Sunday, September 19, 2010

19 September 2010 The cast into next week.


19 September 2010 The cast into next week.

It was a great weekend. Hope you had one as good as ours. I spent most of it chasing elusive trout across Jordanelle Reservoir, in Utah. The fall turn is coming early and it was a little surreal seeing a beautiful fall turn in 85 degree weather (about 30 C for you international readers).

Since you know I was gone, I had to rely on the internet to get my thrills from this weeks Barron’s. We will get to that soon.

A couple of more swings at the plate.

And a couple of more misses. I owed you the results of Friday’s prognostications. If you remember way back to last week, we suggested that the consensus of a .3% jump in the CPI (Consumer Price Index) might be a bit soft and were thinking the actual number might come in at .4%. WE WERE WRONG. It came in right on estimate. Now that is good because it implies inflation worries are still not raising their ugly heads. It’s kinda bad because it won’t keep the D word from being tossed around (Deflation). We agree with the consensus of a 70 rating in the Consumer Confidence report and WE WERE WRONG. It came in at 66 which took a lot a folk by surprise, but had little impact in the market. That is a good thing because Friday was what is called a quad witching day. It was a day when contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. Those days can be very volatile, but in this case it was not. From what we have read, it was a stable quad witching day because of a complete lack of volume. Not many traders. (FYI, triple witching is more common as it does not include the SSF contracts.)

Other good news on Friday that may have off set the poor Sentiment report was Oracle ORCL beating expectations. The good news was not just that they beat, but had great revenue last quarter. RIMM echoed those results with a beat based upon impressive revenue and positive forward looking statements. Texas Instrument TI announced a dividend increase and a sizeable stock buyback program. (I am putting this on my watch closely list as those ore two of the three elements of the shareholder’s yield trifecta. DO YOUR HOMEWORK.

Speaking of Homework

One of our readers asked about NLY Annaly Capital Management, nc., a real estate investment trust, engages in the ownership, management, and financing of a portfolio of investment securities. The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans. Annaly Capital also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association debentures. The company has elected to be taxed as a real estate investment trust (REIT). As a REIT, the company would not be subject to federal corporate income tax, provided it distributes at least 90% of its taxable income to its stockholders. It was formerly known as Annaly Mortgage Management, Inc. and changed its name to Annaly Capital Management, Inc. in August 2006. Annaly Capital Management was incorporated in 1996 and is based in New York City.

OK, here is my two cents worth. Actually I don’t want the two cents as that would make me a professional and create all kinds of liability that I really don’t need. Here is my FREE opinion. One of our first rules of investing in know what you buy. Now it would be easy to say this is a REIT. As a quick review for those that need it a REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Thank You

After doing the research, I can see why this caught the eye of the reader. It is throwing a 17% dividend. If you remember a few weeks back, we did a piece about dividend sustainability. Here is the relevant section:

“In essence, ‘buy the dividend’ is at the heart of value investing. Just watch the cash flow on stocks that pay a high yield (We consider a high yield as anything above the current 10 year treasury yield, currently at 2.6%) to make sure it is a sustainable dividend and not a sucker bet. A quick check for sustainability would be to look at the payout ratio which compares earnings per share to dividends per share. The lower the better as it is a good indicator that they can continue to pay that dividend. For example one stock you mention is VZ Verizon. If my numbers are correct they are paying a 6.3% dividend yield, but the payout ratio is an obscene 733%. (Please check my numbers). However having been a holder of VZ and VOD, I kind of get the convoluted relationship between Vodafone, Verizon, and Calico (sp) Partnerships. This is a cash rich arrangement. VOD has a nice 5.4% yield and only a 50.6% payout, but the incestuous relationship should cover VZ ability to pay dividends.”

NLY’s payout ratio is 145% indicating this is not a sustainable dividend. In most corporate stocks, you can dig into the financials and see why the dividends are not sustainable. I am not smart enough to do this with NLY. The reason why the dividend is so high is because NLY is set up as a tax free REIT so they have to pay out more than 90% of their earnings as dividends, as mentioned above. In order to do this they have to rely on the short term credit market which is improving, but still skittish. They use other vehicles to accomplish this ability to return the earnings as dividends and they are very complex, at least to this simple mind. I can not explain with any comfort what a reverse repurchase contract is or what an interest rate swap contract is. So I go back to my original premise, Only Buy What You Know. If you can’t explain how they make a profit in one or two sentences, I would avoid them.

Big Issue Barron’s

I was able to get this on my kindle this morning and knew it was going to be a great issue. When I got home, I was not disappointed. They have a special section this week about the HOW’s of overseas investing. We highly recommend grabbing this issue.

Even the usually contributors like Santoli, Ableson, Bary, and Carey had positive comments about the market in general. The seem to be supporting the idea we might be in a real rally as we suggested here last week. This rally could have a nice run to Q 1 2011.

