180http://www.drduru.com/money/money.htmlOne-Twenty: Personal Articles on Financial Markets and Analyses You Can UseMon, 21 Sep 2009 17:02:00 ESTMon, 21 Sep 2009 17:02:00 ESTenCopyright Dr. Duru. All rights reservedhttp://www.drduru.com/money/benjamin-small.gifhttp://www.drduru.com/money/money.htmlOne-Twenty: Personal Articles on Financial Markets and Analyses You Can Use10042http://www.drduru.com/money/090907_MOVED.htmJust a friendly reminder that I have FINALLY transferred my blog “One-Twenty” to a true blogging platform. I have dubbed this new location “One-Twenty Two” (http://drduru.com/onetwentytwo/) and preserved the old posts under the original site. Your current feeds to the old site will NOT be redirected to the new site. You need to make the changes manually. For example, go to the new site and subscribe using the links found there. Sorry for the inconvenience, but I hope you enjoy the new format and more frequent posts. Be careful out there!Mon, 21 Sep 2009 17:02:00 ESTOne-Twentyhttp://www.drduru.com/money/090907_MOVED.htmI have FINALLY transferred my blog “One-Twenty” to a true blogging platform. I have dubbed this new location “One-Twenty Two” (http://drduru.com/onetwentytwo/) and preserved the old posts under the original site. Please make the appropriate changes to your feeds and/or bookmarks. Links for subscribing and/or linking to the new site are also provided above. I hope you find the new format more appealing. I look forward to your feedback and comments.Mon, 07 Sep 2009 15:21:00 ESTOne-Twentyhttp://www.drduru.com/money/090903_CasualDiningRemainsStalled.htmIn November, 2008 and March 2009, most casual dining stocks were (briefly) priced for an extremely steep and ruinous recession. Today, most casual dining stocks have enjoyed tremendous gains from those lows, many doubling and tripling. However, most of the gains in these stocks occurred in swift fashion and accumulated in the span of just one to two months immediately following the lows. Such is the price action surrounding panics. Curiously, most of these stocks have now been in holding patterns ever since April…cont’d…Thu, 03 Sep 2009 17:42:00 ESTOne-Twentyhttp://www.drduru.com/money/090903_JOYGChinaSurprise.htmAs usual, mining equipment manufacturer Joy Global (JOYG) provided revealing commentary on global commodity markets and economic conditions (read latest earnings report or listen to full conference call). JOYG has been surprised at the on-going strength of China's consumption of commodities. In its previous earnings conference call, JOYG cast doubts on the sustainability of Chinese demand, particularly in copper. This time around, President and CEO Michael Sutherlin was particularly impressed with the economic activity in China: "...although we previously thought we could see a drop in imports as stockpiling reached an end...there is enough momentum in the Chinese economy to allow the correction of large stockpiles of commodities to be achieved through moderating growth rates rather than import declines." In other words, imports of commodities will remain robust but will not grow as fast as the current pace…However, an uneven mix of economic activity - a strong China, weak U.S., and firming elsewhere - keeps JOYG cautious: "It is too soon to determine whether this will lead to recovery or is the start of a period of bumping along the bottom. We continue to look to the activities and decisions of our customers as the best indicator of future trends and directions for our business, and they continue to be cautious as well. After suffering the pain of delaying approved projects and cutting production, our international customers are waiting for clearer signs of sustainable recovery in the global economy before undertaking the expensive and lengthy process of restarting any projects or adding back production." cont’d…Thu, 03 Sep 2009 13:47:00 ESTOne-Twentyhttp://www.drduru.com/money/090827_HighOptionsVolumePart3.htmThis is the third in a series of analyses I have run to understand whether high options volume provides any trading information for speculators. The first analysis covered the seven weeks of a distinct market downtrend leading into the expiration of February options (December 20, 2008 to February 20, 2009), and the second analysis covered the seven weeks leading into the March options expiration (January 30, 2009 to March 18, 2009) which included the first two weeks of the bounce from the downtrend. I concluded both times that the overall trend in the market was a more important guide for directional trades than the type of options (calls or puts) experiencing the large trading volume. In other words, a trader should typically initiate a trade in the direction of the prevailing market trend upon observing any high options trading volume. A trader needs to apply additional information (for