated our charts of sector relative strength.  In each chart, rising lines indicate periods where the sector is outperforming the S&P 500.  Charts with red shading indicate that the sector has underperformed over the last year.  Additionally, in each chart we have also included red dots that highlight each of the Fed rate cuts since August.

Over the last year, four sectors have underperformed the S&P 500 (Consumer Discretionary, Financials, Health Care, Telecom Services), while six have outperformed.  Consumer Discretionary stocks are consolidating after strongly outperforming in late January through early February.  Consumer Staples, on the other hand, are forming a new downtrend as investors rotate out of defensive sectors.  With oil trading over $120, the Energy sector is starting to rebound after pulling back from the top end of its range.  While Energy stocks are outperforming, Financials remain in a downtrend.  However, they are currently testing the upper boundary of that range, so how the sector performs in the coming days will give a good signal as to where these stocks are headed.

The Technology sector steadily underperformed the S&P 500 in late 2007 and January and February of this year.  Since then, the sector has made a new uptrend in relative performance, as earnings in the sector have generally exceeded investor expectations.

Relative_strength_050608a

Relative_strength_050608b 

Relative_strength_050608c

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Tuesday
May062008

Cramer's Four Horsemen Back in the Saddle

After Cramer turned his back on his four horsemen (with the exception of RIMM) in March, the stocks have been on a tear.  As shown below, AAPL is up 55% from its bottom, GOOG is up 44%, RIMM is up 58%, and AMZN is up 22%.  Cramer recently said he was sorry for turning negative on Google and relying on comScore's unreliable data.

As shown in the charts below, AAPL, GOOG and RIMM have each reached extreme overbought territory, all trading more than two standard deviations above their 50-day moving averages.  While it's great that these things have made solid comebacks, the risk/reward tradeoff for the bulls favors the risk side in the short-term.

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4horsemen1

Tuesday
May062008

That Was Fast: Oil Back to New Highs

In just ten trading days, oil hit a high, corrected by more than 5%, and then rallied back to hit a new all-time high of $119.97 yesterday.  Since its low in 2001 of $17.45, there have been only five other periods where oil hit a high, corrected by at least 5% and then rallied back to new highs in such a short period.  In those five periods, the average one week and one month returns were losses of 3.9% and 4.5%, respectively.

Oil_roundtrips

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Monday
May052008

Updated Year-End S&P 500 Price Targets From Wall Street Strategists

Below we highlight the most recent year-end S&P 500 price targets from strategists gathered weekly by Bloomberg.  Morgan Stanley and Gallatin recently stopped providing price targets, so we've crossed them out from the table below.  The average price target currently stands at 1,513, which is 7.52% higher than the current level of the S&P 500. 

Bespoke readers might remember that Goldman got rid of bullish strategist Abby Cohen when the market was cratering in March.  Cohen had a 2008 price target of 1,675 for the S&P 500, and after replacing Cohen at the market's bottom, Goldman's new strategist (David Kostin) lowered the firm's year-end S&P 500 price target from 1,675 to 1,380. 

Below is an excerpt from an article written at the start of earnings season:

Goldman Sachs’ new strategist told clients that the S&P 500 is likely to decline further in the coming weeks as a number of U.S. corporations, which are reporting first-quarter financial results, are likely to lower their 2008 earnings guidance.

“Although only a few firms have reported first-quarter results, early signs are awful. … We expect generally disappointing results and a swath of lowered profit guidance that will drive the S&P 500 lower in coming weeks,” Goldman Sachs U.S. strategist David Kostin wrote today in the note to clients. “Our message to investors is stick to the fundamentals … pay close attention to the conference calls of these firms to gauge the state of the U.S. economy,” Mr. Kostin also wrote.

Mr. Kostin last month replaced Abby Joseph Cohen, Goldman’s longtime investment strategist who had been bullish on the S&P 500 outlook for 2008, expecting the benchmark index to end the year at 1,675.

Since Goldman's shakeup in strategist land, the S&P 500 has risen back above Kostin's 1,380 target to 1,407.  Only time will tell if Goldman's decision to go bearish was actually the best time to buy all year. 

UBS and Deutsche Bank still have the highest price targets at 1,650, followed by Lehman at 1,630.  Goldman and Credit Suisse are the two firms that have year-end price targets that are currently lower than the S&P 500's current price.

Pricetargets505_2

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Monday
May052008

Overbought and Oversold ETFs

Each day over at Bespoke Premium, we publish our ETF Trends report along with a downloadable Excel file with technical information for more than 200 ETFs.  Below we highlight the ETFs from our report that are currently the furthest above and below their 50-day moving averages.  As shown, China, Brazil and Energy ETFs top the overbought list, with GXC leading the way at 13% above its 50-day.  FXI and EWZ are both 12% above, while OIL is 11.6% above.  India's ETN (INP) is also close to the top of the list. 

On the oversold side, precious metals ETFs are the furthest below their 50-day moving averages.  GDX is 11% below, while DBS and SLV are 8% below.  Currency ETFs like FXF and FXY are also on the list, although they're barely below their 50-days.  It's also notable that most Fixed Income ETFs are trading below their 50-day's at the moment.

Etfabove

Etfbelow

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Monday
May052008

Countdown to Primaries

As the North Carolina and Indiana primaries approach, most people (well maybe not the press and Republicans) are hoping that the results in these two states will help bring some clarity to who the democratic Presidential nominee will be.  While both candidates seem to have similar views in their big picture beliefs, there are key differences in how they say they would address some major issues, which The New York Times did a good job of highlighting this Sunday.  We would recommend that all serious investors make themselves familiar with these issues as the views of the eventual nominee will ultimately have an impact on individual companies.

For example, Senator Clinton's proposal for the creation of a windfall profits tax for major oil companies would almost certainly have negative effects on the energy sector.  Regarding capital gains, while both candidates have suggested that they will raise the capital gains tax (negative for the stock market), based on their rhetoric, it appears as though Senator Obama would be the democratic candidate that would raise the rate to a higher level.

Democandidates_3

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Monday
May052008

Q1 Sector EPS Growth vs Estimates

Q1epsgrowthIn the table at right, we highlight year-over-year Q1 earnings growth for the S&P 500 and its ten sectors.  As shown, Energy and Technology earnings growth has been the strongest at just over 22%.  These two sectors are followed by Materials, Consumer Staples and Telecom, which have all seen earnings growth of more than 10%.  Utilities, Industrials and Health Care are all in positive growth territory so far for the first quarter as well.  Only two sectors have seen negative earnings growth -- Consumer Discretionary and Financials.  Unfortunately, these two sectors have been a big enough drag to pull earnings growth for the index as a whole down 12.70%.

At the start of earnings season, estimates for S&P 500 EPS growth were at -12.8%, so analysts have been pretty much spot on so far.  On a sector basis, Financials and Consumer Discretionary have actually come in worse than analysts were expecting, but a number of sectors have reported much stronger than expected.  In the chart below, we highlight the difference between actual earnings growth and estimated earnings growth at the start of the quarter.  As shown, the Tech sector has been the strongest versus expectations, followed by Materials, Telecom, Consumer Staples and Health Care.  While Energy has seen the strongest earnings growth this quarter, it's actually worse than the 24.1% that analysts were expecting.

Q1actvsest