Stocks are selling off around the world. And China is in the lead. The Shanghai Composite is down 23% since August 4. Former Morgan Stanley Asia economist Andy Xie says Chinese stocks have been in bubble mode and there are more declines to come.
The main issue for China is the same as it is here in the U.S.: prices are getting ahead of fundamentals. At least, that’s the fear. It’s funny, though, that nobody looks at AIG’s moonshot and concludes the U.S. stock market is a bubble.
I sure hope this isn’t the end of the rally, because I’m really growing fond of my new term, the Cash for Clunker Stock rally.
*****In his morning missive to his TradeMaster Daily Stock Alerts readers, Jason Cimpl offered the following advice: "Pay close attention to any weakness in our early warning sign groups such as small caps, technology, oil and bonds, as ways to gauge a top in the US indices."
For clarification, if the Cash for Clunker Stock rally is over, we will see bonds rally as investors move into safe-haven investments. So far today at least bonds are down right along with stocks. And since U.S. stocks are down only slightly, I think it would be prudent to consider the current action profit-taking for now.
******We should probably add shipping stocks to Jason’s list of stocks to watch. The Baltic Dry Index, a leading indicator that measures shipping rates, is down 28% this month.
Shipping rates are down mainly because China is buying less iron-ore. And new ships being delivered is expanding supply and helping drive prices lower.
The Baltic Dry Index was absolutely decimated at the outset of the global recession. SmallCapInvestor PRO readers made 65% on shipping stock Genco (NYSE:GNK) as shipping rates recovered. We took profits on July 22, as the Baltic Dry Index was showing signs that it would roll over.
If shipping rates fall another 50%, as some are expecting, it will mean two things. One, the bloom will be off the global economic recovery and the Cash for Clunker Stock rally will have ended. And two, it will be time to buy shipping stocks again.
*****Before we get too bearish, though, please note that two M&A deals were announced today. Disney (NYSE:DIS) is buying Marvel (NYSE:MVL) for $4 billion and oil services company Baker Hughes (NYSE:BHI) is buying BJ Services (NYSE:BJS) for $5.5 billion.
Mergers and acquisitions are generally considered bullish because they indicate that the acquiring company feels prices are attractive and there is growth ahead.
That’s especially significant in the case of Baker Hughes. There’s not an analyst out there who hasn’t been saying that oil prices have risen too high in the current environment of growing supply and falling demand.
Oil is an important indicator of investor expectations for the economy. And now, it seems, even the "insiders" are getting more bullish on oil prices.
Oil is trading below $71 today. That’s a far cry from the $50-$60 range that some say is fair value. And a move to these levels is looking less and less likely.
Best regards,
Ian Wyatt
Editor
Small Cap Investor Daily
P.S. My book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks is coming out on September 14 – visit www.smallcapbook.com to learn more. You can also follow me on http://twitter.com/ianwyatt
Ian Wyatt is the Chief Investment Strategist of SmallCapInvestor.com and author of The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. You can learn more about his book and receive small-cap stock picks at www.smallcapbook.com.
Remember last week when we rallied from the 1,017 level? Well, we are sitting right at the same level again today and really need to break this level first to have any chance at getting down to the 995 level in BLUE - simple as that. While I’m not sure if it will come today or later on this week, it just needs to happen sooner than later. Still, members and I are enjoying some GREAT profits across the board on our shorts! Most are down over 4% today alone and looking great!
Stocks mostly fell today as the market rally is showing signs of losing steam. Indeed investors seemed cautious on back-to-back bad news from consumer confidence falling to 65.7 from 66.0 in July and initial unemployment claims for last week were 570,000.
The Dow ended the day at 9,544, down 36 points; the Nasdaq finished at 2,029, up just over a point; and the S&P 500 stood at 1,029, down 2 points.
Advances and declines were about evenly matched on the NYSE and Amex while declines lead advances 5 to 3 on the Nasdaq.
The Russell 2000, a composite index of the 2,000 leading small-cap stocks as defined by Russell Investments, closed at 58X, down 2 points.
