Birchtree's Account Talk

[Birchtree]

Always looking for that darn top...

As for the current action of the stock market, it is very interesting to note that both the DJIA and the DTA have confirmed the S&P 500 and the NYSE Composite on the upside. Bottoms above bottoms continue to control the pattern of NYSE breadth MCO and the NYSE breadth MCSUM continues to chop around - no real damage noted at this time. The A/D line is not diverting, and it's very rare that price will top without A/D divergence. In Dow Theory terms the DJIA and the DTA are the indices to watch, not the S&P 500.

This is important since the S&P 500 was NOT RELIABLE in the foreshadowing of the upcoming cyclical bear market and the economic slowdown back in 2000. One should note that the DTA peaked in July 1999, while the DJIA peaked in January 2000. The S&P 500 came within approximately 1.5% of making a new all-time high in September 2000 - only a few months before the onset of a recession and which gave absolutely NO WARNING to the impending cyclical bear market. In the meantime, both the DJIA and the DTA lagged - neither came close (although the DJIA were about 3% off its all-time high, but the DTA did severly lag) to surpassing its all-time high. If one had taken notice of the action in the DTA and DJIA, however, then one would have been given a very reliable warning signal.

 

[Birchtree]

Regional preferences

Some changes in regional preferences are starting to become apparent. Among them: investors have turned more positive on the outlook for corporate profits and become less enthusiastic about Japan; they now regard the eurozone corporate earnings more highly than U.K. earnings; the perceived quality of global emerging markets corporate earnings continue to deteriorate; perceptions of U.S. valuations continue to improve (the balance of investors who say that U.S. stocks are overvalued is now the lowest it has been since 2001); and there is a large consensus that the dollar is headed lower against the yen in 2006, even though sentiment toward U.S. equities continues to improve versus Japanese equities.

A loer dollar is fine by my standards. Exports are barely 10% of the broad economy, but foreign-derived sales account for more than 40% of the revenue stream of the S&P 500 companies. I'll wait in the C fund and simply let the market come to me on its' own terms - in the meantime dollar cost averaging buys more shares every two weeks.

 

[Wizard]

Among them: investors have turned more positive on the outlook for corporate profits

Sell off on Friday was started by disappointment of two DOW stocks earnings; GE and C.

So far all the DOW stocks that have reported have missed.
All that reported so far have lowered forward guidance.

 

[Birchtree]

Yes, I said investors not panicky hedge funds

Wizard,

Good to have your return.

It is becoming more evident with the participation of 8,500 hedge funds that the professional stock pickers are having difficulty thinking long term. They are finding it hard to ignore every economic blip, thus creating swings in stock prices. Fewer fund managers are in the long term holding category, instead allowing themselves to be swayed by each new bit of data. Improved technology has led to advanced stock screening tools, readier access to information and increased electronic trading - all of which have led to shorter holding periods for stocks. Bailing out of a position on bad news only to buy it back the next month when the news turns good again has never been so easy. Kinda like heading for the G fund everytime someone turns on a light.

Dennis

 

[Birchtree]

Might not be a bad thing.

Looked at objectively, companies results look pretty good. But a number of hedge fund managers would object to that characterization. About a fifth of the companies in the S&P 500-stock index have reported results so far, and it looks as though fourth-quarter earnings are on track to come in somewhere between 13% and 14% ahead of the year-earlier period. That's the 10th quarter in a row of double-digit percentage gains - the longest such run in over 30 years.

But the string of strong quarterly profits is showing some signs of wear. Although most companies' results have topped analysts' estimates, there have been more disappointments than usual. Earnings at 21% of the S&P 500 companies that reported so far fell short of analysts' marks, compared with a historical 17% or 18%.

The weakness comes as a surprise. The Fed has only been increasing rates for 18 months. Neither corporate profit warnings nor analyst-estimate revisions - two of the most common places to sniff out earnings trouble - suggested anything was amiss. It could be that business deteriorated late in the quarter, catching companies unawares and giving them no time to prepare investors for weak numbers.

I suspect companies have finally reached the point where it's difficult for them to keep their costs from rising at the same rate, or faster, than their sales are increasing. It sets the stage for narrower profit margins, and smaller earnings gains in the quarters to come. O.K., I'll take 10% and be happy.

That might not be a bad thing. The major cost for most companies is labor. If they've begun to hire workers and increase wages at a faster clip, it may give many households a much needed opportunity to step up savings and reduce debt. The macro picture.

