Stocks are not cheap, and Transports and Semis drag
By Richard Suttmeier Updated: Friday , October 12, 2007 13:00 PM
RightSide Commentary
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Solid gold earnings are factored into Dow 14K. The market reacted negatively to Alcoa’s earnings earlier in the week and there’s a similar reaction to General Electric, which came in as expected.
GE is rated a hold, and is 7.7% above its fair value at $38.64. The stock has been trying to breakout above $42.15 since Sept. 19. The stock has been overvalued fundamentally and overbought technically and my quarterly value level at $40.05 with a semiannual pivot at $41.61 and quarterly and semiannual risky levels at $42.95 and $43.81.
Thomson Financial lowered its Q3 earnings performance to Zippo – which would make quarterly earnings the worst since Q1 2002.
Oracle and Tech M&A – Oracle is in a bidding war to be bigger than arch rival SAP, which bought Business Objects. Selective M&A deals will continue, but the pace will me significantly slower than the first half of the year. Oracle is diluting its fair value which is $18.54 making this stock 21.2% overvalued.
PPI up 1.1% - I don't care about core - We eat and we use energy and food is up 1.5% and energy up 4.1%. Ignore Retail Sales - The more accurate data came out yesterday, which showed retail sales weakest in three years. Today's Retail Sales includes the food and energy we must consume. Check today's RightSide TV post, Today's Four In Four.
Sector Valuations
The recent rise in stock prices has made undervalued sectors less undervalued and overvalued sectors more overvalued. Technology shifted to overvalued leaving Finance and Healthcare the only undervalued sectors, but only by 1.1% and 2.9% respectively. Overvalued by 11.5% to 16.5% are Transports, Energy, Public Utilities and Basic Industries. It seems like bad news was good news on the relief that the news could have been worse.
The Dow and S&P 500 trade to new highs at 14,198.10 and 1576.06, but then the plug was pulled. The NASDAQ reached a new multi-year high at 2834.00. Solid gold earnings are built into Dow 14K, just as they were three months ago. A weekly close below 14,025 is a warning, below 13,925 signals a top, as it did three months ago. A weekly close below my quarterly pivot at 1559.0 on SPX is another warning. Tech leadership is a difficult bet, just try and book profits. I show risk to my quarterly support at 2697 as the bar is raised high for earnings from Apple on 10/22 & Google on 10/18. The NASDAQ may have a “key reversal” as it ended Thursday below Wednesday’s low of 2796, and lower closes Friday and Monday confirm a top.
The Dow Transports and Philadelphia Semiconductor Index (SOX) have been notable drags while the broader averages reached milestone heights. The Transports could not even get above its monthly resistance at 5013 despite the euphoria of the other major averages. The SOX stayed on the rocks all week, and it closed Thursday below its 200-day simple moving average at 488.20. In fact I have been pointing at a head and shoulders top for the SOX! Transports are 10.9% off its all time high, with the SOX 12.1% off its year to date high.
It’s also tough being a bull with gold at a 28 year high, crude oil near a record high and with the yield on the 30-Year Bond poised to move higher. A warning in the yield complex would be a weekly close above the 5.054 yield on the 30-Year US Treasury bond. Comex gold hit $759.3 on Thursday and my quarterly resistances are $786.6 and $813.1. Nymex crude oil should continue to fail between my semiannual pivot at $82.34 and monthly resistance at $84.76.
Beware of the Ides of October
Next week earnings season picks up steam, and my theme has been, “Beware of the Ides of October” as earnings begin for more than a 1000 publicly traded FDIC-insured financial institutions.
The FDIC-Quarterly Banking Profile for Q3 2007 will not be available until around Thanksgiving. We know from the mortgage and real estate news in August and September that there won’t be much to be thankful for when it comes to the balance sheets of our nation’s banks. The situation could be a lot worse than for Q2 shown in this table:
The Housing Market is clearly in a bear market and the FDIC-insured financial institutions remain under financial stress. With subprime resets elevated at the current monthly pace right through October 2008, the Housing Recession will cause the "broader" economy to fall into recession in 2008 - 2009.
The worse is not over, the big banks and investment banks created 80% of $154 trillion in notional derivatives shown on the FDIC-Quarterly Banking Profile for Q2 2007. There will be nothing to be thankful for when the Q3 profile is release around Thanksgiving, as exposures obviously deteriorated significantly between July and September.
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