Transocean - RIG - The Penultimate Zacks Top 10 for 2008

Here's the tenth teaser from Zacks:

Stock #8: Supplier to oil companies fueled by high prices. Recently, this brilliantly run firm acquired a competitor that broadens their already varied product line as well as their geographical footprint.

Stephen Ellis at Morningstar is intrigued by Transocean's acquisition of GlobalSantaFe. Ellis also sees RIG as a solid investment over the Zacks one-year time horizon and beyond:

The new Transocean is set to thrive in the next few years.

We like Transocean's deep-water focus, and its merger with GlobalSantaFe offers a tantalizing opportunity to deliver shareholder value. The combined 140-vessel fleet--twice the size of the next largest competitor--might be able to boost industry profitability by controlling excess capacity. As a result, we expect the combined Transocean to markedly improve on its historically poor returns on capital.

Transocean controls one of the world's largest deep-water fleets, which it contracts to oil and natural-gas companies worldwide. The combined Transocean will have nearly 40 offshore drilling vessels that can handle deep-water operations, more than 30 midwater vessels, and 68 jackup rigs. Discoveries of oil and gas thousands of feet below the surface of deep-water markets such as Brazil and India have caused a surge in Transocean's day rates and fleet utilization.

The limited supply of deep-water vessels worldwide has led to a supply-demand imbalance with operators scrambling to contract Transocean's rigs. The shift in contracting power to the offshore drillers means lengthier contracts and skyrocketing day rates. It also helps that large deep-water markets such as the Gulf of Mexico and the North Sea have little political risk for operators and offer better opportunities to retain control of the discoveries than the difficult operating environments in Russia and Venezuela. We expect day rates and fleet utilization to remain at elevated levels until new rigs are added to the market from 2010 to 2012.

We think the combined Transocean will be one of the best deep-water contractors out there. The source of its narrow moat will be its ability to control excess capacity by virtue of strong market share in several geographic regions and ship categories, such as drillships and semisubmersibles. Transocean's operational processes for employee safety, environmental concerns, and delivering quality rigs give it an advantage over established competitors. The company's industry reputation as a skilled and experienced contractor allows it to charge a premium. Further, its aggressive patent strategy has resulted in patent settlements with Pride, GlobalSantaFe, and Noble, protecting its technical leadership in the industry.

Among the oil drillers, RIG is the dominant player, but still carries a low PEG of 0.3; its peers have PEG ratios averaging closer to 0.7.

I haven't cited Jim Cramer for quite some time in this blog. Here, Cramer tossed off a mention of RIG in his second of ten predictions for 2008:

2. Oil goes much higher, maybe as much as $125 a barrel... We are running out of oil more quickly than people can imagine, and that means great returns for oil companies. Just buy the stock of the company you filled up at today or buy a driller (Transocean (RIG) is my favorite), then sit back and make money.

Cramer likes hawking "best of breed" stocks. I'm not going to contradict his favoritism. Do I think oil is running out quicker than commonly believed, and is going to climb another 25% in the next ten months?

Uh, no.

At that point, even filling up the Pig's wee beastie ('07 Honda Fit) would start looking onerous. If the Pig can't easily zoom out to DC, Boston, AC, the Hamptons, or even the Red Hook Fairway, then hopefully I'll have super-sized shares of RIG to liquidate in exchange for some precious petrol.

Oil just hit $100 again, so it's timely for me and whoever is reading this to revisit Chris Krasowski's piece on RIG:

Oil Hits $100: Time to Look at Transocean

Well its finally happened. Oil breached the triple digital per barrel threshold. It was bound to happen as the supply numbers dimished rapidly and all the civil unrest in the oil producing nations around the world.

Oil eased a bit from record levels but still managed a record close above $99.
Going into the spring, its anticipated that oil will retreat from these lofty levels, but from a technical trading standpoint, oil is still headed slightly higher. The psychological level of $100 is firmly being pushed on the commodities front.

There's a possible trade here, and I specifically like the drillers, such as Transocean (RIG), whose offshore operational rigs are plentiful and among the best in the business; the company just got another endorsement from the famous Jim Cramer. While RIG has indeed doubled over the course of a year, the important earnings metrics haven't yet flown off the handle. So there is still some room there to expand future P/E metrics. But as energy and oil related stocks reach further and further highs, it'll take rationality to not get caught up in the expected seasonal fall.

Notable Calls made its bullish call on RIG on December 19th:

Banc of America is out with a good call saying they see incremental demand for deepwater rigs from exploration success driving additional backlog and ultimately multiple expansion from the higher visibility. Among the names, the firm reits Buy on Transocean (NYSE:RIG) with a $175 target.

Stronger-for-longer. Yes it's a sell-side cliche, but with the industry's inability to keep up with growth in crude oil demand (the tyranny of geology and politics), the lack of deepwater rigs (73% of floater days are already committed over the next 36 months), and upside from a forecasted increase in exploration activity (BAC estimates Tupi alone needs an incremental 25-50 deepwater rig years), they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future. While the lack of rig availability may limit 2008 EPS upside, the increase in pent-up demand, most visibly in the deepwater rig market, implicitly provides backlog for service companies as well, and should make for a multiple expansion the story for 2008.

While forward cash flow and earnings multiples have compressed for the better part of the last four years, multiples appear to have bottomed. With the pent-up demand offering unprecedented visibility, they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future, and drive multiple expansion in 2008. Interestingly, multiples for the group also expanded as the cycle matured back in the 1970s cycle.

Notablecalls: BAC's comments make sense. Companies with deepwater exposure may represent a safe haven for now and we will see multiple expansion there. The chart on RIG looks good, and I think BAC's call will generate some buy interest in the name.

Finally, let's look at some charts.

Here's the daily:



And here's the weekly, for a broader view of RIG's price movement:



The middling RSI 2-day and 14-day readings on the daily chart do not currently offer up a "Buy me now!" signal. The RSI 2-day reading of 78 on the weekly chart suggests to me that I should wait for a pullback of the larger market before building up a buy-and-hold-for-a-year-or-more position in RIG.

LDK Solar - LDK - A Zacks Top 10 for '08

I'm not surprised to see a trendy solar stock amongst the Zacks Top 10 for 2008, considering how First Solar (FSLR) climbed 700% during 2007.

With oil returning to the $100 level, it's a fine time to consider investing in alternative energy companies.

Stock #9: Industrial-strength supplier engineers dynamic growth. Strong margins, geographical diversification, and great management make for a winning combination.

Morningstar does not have an analyst report for LDK, but they are so kind as to present a succinct description of the company:

LDK Solar is a Chinese pure-play manufacturer of crystalline solar wafers. Solar wafers are the raw materials used by manufacturers of photovoltaic (PV) cells for the generation of electricity from sunlight. Wafer manufacturing entails the growing of silicon ingots in furnaces and slicing or "wafering" those ingots into usable form for solar cell makers. This positions LDK at the front of the PV food chain. Despite having only commenced operations in mid-2006, the company has quickly become the fourth largest supplier of polycrystalline wafers in the world and is on track to become the largest by the end of the decade.

Morningstar also offers up some attractive valuation numbers for LDK, like a PEG of 0.2, and a forward P/E of 8.9.

Without my M'star fix, I had to paddle out a little further into the interweb to learn more about LDK, and to flesh out the financial data.

First up, today, Chris Tyler from Optionetics.com reported on a Goldman upgrade:

In other stock news, LDK Solar (LDK) is struggling to keep some of last week’s upswing for the alternative energy sub sector to intact. The manufacturer of “multicrystalline” solar wafers was raised at Goldie to “Neutral” from “Sell” while also being removed from the banker’s Asia Pacific Sell List. Shares are up 1.50 at 35.84. Waiting in the wings, the group which includes First Solar (FSLR), SunPower (SPWR), Jaso (JASO) and MEMC (WFR) will have a potential earnings catalyst from one-time or sometimes growth upstart Suntech Power (STP), which reports tomorrow morning.

