Markets betting on Brown

U.S. Financial Markets rallied Tuesday on speculation that Republican Scott Brown would win the late Senator Ted Kennedy’s vacant seat. A Brown win could cause potential problems for Democrats and those in favor of President Obama’s health care plan. As a result, the health care index ($HCX) closed up 2.04% while the hospital index ($RXH) closed up only 0.61%. The hospital index opened lower, but traded higher throughout the day as the rest of the market rallied.

The markets began pricing the Republican win early in the trading session. The U.S. Dollar and equity markets rallied on the speculation that a Republican win in Massachusetts would help to bring Washington closer to normalcy. However, Brown’s victory may have some serious economic implications that many have not considered. Scott Brown’s victory implies less stimulus money, lower expected future inflation, and a reduced likelihood of a tax increase.

Brown’s victory reduced the likelihood of a tax increase which can explain much of today’s rally. The first two implications are related since a decrease in our current level of deficit spending will in turn decrease expected future inflation. However, lack of necessary stimulus could result in a serious problem. For the record, I disagree with deficit spending, particularly when the intent is to influence the business cycle. With this in mind, reducing or eliminating the current stimulus policy will cause us to fall into a Depression. The government cannot stop stimulating this economy without certainty that we are recovering. Notice I said CERTAINTY and RECOVERING.

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Intel Corp. (INTC) and J.P. Morgan Chase & Co. (JPM) Follow-Up

Both Intel Corp. (INTC) and J.P. Morgan Chase & Co. (JPM) beat analyst estimates as well as Whisper Number expectations last week[1]. Both companies also traded lower on Friday with heavy volume[2]. This negative response to “positive” news suggests negative sentiment among traders, both professional and retail, and is in line with my expectation and forecast that this earnings season will bring the markets closer to reality.

Citigroup Inc. (C) and IBM (IBM) report Tuesday. Worse than expected results will provide more ammunition for the bears and potentially the first 2 day loss for the indices since early December [3].

[1] INTC $0.30 Analyst Estimate vs. $0.33 Whisper Number Expectation vs. $0.40 Actual
JPM $0.62 Analyst Estimate vs. $0.66 Whisper Number Expectation vs. $0.74 Actual
[2] INTC traded on 1.31 times previous day’s volume, JPM traded on 1.84 times previous day’s volume
[3] December 7 and December 8

Intel Corp. (INTC)

Intel Corp. (INTC) will report after market close today. Intraday INTC is up about 2%[1]. Analyst estimate $0.31 EPS compared to a slightly higher Whisper Number[2]. If earnings are in-line with analyst estimates, I expect to see a decent sell-off. A broad market sell-off will follow tomorrow if comfort cannot be found in J.P. Morgan Chase & Co. (JPM) earnings results.

INTC Intraday

INTC Last 6 month

[1] +$0.45 (2.13%) to $21.42 at 2:26 EST
[2] Whisper Number can be found at http://www.whispernumber.com

What January Effect?

The markets experienced a modest 6 day rally[1] to begin 2010 in what many are calling a continuation of the current up trend. Although the markets have rallied nicely from the November lows and finally broke out above December’s resistance levels, this rally is lacking significant substance. Market Fallacy has been bearish for some time now. While not all data has conclusively supported this rally, the important indicators continue to suggest a future decline. Sadly, the brilliant talking heads on CNBC are calling for a “bigger event” to act as a catalyst for this market. Unemployment (although a lagging indicator) has been 10% for two consecutive months[2], today’s retail sales numbers[3] were much worse than expected and Alcoa severely missed analyst expectations[4]. If this any indication on how earnings season might go: here is the BIGGER EVENT.

SPX Last 9 Months

[1] Approximately 2.86%
[2] November Consensus 10.2% vs. Actual 10.0%, December Consensus 10.1% vs. Actual 10.0%
[3]  Consensus 0.4% vs. Actual -0.3%
[4]  Analysts Estimate 0.6 vs. Whisper Number 0.07 vs. Actual Earnings of 0.01

Market Fallacy 2.0

Market Fallacy is back with a new and improved format. Sign up for the Market Fallacy Newsletter at http://www.marketfallacy.com to receive insight into our proprietary approach. Stay tuned in to our blog to receive full market commentary. Market Fallacy will no longer give explicit buy/sell recommendations, but will instead provide a framework for understanding our proprietary analytics.

