Front Running QE3

This article was published by Seeking Alpha here Front Running QE3.  Which we are not allowed to republish on any other site including our own.

Spanish Bond Yields Rising

Markets sold off on Friday due to the stronger dollar and Spanish bond yields moving to the highest levels during the current debt crisis.  Below is a chart of Spanish 10 year bond yields, which is trading above the psychologically important 7% level.  Click to enlarge.

Bottom Line:  With Spanish yields moving higher, the whole union could be on the verge of unraveling soon.  As Spanish bond yields rise, investors are demanding more interest for the risk of buying those bonds.  The US markets have been range bound and holding up well under slowing growth and average earnings reports.  Thank you for reading.

 

Still Range Bound

Even with Fridays move higher, we are still in the same range that I reported about last week.  Volume has also been below average.  So I would rate this market range bound until we get a full look at earnings.  Below is a chart of the S&P fund (SPY) with fibonacci retracement levels. Please click to enlarge.

Bottom Line:  We increased exposure in portfolios during the middle of the week.  I think the market still has some upward momentum to take it to (per chart above) the 138.00 area.  Thank you for reading.

Range Bound Markets

Now that earnings season is upon us, let's look at a chart of the S&P 500 (SPY) to gain some perspective on where we may be heading.  Below is a daily chart showing the recent bounce high at 137.80 and the low on June 4th at 127.14.  

So from the above chart we have a trading range of 8.38%, ( 127.14 low to 137.80 high ).  Volume has been lackluster lately probably from a holiday induced week.  Gold has not performed well during the month of June. We will be looking to buy gold on any dip down to prior support.  We believe that the Fed may act and give more Quantitative Easing (QE) stimulus when they meet in September, and gold should perfrom well if that is the case.  Below is a chart of Gold (GLD) and the zone we may be interested in buying.  

I would view a good risk / reward entry of GLD at the highlighted green area shown on the chart above.  I believe we may get there within the next 1-2 weeks.  

Bottom Line:  The S&P 500 looks to be range bound for now, but may gain better direction once earnings season is upon us.  Gold is heading down to it's support area again.  I expect that area to hold as support, making buying GLD a lower risk entry point.  

Obamacare Passes

In a 5-4 vote Obamacare also known as the "Affordable Care Act" (ACA) passed.  We will have Obamacare starting in 2014.  In plain english, here are some of the highlights of the program.

Americans must sign up for healthcare by 2014:

Congress did order Americans to obtain - and to keep up every month - what it called "minimum essential coverage".  Congress in the ACA made the mandate depend upon an assessment for those who do not sign up or maintain health insurance.  For those who do not signup and maintain health insurance a federal "tax" will be imposed and paid to the IRS.  Whether you obtain insurance or not, you will be treated under the new act.

What is the penalty and how will it work when it goes into effect 2015 for 2014 tax year?

The "Affordable Care Act" (ACA) uses complex formulas to determine how much the penalty will be, but in general it is calculated each month the individual does not have health insurance, and it is to be paid as a flat amount or as a percentage of household income.  If it is to be a flat dollar payment, the law starts at $95.00 a year in 2014, $325.00 for 2015, and $695.00 for year 2016 (each month's assessment is 1/12 of those totals).  After 2016, the monthly amount is to be adjusted for a cost-of -living amount.  If it is assessed as a percentage of household income, it starts at 1% of a base amount in 2014,  to 2% in 2015, and 2.5% after 2015.  The failure to buy health care insurance shifts the cost for the uninsured to health care providers, insurance companies, and everyone who does have health insurance.

Medicaid:

The courts decision on Medicaid expansion is divided and complicated.  The main focus is. 

A)  Congress acted in offering states funds to expand coverage to millions of new individuals;

B)  So states can agree to expand coverage for exchange of those new funds.

C)  If the state excepts those expansion funds, it must obey by the new rules and expand coverage.

D)  A state can refuse to participate in the expansion without losing all of its Medicaid funds; instead the state will have the option to continue with its current no-expanded plan as is.

Bottom Line:  Stocks did not like the outcome of this act, as markets initially sold off after the decision was public, but later rallied to close down just slightly.  Health care companies were down with the market on an even basis. 

 

Fed Continues Operation Twist

Back in September of 2011 the fed chairman Ben Bernanke announced Operation Twist, which I wrote about here  Fed Announces Operation Twist. Today the Fed announced a continuation of the same program and that interest rates will remain low through 2014.  The continuation program of selling shorter term treasuries and buying longer dated treasuries is an attempt to keep bond yields low.  The program will run until the end of 2012 and will total 267 billion. The initial program was estimated at 400 billion, which is set to expire.  Similar to the original Operation Twist, the fed's balance sheet will not expand as it did during the release of QE1 and QE2 (quantitative easing).  How did bonds react after the announcement of the continuation of this stimulus package.  Below is the 10 year bond TLT.

This move by the Fed looks like it was telegraphed and expected weeks early as bonds put in an all time high as seen from the chart above.

Under QE1 & 2, the feds balance expanded by purchasing mortgage backed securities and treasuries, and the liquidity found its way into stocks, commodities and bonds worldwide.  I don't see this stimulus continuation being as equity friendly as the prior two stimulus packages, that did not see a rapid economical improvement when all was said and done anyway.

Bottom Line:  I am not sure what another few basis points lower will do to spur the housing market.  Also, unlike QE1 and QE2, this package will not have a direct effect on stocks or commodities, but should lift longer maturing bonds (lower yields) in an effort to boost the housing market. Thank you for stopping by.