Bloggingstocks.com noted an earlier upgrade of LDK on January 9, 2008:

CIBC upgraded shares of LDK Solar (NYSE: LDK) to Sector Performer from Sector Underperformer following a meeting with management as they have greater visibility on polysilicon supply for 2008 as well as comfort that average sales price declines will be lower than previously expected in 2009.

Here are links to some pump-action from Seeking Alpha's David White here, here, and here.

Click on the links if you're interested. According to the disclosure on Seeking Alpha's website, the author has been long LDK while writing each of those pieces over the last three months. A skeptical reader should also consider that over the last three months, LDK moved from $27 to $75, back down to $30, and is now trading around $35.



I counted 72 posts regarding LDK on Seeking Alpha, including the three David White posts. That's a lot of commentary on a young company with a volatile stock in a red hot sector.

For a more reasonably bullish approach, read this piece by Zachary Scheidt.

For a growling, as opposted to snorting, perspective, here's an excerpt from a skeptical outlook on LDK from Stephanie Grimmett:

A former employee told reporters that a large portion of the company’s inventory was actually junk, waste silicon that LDK had no way to process into new wafers.

LDK denied the accusation (at one point the solar cell company even made the claim that just because it couldn’t process the silicon right now, it didn’t mean it wouldn’t develop the technology in the future). And LDK brought in an external auditor to prove it was telling the truth.

As is usually the case in a Wall Street scandal, the actual truth is less important than a few soothing words and a nice soft-shoe to make investors feel better about the situation. And that’s what LDK gave us.

The external auditors swore the solar cell company had just as much silicon as it had claimed. And the stock soared on the news, without anyone mentioning whether or not LDK could do anything with that silicon.

LDK still hasn’t proved it can turn any of that waste silicon, which includes defunct wafers sold as garbage and ingots too impure to be processed by other solar cell producers. But maybe we weren’t supposed to notice that.

If LDK can’t use its recycled silicon, if that former employee was right, then the company’s only advantage is its cheap Chinese labor. Don’t get me wrong, we’ve built plenty of fortunes on a pure-play outsourcing deal.

But that cheap labor doesn’t make up for LDK’s lack of processing know-how. And it won’t prevent the company’s profit margins from continuing to fall as silicon prices grow at an alarming rate in the next few years.

Silicon is already incredibly expensive compared to prices even a few years ago. And solar cell and semiconductor manufacturers are already preparing for a probable shortage. Companies are setting up contracts for silicon years or even decades in advance, as if the stuff was… oil. And as technology puts computer chips in more and more devices in our everyday lives, don’t be surprised if silicone becomes as precious a commodity as oil.

In that environment, I don’t trust a new kid on the block with nothing to recommend it but inefficient business practices and penny-a-day labor.

If you want to grab some gains in the short term, go ahead and jump into LDK Solar, but be prepared to jump back out again within a few months or weeks. If you’re looking for a long-term investment, don’t put money into the stock. It’s not a durable competitor in the silicon wafer industry.

LDK seems to be a bold pick amongst the Zacks Top 10. Its financials and recent stock price scream value, but there are challenges to comfortably buying and holding this stock. These challenges to understanding LDK include the need to filter the cacophony of commentary on this stock and stomaching the extreme reactions on this company's news. And then there's the trust and transparency issue with a young Chinese operation.

LDK could be a great investment, especially a short-term one, but I'm not convinced its value and growth combo fits with the Zacks Top 10 thesis of buy, hold for a year, and forget.

Huaneng Power International - HNP - A Zacks Top 10 for '08

Zacks teasing pitch for HNP:

Stock #4: Chinese power company becomes more powerful. They increased power generation by double digits in a country that's thirsting for consumable energies.

Click on today's HNP chart below to fill up your monitor with historical price goodness.



As you can see, HNP's stock price has been beaten down as of late, towards its 52-week low.

Here's what Morningstar analyst Paul Justice thinks of HNP:

Huaneng Power International is the largest independent electricity producer in China. Due to strong growth in demand for electricity and an aggressive acquisition strategy, Huaneng has enjoyed robust demand growth in recent years. Now that government appears willing to link electricity prices more closely to coal prices, after a few years of rapid and uncollected cost increases, Huaneng appears ready to harvest substantial profits for several years and deliver hefty returns to risk-tolerant investors.

We expect demand for electricity in China to increase at a rate of about 10% annually during the next several years, providing Huaneng with a solid operational tail wind. To make things even better, most of Huaneng's power plants service the more developed eastern portion of China, where electricity demand is consistently strong.

...

As it is controlled by HIPDC (Huaneng International Power Development Corporation), a state-owned company, and has strong relationships with the central and local governments in China, Huaneng has been able to build a portfolio of about 25 power plants, most of which are protected from significant competition.

Typically, the price of this protection from competition is strict regulation of the amount and timing of electricity generation and rate-setting. This is the case for Huaneng, which has little control over the price at which it sells its electricity. If costs increase significantly, the company might not be allowed to pass these higher costs on to its customers. Not only is such an event a risk, it has also been a reality in the last year, when coal prices skyrocketed but Huaneng was unable to raise prices in step, leading to a return on invested capital that failed to match the company's cost of capital. We expect coal prices to wreak less havoc on Huaneng going forward, which, accompanied by strong revenue growth, should push Huaneng's operating margins higher during the next decade.

So it seems that the price of HNP shares is down thanks to the overall decline in the price of shares in Chinese companies, combined with the recent increases in the price of coal.

The Hang Seng index is back to levels last seen in July. Of course, the index climbed 50% and then plummeted back over the course of the last six months or so.

With regards to the price of coal, Goldman Sachs today called a top on the price of coal, which should be good news for a coal consumer like HNP.

From the Marketbeat blog at WSJ:

February 15, 2008, 4:05 pm
Four at Four: Letting It Steep
Posted by Tim Annett
Coal stocks got burned up Friday after analysts at Goldman Sachs downgraded the sector to 'cautious' from 'neutral.' The problem in Goldman's eyes? Coal has come too far, too fast. "A perfect storm of international supply problems has driven U.S. coal pricing — and coal stocks — to record levels," Goldman wrote. Indeed, coal stocks have been beating the market by a healthy margin, gaining about 30% since the middle of last month, versus a 3% increase over the same period for the Russell 3000. Consol Energy shares dropped 6% after Goldman cut the stock to "neutral" and removed it from its conviction buy list. Peabody Energy, likewise cut to "neutral" by Goldman, tumbled 2.5%

From CNBC:

Feb.15
7:07 PM ET
14 minutes ago
Dow, S&P and NASDAQ Turn in a Positive Weekly Performance Despite Negative News
Posted By:Gina Francolla | Yolaiki Gonzalez | Giovanny Moreano
Topics:Commodities | Stock Market

-Central Appalachian Coal that trades on the NYMEX is up 50% in 2008.
*Coal producers fell today on the Goldman downgrades due to historic multiples and the run up in commodity prices that are most likely at a top. Foundation Coal is trading at a P/E of 72.1.

Keith Fitz-Gerald from Moneymorning.com gives seemingly conflicting advice in suggesting shares of HNP. He touts the stock in spite of his thesis that the price of coal is going to double, contradicting the Goldman outlook.

A good ancillary play on coal is Huaneng Power International Inc. (HNP). Huaneng Power is a major China power producer - meaning it's also a big user of coal.

At yesterday's close at $34.57, Huaneng's share price is near its 52-week low of $31.92 and is well off its 52-week high of $57.50. According to Fitz-Gerald, rising coal prices have played a part in Huaneng's share-price decline.

Fear not, Fitz-Gerald says. China's central government would never allow a major power producer to fail. And the share price will rebound and grow as China's economy advances, he said.

