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Saturday, February 24, 2024

Will We Break Out Wednesday? No.

So close but yet so far!

As you can see from David Fry's chart of the QQQQ's, the Nasdaq is looking to boldly go where no index has gone since last October, back through the September highs!  If you look at the chart pattern, we have a nice "W" bottom already in and a breakout here at 40 on the Qs could mean we're heading back to where the drop began – way up at 47.5.  That's a neat 20% gain from here and that would give us Dow 11,160, S&P 1,200, Nas 2,400, NYSE 7,800 and Russell 700.  

What?  Do you think that sounds like a bit much?  Well, if you question the resulting trend of a breakout then perhaps you should get ahead of the curve and question the breakout in the first place…    

Does it strike you as strange that a breakout here and a move up to the top of that "W" would put stocks back to where they were valued last June, when the average company earned twice as much on 35% more revenues?  Do you really consider MRO a value because they beat expectations of .53 by earning .58, "just" 39% below last Q2.  MGM is down 21%, TAP down 54%, RRI down 61%, APC down 37%, CTX down 49%, FST – 64%, LF -27%, PHM – 57%, VMC -29%, ADM – 24%….  Well you can look them up yourself here and I'm not saying there aren't winners in this market, but they are few and far between yet the rally is indiscriminate – as if the whole market is spectacularly undervalued. 

While I have long been in the camp of those saying "The economy is not that bad," I do have to, at this juncture, point out that the economy is not THAT good either.  Keep this in mind when you are buying stocks.  How far away are we from your company earning what it earned last year?  What is your expected growth rate.  Keep in mind that last June, your company had positive guidance and was projecting revenues and earnings 10-20% higher than that by 2010 and all we are saying here is how long will it take your company to get back to what it was earning in 2008?  If you say 2 years – then look at the price of your stock in 2006 – THAT is probably a fair value for your stock! 

XOM, for example, made $8.47 per share last year but made just $1 last quarter and projects making $4 for all of 2009.  In 2010, XOM projects to make $6 per share.  That's still 25% less than last year, when XOM topped out at $90 with oil at $140 a barrel and gas at $4 per gallon.  XOM is now trading at $70, just 22% lower than last year on 50% less earnings with oil at $70 and gas at $2.50 a gallon.  On what fantasy world do investors imagine XOM can possibly get back to last year's value in 2 years?  What would it do to the global economy IF XOM were able to charge us $140 for a barrel of oil and $4 for gas again?  Where would the money possibly come from?  Over 100M more global workers had jobs last year than currently do – some of those people must have been XOM customers.  So $70 for XOM now is silly – a ridiculous valuation based on a recovery not even the pump monkeys at CNBC would have the gall to project.

We are seeing too many earnings misses being "forgiven" this season, as if we are in such a bull-run market that a few peccadilloes along the way are simply ignored by investors and even companies with both earnings misses and lowered guidance are finding buyers (especially if they are in, of all things, the real estate sector).  This is madness, MADNESS I tell you and it's the same madness we had when the Dow went from 11,500 to 14,000 in 2007, even as the evidence of a massive housing and lending crisis was mounting and retail sales were plummeting as more and more discretionary dollars were being pumped into gas tanks.  The last time XOM earned "just" $4 per share was 2004, when they earned 3.89 per share (up from $3.23 the prior year) and were on the way to earning $5.71 per share in 2005.  What was XOM's stock price in August of 2004?  $45 a share!  What was XOM's stock price in Aug of 2005, AFTER they posted a 50% ACTUAL increase in per share earnings?  $65 per share!  How much are "investors" paying for the 2009 version of XOM that HOPES to make $4 per share this year?  $70. 

If all this seems fine to you – then by all means BUYBUYBUY but it seems to me a little caution would be advisable as some stocks – many stocks, have now gotten so far ahead of themselves as to be dangerous.  We are going to give the indexes until Friday to show us the levels but, on August 7th, like our man Clint, we will begin hunting for stocks that should be "unforgiven."  In contemplating the safest way to invest in our new $100K Virtual Portfolio, that will begin after August expirations, I found that there were few bargains out there to go long on but the opportunities to take short positions, in what is effectively a "Sell/Write" position, were simply everywhere.  In the short run, the market can do whatever it wants but, when we look at long-term investing, fundamentals do kick in and I can promise you that no one is going to pay $90 for an XOM that makes $6 per share – not for very long at least.  That means XOM meets our criteria for a sell/write as a stock that is NOT going to gain 20% in the foreseeable future and is more likely to turn down over time.  These are the kind of opportunities we'll be looking for to balance out our long market plays

Asia finally saw some red this morning with the Hang Seng falling about 500 points from an opening run up, down 300 for the day but giving up the last 3 days of gains (one could say just filling a gap if they bounce back).  The Nikkei dropped from the opening bell to the close but just 1.2% in the end and the gap was not filled but 3 days of gains were also erased.  "Players are worried that markets are becoming increasingly immune to positive cues, while any negative cues may trigger profit-taking," said Investrust chief executive Hiroyuki Fukunaga.  "A technical correction seems to be needed, to cool down the overheated market," said So Jang-ho at Samsung Securities in Seoul. "Better-than-expected earnings are already priced in, so players are now quietly waiting for U.S. jobs data (due Friday)," said Mizuho Securities market analyst Yukio Takahashi in Tokyo.

Europe is trending just over flat at 9am despite a 0.2% drop in June retail sales from May's report (and off 2.4% from last June).  Economists had expected a RISE of 0.2% and that sales would be off just 0.4% from last year so they missed it by a mile but – oh well!  Retail sales for meay were revised lower as well.  German retail sales were hit hardest, with a 1.8% decline from the previous month.  As I said to members this morning: "At this point, it’s important to keep an eye on the MSM as there is virtually no negative news at all and sentiment is very, very bullish."  This market will not turn down on bad news – there is plenty of that already, this market will turn down when the media turns on it and they will do that once cheerleading stops drawing ratings (something Tyler noted last week).  Both the BOE and the ECB have rate meetings tomorrow but it's doubtful there will be any changes. 

We got our ADP report this morning and 371,000 jobs disappeared in July, just a tad higher than the 365,000 losses expected and quite a bit better than June's 473,000 losses.  So that's "only" 844,000 less people working on August 1st than there were on June 1st – it's a slow march to victory I guess….  We have June Factory Orders (expected down 0.5%) and July ISM Services (expected 48.5, up from 47 but still contraction) at 10 and crude inventories at 10:30, which will be interesting as we had a 5.1Mb build last week and this week there will be a draw in crude (refineries upped capacity) but a probable build in gasoline in what should be the very height of summer demand.  Forecasters disagree with me and are looking for an 800,000 barrel build in oil and a 1M barrel draw in gasoline but they agree with me that distillates should build by about 1.2Mb as well.  We'll see if oil can break over the magical $72 mark.  We'd actually like them to so we can short them again but for now, we are sidelined on energy trading.

For now we will watch and wait.  We are still slightly bearish in our index covers as nothing that happened yesterday really impressed us.  While 40 is our key break out line on the Qs, SMH is already over 25, XLF is over 13.50, RKH is right at 75, XLB right at 30, XHB is right at 15 and, as I mentioned in yesterday's post, our dollar is right at 78 and $1.70 to the Pound is still key there.  If the dollar comes back, the market will drop hard (especially commodities) and, meanwhile, we'll be keeping an eye on these key levels to show us the direction.  You can be skepical and still go with the flow – it just makes your brain hurt a little if you haven't switched it off yet



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