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The Oxen Report – G-20 Inspiring World Markets, America Drops Top Spot

The World Economic Forum in Geneva, Switzerland that combines 13,000 world business leaders took a poll about the country with the most competitive economy. The USA lost its top spot to Switzerland, which got the top spot because of its "relatively stable" economy during these hard times. While I do not think this should be market moving news, it is very interesting indeed. For some time, America has continued to lose its preeminence among the world in both business and politics. This is yet another sign that the USA has its work cut out to build itself back up to something prestigious.

Okay enough with the rant. The big market moving news, however, is the G-20. The meeting of the twenty top world economies said that they will be keeping stimulus measures in place to continue boosting the global economy. Concerns over certain countries rescinding stimuli or pushing for countries to stop pushing certain packages was a worry. The markets in Asia and Europe have reacted very well to the news, and it appears that the American markets will, as well.

With pretty much no economic data on the day, the G-20 movement and market momentum will push the market, most likely upwards. At 3:00 PM, the market will get some news on consumer credit, but that will probably only play out effectively in the last hour of the day and tomorrow’s market.

One bit of weak news I did see this morning was from Smithfield Foods Inc. (SFD). The country’s leading pork producer was hit hard by weak hog prices, still slightly spurned by swine flu fears and a drop in demand for pork. The company reported a quarterly loss at -0.56 EPS, whereas the company was expected to earn -0.55 EPS. The company has dropped a slight 1% in the pre-market.

The world economy’s renewed optimism about recovery is definitely driving future prices higher. As of 8:00 AM, the Dow’s open price is up almost 90 points, while the Nasdaq is close to 16 points. Those numbers appear to be falling slightly with the Dow now looking at an 83 point higher open and the Nasdaq with 14, but these fiugures are still very high. The numbers may actually be too high and unhealthy, and we may see some slight profit taking to start the day off if things really do open this high.

Finally, my favorite market besides the stock market is the oil market. Crude oil is up to $69 per barrel in Asia on the bullish news from the G-20. Additionally, the oil markets are reacting well to the news that OPEC said the market for oil is healthy and there will be no need to cut supply. Fundamentally, a non-cut means more supply, but OPEC is saying that the supplies are at the proper level to meet demands currently, which is fundamentally very sound for the oil markets. I would expect American crude to rocket up this morning as things have turned pretty optimistic.

Let’s get into some plays to print you some dollar bills this morning.

Buy Pick of the Day: Ultra Proshares Oil and Gas (DIG)

It looks like the oil market bottomed here at $68 and is ready to make some movement back upwards as there is a renewed sense of optimism about the health of the global economy spurned by OPEC and the G-20 over the past two days. With oil set to open near $69 per barrel, DIG is definitely going to gap up and probably see a pullback in the first thirty minutes of the trading session. Yet, the fundamentals are there for oil to make some movement to the upside.

For one, OPEC is not cutting supply, but it is because they believe the oil market is "healthy." When is the last time investors heard that the oil market is healthy? Been awhile… The commodities market especially is such a momentum market that is made or break by calls such as the market is healthy or a major investor saying oil is toppy. This news is great for the markets.

When oil is going up, a normal oil and gas ETF should be increasing, as well. Higher oil prices equals higher revenues for oil companies. DIG has definitely been beaten down as oil prices dropped seven dollars over the past week, losing nearly 10% in value. The ETF saw a bounce back on Friday, but it has a lot of room on the upside for growth. The ETF is trading slightly in the oversold range, so a bounce back is definitely in order.

With oil jumping nearly $2.00 since Friday’s close, DIG is definitely going to gap up though. It is up over 3% in today’s pre-market trading. The whole market though should see a quick sell off of such high prices as signalled by Europe and Asia’s markets, as well as, a continued drop in futures.

Check back for exact entry and exit prices in my Morning Levels Alert, but this should be a solid day for this ETF with the proper entry lower than its open price.

Sell Pick of the Day: Smithfield Foods Inc. (SFD)

Smithfield Foods posted lower than expected earnings on Tuesday due to lower oil prices and debt writeoffs. The company reported a -0.56 EPS versus expected -0.55, but the company’s miss comes after a surprise beat to the upside and optimism in the company that came last quarter.