Plus, Huaneng's stock pays a $2.70 a share dividend, giving the stock a yield of about 8%. In a market as volatile as this one has been, owning income-producing shares is crucial for investors who want to maximize their portfolio profits, according to Fitz-Gerald.

HNP has a PEG of 0.6 according to Morningstar. That's better than its sector competition.

My take is HNP has many attractive attributes:

• Low PEG;
• Beaten-down share price that looks like it may have bottomed out;
• Generous dividend approaching 8%;
• Goldman-endorsed top call on coal prices; and
• The continued growth of China after a significant but healthy market correction.

GME - GameStop on Sale?

Well that was quick. GME went on sale today. Hopefully it'll be on sale tomorrow, because I neglected to pick up any shares.

Today's close: $45.76
RSI(2) = 3
RSI(14) = 32

There was a huge volume spike at around 2:30pm as the price quickly rose from 45.30 to 45.75 in a matter of moments. The 50-week moving average for the stock is 45.50. I guess you could say the stock found some support at that price.

Why the (almost) Presidents' Day sale? I found a possible explanation from James Brightman at gamedaily.com:

Video game specialty retailer GameStop has seen its stock take a dip thanks to Microsoft's Xbox 360 supply issue, which could linger for a few months.

Earlier we reported on the supply issue Microsoft has been facing with its Xbox 360. According to Corporate VP Jeff Bell some retailers have been "really upset," and he noted that it may hurt sales as well. The news is apparently already having an effect on leading video game retailer GameStop, whose shares (GME) have dipped nearly three percent to $45.91 (as of press time). The company's shares hit a low of $44.88 during morning trading.

According to UBS analyst Ben Schachter, "supply will remain an issue for at least a few months. This near-term issue creates a buying opportunity in GME in our view."

Although GameStop may be slightly hurt in the near-term, over the long-term UBS remains quite bullish on the retailer. "...GME's growth story remains intact longer-term. We believe the co. will continue to expand margins from debt reduction and mix improvements (higher software sales vs. hardware and more used software vs. new). Moreover, while 360 supply issues may impact industry growth a bit, overall we remain bullish on industry fundamentals. Finally, GME continues to execute, establishing itself as the game retailer of choice," Schacter said.

UBS has upgraded GME to a "Buy" rating (thanks to the opportunity presented by the 360 supply issue) and is maintaining a price target of $64.

GameStop - GME - A Zacks Top 10 for '08

It wasn't hard to ascertain which company Zacks meant from the following description:

Stock #5: Video game seller to win big. Now is the time to own this stock. Profits from next-generation video game systems are expected to pour in for at least the next two years.

I'm not sure Zacks' plug got it right. Apparently, the profits won't necessarily come from the sale of the Wii, Xbox 360, PS3, and handhelds, but from GameStop's used game business.

From Morningstar:

While the availability of new video game software and consoles attracts gamers to the company's stores, sales of used games generate more than 40% of GameStop's profits. The company has no pricing power on new products as retail prices are dictated by manufacturers and competitive forces keep margins low.

However, the company's market in the trading of used games is unique among North American retailers and gives GameStop pricing flexibility. GameStop allows gamers to trade in used games and video game hardware for discounts on new purchases. The company then turns around and sells the used products to customers looking for deals at below prevailing market prices for new products. GameStop's market in used products thus provides the company with a dual edge over competitors.

First, hardcore gamers who like to play the latest hit game are more likely to purchase new games from GameStop as they can trade in games they have outgrown for discounts toward their purchase.

Second, value-oriented casual gamers--who tend to be comfortable with playing older games at a lower price point--are more likely to look to GameStop for their purchase of used games as the company's inventory of such products is very robust. This unique position allows GameStop to make a handsome profit from its trade-in used games, with gross margins approaching 50%, compared with gross margins of about 20% on new games.

That's an impressive business model that allows GameStop to profitably participate in the churning of video games as they are sold and re-sold. And I particularly appreciate the concept that GameStop draws in the spectrum of video game shoppers. Using outmoded music store references, it's like GameStop has combined the Top-40 draw of a Sam Goody



with the trade-ins and back catalog of a used record store like Vintage Vinyl.



Speaking of the outmoded dinosaur record store business model, Morningstar sees threats to GameStop's business on the horizon, but not in the one-year investing timeframe for these Zacks Top 10 stocks:

[T]he company's business model could be compromised in the long run by industry forces beyond its control. Video game publishers are increasingly attempting to improve profitability by selling incremental game updates directly to gamers through online micro-transactions. A steady stream of exciting new features could persuade gaming enthusiasts to hold onto their library of games, thereby drying up the supply of used games. Additionally, rapid growth in residential Internet bandwidth has the potential to enable direct delivery of new games to gamers over the Internet, bypassing retailers like GameStop. We do not expect either of these possibilities to materialize and impact GameStop's business in the next two to three years; however, the threat of technological disruption over the next five to 10 years prevents us from assigning a moat to GameStop at this time.

So is it a good time to buy shares of GME? I found a post from Market Intelligence Center, via Google Finance, that says no:

GameStop (GME) NewsBite - Insider Trading Indicates Bearishness on GameStop
Posted on Wednesday, February 13, 2008 1:35 PM
GameStop Corp. (GME) opened at 49.38. So far today, the stock has hit a low of 46.25 and a high of 49.52. GME is now trading at 48.00, down 1.10 (-2.23%). The stock hit its 52 week high of 63.77 in December and set its 52 week low of 24.95 in March. GME has been climbing for the past year. A quick look over insider trading shows that insiders have sold over $2 million worth of holdings in GameStop over the last three months, with no buying activity, indicating that we could see some additional weakness ahead. Technical indicators for the stock are bearish but slightly improving while S&P gives GME a neutral 3 STARS (out of 5) hold rating. If you're looking for a hedged play on this stock, consider a March bear-call credit spread above the $55 range. GME stock could rise up to 14.6% before expiration and this position would still be profitable.

Bold added by yours truly.

Looking at the daily chart for GME:



The RSI(2) of 5 gives a short-term buy signal.

Looking at the weekly chart for GME:



We see a consistent bullish trend, with the share price approaching the 50-week moving average. Share of GME have not crossed that 50-week moving average since mid-2006, and even then, shares did not fall far below that average.

My reading of the charts is that it's a fine time to pick up shares.

Trader Mark over on Seeking Alpha lamented Gamestop's "No Win Situation" while retaining his essentially bullish outlook on the company's prospects:

Very tough sledding... Gamestop (GME) is a great example. I have opined in the past that the last thing consumers will give us is electronics - whether it be gadgets, video games, etc. To show how hard it is to invest in any form of retail right now, all this company did was post a blow out quarter, raise guidance, perform... perform... perform... and the stock is down 5%. After dropping from $62 to $55 in the past week. Just treacherous out there, and anything within six degrees of any consumer is being shot.

If so many other names I like were not "on sale," I would be heading into Gamestop which is a de facto monopoly on video game retail sales... gamers will cut back on eating before they give up their games! But that doesn't matter in this type of market. This reminds me of Research in Motion (RIMM) - the stock just reported two weeks ago, provided great guidance and said they see no slowing. Not a week later, the stock is crushed on fears of slowing! Which means guidance is not even worthwhile after a week, because fears are so high out there. Toss out what the company said, literally 10 days ago, because the End of Days is approaching. This seems to be the approach.

I always find it interesting that investors want companies to beat earnings... if they don't beat them, they crush a stock... but when a company issues conservative guidance (that it knows it can beat), it still gets crushed. There is no winning and that's the part of earnings season I really hate. I love the "information acquisition" part; I hate the investor reaction part.