example, technical analysis) to decide to trade contrary to the existing trend (if any). I ran two more analyses for seven weeks leading into the April and May expiration (February 27 to April 17, 2009 and March 27 to May 13, 2009, respectively). Both periods covered substantial uptrends, and I came to the same earlier conclusions. cont’d…Wed, 26 Aug 2009 17:34:00 ESTOne-Twentyhttp://www.drduru.com/money/090817_BUCYNotAsPessimisticAsMost.htmMining equipment company Bucyrus International (BUCY) reported earnings the morning of July 24, 2009. In reaction, the stock sold off 12% over 4 days before recovering all those losses over the next 7 days. It has now fallen back all over again. The lack of direction in the stock price matches well with the push and pull between the uncertainty and promise that came out of the earnings conference call: a cautious management highlighted the potential for stabilization and improvement in the business, but they stopped short of declaring that a meaningful rebound is indeed underway. For example, Timothy Sullivan, President & CEO, responded to an analyst's questions regarding normalized revenues and margins by explaining that "we're not as pessimistic as most but we're certainly not optimistic" and it is "anyone's guess" what specific revenues and margins will look like in the next two quarters. (We have frequently heard similar refrains during third quarter earnings season)…cont’d…Tue, 18 Aug 2009 00:43:00 ESTOne-Twentyhttp://www.drduru.com/money/090812_EarningsDebacleThatWasnt.htmThe message from this earning's season is that 1) the bottom of the recession is now behind us, 2) Visibility going forward remains poor, 3) cost-cutting and restructuring have turned American companies into lean, profit-making machines, and 4) despite prospects for continued economic weakness, an economic recovery seems closer than ever. Earnings season was NOT the debacle I had originally pictured. The S&P 500 reached its most recent bottom around the beginning of earnings season on July 8, and is up a healthy 13% since then. On July 9, I claimed the S&P 500 was ready to bounce, but I expected a weak bounce that would soon give way to earnings-related selling. Reviewing the performance of the companies that seemed to send up the proverbial red flag provides a great demonstration of how the market's obstinate faith in the near-term future has presided handily over any and all negative indicators…cont’d…Wed, 12 Aug 2009 01:25:00 ESTOne-Twentyhttp://www.drduru.com/money/090811_FedEndDollarReliefRally.htmAs the dollar finally broke its December lows last week, I speculated that "...a strong US dollar relief rally in the coming week or so still seems likely given the synchronous multi-month highs being made by so many currencies against the dollar." Sure enough, over the past three days, the dollar has experienced a rapid bounce just about as sharp as the move down that took the dollar beneath the December lows. It seems that Friday's less-bad-than-expected jobs report ignited the relief bounce as the Fed funds futures produced higher odds of a slight uptick in interest rates by December. The stock market also responded with a sharp one-day celebration. How quickly sentiment can change: it was just a month ago when a poor jobs report produced all types of bellyaching and even some calls for yet more stimulus to the economy. The Republicans were crying foul that the Obama administration's policies are doing nothing for the economy. And now this month, Obama got his chance to join other world leaders in announcing we now have tentative signs that the beginning of the end of the recession has arrived. It truly is amazing to observe the stir that a "lagging indicator" can cause.Anyway, When it comes to tomorrow's interest announcement by the Federal Reserve, I am betting that Ben and crew will be more closely referencing last month's poor showing. The Federal Reserve will also duly note that unemployment remains extremely high despite all the excitement over the current downtick in the unemployment rate from 9.4% to 9.2%. Finally, the Fed's forecast for high rates of unemployment sustained through 2010 will remain untouched. All this means that the Fed is not likely to provide any signs of imminent rate hikes (also see "Fed not ready to use other R-word: Recovery" for a similar point). The Fed's continued dovish stance should put an immediate end to the dollar's current relief rally if it has not already ended by the release of the actual statement. …cont’d…Tues, 11 Aug 2009 12:30:00 ESTOne-Twentyhttp://www.drduru.com/money/090804_DollarBreaksDecLows.htmThe dollar's steady descent continued with Monday's long anticipated break of the December lows (see chart below). While I fully expected the dollar to reach this point, I thought a stronger relief rally would ensue before we got