This quote, though, is what really scares me. "The sharply lower hog prices reflect the impact of the A(H1N1) outbreak at the end of the prior quarter and softer export demand," said Chief Executive Larry Pope.

Ah Swine Flu.

While the fears of swine flu will continue to decrease over time, in the period, SFD has taken on a lot of debt. The company, for example, had impairment charges of $34.1 million and debt extinguishment charges of $7.4 million. The company is writing off a lot of charges because the exports are not there, the demand is not there, and the price of hogs is dropping. While the economy is definitely sustaining, Smithfield is definitely on the back end of the recovery.

The only reason I would suspect SFD would not be a great short sale is if the market really rockets off, and SFD follows market sentiment. I think we are going to start the day though with some selling and profit taking at the higher open, and that should create a downward swing with a lot of short interest coming into the stock. That means we have to get into SFD right at the open.

Further, the technicals are just fantastic for a short sale. The stock is outside its upper bollinger band moving into the earnings report. That means a lot of investors, expecting better than expected results after last quarter’s beat, pumped up the stock. Now that the truth is out, all those investors are going to leave being replaced with short sellers. The stock is overbought and heavily overvalued. It appears the stars are aligning.

Good Investing,

David Ristau

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  1. Oxen Report Morning Levels

    DIG – The ETF has moved up to some pretty high levels up 4.25% in the pre-market trading. This is not worrisome really because we just have to know how to play the ETF. We are not going to buy at this level and get stopped out on some downward movement. Instead, we want to wait to buy in on some downward movement. I would look to enter in the 29.80 – 29.90 range…perhaps even a bit lower. On the other hand, these Proshare ETFs can move up 10% in one day like its nothing. So, if this thing is just taking off without any regression, I would definitely get in to take that upward swing.

    SFD – The stock has moved down tremendously from its pre-market levels that were first reported this morning, which was one of the reasons I was very bearish on the stock. I think it definitely is looking at a down day, but it down 4% in pre-market trading. Still buy in towards the open, but be careful. If the market really takes off this is going to be a great buy not a great short sale.

    Good Investing!

  2. Patiently waiting for the DIG pullback, like waiting in the midnight buffet line on a cruise ship, eyeing the crab legs.

  3. David,
    Missed DIG waiting for it to drop below 30.00.  Now almost 30.30.   Do you still suggest waiting for a pullback to 29.90 or did we miss it do you think?   Dangerous to buy at this level?

  4. David,
    DIG dropped to 30.10 while waiting your reply but now back up to 30.40.   Any advice?

  5. David,
    Frustrating.  Now over 30.50.  Looks like this one is a goner.

  6. David,
    I missed out on DIG this morning. but it is dropping again.  Do you recommend still trying to get in if it drops more?  Any recommendation on a good price?

  7. Hey Jere

    Sorry about not getting back to you. I was busy this morning from when I made my post till now. Well, DIG did pull back to 29.90 this morning, sorry you missed it.

    If DIG drops back to the low 30s it may be a pretty solid investment in the long run. Day to day its anyone’s guess, but it looks like it is on its way back up to 74-75 range and a price at 30 is a nice discount.

    Otherwise, I would avoid it and wait for another day.

  8. Oxen Report Midday Message

    DIG – I was able to get into the stock at 29.90 because the stock opened much lower than I had expected and was able to get a solid entry point there. From there, I am looking for a 2-3% increase in price for a sale. That would mean I am looking for an exit in DIG from 30.50 – 30.80. The ETF hit a high of 30.68 and has trended back to the 30.50 range. I would take the 2% as the market looks to be losing a lot of steam.

    SFD – Got into the stock at 12.70. Had that jump right at the beginning of the first couple minutes and I thought it was great place to enter, but the stock followed the market up as I was worried about it would. It is coming back down at this point from the session highs and trading right at 12.80s. Still holding onto this one. Would recommend getting out at break even because it is going to be very difficult to make much money on this one today unless the market really tanks out.

    Happy Investing!

  9. David,
    Are you saying hold DIG more than one day?

  10. Jere,

    I was saying that if you wanted to get into a position with DIG you could long term. I like oil’s prospects for increasing over the next couple weeks, so it may not be a long term play. That was my response to whether you should buy it or not.