GameStop Corp (GME), the largest U.S. video game retailer, raised its quarterly earnings estimate on Thursday after holiday season sales rose sharply on blockbuster games like "Guitar Hero."
But shares of GameStop fell 6 percent even after the announcement as analysts, while bullish on the stock, cited concerns that video game sales could not maintain their momentum over the short term.
"First of all, the numbers were lights out," said Mike Hickey, an analyst with Janco Partners Inc. "But the concern is that their same-store sales guidance was raised to 15.5 percent to 16.5 percent, which is measurably below the 20 percent they just produced for the holiday period." (notice the word raised... they raised guidance but since it was not as high as the holiday period its 'bad'. Don't people realize this is a retailer? Retailers have higher sales during the holiday period - hello?)
"But I will say this is a conservative management team, and we continue to like the name. They appear to be doing all the right things."
GameStop's comparable store sales for the holiday period increased 20 percent, while total store sales for the period rose 34.7 percent, it said. Given the rise, the retailer increased its fiscal fourth quarter 2007 comparable-store sales estimate from a range of 7 percent to 9 percent to a range of 15.5 percent to 16.5 percent. (last I checked, that was a good thing.... but apparently not anymore)
GameStop also boosted its fourth-quarter diluted earnings per share estimate to a range of $1.09 to $1.10. Full-year earnings per diluted share are now estimated to be in a range of $1.75 to $1.76, or 13 cents per share higher than guidance issued in November. (not good enough... because video games may slow in 2014 - sell!)
Another analyst, Arvind Bhatia of Sterne Agee, reiterated his buy rating on the stock and said the pullback marked a ripe time to buy shares. "We think even though the stock is down today on the 'sell on news phenomenon,' we were fundamentally more impressed after the release than before the release," Bhatia said. (sell the news? what have they been selling each day of the past week? sell the pre-news?)
And this is why this market is completely treacherous right now - logic does not apply, and good stocks are thrown out with bad. Stock picking is rather useless as 'baby bathwater' theory is now upon us. How long it lasts is the open question and if anyone has that crystal ball, drop me a line. But when I see action like this, the contrarian in me wants to get very very long this market. Oh wait, already am...

Fundamentally and technically, GameStop looks like a solid addition to a buy-and-hold-and-ignore portfolio, the kind that Zacks promoted with their Top 10 package.

DXD - When the Dow Looks Short-Term Overbought

Yes, I've made another pwetty graph with unseasonally Christmas-y colors, depicting some simple technical data. Please click on the image to make it larger and somewhat readable.

The chart shows the 30 Dow components, along with their corresponding 2-and-14-period Relative Strength Index readings at the close of each day. When the RSI(2) falls at or below 10, that grey cell goes green. When the RSI(2) is at or above 90, the cell goes red. Green signifies short-term oversold, and suggests going long; conversely, red signifies short-term overbought, and suggests going short.

At the close of market today, the Dow rose 1.45% on light volume. The Dow is up 3% for the week, after last week's 4.5% drop. Fifteen of the 30 Dow components show up in the red today on the above chart. Another six components have RSI(2) readings at or above 80.

There are zero green boxes.

When the Dow looks short-term overbought, I like to take a look at shares of DXD.



Guess I liked what I saw. I had an order filled today at $55.48 a share. This is intended to be a short-term play, using straightforward short-term technical indicators. The goal is to trade out of the position within ten days, if/when boxes on the chart start to turn green.

Flowers Foods - FLO - A Zacks Top 10 for '08

This is the Zacks teaser describing FLO:

Stock #2: Food company feeds on higher prices. This market leader has pushed through price increases, and looks ahead to annual double-digit growth for fiscal 2008.

Here's the Reuters description of Flowers Foods' business:

Flowers Foods, Inc. (Flowers Foods), incorporated in October 2000, produces and markets bakery products in the United States. The Company consists of two business segments: Flowers Foods Bakeries Group, LLC (Flowers Bakeries) and Flowers Foods Specialty Group, LLC (Flowers Foods). Flowers Bakeries produces and markets its bakery products in the southeastern and southwestern United States. Flowers Bakeries markets a range of breads and rolls under its Flowers, Nature's Own, Whitewheat, Cobblestone Mill, Captain John Derst, Dandee, BlueBird, Butter Krust, Mary Jane, Evangeline Maid, Ideal and Mi Casa brands. Flowers Specialty produces snack cakes for sale to co-pack, retail and vending customers, as well as frozen bread, rolls and buns for sale to retail and foodservice customers. Flowers Specialty products are distributed nationally through mass merchandisers, brokers, and warehouse and vending distribution. On February 18, 2006, the Company acquired Derst Baking Company (Derst).

Morningstar is favorable on Flowers Foods' prospects, although the stock is priced near its 52-week high, and Morningstar's fair value. It's a well-run company in a tough sector.

There hasn't been much to like about the packaged food business in the past several years, as the categories face increased private-label penetration, declining brand relevance, and changing consumer preferences. Manufacturers such as Kraft and Sara Lee struggle to carve out successful strategies to cope with eroding demand for their products. With this in mind, it's all the more surprising to find Flowers Foods, a small bread company, beating the odds.

As a regional manufacturer of bread, rolls, pastries, and snack cakes, Flowers implements a focused, two-prong strategy. The firm develops branded bread products that meet consumer needs, and it leverages its network of independent distributors to effectively service 3,000 direct store delivery routes. Flowers has strong brands in the bread aisle, including Nature's Own and Cobblestone Mill, and it strives to keep its products front and center in a rather staid category.

The bread aisle is crowded, however, and it's not just strong brands that have helped Flowers achieve a 23% market share in the Southeast. The company has an enviable DSD network of independent distributors that distribute 80% of its products to grocery stores, convenience stores, and food-service customers such as restaurants. The remaining 20% of Flowers' distribution is direct-to-customer warehouses. With efficient bakeries, and distributors who benefit when customer accounts are maximized for sales and profitability, Flowers carefully builds out its DSD territory. Each year, new markets add about 1.5% to sales, and the firm is very proactive about making investments in technology and capacity.

Sounds to me like FLO is a nice house



surrounded by this



and this



in a crap neighborhood.

Morningstar seems to agree:

Flowers continues to focus on what it does best: building market share carefully, introducing new products, and finding bolt-on acquisitions it can easily integrate. We think it remains a solid choice in an otherwise unattractive industry.

Generally, I would rather invest in a strong business in a strong sector. So how does FLO sweeten their offerings and make them more enticing? How about reporting solid earnings and a share buyback:

Market Report -- In Play (FLO)
January 31, 2008 7:38 AM ET
Flowers Foods beats by $0.02, beats on revs; guides FY08 EPS in-line, revs in-line Reports Q4 (Dec) earnings of $0.23 per share, $0.02 better than the First Call consensus of $0.21; revenues rose 8.1% year/year to $473.7 mln vs the $468.8 mln consensus. Co issues in-line guidance for FY08, sees EPS of $1.07-1.17 vs. $1.12 consensus; sees FY08 revs of $2.21-2.258 vs. $2.2 bln consensus.
__

BOSTON (Thomson Financial) - Flowers Foods Inc. Friday declared a quarterly dividend of 12.5 cents a share, and said it is now authorized to repurchase up to 30 million common shares.

The dividend is payable on March 7, to shareholders of record on Feb. 22.

Flowers Foods (nyse: FLO - news - people ) said the board increased the company's share repurchase plan by 7.1 million shares to 30 million from 22.9 million.

Flowers Foods has about 91.9 million shares of common stock outstanding.

Shares of the Thomasville, Ga.-based provider of packaged bakery foods rose 1.2% to $24.40.

FLO's PEG ratio of 1.9 is empirically high, as well as high in regard to its competition. Like EMN, I do not find FLO shares to be trading at a compelling price. At today's close of $24.22, I would develop an appetite for FLO at an 8-10% discount, closer to the 200-day-moving-average--not exactly the discount on day-old baked goods, but a discount nonetheless.

Albemarle Action - Update on a Zacks Top 10 Pick for 2008

Albemarle shares shot up over 4% today.