here. The dollar's "fate" seemed sealed after the Canadian authorities signaled resigned acceptance of their currency's strength against the US dollar. As the dollar continues to roll back the gains from its earlier status as safe haven currency, I am still left wondering at what point do America's trading partners begin to voice concerns about how dollar weakness will hurt their own exports. Americans are already saving more, and the propensity to save should get stronger as imports continue to get more expensive (this relationship of course was VERY broken during our credit bubble as rapidly expanding debt became a very convenient way to finance increasing net consumption of imports). Then again, economic recovery seems to be all about China and any company fortunate enough to be doing business there, so it is possible that finance ministers outside of China and Russia are not going to worry as much as they otherwise might have done…cont’d…Tues, 04 Aug 2009 01:47:00 ESTOne-Twentyhttp://www.drduru.com/money/090802_FSLRDisappointsAsExpected.htmIn late June, First Solar (FSLR) alerted analysts that the solar market is undergoing a major transition that will very likely squeeze the company's margins. Investors responded by continuing the selling that started earlier in the month. The stock finally found support at the 200-day moving average (DMA) (see chart below), and Sunpower's (SWPRa) surprise earnings report propelled FSLR a final 10% going into its own earnings report. All the post-analyst day losses were erased, the words of caution were long forgotten, and the thrill had returned. In preparing for First Solar's earnings report, I claimed that the news would disappoint: "...I am also guessing there is a high chance that FSLR's earnings will disappoint based on the company's remarks from its analyst day. The market's reaction to disappointment will depend on the price of the stock. At $180 or $190, the stock should sell off dramatically. At $140 or so, FSLR could hang in there." FSLR disappointed as expected, and the stock sold off as expected, but the path downward was wild. Traders first reacted positively to the headline news that FSLR handily beat expectations for last quarter. The stock gyrated wildly before topping out at $192 right before FSLR's guidance confirmed what the company had already indicated a month earlier. We just got more specifics: FSLR is offering rebates in the extremely important solar market in Germany and is actively responding with pricing to protect factory throughput…cont’d…Sun, 02 Aug 2009 00:16:00 ESTOne-Twentyhttp://www.drduru.com/money/090724_FSLREarnings.htmSunpower (SPWRa) lit a fire under solar stocks today with impressive earnings results and even better earnings and revenue guidance. Even First Solar (FSLR), whose stock had become a bit of a laggard in the sector, powered higher around 7%. Now, FSLR's earnings report next week gets even more interesting. My biggest outstanding question is whether SPWRa benefitted from taking some market share or has the total pie expanded enough to allow all the major players to report surprise results? Before the bottom fell out of the solar sector (and the stock market), it made sense to buy FSLR ahead of its earnings report. Of course, by the time I got on the case last June, the pre-earnings dynamics got a lot more complicated. For next week, the pressure should be more upward than downward for FSLR but there are some technical levels to keep an eye on. …cont’d…Fri, 24 Jul 2009 15:39:00 ESTOne-Twentyhttp://www.drduru.com/money/090722_CaseForDollarReliefWeakening.htmThe Fed's official announcement of its exit strategy motivated me to make a soft case for a relief rally for the U.S. dollar. The ink was not even dry when I learned that the Canadian Central Bank may instead have greased the skids. On Monday, the Bank of Canada left its interest rate target at 0.25%, adding that "conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target." Bank Governor Mark Carney also seemed to give a relatively hopeful and optimistic outlook on the economic recovery in Canada and across the globe. The Bank of Canada even seems close to declaring an end to Canada's recession. Contrast these remarks to U.S. Federal Reserve Chairman Ben Bernanke's "Semiannual Monetary Policy Report to the Congress" on Monday in which Bernanke reiterated the Fed's concern about stubbornly high rates of unemployment and the resulting downside risks to the economy. The apparent brighter outlook for Canada's economy, heavily dependent on commodity exports, supports continued strength for the Canadian dollar. …cont’d…Wed, 22 Jul 2009 22:54:00 ESTOne-Twentyhttp://www.drduru.com/money/090721_DollarReliefFromFedExitStrat.htmThe dollar has been stuck in a trading range for about two months as it hovers above December's lows…I still expect those