Small-cap leaders trading over 1 million shares include Helios BioSciences (Nasdaq:HLCS), up 20%; Echelon Corporation (Nasdaq:ELON), down 22%; Curis (Nasdaq:CRIS), up 20%; and Glu Mobile (Nasdaq:GLUU), up 20%
*****The New York Times article is titled "AIG Rises, and Many Ask Why". After all, the company is 80% owned by the government, owes around $180 billion, is cash-flow negative and would be in even worse shape were it not for accounting changes that help it keep toxic mortgage assets unfairly valued.
And to top it off, the company is actively seeking buyers for its best business units, which will impair its ability to earn its way back to health.
Why would anyone buy this stock? Simple. This is the Cash for Clunker Stock Rally. The worse your balance sheet is, the higher your stock price will go. AIG’s stock price has quadrupled in a month. Indeed, yesterday it was the most active stock with 149 million shares traded; six times more than the next highest traded stocks on the NYSE (those would be HIG and NOK at about 23.5 million each). And AIG’s volume yesterday was nearly five times its 50-day average volume. That’s simply amazing.
But it goes to show you with cheap money and a government guarantee that there is no risk in the financial markets.
*****I can only imagine how Mr. Otelli and crew feel over at Intel (Nasdaq:INTC). Intel is very well run business. So far as I know, it never invested in mortgage back securities and didn’t engage in any activity that could be considered a threat to the American economy.
In fact, one could argue the exact opposite – that the productivity gains America has enjoyed from computing power are a direct result of Intel’s innovation. Of course, that didn’t prevent Intel’s stock from getting cut in half after the actions of AIG and its ilk brought the U.S. economy to its knees.
Today, Intel raised its revenue estimates for the current quarter, a sign that the company is weathering the difficult economic environment admirably. Investors have rewarded the company with a 5% move higher for the stock.
Of course, AIG was up 13% in the early going this morning.
Clearly, it’s better to be a complete disaster of a company these days.
*****Yesterday, the Dow Industrials were off nearly 100 points in the early going, as initial jobless came in worse than expected and second quarter GDP couldn’t be massaged to show anything better than the 1% decline economists were expecting.
By the end of the day, the Dow was up 40 points. "Buy the dips" is the mantra for the Cash for Clunker Stock Rally.
I’m starting to feel a little sorry for the bears, who think every red tick is the start of the massive correction they expect any day now. But with money as cheap as it is, and a government hell-bent on supporting asset prices, it’s hard to imagine a significant correction without some kind of shock to the system.
Of course, the Cash for Clunker Stock Rally will end at some point. But it would not be wise to bet on when. After all, a market can remain irrational longer than you (or I) can remain solvent.
*****Now, please enjoy TradeMaster Daily Stock Alerts Jason Cimpl and his weekly video chart analysis. It’s online now and Jason once again shares with you his synopsis of this week’s trading activity and gives you his prognostication for next week’s market movements. CLICK HERE for his video.
Until tomorrow,
Ian Wyatt
Editor
Small Cap Investor Daily
P.S. – I received even more emails overnight about my Recovery Portfolio service. Seems like a lot of investors are interested but just keep losing the link. That’s fine. Here’s the link to my Recovery Portfolio service and how I’m turning $100,000 to $250,000 in the next 4 years. CLICK HERE. I also explain why its $100,000 and not something absurd like $1,000,000 and give you an opportunity to get my new report on 5 outstanding funds that Financial Advisors aren’t sharing with their clients (shame on them, but good for you). CLICK HERE for Recovery Portfolio.
P.P.S. My book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks is coming out on September 14 – visit www.smallcapbook.com to learn more. You can also follow me on http://twitter.com/ianwyatt
Ian Wyatt is the Chief Investment Strategist of SmallCapInvestor.com and author of The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. You can learn more about his book and receive small-cap stock picks at www.smallcapbook.com.
Another failed bullish attempt today as the indexes were basically flat at the close. Shorts did great for members and I today while our few longs were mixed; some higher some lower. Overall though we were seeing some GREEN on the screens.