Why?

Some unsubstantiated rumors:

Germany's BASF eyes Albemarle: report
Tue Feb 12, 2008 10:44am EST

FRANKFURT (Reuters) - Germany's BASF (BASF.DE: Quote, Profile, Research) may be interested in buying U.S. chemicals group Albemarle (ALB.N: Quote, Profile, Research) for $4.9 billion, German weekly magazine Capital reported.

The magazine, which did not give a source for the report, said BASF could be interested in Albemarle's lucrative refinery business, which generated about 40 percent of its sales.

A BASF spokesman declined to comment on market speculation.

Albemarle shares were up 1.2 percent at $38.94 at 1450 GMT, while BASF rose 1.8 percent in a broadly higher market.

Albemarle, which also focuses on polymer additives and fine chemicals, posted net profit of $230 million on net sales of $2.3 billion last year.

BASF, which competes with the likes of Dow Chemical (DOW.N: Quote, Profile, Research), DuPont (DD.N: Quote, Profile, Research), had said it could spend up to 10 billion euros ($15 billion) on acquisitions.

The German group is also in the process of selling its styrenics operation, which had annual sales of around 3.2 billion euros.

BASF has sold weak performing assets and trimmed highly cyclical businesses. It spent about 7 billion euros in 2006 to buy U.S. catalyst maker Engelhard, the construction chemicals business of Degussa and U.S. resin maker Johnson Polymer.

(Reporting by Mantik Kusjanto)

ALB shares closed today at $39.74. That corresponds to a market capitalization of $3.81B. If ALB were to be bought out for $4.9B, that would translate to an approximate share price of $51.11.

That type of return-on-investment certainly wouldn't suck.

If you were thinking of checking out the options market to try to leverage on this bit of speculation, well, that's already gotten expensive. From Andrew Wilkinson's Daily Options Report:

(ALB) - Shares in specialty chemicals maker Albemarle are up 6% today at $40.10 on a resurgence of takeover chatter suggesting German chemicals giant BASF is on the verge of a $4 billion-plus bid for the company. Albemarle has a strongly heterogeneous product palette, producing polymer additives for flame-retardant and antioxidant use, catalysts for the oil refining industry, pharmaceuticals and other complex chemicals for industrial use. Although the takeover chatter remains unsubstantiated, some analysts have given credence to BASF as a possible suitor on strength of Albemarle's oil refining catalyst activities, which are said to account for half of its profits. This is the second session in 7 that Albemarle call volume has picked up on BASF chatter, and today's heavy buying interest in February 40 calls has driven overall volume to more than 4 and a half times the normal level. It also appears to have driven implied volatility higher by more than 20% to 50.7%. We would add however that there's not a lot of momentum elsewhere in the Albemarle calendar – trading interest is firmly rooted in the front-month, at-the-money.



Disclosure: I picked up some ALB shares earlier this week. I will add to the position once the rumor-mongering settles down.

Eastman Chemical - EMN - A Zacks Top 10 for '08

Stock #7: Chemical producer finds formula for growth explosion. Emerging Asian markets are accelerating the demand for their chemical products. A new plant will help them ramp up production.

Here's a nice, concise overview of Eastman, from Morningstar:

Eastman Chemical is the world's largest producer of polyethylene terephthalate, a plastic used to make bottles, synthetic fibers, and other packaging products. The firm is also the world's second-largest producer of acetate tow, a key ingredient in cigarette filters. It is a leading supplier of intermediates used in the manufacture of coatings, plastics, and adhesives. Formerly part of Eastman Kodak, Eastman supplied chemicals to its parent until it was spun off in 1993.

I'm getting a whiff that EMN is a China play based on the Chinese adoration for cigarettes.



Can't you see it in his face? He smokes for the rich flavor--that undeniable taste.



The Telegraph recently reported that China is home to a third of the world's smokers. And they can get pretty feisty and rebellious when the government keeps 'em from getting their nicotine fix:

A sign of the passions the issue can raise has already been seen at the stadiums for next year's games. Earlier this month, an attempt by security guards to stop construction workers taking a cigarette break in a no smoking zone degenerated into a drunken brawl, with several workers injured.

The tobacco industry has also fought back. Zhang Baozhen, an industry official who is also a member of the National People's Congress, the parliament, has said that a ban could cause "social instability" - the Chinese leadership's greatest fear.

Morningstar has more details on Eastman's profitable, and growing, acetate tow business:

Eastman is the world's second-largest producer of acetate tow. Acetate tow is the key ingredient of most cigarette filters. This market's future remains promising--despite slowing tobacco use in North America--as the Chinese and European markets continue to be robust and manufacturers increasingly replace other filter materials with acetate tow. Global demand in this market is projected to grow at 3% per year through 2010, and new capacity additions look to be few and far between, making for a favorable global supply/demand outlook and Eastman's prospects in this lucrative business.

The firm's fibers segment, which encompasses acetate tow production, has earned an average return on assets of 28% over the past five years and has contributed about one third of the firm's operating earnings over the past two years. On a trailing two-year basis, the return on assets for Eastman's fibers segment has been about 10 percentage points higher on average than that of its next closest competitor, Rhodia. This tremendous outperformance can be attributed to the fact that the firm uses coal as its primary raw material in acetate production, which dramatically decreases total input costs.

According to SmartMoney.com, EMN has a high PEG of 1.90. Its dividend yield is about 2.67% (it pays a 44-cent quarterly dividend). The share price is pretty much midway between its 52-week high and low (EMN closed at $65.85 last Friday). EMN looks to be a safe, low-volatility (beta of 0.71) addition to a value portfolio. I would be more interested if the share price retreated toward $60.

Coca-Cola Enterprises - CCE - Another Zacks Top 10 for '08

Coca-Cola Enterprises, the bottler, not Coca-Cola (KO), the Dow component.

Stock #6: Beverage bottler toasts the future. This is the first full year the company will offer its recently acquired water franchise. They're continuing to diversify for greater growth and earnings.

Coke (KO) bought Glaceau of Vitaminwater fame, back in May.


So here is what Zacks has to say about CCE, from a post on Seeking Alpha from December 26:

Coca-Cola Enterprises, Inc. (CCE) is currently in the midst of a restructuring program that emphasizes a movement toward developing markets in bottled waters, juices and teas. On December 12, the company increased its 2007 guidance due to stronger than expected growth in the European region.

Coca-Cola Enterprises engages in the manufacture, distribution, marketing, and sale of nonalcoholic beverages. The company sells its products through wholesalers and retailers primarily in North America, the Great Britain, continental France, Belgium, the Netherlands, Luxembourg, and Monaco. Coca-Cola Enterprises was incorporated in 1944 and is based in Atlanta, Georgia.

On December 12 Coca-Cola raised its 2007 earnings outlook based upon tax savings and strong growth from European markets. The company now expects earnings of $1.36 and $1.39 per share, compared with previous guidance of $1.31 to $1.36.

The company is currently implementing a restructuring program to improve profit as it and other bottlers face higher costs for aluminum and other commodities and a shift in consumer taste away from carbonated soft drinks toward water, juices and teas. 2008 will mark the first full year the company will offer its newly acquired water franchise Glaceau.

In 2008 the Coca-Cola said it expects revenue will increase in the high single digit percentage range on higher volume and growth in new products. Within the last 30 days two covering analysts have increased their next-year projections, moving the consensus estimate higher to its current reading of $1.47 per share.

On Oct 24, the company reported a slightly soft quarter that still met analyst expectations. Net income for the quarter was $213 million, which produced earnings of 44 cents per share. Coca-Cola does have a strong history of beatings analyst projections, over the last four quarters having done so by an average of four cents, or 36.82%.

Coca-Cola's stock price has had an excellent year, gaining close to 30% in value. The move higher has been very smooth with no major turbulence or pull-backs.