The big worry: That thanks to the Federal Reserve's interest-rate increases and the rebound in energy prices, the economy starts to slow right as companies are facing falling profit margins. The Goldilocks economy resumes unabated with the help of exports and cap-ex spending. Holding 100% C fund.

 

[vectorman]

Hey Birchtree your mail box is full, will not except any more PM. I'm looking for a decent rally in the S&P maybe tomorrow or friday, its been lagging compared to the S & I. It retested its low from friday today, and buying was seen in the last hour. So I'm looking for a catch up day. What do you think?

 

[Birchtree]

Compression release for the C fund.

Vectorman,

I noticed that the equity P/C ratio was the second lowest in 3 years at .37, this would normally be bearish - but not always, and TRINS are all oversold. The bulls are making a stand here - the bottom is behind us and new recovery highs are on the way. We have placed a good foundation beneath the market with bottoms continuing above bottoms - not to mention all the new - all time highs recently. All we've done for the past two weeks is rally to new 4 year highs on many indicies and we've had a 5% correction - no real knock out punch from the bears. However, there hasn't been a lot of conviction on the S&P 500 buyside but it's still very resilient. I'm actually looking for some compression release and a surprise move to the upside. At any rate patience is virtuous and I keep dollar cost averaging, so I have time on my side - right?

Dennis

 

[Birchtree]

The wind at my back

Of the 241 S&P 500 companies to report, 64% have come in above analyst expectations, 17% have matched and 18% have fallen below forecasts. By the end of this upcoming week, two-thirds of the S&P and 80% of the Dow will have reported fourth-quarter results. So far, the S&PO growth rate stands at 13.8%, compared to 13.7% the previous week.

Marathon Oil (MRO) $74.04 +2.54, made a nice contribution.

The Oceanic account is now at $1,020,547.00 - keep it quiet - and I'll try and hold the line. I am now eligible for 400 free trades this year and will start soon to build more income as well as peel off some profits.

I think we are headed for a long lasting and powerful price advance considering the current price pattern structures. The NYSE breadth MCSUM closed at a reading of +731 which is now getting close to the longer term declining tops line. Once we get enough volume to blow through this negative resistance line - stand back and hold your cheeks - will it be 1995 or 2003?

The key to economic forecasting is to find indicators which can tell you when things are about to slow down. Anybody seen any besides GDP of 1.1%

 

[robo]

Things are looking good!

Birchtree,

Things are looking good! GDP this year should be around 3 to 3.5%. The Fed should have already been DONE. No reason to keep increasing rates. The economy has slowed some and inflation is ok... Earnings are looking good. Lets hope they don't spoil this BULL RUN your looking for by to many rate hikes!!! I was looking for a test of the 200 DMA soon, but it just could turn out to be wishful thinking.

GO GO BIG BULL!!!!!

 

[mlk_man]

Congrats Birch! You might be interested in this site now:

http://www.millionaire.com/index.htm

This is a dated post from a year and a half ago:

http://www.globalpolicy.org/socecon/inequal/2004/0615millionaires.htm

Once again, congratulations. You're not really a construction worker making $20000 a year are you? Just kidding, that was the show "Joe Millionaire"......

Make sure you pay taxes when you are suppose to though. What was that guys name from the show "Survivor", something Hatch? Greggy probably knows.......

 

[Birchtree]

The next big thing - wheels

From TWSJ:

It seems like almost everyone on Wall Street thinks this will be the year that stocks with large market capitalizations will finally, finally break out. But the popularity of that idea may turn out to be the biggest strike against it.

Birchtree, you are so mainstream, - thinking you were being contrarian.

Recent years have seen large-cap stocks lag behind their smaller brethren. The S&P 500 (whose median constituent has a market value of $11 billion) has underperformed the S&P Small Cap 600 (median market value about $700 million) in each of the past six years. A reversal could be coming. To begin with, the outperformance that large-cap stocks saw over small caps in the years leading up to the market bust in 2000 has been erased, and then some. As a result, valuations for large-cap stocks, relative to small caps, have come down substantially.

At the same time, the business climate in the year to come looks as though it might favor larger stocks. Slowrer sales and rising costs appear to be taking a toll on companies' profit margins. That should favor the shares of companies that can continue to generate steady earnings growth. Big, established companies are in a better positiuon to do that. They tend to have more diverse product lines, and to make products that sell relatively well, regardless of what the economy is doing. They also sell more abroad, which gives them exposure to booming overseas economies while protecting them against the slowdown in U.S. consumer spending that many investors expect.