Now, looking at the chart of the QQQQ’s below you can see a very clean trendline break and retracement. Honestly, these are golden opportunities to learn from because they are happening RIGHT NOW in the markets. Notice that we broke this two week trendline yesterday after the failed rally. Then today, we opened up here and made a very successful retrace of the breakout (highlighted in BLUE around 40.60). If you were using technically analysis you would have clearly seen that this mornings rally was nothing more than a retracement of the breakout - and really just another opportunity to go short! Amazing how this stuff works time and again people!
As of 2:00 p.m. Eastern Time press time, stocks in the Dow and S&P 500 were trading up, while the Nasdaq was slightly down. The Dow was trading at 9,550, up 10 points; the S&P 500 at 1,028, up 0.27 points; and the Nasdaq was down 0.80 points, trading at 2,023.
The Russell 2000, an index of the leading small-cap stocks, was down 1.32 points at 582.
Declines lead advances across all three major exchanges at a ratio of about 5 ½ to 4.
Leading small-cap price gainers trading over 1 million shares include Vonage (NYSE:VG), up 37%; Nymox Pharmaceutical Corp. (Nasdaq:NYMX), up 29%; TravelCenters of America (Amex:TA), up 30%; and Trident Microsystems (Nasdaq:TRID), up 18%.
Vonage saw shares surge on growing consensus that the company would survive the recession. One of the first firms to offer Internet-based calling services, Vonage has been challenged with high costs and competition from telephone and cable operators have increasing begun offering bundled services of video, Internet and phone services.
Shares of Vonage are up over 400% since Monday’s open.
*****Yesterday, I mentioned that I thought the Cash for Clunkers was a pretty decent idea, as far as stimulus plans go. Rather than simply hand the automakers cash, the government came up with the Cash for Clunkers program that not only got some desperately needed extra cash in the automakers pockets and also took a few low-MPG cars off the streets. It also put cash into the hands of car dealers who have been struggling and a small percentage of that money into local economies.
Of course, the Cash for Clunker program ended Monday. But it occurred to me last night that the rally we’ve enjoyed since March could well be called the Cash for Clunker Stock rally…
*****There’s no way the government can simply replace the wealth that was lost during the financial crisis. Not only would it have to absorb the banks losses, the government would have to reimburse investors for their investment losses and put around 3 million people on its payroll.
No, America must earn its way back to prosperity. And the government has created an environment where many companies can do just that. For banks, accounting rules were changed so that what once was a loss can now be treated as an asset. Without these rule changes, Bank of America (NYSE:BAC) and Citigroup (NYSE:C) would still be clunkers.
Credit card companies have been allowed to jack fees for even their best customers. Government backed efforts to modify mortgages has slowed the foreclosure rate dramatically, and the lag time of foreclosed homes coming to market has allowed prices to stabilize in many areas.
Government guarantees fixed the money markets. And the weak U.S. dollar has put a floor under oil and commodity stocks, even as demand has fallen steadily. (Note: if you’re interested in how a continually weak dollar and coming inflation are fuelling a commodities boom and enriching investors, CLICK HERE.)
Amazingly, banks even rejected one of the sweetest Cash for Clunker Stock programs – TARP. TARP would have actually given banks money for their toxic mortgage assets. Imagine that!
*****The Cash for Clunker Stock program has also returned a lot of wealth that Americans lost in the stock market. The government has bent over backward to make it possible for companies to start earning their way out of the hole, and investors are enjoying much improved brokerage reports.
It’s no coincidence that some of the best gains during this rally have been achieved by some of the biggest clunker stocks. Bank of America has rallied from a low of $2.53 to $17.75, a 601% move. Citigroup has run from $0.97 to $4.90, a 405% move.
Heck, even walking dead, ward of the state companies Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) have doubled in the last week. Doubled! These two stocks have virtually no purpose except to provide a buyer of last resort for mortgages and make token payments on government loans. And investors are acting like these two companies are actually good investments!
*****Case in point, on Monday and Tuesday this week, Reuters reports that these four stocks – Bank of America, Citigroup, Fannie and Freddie – accounted for 40% of the trading volume at the New York Stock Exchange.