Greece Kicks the Can

All eyes were on the Greece elections last night.  Greece voters chose to stay on the Euro and accept the bailout money, kicking their problems further down the road.  The markets originally liked this outcome over night, but since then the euphoria has worn off.  The Euro crisis is far from over.  Forget the headlines, let's look into the credit markets of specific country bond yields to see what they are saying.  Below is a chart of Spain 10 year bond yields, which have reached new highs today.

So the cost of borrowing for Spain has increased to new elevated levels.  I would have expected Spain 10 year bond yields to come down some, given the Greece elections have been decided.  Italy 10 year bond yields have also increased today, but not as much as Spain.  Below is a chart of Italy 10 year bond yields.  Not an all time high, but still elevated at over 6%.

Bottom Line:  The Greece elections were an important event to see if they would stay within the Euro.  Even with the outcome to stay in the Euro, the 10 year bond yield in Spain reached a new all time high of over 7%. One has to ask, has anything really been solved. Has the sovereign debt crisis disappeared or have they simply borrowed more time?

 

World Markets

Back in March  I posted the chart below here Weekly Recap 3-23-2012 to show world market performance from major stock markets around the world. Keep in mind, the chart below was year to date up to March 23, 2012.

The returns at that time were beyond exceeding expectations, the returns were outstanding for just three months into the year.  Fast forward to the same chart today of the same world markets and notice a much different picture.  

Since March, returns have vanished as the Brazil (Bovespa) Index is down -24% from the high.  The Japan (NIKK) is now down approximately -20% from its high.  The other country indexes have also fallen back from their highs ranging from -6% to -14%.  

Bottom Line:  The charts above illustrate that the current environment is not conducive to a buy and hold strategy.  I believe the world markets have put in a top in March, have sold off, and will remain under pressure throughout the year.  There will be oversold bounces higher, but I do not see new market highs achieved this year.  Thank you for reading.

Facebook IPO - Sitting on the Sidelines

This article was published on Seeking Alpha here Facebook IPO - Sitting on the Sidelines.  The Facebook IPO on May 18,  presents a rare chance to own an ultimate consumer stock, a company that almost everyone has heard of, or is actively using as a social media gateway to the world.  More details why we elect not to participate in this IPO is in the article.

ACOM - Wait Until A Lower Risk Buy Point

The last time I wrote about ACOM was their third quarter 2011 release here ACOM Third Quarter Results.  Ancestry.com released their first quarter 2012 earnings results on Wednesday April 25th. The company beat on top and bottom line vs. analyst expectations.  I wanted to dig a bit deeper into the numbers to see how the company's growth is compared to the past.  First, let's have a look at sequential revenue growth from 12 quarters back.  Keep in mind, I am looking at revenue growth from quarter to quarter.

2010 Sequential Revenue Growth

 7.2%  15.6%  6.5%  4.3%  = 33.8%

2011 Sequential Revenue Growth

10.0% 11.3%  1.8%  1.1% = 32.8%

2012 Sequential Revenue Growth  

 4.1%   6.9% est. 2.6% est.  2.1% est. = 16.3%

As shown above, ACOM is expecting a slowing of sequential revenue growth after the 2nd quarter release.  This should be viewed as seasonality, as the first and second quarter are the strongest quarters of the year.  But what stands out is the year/year growth drop off from 2010 and 2011 into 2012 of 16.3%.  Based on these numbers, it is understandable why ACOM announced it has purchased Archives.com for 100 million dollars on April 25th to potentially increase growth.

VALUATION:
I have a forward 2012 P/E ratio of 13.02 and a PEG (price earnings growth) of .62.  Both represent excellent value.  I have a price target based on PEG alone of $37.00 per share.

TECHNICALS:
The stock has good support in the $21 to $22 dollar range.  So I would be patient and wait for that area prior to starting a position.  Below is a weekly chart of ACOM.

Bottom Line:  ACOM has done a very good job of maintaining a stable stock price despite declining revenue forecasts.  They have initiated a 100 million potential stock buyback, plan on releasing new products, and has purchased Archive.com for 100 million.  The stock has strong support in the $21-22 dollar price range. I plan on remaining on the sidelines for now and will wait until the stock comes to a lower risk buy point in the low twenties until considering a buy.  Thank you for reading.

Celgene Reports 1st Quarter Results

Corporate earning releases are past history, and at times will have little effect fundamentally moving forward.Celgene's latest earnings release fits into this category well.  This report can be viewed at Seeking Alpha here, Celgene Reports 1st Quarter Results, as we are not allowed to reproduce the report on another website including our own. 

Month of March Recap

The markets returned +3.21% during the month of March.  A 3.21% return annualized is approximately +36% for the year, which is four times the average stock market return.  So it was a strong month for stocks.  Below is a chart of the S&P 500.  Notice the upward trend line support.

Celgene (CELG) is a major holding of ours and we began buying the stock in the low 60's.  The company has several near term catalysts approaching in the 2nd quarter and beyond.  I do not believe the street has given this stock the respect it is due.  Below is a chart of CELG.

Bottom Line:  The overall market is performing well and looks like the move higher will continue into April.  Celgene is a key stock of ours, and we await several near term catalyst to push the shares higher.  The company continues to buy back stock in the open market, and should continue the buyback until the stock hits $100.00 a share, which I believe can happen sometime in 2012.  Thank you for stopping by.