Unfortunately, the argument for large stock outperformance has become so well worn that it might not happen. In a recent Merrill Lynch survey of global fund managers, 70% said that they preferred large cap stocks over small-cap caps; only 8% saw things the other way. This situation may be similar to the beginning of last year, when almost everybody expected the dollar to weaken, for what seemed like very good reasons - only to see the dollar rally against most major currencies.

Large companies can opt to buy smaller companies with promising new products, rather than trying to come up with something new on their own. But that's really an argument for buying smaller stocks.

Birchtree will continue to hold the C fund and wait for the market to come in this direction. You can't always believe what you read.

 

[Wheels]

Birchtree will continue to hold the C fund and wait for the market to come in this direction. You can't always believe what you read.

I wasn't challenging you. In fact, for the last 6 months or so, each time I jump into stocks I have included a chunk into the C fund. But as I try to figure out why this rotation hasn't happened, the only thing I come up with is that borrowing is still really cheap, which favors the smaller cap stocks. So, until longer term rates really take off, or until the rotation really starts to happen, I will try to resist the urge to "anticipate" larger gains for the C fund. You'll have to watch my account to see how long I am able to resist.

Dave
<><

 

[Birchtree]

Purge or Accelerate

Last Wednesday the market's renewed strength pushed the NYSE Composite, S&P 400 Mid-Cap, S&P 600 Small-CAp, Value Line Composite, and the DJTA (Transportation index) to new post 2002 bull market or all time highs. It also lifted the NYSE cumulative daily advance-decline index to an all-time high and enabled the weekly NYSE volume and 52 week new-high list totals to expand to their best levels since July 2002 and August 2005, respectively. All positive on balance.

Do we have any negatives, certainly we do. From a major cyclical trend perspective, despite the market's selective or gradual strength of recent months, such indicators as the percentage of NYSE common stocks trading above their 200-day moving averages, the number of NYSE stocks setting new 52-week highs, and the 26-week average of the NYSE advance-decline ratio remain in downtrend patterns from their peak levels reached in early 2004. Although that gradually unfolding negative divergence pattern is far from being a precise market-timing tool, it has historically been a characteristic of the late, not early, stages of a bull market cycle. The precedent is consistent with the expectation of a potential 20-25% peak to trough cyclical decline in the DJIA and S&P 500 during 2006 before a new bull-market cycle in 2007-08. I can hardly control my enthusiasm - if you are smart don't believe a word of this negative scenario.

 

[Wizard]

Moving this post to the weekly thread.

 

[Birchtree]

Doing your homework - again.

Wizard,

Shouldn't you be out frolicking with the other bears - instead of doing your homework. You've earned my salutations.

PCL - I own and dollar cost my hefty dividends into that sweetie.

It will surely be a remarkable event when you make the cross over to the bull manure pile - but hold out as long as you can. I'll leave the light on to provide the way.

Wonder how you'd handle $400,000.00? Hide out in a gold ETF?

Dennis

 

[Birchtree]

Come on down

Let the C fund drop to $13.50 if it wants - I need more shares. The loss in the balance will rectify itself over time - I need more shares and I don't mind paying a lower price to accumulate them. As long as I make a dollar on the year in share price my expectations are met - so let's roll.

 

[Birchtree]

Robert Dean Stethem

Public opinion in Germany has recently been agitated by reports of secret CIA prisons in Europe, which follows indignation about Taliban prisoners at Guantanamo Bay. "Torture State America" is how Michael Naumann of the influential newspaper Die Zeit sums up life in the U.S. these days. So it's all the more strange that, when it comes to a torturer in their own midst, Germans have adopted a forgiving attitude.

The torturer in question is Mohammad Ali Hamadi, who in December was released from a German prison after serving not quite 19 years of a life sentence. In 1985, Hamadi was among the Hezbollah hijackers who seized TWA Flight 847, held its passengers hostage for 16 days, and murdered 23-year-old U.S. Navy diver Robert Dean Stethem.

But the word "murder" doesn't adequately describe what Hamadi and his crew did to Stethem. "They singled him out because he was American and a soldier," said one eyewitness. "They dragged him out of his seat, tied his hands and then beat him up....They kicked him in the face and knee caps and kept kicking him until they had broken all his ribs. Then they tried to knock him out with the butt of a pistol - they kept hitting him over the head but he was very strong and they couldn't knock him out....Later, thry dragged him away and I believe shot him."

In 1987, Hamadi was detained at Frankfurt airport when customs officials found liquid explosives in his luggage. A U.S. extradition request was denied on grounds that he was liable for the death penalty. Instead, Germany meted out its toughest sentence: Life in prison. But as one German official acknowledged to us, there is no such thing as life imprisonment in Germany. The country's Constitutional Court requires prison officers to review life cases after 15 years and seek reasons for early release, including good behavior and expressions of remorse. Whether Hamadi has expressed remorse the official could not say.