One commentator said, "No one is buying them based on their fundamentals, they’re buying based on what the government might do keep them alive."
Yes that’s what’s moving the stock market these days – the firm understanding that the government has removed risk from even the clunkiest of clunkers.
Reuters is also reporting that short interest for Bank of America is up 28% in August to 118 million shares and at Citigroup, the short position is up 82% to 624 million shares. Makes sense, but I’m not sure I want to take that bet. At least, not until I know the Cash for Clunker Stock program is over.
Until tomorrow,
Ian Wyatt
Editor
Small Cap Investor Daily
P.S. My book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks is coming out on September 14 – visit www.smallcapbook.com to learn more. You can also follow me on http://twitter.com/ianwyatt
Ian Wyatt is the Chief Investment Strategist of SmallCapInvestor.com and author of The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. You can learn more about his book and receive small-cap stock picks at www.smallcapbook.com.
Jim Nelson is the managing editor of the Penny Sleuth e-letter, a free daily newsletter that focuses on small-cap, options and high-growth opportunities. Along with analysts Greg Guenthner and Jonas Elmerraji, Jim is an editor of Penny Stock Fortunes, a premium small-cap newsletter. Jim is also the editor of Lifetime Income Report, Agora Financial’s new income investment advisory that launched in February.
I recently sat down with him to give us a little perspective on the small-cap market these days. As a big fan of small-cap stocks myself, I’m always interested in hearing what other small-cap experts have to say. Plus he’ll share with you a few of the stocks he’s watching now. Here’s what he had to say…
Ian: Jim, first and foremost, "penny stocks" are one of the most misinterpreted investments on the market. How do you define them?
Jim: Ian, the term "penny stock" is misleading to many investors. Basically, we consider penny stocks to be any small caps that trade under $10 per share. But share price isn’t the most important thing here — total market capitalization is.
We define a small cap as any stock whose total market cap rings in at $1.5 billion or less. While those cutoffs can be subjective, those are pretty common ranges for penny stocks to trade in.
Ian: Some investors tell me they think penny stocks are risky. What’s your response to that?
Jim: Risk is a very important question when it comes to penny stocks. You see, small companies behave very differently than larger companies like GE or Microsoft. That said, the stocks we look at are real companies with growing, sustainable businesses — while they may be subject to somewhat bigger price swings than blue chip stocks, they also bring the potential for much bigger profits because most of their growth is ahead of them.
The vast majority of small caps we look at trade on major exchanges like the NYSE or Nasdaq… only a select few carefully vetted over-the-counter stocks reach our readers.
Ian: How are penny stocks performing in this market?
Jim: For the most part, penny stock performance mirrors the rest of the market. But what’s unique about penny stocks is the fact that historically, they lead the charge out of recessions and into prosperity.
That changeover is something we’ve seen a lot of — probably more than many blue chip investors — in 2009… While we generally focus on broadening Penny Sleuth readers’ "investment toolboxes" in our free daily issues, we do occasionally talk about specific small-cap opportunities in the Sleuth. Two of our most recent mentions were Xinhua Finance Media (Nasdaq:XFML) and GP Strategies (NYSE:GPX) — these penny stocks brought in returns of 45% and 77%, respectively, during a rough time for the rest of the market.
And in Penny Stock Fortunes, our premium newsletter, in which we recommend small-cap plays every month, we’ve closed gains as high as 279% already this year.
Ian: What’s your fundamental strategy right now?
Jim: With an economy that’s still far from recovered and credit that’s hard to come by, three of the biggest metrics we’ve been targeting have been a strong balance sheet, positive free cash flow and a bargain-priced price-to-book ratio.
In this climate, we’re after penny stocks that can thrive and not just survive this economy… that’s why a solid balance sheet position and positive free cash flow are so important. We’ve seen scores of businesses deemed "too big to fail" collect emergency funds from Uncle Sam to keep from going belly up; penny stocks don’t have that luxury. That makes ensuring that a small-cap company can pay its bills on the top of our priority list.