Look for a follow-up to the Summer Stock Picks, Earnings Season Coverage and Market Analysis

Proof but no Pudding

Futures rally on better than expected Q3 GDP (3.5% vs. 3.2% median estimate). Is this enough to stop the current retracement? There will be an early morning pop, and the markets won’t take long to reveal which way they are headed. If the early morning gains are not sustained, SPX will retest 1000. Yesterday, NASDAQ closed below 50 day moving average on 120% of 10 day average volume.

Profit Taking?

Market Fallacy apologizes for any inconvenience that resulted from the switch to the new format. The Market Fallacy Blog, www.marketfallacy.wordpress.com, will now provide macroeconomic analysis, while the newsletter will give stock picks and recommendations. For the remainder of May the recommendations will be free of charge, but starting June 1, 2009, there will be a monthly charge to view the updated predictions. Each newsletter will be broken down into two types of recommendations: Preferred Picks and Optional Picks. Preferred Picks are must haves for any portfolio, whereas Optional Picks give the reader the opportunity to choose between two companies in a particular sector or industry. For Optional Picks, the recommended allocation is to divide the capital between the companies instead of holding full positions in both. This strategy is suggested since Optional Picks will typically be in the same sector or industry. When allocating do not over expose your portfolio to the given sector by allocating too much in each of the Optional Picks.
 
Preferred Picks
The three Preferred Picks for this newsletter are Goldman Sachs (GS), Ford Motor (F), Proshares Double Crude (DXO).
As of the close on Friday, Goldman Sachs is approximately 10% above its recent equity offering price. Based on academic studies in behavioral finance, on average, companies that issue seasoned equity offerings have approximately 40% cumulative abnormal return in the 500 days leading up to the announcement. On average, the price of the equity drops to reflect the new offering price, and then remains flat for about 3 months. The fact that GS has already been able to overcome the typical scenario has positive implications on Goldman’s future. Market Fallacy recommends buying Goldman Sachs (GS) up to $155. At the current price, this will be an approximate 15% return, in addition to the $1.40 per year dividend.
 
Ford Motor also just recently raised capital through an equity offering. Although the stocks has not returned to pre-issuance levels, Market Fallacy recommends buying Ford Motor (F) up to $8. At the current price, this will be an approximate 46% return.

 
Proshares Double Crude (DXO) is an etf that tracks twice the daily return of light sweet crude oil (WTI). Market Fallacy has had a buy rating on DXO since $2.80, and reaffirms this recommendation up to $6. At the current price, this will be an approximate 84% return.
For more information on Market Fallacy’s oil outlook, please visit www.marketfallacy.wordpress.com
 
Optional Picks
The first Optional Pick is in the basic materials sector and agricultural chemicals industry. Potash Corporation of Saskatchewan (POT) and Mosaic Company (MOS) are the two choices for the first Optional Pick.

Potash (POT)

Potash (POT)


Mosaic (MOS)

Mosaic (MOS)

 

Based on technical analysis, the triangle bullish pattern breakout implies POT is headed higher. POT has recently established support on top of prior resistance, also bullish. Market Fallacy recommends building positions in POT on pull backs only, as the current price has broken out above previous consolidation levels. Market Fallacy’s price target for POT is $130. At the current price, this will be an approximate 22% return, in addition to the $0.40 per year dividend. On Thursday, MOS had a bullish engulfing candlestick which was confirmed on Friday. This candlestick pattern in addition to the current breakout above the bullish channel suggest further appreciation in the stock price. Market Fallacy recommends buying MOS up to $63. At the current price, this will be an approximate 23% return, in addition to the $0.20 per year dividend.
 
The second Optional Pick is in the technology sector. Research in Motion (RIMM) and Apple (AAPL) are the two choices for the second Optional Pick.

Research in Motion (RIMM)

Research in Motion (RIMM)


Apple (AAPL)

Apple (AAPL)

Based on technical analysis, the rising wedge patter suggests RIMM is setting up to break out. After the recent pull back in techs, it is likely there will not be a better entry point the rest of the summer. Market Fallacy recommends buying RIMM up to $95. At the current price, this will be an approximate 31% return. Fibonacci retracements and Elliot Wave Theory explain the recent pull back in AAPL as a corrective wave. Wave 4 down precedes impulse wave 5 up, which in theory will be between 20-50%. Market Fallacy recommends buying AAPL up to $155. At the current price, this will be an approximate 27% return.
 
Market Outlook
After the recent 5% retracement, the market approaches an important point where it must decide to break the short term up trend or rejoin the longer term down trend. Given the recent economic data which suggests the economy is improving, Market Fallacy reaffirms its long positions. Any new optimism will spark additional fuel for this rally. In the coming days expect above average volume, volatility and price movement.