On Dec 13, the day after the company increased its guidance, shares broke through an area of resistance just above $26. A few days later the 52-week high was established just above $27. The $26 dollar level should provide a nice base of support as this stock looks to once again move higher and tack on more gains.

In addition, the stochastic is providing an excellent signal that shares are not over-extended, indicating that their is room for this stock to progress higher. Look for the trend to stay in tact and continue to apply upward pressure to prices.

But between KO and CCE, which Coke is really going to see the benefits of product diversification? Matthew Reilly at Morningstar has a thought:

Coca-Cola has virtually all of the leverage in its relationships with bottlers like Coca-Cola Enterprises, charging them high prices for concentrates while focusing on marketing Coke brands. Using this business model, Coke has consistently delivered returns on invested capital that easily best our estimate of its cost of capital.

CCE is a very different story. Coke has been able to deliver such impressive returns in part because it leaves capital-intensive operations, such as mixing, packaging, and delivering finished beverages, to CCE and other bottlers. These operations require extensive capital investment and they offer low margins, in no small part because of the large markup on concentrates, the price of which Coke controls.

Coke also wields control through its 35% stake in CCE--just below the threshold that would require consolidation. In addition, Coke controls CCE's profitability by determining the level of "marketing support" that it refunds to CCE, which essentially amounts to a refund of concentrate purchases. The companies have been working to net these numbers out against each other, but it is clear that Coke holds virtually all of the cards in the relationship.

CCE has the inferior position in the KO/CCE relationship--apparently, CCE is Coke's bitch. And then there's the issue with our economic troubles, i.e. the weak dollar, high commodity prices, and the R-word. Morningstar is less sanguine on CCE's prospects in a recent Analyst Note from Greggory Warren:

While rising commodity prices have been a drag on food and beverage manufacturers alike for much of the past year, it has been far more of a burden on the carbonated soft drink bottlers. With commodity costs now expected to be just as problematic in 2008, we don't envision the bottlers receiving much of a reprieve from the challenges they faced over the course of the past year. The situation is bound to be even more difficult for companies operating mainly in the United States, like Coca-Cola Enterprises and Pepsi Bottling Group, where volume growth for carbonated soft drinks continues to be sluggish, the price of corn (a key input for the sweetener high-fructose corn syrup) remains at record highs, and a weak U.S. dollar has increased the cost of imported raw materials.

If that wasn't a clear enough panning of CCE, here's the wrap-up paragraph from that report:

We do not think Coca-Cola Enterprises has much going for it at present, and it's unlikely to substantially improve in the near future, given the maturity of its markets. This leaves no compelling long- or short-term rationale for buying the shares.

So Zacks and Morningstar are in complete disagreement over investing in CCE. Perhaps KO is the better option, over CCE?

Morningstar doesn't think much of that idea, either:

Today's Coke seems to be energized by the risk-taking that comes with rolling out new products--even if it has meant going outside of the firm to acquire hot brands like Fuze and Vitaminwater. To truly succeed longer term, we believe the company needs to be an innovator rather than a responder, and use its unparalleled network of distributors to separate itself from the competition.

This is why we feel it is critical for Coke to improve its relationship with its bottlers--something Isdell was not able to fully accomplish during his time at the helm. In order for Coke to continue leveraging the strength of its global distribution network, we feel the firm needs to find a better model for working with its bottlers longer term. Absent that, much of what Coke has done over the past few years to right the ship will start to come undone. [Bold added.]

Perhaps an investor should wait and see if KO decides to play nice with its bottlers, before investing in CCE shares. Back to KO's shares, M'star gives KO a fair value estimate of $60, less than 3% above the current share price. Coke's not really on sale right now.



I'm not convinced that CCE is a Top 10 pick. Coke (the iconic company) isn't going anywhere, so on that front, it's a safe investment, but on the other hand, I'm not sure Coke (the stock) is going anywhere, either.

The only argument that holds any purchase with me is the idea that CCE is a downtrodden, slow-growth company that has weathered the last several years and is poised to breakout of its rut.

And then I read this uplifting piece by Neil Merrett, in today's top story from beveragedaily.com:

Coca-Cola will acquire a 40 per cent stake in US-based organic beverage group Honest Tea, as part of an ongoing drive to focus on non-carbonated alternatives for its brands.

...

Adopting this focus for beverage innovation comes at a crucial time for the company and its international bottlers, which have had some difficulty in meeting consumer demands in recent years.

Last year, Coca-Cola Enterprises (CCE), the group's main bottler in North America and Western Europe, said earnings per share were expected to fall between five and 10 per cent in 2007, compared to 2006.

It is a prediction that follows Coca-Cola Enterprises (CCE) decision to axe more than 3,000 jobs, and re-iterates the firm's struggle to realign its business with consumer demand.

CCE global revenues rose five per cent for the first fiscal quarter of the year to $4.56bn, thanks to stronger performances from juice, water and sports drinks in North America, and the expansion of Coke Zero into France and the Netherlands.

But volumes declined four per cent in North America, CCE said, as consumers left full sugar, fizzy soft drinks on the shelves.

CCE added that it also faced "great challenges" in the UK, with moves like renaming the fizzy drinks category "sparkling beverages", instead of the traditional "carbonated", not yet paying off.

I Bought A Mexican Cellphone - AMX

I bought a Mexican, whoa oh, cellphone.




Next up in my evaluation of the Zacks Top 10 for 2008, America Movil (AMX):

Stock #10: Wireless carrier wires into new revenue sources. Already established in developed markets, they're targeting emerging markets for mega-gains in 2008. And they pay a healthy dividend.

Morningstar provides some background in its 5-star report:

America Movil's performance has been outstanding since it was spun out of Telmex in 2000. As Mexico's incumbent wireless provider, the company continues to dominate the country's cellular market with more than 70% share. Its extensive scale has helped lower its operating costs significantly, as it can avoid paying high interconnection costs and receive lower prices on equipment. This, in turn, has allowed America Movil to generate margins that are among the highest of wireless operators globally. While competition is expected to increase with deep-pocketed rival Telefonica becoming more aggressive, we believe the company's towering scale in Mexico will give it a leg up against competitors.

Morningstar continues by stressing AMX's expansion throughout Latin America, most notably, Brazil, while at the same time, increasing its margins in those countries.

Who else likes AMX? AMX rounded out Pequot Capital's Art Samberg's '08 picks:

Art Samberg, Chairman and CEO, Pequot Capital was one of Barron's 2008 Roundtable participants. He likes six U.S.-traded stocks...

Wireless provider America Movil stands to gain from a recent easing of competition that has seen minutes-of-use boom.

AMX looks like a promising choice for exposure to developing markets with perhaps less of the worry that accompanies those investments. Granted, its beta of 1.90 (according to Google Finance) means AMX does react to the markets (it's traded in a 12-point range over the last two months--that's quite whippy for a $58 stock).

On January 28, Standard & Poor's (NYSE:MHP) Ratings Services revised its outlook on its 'BBB+' long-term corporate credit rating on America Movil (NYSE:AMX) SAB de CV (AMX) to positive from stable.

'The rating action reflects the improvement in AMX's business and financial profile during the past five years and our expectations that its position as the leading wireless service provider in Latin America and its modest financial profile will allow the issuer to weather volatile market conditions and potential regulatory actions during the next 12 months,' said S&P's credit analyst Jose Coballasi.

Delving into Zacks Top 10 Stocks for 2008 - ALB

Zacks Investment Research offers up a Top 10 list of stocks to be bought, held, and forgotten about for 2008. '07's list scored 9 winners with an average return of over 30%.

A quick Google search turned up the list for 2008.

I'm going alphabetically, by ticker. First up is Albermarle (ALB):

"Stock #9: Industrial-strength supplier engineers dynamic growth. Strong margins, geographical diversification, and great management make for a winning combination."