And an attractive price-to-book ratio shouldn’t be discounted either… when the stock market "fell through the floor" in 2008, it dragged just about every publicly traded company with it — whether or not the company was overvalued at the time. In the aftermath, we’ve found that there are many companies trading vastly below their fair values. That’s true even today. We’ve been lucky enough to snap up many beaten-down companies early enough that we were left with respectable gains after more mainstream investors realized the value proposition that was going on at the time.
Ian: You said that penny stocks historically lead the way out of recessions… Where will this recovery come from?
Jim: It’s funny you mention that — a few months back, we set out to create a small-cap recovery index to determine exactly which industries were leading the charge to recovery, as well as how far along recovery actually is.
The project is a complicated one. It involves the selection of hundreds of stocks and additional metrics like unemployment and savings rates. Once these benchmarks are selected and compiled, we will begin to see a picture developing that will reveal investor sentiment and market performance. Eventually, when enough data are compiled, we will have a more accurate picture of where the market is headed.
Ian: More specifically, into which industries are you putting your money?
Jim: Two industries sure to set fire to the market over the next few years are "green tech" and telecommunications. Green tech stocks are, obviously, on every investor’s mind — especially people who put their money in small-caps. Finding the right ones is the hard part.
For instance, Maxwell Technologies (Nasdaq:MXWL) popped on our radar awhile back. We got in while it was still trading as a penny stock. We’ve since booked our gains on that one, but we’re always watching in case we get a second chance to act.
Telecoms, at least in emerging economies, have the benefit of billions of potential customers and fat profit margins. Just look at Nortel Inversora (NYSE:NTL). This Argentinean telecom is growing its top line in a country where millions of new Internet and phone users are subscribing every year.
Ian: Say someone who had never invested in penny stocks before approached you. What would your first piece of advice be?
Jim: You need a discount broker you can trust — one that won’t charge you an arm and a leg to buy and sell stocks. If you are paying $3 per share and getting charged $50 for each trade, you’re putting yourself in a huge hole from the start. There are plenty of discount brokers, but you need to know what exactly you’re looking for. We keep our Penny Sleuth readers up-to-date on which brokers are out there and of any changes to their fee schedules.
Jim, thanks for spending some time with us today and sharing your thoughts on penny stocks with Daily Profits readers.
Jim Nelson is the managing editor of the Penny Sleuth e-letter, a free daily newsletter that focuses on small-cap, options and high-growth opportunities. Delivered at least five times per week, Penny Sleuth shows readers everything from macroeconomic trends and technical analysis to individual penny stock and option investing ideas.
Click here to start your FREE Penny Sleuth subscription today!
After a quick rally this morning, the indexes seem to be pulling back from the 1,030 which I think is going to be major resistance. Not only is it a cross of Fib levels, but also a pivot point level too. Notice on the chart below that it’s hit that level nearly three different times and failed to rally significantly off of it. Now the track seems to be down towards 1,017 as the next intra-day support level. As for our shorts, everything is looking GREEN this morning members! Way to go!
The markets reversed yesterday’s sell-off close up just slightly. The Dow closed at 9,539, up 30 points; the Nasdaq finished at 2,024, up 6 points; and the S&P 500 stood at 1,028, up just over 2 points.
Stocks on the Russell 2000 finished up 3 points ending the day’s session at 583, its highest close since October 2008.
Advances lead declines by a margin of 3 to 2 on the NYSE; 5½ to 4 on the Amex; and 5 to 4 on the Nasdaq.
Small-cap price gainers trading over one million shares include Willdan Group (Nasdaq:WLDN), up 120%; CAS Medical Systems (Nasdaq:CASM), up 84%; Nexstar Broadcasting Group (Nasdaq:NXST), up 38%; and Reddy Ice Holdings (NYSE:FRZ), up 35%.
*****As if there had been any doubt, Fed Chief Ben Bernanke was nominated for a second term. This is a good move in my opinion. Especially now, switching horses midstream would seem like a dangerous move. Plus, my biggest gripes about the various stimulus plans and bailouts are with Congress, not the Fed.