lows to break eventually, but in the meantime, the release of the Federal Reserve's official exit strategy from easy monetary policy may spark some kind of relief rally in the dollar. Several currencies are now "overbought" (based on daily stochastics) against the dollar - including the Pound, the Euro, the Canadian dollar, and the Aussie dollar - so a pullback in these currencies in the coming days or week appears likely. Fed Chairman Ben Bernanke is trying to reassure us that money will remain easy long enough to take care of the current recession but not a dollar longer. Never mind whether all of the Fed's strategies will work (for example, some or many of the assets the Fed thinks it can shed from its balance sheet and sell into the market at will may prove to be worthless or otherwise unwanted and unloved) or whether the political climate will even allow the Fed to tighten if the economy so much as sneezes during a tightening phase. The near-term point is that the market will likely adjust its expectation for U.S. inflation and the on-going debasement of the dollar based on the talk alone. Going forward, traders and investors will look closely at Fed statements for hints as to when exit strategies may begin in earnest…cont’d…Tue, 21 Jul 2009 02:10:00 ESTOne-Twentyhttp://www.drduru.com/money/090715_BouncingThruBadNews.htmWhile talking about the stock market today, a friend of mine sighed out loud: "the vacillation is mind-numbing." Another bad jobs report motivates some to clamor louder for a second stimulus package, and the stock market reels. Goldman Sachs (GS) wows us with how much profit exists in riding the backs of American taxpayers, Intel (INTC) crushes well-managed expectations, and the market goes back to celebrating the coming end of the recession. It probably also helps that almost every stock market technician was staring at that tantalizing head and shoulders pattern on the S&P 500. Anyone shorting based on those technicals has likely been scrambling for cover this week as the bounce that I expected from oversold conditions continues. With today's surge, this is all the bounce I am willing to bet on for now. I am going back to neutral for the next two weeks or so, and I remain bearish over the next 4-6 months. I still suspect that the June highs will hold for the summer and the extended trading range will throw both bears and bulls for loops..…cont’d…Wed, 15 Jul 2009 17:27:00 ESTOne-Twentyhttp://www.drduru.com/money/090709_ReadyForOversoldBounce.htmThe S&P 500 has fallen back to the bottom of a two-month trading range, and it remains stuck in a zone extending back to October, 2008. After a swift 3-month rally from the March lows, this kind of action has all the feel of a near-term top. Technicians will note the formation of a head and shoulders top. The 200-day moving average (DMA) is still moving downward, the 50DMA is flattening out, and many individual stocks are breaking down as they experience 2-month long downtrends. However, the market is getting oversold and is likely to experience an oversold bounce before any follow-through of these topping patterns. Oversold conditions are market by the stochastics (see chart below). But perhaps more importantly, T2108, the percentage of stocks below their 50DMA, has dropped all the way down to 27%, its lowest level since mid-March. T2108 at or below 20% represents an oversold condition in the stock market. Given that the stock market is coming off such a strong rally, I am inclined to believe that T2108 will work much better as an oversold indicator than it did during last year's market collapse.…cont’d…Thu, 09 Jul 2009 01:24:00 ESTOne-Twentyhttp://www.drduru.com/money/090707_EarlyEarningsWarnings.htmThe next earnings season has not quite started yet, so it was probably easy to miss potentially indicative earnings warnings last week from two companies with combined market capitalization of just over $3 billion. Acuity Brands, Inc. (AYI) - an Atlanta-based company that designs, produces, and distributes lighting fixtures and related products for commercial and residential buildings - indicated that construction activity will continue to drop through into next year. MSC Industrial Direct Company (MSM) - a New York-based company that sells industrial products - indicated that its customers see no near-term improvement in economic conditions. Some specifics…cont’d…Mon, 06 Jul 2009 23:07:00 ESTOne-Twentyhttp://www.drduru.com/money/090701_FSLRPreparesForChallenges.htmFirst Solar (FSLR) hosted an all-day analyst meeting last week in Las Vegas, NV. I could not find a complete summary of the event, so I decided to listen to it myself. FSLR's executives provided a thorough and comprehensive presentation of the company and their perspectives on the solar industry (click here to listen to the webcast and download the