According to Morningstar, Albermarle is the:

world's leading manufacturer of flame retardants typically found in consumer electronics, automobiles, and other goods. In addition, the company produces oil-refining catalyst chemicals, herbicides, and ibuprofen.

Albermarle makes this:




and (sorta) this, too:




Morningstar is mixed on the prospects for Albermarle:

Specialized chemical manufacturer Albemarle currently leads the brominated product market as the low-cost provider. Over the long term, however, we think the firm's advantages will go up in smoke.

Albemarle produces a wide variety of plastic additives that are mainly used as flame retardants in consumer durables such as electronics, cars, and home insulation. These end markets are notoriously cyclical and subject to pricing wars, and Albemarle's volume has suffered as of late. Nonetheless, the current price environment has bucked this trend. Competitor Chemtura recently raised prices to recapture costs, and Albemarle followed suit. A heightened pricing environment strongly favors Albemarle, as it is the low-cost manufacturer of bromine, an element used in one third of the company's products. Three firms worldwide--Albemarle, Chemtura, and Israel Chemicals--control production of this raw material, which is found most abundantly in Arkansas and Jordan's Dead Sea. Albemarle has facilities in both locations, and its Arkansas plant runs at a lower cost than rivals' comparable facilities. Robust demand for recently acquired chemical processes further suggests near-term success for Albemarle.

...

We think Albemarle's short-term prospects look favorable, but we believe competitive pressures will erode its advantages in the long run.

ALB has good value characteristics. The company generates considerable free cash flow and has an attractive PEG of 0.6. A cursory reading of these data made me curious about Morningstar's pessimism about ALB as a long-term holding. I do appreciate the M'star analyst's attempt at humor (the "up in smoke" part).

Nevertheless, as an investment for '08, Zacks and Morningstar do seem to be in agreement.

And we may not have to worry about holding ALB for long enough to care about Morningstar's down-the-road concerns:

Rumor: BASF Bidding for Albemarie
posted on: February 04, 2008 | about stocks: ALB

I'm hearing some chatter saying BASF A.G., one of the largest chemical companies in the world is close to making a $4.9 billion offer for Albemarle (NYSE:ALB).

Since I've been following ALB for quite some time, I thought to give some quick colour on the topic. While one has to treat all market rumors with a fair dose of skepticism, there may be some truth to this one. Why?

- First of all, ALB does have a very good petroleum refining catalyst business, which they bought from Akzo Nobel back in 2004. One of the main products is a hydroprocessing catalyst that removes sulfur from heavy crude oil, turning it into more expensive light sweet crude. The deal proved to be a brilliant one as demand for refining catalysts surged. Customer list includes Exxon, RDS, Chevron as well as many independent refiners like VLO & TSO. Today the business accounts for about 40% of total revenue (and 50%+ of profits).

This is definitely something BASF would want to have complementing their existing refinery catalysts business.

- Secondly, BASF has a history of making acquisitions in the space. They bought Englehard, another big player in the refining catalysts business in 2005/2006. If my memory serves me correct, the deal was a hostile one.

- Third, BASF sure has the firepower to do the deal. The co has around EUR10 billion available for deals and the management is on record saying they have identified catalysts as an area of potential interest.

So there you have it. Hope it helps.

This is a fascinating first pick from Zacks--a fundamentally strong company with growth characteristics and an intriguing bit of rumor-mongering, too.

How I Am Playing Market Swings

Lookee! Lookee! I made a gwaph with pwetty colors.

After that bit of juvenalia, if you dare to look closer, it's a grid with the 30 Dow component stocks, and their 2-day and 14-day RSI readings at the close of the market for those respective dates listed at the top.

Red means that issue has a RSI(2) reading at or above 90, while green means the RSI(2) reading is below 10.

The overall Dow, via DIA, closed today with a RSI(2) reading of 92. 16 out of 30 Dow components are marked with red.

These (relatively) simple statistics tell me that the Dow is hankering for a pullback. Over half of the Dow is short-term overbought. But how will I make a quick-ish play (and some ducats) without dabbling in options or actual shorting?

DXD, a 2x-leveraged short Dow fund from Proshares that attempts to double the daily movement of the Dow. There's also DOG, a 1x-leveraged short Dow fund, but as a short-term play, I want the added price movement of DXD over DOG.

And next time my Dow chart is greener than Ireland, I'll be considering DDM, the 2x-leveraged long Dow fund over the Diamonds.

Barry Ritholtz discussed
these 2x-leveraged index longs and shorts back in the summer of '06 when some of the aforementioned funds appeared on the market. He brought up liquidity questions and other growing pains with a new issue that have since dissipated.

The Bottom line remains: These are good product for hedging in accounts that either cannot short or use options; And while they are also superior to mutual funds, they remain are inferior to traditional ETFs. Hopefully, as they become more popular and liquid, these pricing / spread / delay issues will work themselves out.

Bouncy bouncy?

So it seems the NASDAQ is down almost 7% for January, and that takes into account the 1.4% jump that happened late this afternoon. The Dow is down a nifty 4%, and when I use the word 'nifty', I use it incorrectly.

Again, until late this afternoon, my stock watch list was chock full of extremely oversold options, including eight Dow components with a RSI(2) at or below 2.

Perhaps the market's about to turn itself around, at least in the short term. I generally like the 2-period RSI overbought/oversold indicator. But it's always good to look at fundamental and technical indicators outside one's favorites as well.

Here are some links and excerpts to ponder:

Adam from Daily Options Report suggests the VXN, trading far above its moving average, is signaling a bounce:

311 is coincidentally where the Nazz looks headed.

What could convince me I am wrong? Well, volatility is finally getting very overbought. When a volatility index gets 10% above it's 10 Day SMA, it's a bit extended. The VXN is now 20% above, so maybe, just maybe, that rubber band is going to snap back one of these years.

Again, this indicator had an awful track record in 2007, as down moves tended to go way past the station. And this is no different, after all if you trusted it and went long QQQQ's when we were 10% above the SMA, you are sitting underwater already.

What I will say though is it's a sign we're getting quite overdone, and it's suggestive that a pop back up will be one of those monster rallies that will get the pundits all atwitter. Where that starts is anyone's guess, but sure feels like one of those terrifying rinse and reversal days is up soon.

Barry Ritholtz offers up a black box pointing to bullish sentiment, if not much else:


Phil Davis is unsure. But he thinks the Bush administration may, once again, ignore their alleged free market principles and intervene:

Forbes jumped on the recession bandwagon and it hit the USA Today as well and, while I still feel this is a massive, coordinated effort to "foment" a panic ahead of action by the famous Plunge Protection Team, the fact is I'm not 80% sure of anything. I'm not 70% sure and I'm barely 50% sure but I think that's as unsure as you can be so that means that unless I am investing in things that are going to, on average, return 50% to me with near certainty, then I am better off not playing until I become a little more certain of direction.

Yes, the Plunge Protection Team. Wouldn't Plunge Protection Posse be a better name? I am a sucker for alliteration.

Damn. Somebody already used the PPP.

From the Telegraph story on the PPT:
Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.


It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

At least the shorts will be fried properly--not sodden with grease.

Unlike Phil, Doug Kass is certain that Helicopter Ben will save the day:

I have friends.

I have friends in Washington D.C.

I have friends who are very close to the Administration.

I have friends who are very close to members of the Fed.

This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy -- far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.

And they say that the Fed will ease momentarily.

Enough said.

Finally, Seeking Alpha offers up some chart analysis of recent rebounds:

At some point, probably some point soon, stocks will bounce. There are still bulls out there and at some point some will step in and start buying stocks.

The question is: How much of a bounce can we expect?

Personally, while I think there will be a bounce I don't expect it to be much. I think that sentiment is undergoing a shift towards the bearish camp and that higher prices will be met with selling.