Abelson’s Up and Down Wall Street column points out that “Suddenly, Everyone Is Not Bearish”. Great article and again I suggest you pick up a copy of this week’s Barron’s. With regards to the positive sentiment in most of these articles and more importantly several references to the S & P piercing the 1130 mark which according the experts will draw significant institutional monies into the market. (Something desperately missing since the end of May). This is explained well in Racanelli’s article “Market Still Peppy After Shot of Tea”.

By far the most useful article of the week is Santoli’s second article “Setting the Standard” which explains the components of the Barron’s 400 index and how the big money boys use it to find the next big thing. As a beginner investor, this article takes basic knowledge that we have learned from Mr. Cramer and puts it to practical application. I am keeping this one on my hard drive.

The Week Ahead.

Last Sunday night I suggested the market would move 1.5% and I absolutely nailed it! Unfortunately we said it would be down 1.5% and the S & P 500 was up 1.4% and the Dow was up 1.5%. We? It’s the voices don’t ya know?

Anyway, we will step into the batters box again and see what we think will happen. We have about 8 key domestic economic data points to keep an eye on this week. (Please drop me a note either way if you feel these economic data points are helpful at all.)

Monday is the Housing Market Index. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. (Thank you National Association of Home Builders.) This is a true index 0-100. So anything over 50 is positive anything under 50 is negative. Last month, we saw a 13. We are guessing a slightly positive index rating of 15 that will give the S & P 500 the umph it needs to break the 1130 mark. Not much else going on Monday. It’s a holiday in Japan.

Tuesday is the monthly new housing start report. July number looked to be up from June but in reality it was a drop because of a downward adjustment in Junes numbers that made July numbers look better. If you go in and read the Beige Book from about week ago, most districts report permits being soft but improving. The consensus .550 million units for August. We feel it might be a bit healthier than that. Look for .565 million units keeping the S & P 500 above the 1130 range for two days. (One more and we got a breakout.)

The FOMC will reports its prime interest rate on Tuesday and everyone KNOWS the fed will not mess with the prime and leave it at .25%. I always get worried when everybody KNOWS something. But, we will go with the flow and agree no change to the interest rate base.

Wednesday has little to report, but for those of you heavy in energy jeep an eye on the energy report.

Thursday we have initial jobless claims with a consensus figure of a flat number of 450,000 new claims, the same as last week. We are feeling a bit more optimistic and look for yet another drop to 442,000 which will keep this rally going.

Existing home sales also reports on Thursday and the wisdom holders say a 5.79% increase over last month to 4.05 million homes sold. We think that is a bit aggressive as that kind of volume would have been noted in the Beige Book. Look for 3.95 million homes, but it will be in the safe range and should not impact the market.

Thursday will also give us the Dept of Commerce’s Conference Boards index of leading indicators. This is a vegetable soup of economic indicators and I could bore you to tears with the actual make up of the index. Instead we give a link to what it actually is. The consensus is flat staying at .1%. We feel this is a bit conservative and look for .2% adding to a nice extension of this rally.

On Friday, durable goods orders are forecasted to drop 4 tenths of a percent to -.1%. We agree with the downward adjustment and it was well telegraphed in the Beige Book. Perhaps we think that it will only be a drop to 0.

New Home Sales also reports on Friday and that is set to improve to the 290,000 unit level. We feel they got the number just about right and if anything a bit more aggressive.

So there are your data points. Now let’s see if there are any earning reports that might sway the market.

Back on the 12th we told you DFS, Discover Financial Services would report on the 13th. We got a head fake some how as they are reporting tomorrow. The estimate on the street is 35 cents a share and we still think they will come up short to 33 cents a share. It will hurt the stock but not the market or the sector.

Adobe reports on Tuesday as well and we like what we are hearing lately and the fact that Apple blinked in the app war, but that is too recent to impact this reporting. They are looking for 49 cents a year and with all the beats in tech, this one should follow suit. We are thinking 50 cents a share.

Cintas is reporting on Tuesday and we did a homework assignment on the stock on the 9th of this month. This is a 27 dollar stock which is actually a 27 dollar stock. They are expecting 38 cents a share, but we see 35 cents and again no impact to the market.

That gets us to Wednesday and we have some big reports like Darden restaurants, General Mills, Bed bath and Beyond, Nike and KB Homes. Several of those could be game changers so we have more homework to do.

“I had a another link, and I had a cup of tea and butter pie.”

In the huge hit Hands Across The Water, I am sure sir Paul was not talking about informational links to make stock plays on, but here is one for you. Of late many of the brokerage houses like Schwab and Ameritrade have not been performing well. That is because of the utter lack of volume in the market. If we are seeing a rally, and we see some interesting technical levels pierced in the next several days, we could see volume start to pick up. You can figure it out from there. Do Your Homework.

Sorry there were technical difficulties associated with importing pictures today.  I'll try and find two next time.

Salve Lucrum


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