presentation). FSLR is preparing to face the challenges of major changes in the markets for solar technology. The executives focused on the long-term view, explaining that they are building a company for the next 50-100 years that is part of a carbon-free infrastructure helping to fight global climate change. FSLR's immediate challenge is to expand from saturated subsidy markets to "transition markets." These markets are less dependent on subsidies but involve major investments in large-scale solar power plants and the necessary grid infrastructure to support solar-generated power. Sustainable markets develop after transition markets, a time when solar is a well-established component of worldwide energy grids. After listening to the webcast, I understand why FSLR made the special effort to present so much revealing detail (including a tour of one of its facilities): in its own words, "the complexity of the business means higher risk of lumpiness in results in the future." In other words, the investment community must moderate its expectations. To bolster the re-orientation, FSLR's CFO also redirected analysts to measure the company on EVA (economic value-added) and RONA (return on net assets) and not gross margins. FSLR projects gross margins to erode slowly over time. The risks to FSLR's business (and all of solar) will continue increasing as the industry struggles to establish the transition markets. We should expect this in any market that requires major increases in capital investment and integrated and coordinated infrastructures crossing many political boundaries. FSLR acknowledged that it needs a convergence of economic and political forces to build upon its current success. FSLR has a first-class handle on its technology and manufacturing processes, and the company should remain unrivaled for quite some time. However, there are many external forces that are largely out of its control but critical to extending further this technical prowess into market prowess…cont’d…Wed, 01 Jul 2009 11:22:00 ESTOne-Twentyhttp://www.drduru.com/money/090622_MarketRemindsFedToKeepMoneyEasy.htmBack when Alan Greenspan was giving away money on the cheap during and after the last recession, it seemed like the stock market would sell off going into every Federal Reserve meeting. It was if the market wanted to remind the Fed to keep the easy money flowing. Of course, the market would get its drug, uh, wish, and proceed to launch into another short-lived bear market rally. I daresay the market has resorted to the same tactic over the past week in the wake of all the G8's talk about exit strategies from existing stimulus measures. The stock market's changing character that has driven the S&P 500 back below 900 and challenging critical support levels will certainly wake up a few people in this week's Federal Reserve meeting. Sure this one week of selling has barely dented the big move from the March lows, but it will take complacency down a notch. It is all too easy to assume that a rallying stock market means a rallying economy is ahead and forget that the market predicts about 5 out of every 3 recoveries just as it predicts 9 out of every 5 recessions..…Mon, 22 Jun 2009 13:54:00 ESTOne-Twentyhttp://www.drduru.com/money/090617_FSLRStillAShort.htmFirst Solar (FSLR) is still a short after breaking a six week support line today. Last month, I tagged FSLR as a short mainly because massive insider selling combined with a premium valuation is a huge red flag to me. I pared back some of the position today and will look to add on any near-term bounce. TraderMike beat me to the bunch on a technical review of FSLR's chart, so I will just add that today's break below the 50-day moving average (DMA) greatly increases the odds that FSLR will fill its May post-earnings gap sooner than later…Wed, 17 Jun 2009 12:06:00 ESTOne-Twentyhttp://www.drduru.com/money/090617_AnotherCharacterChange.htmAlmost one month ago, on May 18, the stock market experienced its first bounce from oversold conditions since the rally from the March lows. I noted several important characteristics that had changed about the stock market. The most significant was that the percentage of stocks trading above their 40-day moving average (T2108) dropped below 80% for the first time. A trader would have missed an additional gain of 3.2% (7.3% maximum gain) if s/he had sold out of the S&P 500 at that time (the trading day before the bounce) using the "T2108 capital preservation strategy" with an 80% threshold for T2108. I actually examined this strategy using 70% as the selling threshold. On Monday, T2108 traded below 70% for the first time since March 31, 2009, generating another significant change in character for this rally. I am surprised that this drop occurred at a higher level on the S&P 500 than the first drop below 80%. However, this event may provide