For an idea of what we can expect, let's look at the last three bounces:

From October 22 through October 31st the S&P managed about a 50 point move from around 1500 to around 1550 leading up to the Fed meeting on October 31st.

From November 27th through December 11th, the S&P managed a more impressive rally from lows around 1407 all the way up over 1520 - a move up of about 115 points - ahead of a hoped for 50 point rate cut by the Fed on December 11.

From December 18th through December 26th, the S&P put together a Santa Claus rally that took it from 1446 to 1498 - again about a 50 point move - before the assasination of Benazzir Bhutto on Thursday December 27th put an end to it.

What this suggests to me is that any bounce is likely to be capped at about 50 points on the S&P. That would retrace about half the move down over the last couple of weeks and put us up around 1440.

But I also wouldn't be surprised to see a smaller bounce in the range of say 20-30 points before the selling resumes.

I appreciate that nobody mentioned above is being so bold as to call a bottom. There is a plethora of reasons to think that we'll have a market rebound, soon.

Booknotes - The Great Crash 1929

"It has long been my feeling that the lessons of economics that reside in economic history are important and that history provides an interesting and even fascinating window on economic knowledge." p.28

Galbraith wrote this book 25 years after the Great Crash, as an elder statesman, one generation removed from the event.

"The wonder, indeed, is that since 1929 we have been spared so long. One reason, without doubt, is that the experience of 1929 burned itself so deeply into the national consciousness. It is worth hoping that a history such as this will keep bright that immunizing memory for a little longer." p.29

I had to buy my copy recently from an Amazon reseller based in the UK. When my book arrived, it was postmarked from Malmo, Sweden. Looking again at Amazon, I see that a new printing of this work has appeared in the U.S. Whenever there is turmoil in the markets, I guess interest in the history of previous market disasters rises like fear and volatility.

Considering this week's over-zealous run-up in the markets, followed with today's petulant overreaction to Helicopter Ben only dropping the federal funds rate by 25 basis points, it's as good a time as any to look back nearly 80 years.

Here are some of my notes on The Great Crash 1929.

The precursor to the crash: the desire to get rich quickly with little effort via speculation and leverage. Galbraith delved into the mid-twenties Florida land boom (and bust). Apparently, the Ponzi scheme originated in this period: "As the speculation spread northward, an enterprising Bostonian, Mr Charles Ponzi, developed a subdivision 'near Jacksonville'. It was approximately sixty-five miles west of the city. (In other respects Ponzi believed in good, compact neighbourhoods; he sold twenty-three lots to the acre.)" p.33

"The Florida boom was the first indication of the mood of the twenties and the conviction that God intended the American middle class to be rich. But that this mood survived the Florida collapse is still more remarkable...Even as the Florida boom collapsed, the faith of Americans in quick, effortless enrichment in the stock market was becoming every day more evident." p.35

Galbraith is unclear as to the origins of the speculative frenzy in the stock markets. He lamely suggested that growing corporate earnings encouraged upward movement in securities pricing. More interestingly, Britain's return to the gold standard pressured investors to take leave of costly investing in Britain and the Continent, and shifted that money to the U.S. Also the Federal Reserve Bank of New York cut rates and made it cheaper for more people to obtain credit and invest in shares. And then there was the issue of rampant trading on margin and the values of the underlying stocks used as collateral for those loans.

...

Reassurances from Wall Street professionals, much like the quotes detailed and mocked in "Oh Yeah" that permitted many en masse to abandon fundamental analysis and join the speculative frenzy, untethered to reality.

The Federal Reserve was impotent to quash the speculative market. Raising the "rediscount rate" would not have affected the speculators who were borrowing on margin at twice the rediscount rate (or more) and until the crash, were watching their shares accelerate at an even steeper rate. Galbraith asserted that the Fed could have increased margin requirements, but it decided to keep mousily quiet. Galbraith mocked the Fed's feeble attempts at "moral suasion" via mildly-worded press releases.

...

The Crash decimated leveraged investment trusts, instruments created to take advantage of the demand for speculative offerings. The values of these trusts were inflated not with tangible assets, but with the perceived value of "the precious ingredient of financial genius." p.79 They seem analogous in some ways to today's hedge funds, many of which don't actually seem to engage in the act of hedging. The Crash also crushed the values of American blue chip industrials like General Electric and AT&T. Solid companies and defensive stocks couldn't avoid the destructions of wealth.

...

Perhaps the most important lesson in Galbraith's work is covered in Chapter 4 - In Goldman, Sachs We Trust.

What is that lesson? GS seems to find a way to survive financial debacles with their money and reputation largely intact.

According to a lovely chart in the January 2008 issue of Bloomberg Markets detailing the subprime market collapse, GS is the only bank/security firm on the chart to have no subprime-related write-downs, no layoffs, and a recent positive return on its share price.

In 1929, GS launched the Goldman Sachs Trading Corporation, an investment trust organized by GS and largely sold to the public at $104 per share. As of a 1932 Senate hearing which closes Chapter 4, the reader discovers that just three years later, the Goldman Sachs Trading Corporation was trading at 1 3/4, that after a two-for-one split.

Booknotes - Oh Yeah?

For years, I've been in possession of a 1931 book entitled "Oh Yeah?"

I recall finding it on my Dad's bookshelf. As a child of the Depression, he often expressed a mix of macabre humor and frustration about the 30's. He also would worry that any economic downturn would lead to another one. I recently pulled "Oh Yeah?" off the shelf and perused its collection of contemporary quotes by presidents, business leaders, economists, and journalists.

As this book was published in 1931, it captures only the very beginning of the crash and ensuing depression. However, near the end, on page 59 (yes, it's short and sweet), there's a calendar for 1931, with a quote for each month.

JANUARY The American business man is getting his tail feather off the ground.--Louis K. Liggett, Republican National Committee.
FEBRUARY The bottom has now been reached.--Roy A. Young, Federal Reserve Bank of Boston.
MARCH The long decline has at last been halted.--Dr. Julius Klein, Assistant Secretary of Commerce.
APRIL Business has turned the corner.--Roger W. Babson.
MAY Big attendance at race meetings is one of the best indications of improving business conditions.--Stuyvesant Peabody, Illinois Turf Ass'n.
JUNE Much of th present crepe-hanging should be historical....In July, up we go.--Dr. Julius Klein.
JULY A level of resistance is being reached.--Bradstreet's.
AUGUST Angels, looking down, probably pay little attention to our difficulties.--Arthur Brisbane.
SEPTEMBER The glow of righteous satisfaction that many have felt in their recent savings should be replaced by the knowledge that thrift under certain conditions is very wasteful.--William Trufant Foster, Economist.
OCTOBER The overliquidated prices of many securities are a sign of too short perspective and too excitable temperament.--Charles M. Schwab.
NOVEMBER ?
DECEMBER ?


The book seethes with skepticism. So much hooey said by so many people who should know better, why should any of these predictions be believed? Yes, as a reader in 2007, we know how wrong these men were, but I think "Oh Yeah?" is still valuable beyond my sentimental reasons for keeping it on my bookshelf. The editors of "Oh Yeah?" were right. They weren't going to make the same mistake, and contribute to the folly of economic forecasting. That's a valuable take-away from "Oh Yeah?". They seemed uncertain about the future and closed the wee volume with a perfect pessimistic punch:

"The country is not in good condition.

--From "Calvin Coolidge Says," January 20, 1931."

As much as I enjoy "Oh Yeah?", it's difficult to extract a broader understanding of the 1929 crash and aftermath from a contemporary, primary source. It was written for people who were living through the turmoil, who would recognize names like Reed Smoot, Arthur Brisbane, and Roger Babson. The only name that still resonates today is Charles M. Schwab, but we're now on more familiar terms when we Talk to Chuck.

So that led me to John Kenneth Galbraith's 1954 classic, "The Great Crash 1929".
I'll hopefully post my thoughts on that book soon.