That Was The Week That Was-3rd Week October

Wake me up after the election….

Stocks closed on an upbeat Friday, slipping above the trading range they’ve been stuck in. Still concerns continue as investors worry that lenders are not showing the same confidence at investors, fears of the European debt contagion problems, and how much support we can expect from Washington. 

Asset Allocation doesn’t work in 2011 any more than it did in 2008. Oh, it’s alright to own bonds and cash,which will not stray too far off the mean when equities fall apart, but don’t try building portfolios with emerging market, small, mid or large cap equity funds or stocks in 2011 and expect a reverse correlation. The actuality in 2011 is that when one goes down so does the other. It works in reverse, too. When one goes up they all do. Which is a shame because it’s not supposed to work that way.

Bonds will go boom. Eventually. Sooner or later yields have to go up and principal down. And when rate do start climbing-eventually- they will continue for years and years, according to Bill Gross, of Pimco.

Volatility is causing a lot of the Big Boys from playing in the sand box.  The problem creates a wider than normal gaps in stock/bond price. One trader of a well known hedge fund tried to buy a stock and found that the price ran away from him as he was placing an order. Another saw his trade go sour even as he placed his order. According to Tuesday’s WSJ many investors, fund managers and hedgies, are staying on the sideline. With fewer investors, including banks, taking either side of a trade, air pockets develop where a 5% drop in price is common. Jeffrey Kronthal, co-founder of hedge fund KLS Diversified, said, ‘Any reasonable sized selling is driving individual bond prices down quite a bit.’ This chicken and egg syndrome is driving the big boys out of the market. 

  Euro Crisis drives markets lower as the Germans put the Greeks and European banks on the back burner Monday. Last week’s rally bespoke of our understanding of a new sense of urgency among European leaders. Monday illustrated that was not the case as markets swooned on a less than positive news that German Chancellor Merkel said discussions would most probably continue into 2012. Monday markets fell, including oil and gold. Out of 500 stocks in the S&P 450 were lower at the end of the day.

Another Day… and markets rose Tuesday! Bank of America was the largest beneficiary gearing up 10% as the banking giant reported 3rd quarter earnings that exceeded expectations. A triple digit Dow kinda day with gold and oil down slightly. Wholesale prices up- giving nudge-nudge to inflation. The positive mood and move was buoyed by news that Germany and France agreed to 2.7 trillion pound rescue package. The Dow climbed as high as 254 points on the news before settling under 200 for the day.

Blame Recovery on us. Old time spenders are now savers and hurting the recovery, according to Jon Hilsenrath and Ruth Simon, who seemed to have nothing better to do at the WSJ except throw stones at the non-spending, non- debt building middle class. The Federal Reserve and economists have a word for us paying down debt and its called deleveraging. From 1997 to 2007 household debt ballooned from 66% of economic output to 98%, and now is a paltry 89%. 

One point three billion customers….every time I think of China I think 1.3 billion people. And Apple says that China is their second largest market and the Apple CEO says the sky is the limit for sales in China. Sales in China for Apple popped to $13 billion from $3 billion just one year ago. The fastest growing middle class in the world. Shares of Apple fell Tuesday as the company missed numbers and after hours shares fell under $400.

Domestic Autos taking it to the Germans and Japanese because of increased quality and…ta-da…the cheap dollar. Yes, dear reader, Americans are able to compete because the foreign manufacturers cannot sell their cars here at a price less than what we can. The difference is more so in the small car market which is down 20% for Asian car builders. The price gap is the widest, according to Bloomberg, since 1999.

Tip…from the Weekday Trader…who likes cheap shares of Alcatel-Lucent (ALU). Shares are trading where they were 2 years past and are ‘incredibly cheap’, according to Michael Genovese, communications equipment analyst at MKM Partners. According to WT shares should be in the vicinity of $5.00 a share, or 70% higher than where they are today. The five dollars is using a modest 9x’s earnings versus a more normal 13-17 times earnings. Shares closed at $2.85 and had a 52 week high of $6.63. Morningstar likes shares at fair value of $3.50 but haven’t reported on them since earlier this year.

Wednesday the markets back down….as confidence lost in European leadership, Apple didn’t make numbers (a temporary situation), and the government’s ‘beige book’ on economic activities showed investors did listen to the Fed and pared back risk as suggested. You could have stayed in bed for all the day did for you. The numbers about the economy tell us we’re in a holding pattern making big circles in the sky and accomplishing not to much. Gold was down also oil (a smidge) but like everything else just hanging around for someone to toss a softball across the plate.