Today there is a U.S. Navy guided missile destroyer named for Robbie Stethem. We salute the sailors who put their lives at risk for our liberties. As for our ally Germany, we trust that in the war on terror it has kept a clean conscience. From TWSJ

Merkle made hold a new promise as a ally.

 

[Birchtree]

Hints of a new theme

Because of the fact that hedge funds (over 8000) are emotional professionals the best technician in the world is going to be wrong more times than not.

Trading markets are identified by increasing volatility which traders like. But it's easy to turn a trading market into an investing market by applying a consistent dollar cost averaging technique. It works without stress.

From Merrill:
Growth oriented themes are likely to do well in the months ahead. Another hint has to do with a set of growth-related hints in the data for corporate earnings. Fourth quarter results appear to be on track to post a year to year gain of about 14%, roughly three points above the consensus forecast. Moreover, sales appear to have increased at a double digit pace during the quarter, costs were well controlled, and profit margins expanded. That is a positive mix, and it suggests that the current consensus that first-quarter earnings will increase by about 11% may be too low.

The earnings picture, in turn, provides support for the argument that overall economic growth may be somewhat stronger than it appears to be. The GDP figure of +1.1% for the fourth quarter was weak, but it was an initial estimate that lacked December data for foreign trade, construction, and inventories. At the same time, several factors hint that GDP growth for the current quarter could be on the strong side. Consumer spending, which accounts for more than 70% of GDP, has been doing better lately, and three important indicators - back logs of durable goods, trends in commercial and industrial loans, and the inventory-to-sales ratio - suggest that the pace of economic activity is poised to pick up. May be a clue that underlying trends aren't as weak as some observers suspect they are.

 

[saturneptune]

Birchtree,
I enjoy your posts and what you say makes a lot of sense. A little optimism in an atmosphere of bears.

 

[Birchtree]

Yield-curve inversions

From TWSJ:

Most market professionals expect the inversion to deepen. And history has been brutal to economic forecasters who have doubted the yield curve's predictive powers. Over the past 50 years, the yield curve has given onlt two false signals, and the most recent head fake may have been caused by some very big extenuating circumstances: In 1998, incestors spooked by a financial crisis in Russia and the demise of investment firm Long-Term Capital Management fled to the safe harbor of Treasury bonds. That pushed up the prices of those secutities, and therefore drove down their yields, so low that long-term yields fell below shorter-term rates. But the economy survived, and even the swoonong stock market righted itself.

When the curve last headed toward inversion in early 2000, with the yield on 30-year bonds falling below the yield on 10-year Treasurys, most of the major Wall Street banks saw little reason for concern.

Their rationale: The government, which was running a budget surplus at the time, was selling fewer long-term bonds, creating a shortage of those securities that pushed their prices up and their yields down.

For a bit of deja vu, consider a February 2000 report from Deutsche Bank: "When this spread went negative in the past, it either foreshadowed a recession or a sharp slowdown in growth in the immediate quarters ahead. Fortunately for Main Street, we do not think the 10s/30s inversion is sending us that message. Four quarters later, however, the economy did indeed slip into recession.

This time, economists have some more weighty arguments against the voice of the yield curve. Chief among them is that long-term rates have remained ectremely low for a varity of reasons unrelated to recession fears. For one, foreign investors have piled into U.S. bonds. Second, as the U.S. population ages and companies or the government try to fund traditional pension plans, demand has grown for the kind of lonf-term bonds that can guarantee payments to future retirees.

Third, the Fed's success in controlling inflation over the past couple decades has led investors to demand less compensation for future inflation. All these factors have brought down long-term yields. A recent report published by the Fed estimates that foreign buying alone has depressed the 10-year yield, which forms the basis for yields on corporate and mortgage bonds, by as much as 1.5 percentage points. That means that consumers and companies can still borrow money cheaply.

Even the Fed's steady increase in its short-term interest rate target over the past year and a half haven't brought it to a level that, by historical standards, would be considered a brake on the economy. The rate now stands at 4.50%. However, dealings in the futures market suggest it will rise as high as 4.75% - about 2.75% in real terms, or after inflation.

The average real Fed funds rate during the past nine yield-curve inversions was a much more restrictive 4.88%. Interestingly, the real rate was particularly low - 2.74% and 3.68%, respectively - during the inversions of 1966 and 1998, the last two times the yield curve gave false alarms.