Congress is responsible for turning the bailouts into a cash-grab for their favorite constituents. Of course, some programs were necessary, like the efforts to modify mortgages to keep people in their homes. Even the Cash for Clunkers program helped automakers and dealers.
There’s been some criticism that much of the rebate money in the Cash for Clunkers ended up going to foreign car makers. But Toyota, Honda and all the rest hire American workers to work in their U.S. based factories. And if Cash for Clunkers helps these companies keep workers on the payroll and off unemployment benefits, them it’s a good thing.
*****You gotta give economist Nouriel Roubini, aka Dr. Doom, credit for his consistency. Now that growth for the global economy is widely expected by economists, and home values are improving slightly, Roubini is now warning about the potential for another round of recession.
To be fair, Roubini called the depths of the recession pretty accurately.
And even his double-dip recession scenario makes sense. He believes that food and energy prices are rising faster than demand should warrant. At some point, like oil at $100 a barrel, prices will further depress demand.
Not only that, loose monetary policy will have to be tightened at some point. And it’s likely that growth in the U.S. will only be in the 2% GDP growth range when the Fed is forced to raise rates.
And, on top of that, unemployment is likely to remain high for a few years. That’s a natural cap on demand and a big reason why GDP growth in the U.S. is expected to top out around 2%.
Come to think of it, Roubini expectations sound a lot like mine. I call this situation "Managed America." And I’m currently focused on buying the companies that can grow in an environment of slow growth and weak demand. For more about Managed America and how you can profit form it, click HERE.
*****If you’re on the Preferred List, you love Goldman Sachs. But as an ordinary individual investor, you probably feel like Goldman represents all that’s wrong with Wall Street.
Regulators are investigating Goldman’s practice of sharing short-term trading ideas with top clients that sometimes differ from the firm’s stated fundamental stance.
In other words, Goldman’s analysts might tell top clients to short oil, even while Goldman is publicly bullish on prices.
We all know that Wall Street’s interests are rarely aligned with that of individual investors. This is just one more example of why it’s critical that investors be careful out there.
Best Regards,
Ian Wyatt
Editor
Small Cap Investor Daily
P.S. Speaking of Wall Street not looking out for your interests, yesterday I mentioned my Recovery Portfolio advisory service where I share with you what I’m investing in. I’ve put $100,000 of my own money on the line and share all my trades with readers. A bunch of you signed up yesterday to start profiting alongside me. If you missed yesterday’s Small Cap Investor Daily or just want to learn more, CLICK HERE.
P.P.S. My book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks is coming out on September 14 – visit www.smallcapbook.com to learn more. You can also follow me on http://twitter.com/ianwyatt
Ian Wyatt is the Chief Investment Strategist of SmallCapInvestor.com and author of The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. You can learn more about his book and receive small-cap stock picks at www.smallcapbook.com.
The indexes are moving higher this afternoon on much better consumer confidence. This goes in lock step with my whole theory right now that after everyone (and their mother) has bought into this rally and the recession being over - then things will turn south fast. When there is nobody left to continue buying, who will keep prices up? Just saying…
DUG is an interesting little chart right now and seems to be making a nice double bottom. If this holds and the dollar starts to rally some then we could see this bounce strongly off of the recent lows.
Morning all! First, I just wanted to remind everyone about the FREE Option Trading Newsletter. It’s been a huge hit since we put it together a couple months ago now and really what do you have to lose by signing up - it’s FREEEEEE for goodness. If anything you will pick up some great tips and tricks for options trading more profitably.
Hopefully all the members enjoyed last night’s trading video and market insight. In general we have a fairly hedged portfolio right now which is great for what I am expecting in the markets over the next couple of months - i.e. sideways trading. Our longs have been doing great and are showing some fat profits right now - while our shorts are still holding their own.
As for today, we seem to be stuck in another trading range. Honestly things could go either way today - and most likely will test each level once I think. So, just sit back and wait for the clear direction to show it-self to you. There’s no need to get all worked up on any day trades today as the risk/reward will probably not be there. Here’s what we are seeing as support and resistance on the S&P 500.