Coffee prices set to rise. Unexpected rain storms in Central America, where 10% of our java comes from, is experiencing more than unusual rains. Prices have already popped 5.7%.

Some stocks shouldn’t have been bought after the crash of ‘87’.

 

and I haven’t mentioned General Motors….

Experts at 24/7 WallStreet predict that there are other tech stocks that should do better than Apple going forward. Apple has a consensus price of $500 a share. The outperform list includes: Corning, Juniper, Micron Tech., EMC Corporation and Baidu, Inc.  

Barrons’ Cover proclaimed same such comments about tech Saturday, reporting that today’s tech doesn’t command much respect from investors. Barrons believes that companies in the wireless arena should do Great in the next 12 months and prospects for social networks bode well. Their top 10 includes: Ancestry.com; Apple; eBay;Electronic Arts; Fortinet; Fusion-io;Hewlett-Packard; Nuance Comm; Oracle; Tibco Software.

Slight gain Thursday…on a mixed market day for the Dow. Goldman Sachs Chairman Jim O’Neill thinks the US is doing a better job than people realize. ‘There seems to be this mood of inevitability…we’re back in a recession. I don’t really buy that.’

Joe Terranova on CNBC Fast Money…said Thursday to beware of paralysis from analysis. Stephen Massocca of Wedbush Morgan probably said it best, ‘It’s a ping-pong game- people have been burned by reacting to individual news stories only to have them refuted, withdrawn or contradicted.’

The Ben Bernanke told Senate Democrats that the European Crisis is Solvable. He also said that the Fed has done all it can to stimulate job growth and now it would have to be taken up by Congress. 

Time to Buy stock in Home Builders? FBN Securities thinks that several stocks have been beaten up good and tender enough for some investors to add them to their portfolio. FBN states that they think that the ‘space’ is offering the most inefficiencies since the beginning of 2009. They offer the following as long term holdings: M/I Homes, Ryland Group, PulteGroup, Beazer Homes and D.R. Horton.

Gold trickling down. $1623. on Thursday. Remember trading just weeks earlier close to $1900.

The Federal Reserve may be ready to buy mortgage backed securities –maybe. We’ll have to wait until the Fed meeting beginning of November but some argue that the ‘plan’ would be met with ‘fierce’ opposition. The argument for buying mortgages stems from the fact that interest rates on mortgages have not fallen as much as have Treasuries and refinancing existing mortgages is a way to take advantage of lower rates and offsetting a host of bank fees. The Fed action of pushing down rates may actually stimulate more refinancing even with odious bank fees.

Leap Wireless fell like a stone starting the first of July 2011 from a high of over $16 a share the stock plummeted and closed Thursday a penny over six bucks. Hot Research analyst Brigantine Advisors writes that the stock can pop 50% if….subscriber growth improves. Seems Leap has an improved subscriber growth through the company’s Premier stores, which sell only Leap products but the stores are not owned by Leap. Brigantine Advisors sees store growth around 500 for 2011 and more in 2012. The upshot is that by year-end 2012 shares could trade as high as $9.00.

Ford Upgrade by S&P and Fitch and shares responded by 4% pop on Friday. Ford also had new contract ratified by union which didn’t hurt the move on shares. Just a few days back Ford traded under $10 a share and closed Friday over $12.00.

Be still my heart…markets roared on Friday! What’s better than the Lions going 5 and 1? Having all indices shoot up to close the week so we can forget about stocks and savings and enjoy college football, Fall foliage and a hot bowl of chili. It’s 3 weeks of gains and Friday closed out with Dow up 267 and the S&P 500 index was plus 23 along with gold up $30., and oil (watch this) closed at $87.53. We could end up even for the year at this rate, or match our April high. Trading was big. This was an across the board rally predicated on Europe doing something by next Wednesday. Volume on the NYSE was 1.1 billion. So far in the 4rd quarter 75% of all reporting companies have earnings in excess of estimates.

The Big European Plan? Greek debt will peak at 186% of GDP in 2013 and decline to 152% by the end of 2020, even with all the austerity measures. The German plan is to have banks who hold Greek debt to reduce what the country owes them by 50-60%. Currently European banks have agreed to a 21% haircut. That’s the plan and I am not making this up….

Hedgies cut their positions in gold and silver, slightly, according to Murray Coleman. But, the managers increased their positions in heating oil plus crude oil, soybeans, gasoline and sugar. This has been the biggest push into commodity futures since the end of August.

Finally- 4 more banks closed by FDIC on Friday bringing the total to 84 so far in 2011.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.