an even stronger validation point for the T2108 capital preservation strategy using 70% as the threshold for selling. The stock market spent a total of 51 trading days with T2108 above 70%, placing this rally in the top 3% of all rallies since September, 1986. This historic bear market continues to post a string of extremes. For now, the rally is still in an (intermediate) uptrend and remains healthy from a technical standpoint. I suspect the S&P 500 will continue approaching oversold conditions and bounce again from there. In the meantime, I have noted three other interesting character changes that warrant monitoring as this rally tries to extend into the summer…Wed, 17 Jun 2009 00:27:00 ESTOne-Twentyhttp://www.drduru.com/money/090616_TestingUptrendsInSolarStocks.htmSeveral solar stocks have had very strong upward moves since the middle of May. Most of these moves are continuations of the strong upward trends from the March lows. Over the past three days, these same stocks have sold off on decreasing volume toward important levels of support…Tue, 16 Jun 2009 07:16:00 ESTOne-Twentyhttp://www.drduru.com/money/090608_JOYGDoubtsChinaCommodityImports.htmJoy Global (JOYG) CEO and President Mike Sutherland provided intriguing commentary about global commodity demand in his company's second quarter earnings report on June 3, 2009. I was particularly interested to hear him question the sustainability of China's reigniting demand for commodities. By his estimation, Chinese steel exports are now down 60%, back to 2006 levels and will lead to an accumulation of 100 million tons of inventory by year-end. Given that China's current restocking cycle is the most aggressive to-date, he figures that commodity imports cannot be sustained, including copper...Mon, 08 Jun 2009 17:02:00 ESTOne-Twentyhttp://www.drduru.com/money/090604_FordAchievesHigherTransactionPrices.htmFord held its monthly sales conference call on June 2, 2009. While scanning a summary of the call, my eyes widened when I read that Ford achieved higher transaction prices in May. Given my continuing confidence that the Federal Reserve will win the battle against fears of deflation, I am always (opportunistically) alert to any evidence that inflation is taking root in the economy. Still...how could a car manufacturer, of all companies, accomplish ANY pricing power in this recessionary environment? I decided to listen to the call to get the full context. It turns out that changes in product mix drove the average transaction price higher: consumers bought well-equipped, higher-end models. Ford also reduced incentive spending although it was not clear to me whether this factored into average transaction price. Ford got a bit stingier, marketed and sold higher-end features, and its customers ate it up even as industry conditions remain tenuous at best. The strength in demand occurred in the last third of May. Here is a summary of the pricing and demand-related commentary from the conference call…Thu, 04 Jun 2009 01:35:00 ESTOne-Twentyhttp://www.drduru.com/money/090603_PutCallRatioBullishAgain.htmMonday was fun for the bulls. Wednesday was fun for the bears. If not for a 15-minute buying spree into the close, the market would be resting right about where it started the week. In late April, I claimed the following: "As the S&P 500 continues to toy with the 875 resistance level, I would not be at all surprised to see at least one false breakout to 900 or so and several 'false' breakdowns that complete a circle of frustration for bears and bulls." From there, we rallied to 930 before getting the first oversold correction of this entire bear market rally. The put/call ratios on SPY, the SPX, and the OEX (S&P 100) all spiked toward 52-week highs (in ranking) right as the correction began. However, within days, these ratios fell right back to the lower halves of their respective ranges. This extremely sharp reversal occurred as the S&P 500 staged an impressive 3% rally the day after options expiration (coincidence? I think not...!). Since then, the put/call ratios on various S&P 500 instruments have diverged (see Schaeffer's investment research for the charts and rankings): the put/call ratio on the SPX continues to languish in the 30% rank for the past 12 months, but the put/call ratio on SPY and OEX have crept back upward. The OEX is even right back to year highs. To break this "tie", I turned to the CBOE equity put/call ratio which excludes the action of the indices. This ratio has been declining for much of 2009 and now sits comfortably at levels last seen in late 2007, the end of the last bull market. (For emphasis, click here to see the 21-day moving average over the last 6 months). So, I think it remains safe to assume that market participants expect even higher prices to come in the near future…Wed, 03 Jun 2009 21:06:00 ESTOne-Twenty