– The Stock Market Companion –

15Minute Market Update

October 2, 2012

—— Stock Market Investing since the 1980’s ——

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-Executive Summary-

• Markets Quiet. Underlying Weakness Prevails… Please see details, below…  S&P 500 (+.09%); DOW (-.24%); NASDAQ (+.21%) 
  
• Market Overview = Unchanged … The markets have found momentary support, but the “confirmed uptrend” remains at risk.  On September 13th, the U.S. Federal Reserve announced “QE 3” and the markets roared to new multi-year highs.  (Quantitative Easing is an action taken by the Federal Reserve that are “outside” of their traditional tools for using monetary policy to meet their established mandates of low unemployment and low inflation. Please click here for this important Federal Reserve announcement, that describes the actions that they are taking and the reasons why in detail, directly from the U.S. Federal Reserve website. )
  

   “QE3” was implemented by the U.S. Federal Reserve because they are concerned about the future economic condition in the U.S.  There is a real risk of recession in the U.S. next year and the “Fed” wants to do all that it can to avoid it.  One commonly held measure of a recession is two consecutive quarters of negative GDP (gross domestic product) growth.  England and the rest of Europe are currently in a recession.  Our own U.S. GDP growth rate of +1.8% as measured in July, is not very far from possibly turning negative.
  

   Excellent U.S. companies like Federal Express (FDX $84.40) have announced LOWER expectations for sales and earnings in the upcoming quarters.  In the case of FDX, shipping is an easy barometer for us to use to read the strength of the economy and to correlate with the data that we are accessing from regional Federal Reserve Bank surveys (Philadelphia and Empire State, for example).  When expectations for shipping volumes decrease,  you can directly correlate that with diminishing output and GDP weakness ahead, unless things change.
  

  
  

• Last week’s Chicago Purchasing Manager’s Index (Chicago PMI) for September showed WEAKNESS and measured 49.7.  A measure below “50” means that the region is experiencing contraction for that index.  5 out of 7 business activity measures showed declines.  Please click here for a full report from the Institute for Supply Management.
  

  
  

• Our SMC Facebook (FB $21.66) shares remain firm, but not particularly geared to rush higher at this time – Although this can change on any new revenue sources that FB unveils for the public.  News released Thursday that Facebook would begin offering a “Gift” giving feature that allows subscribers to send gift cards and other items to others directly from the site has helped strengthen the shares.  This was an unexpected revenue source that we think at Stock Market Companion is a example of the many ways that Facebook will find ways to drive revenue AND EARNINGS.  We like our position here and as long as the shares are able to hold above $21/share, we think that those who expected and bet that FB shares would continue to diminish in value – by shorting the shares – will find that they may need to “cover” their bets.  (Short sellers are investors who borrow the shares of a company from a brokerage company and sell them, hoping to buy the shares back at lower prices and return the shares to the brokerage.  “Covering” their position is when they buy their shares back and close-out their investment).Here is a link to Facebook describing the GIFT GIVING opportunity to come. 
• If the overall U.S. markets CANNOT maintain a positive bias (upside) with QE3 announced, then we have to continue to posture ourselves to purchase shares of excellent companies that are “oversold” and avoid attempting to purchase “Break-Outs”.  A “Break-Out” is a move higher in price on strong volume that pushes the price of shares UP and above a lateral (flat) trading range.  In a down-trending market, “Break-Outs” have a tendency to fail, leaving a trail of disappointed investors in their wake.  We may consider purchasing shares in funds that increase in value when the market decreases in value.  These are called “inverse” funds and there are many that have been created and operated by companies like Rydex.  Please click here for a link to the Rydex funds that are designed to increase significantly in value, when the markets decrease in value.
  

   

• Please click here to view today’s Stock Market Companion Daily Chart of the S&P 500 ETF (SPY) – Our Roadmap for Successfully Investing in the U.S. Domestic Stock Markets
  

  
  

• From last week… What is keeping us at Stock Market Companion from jumping so strongly into this market – besides are investments in Facebook and Arena Pharmaceuticals?  The fact that this U.S. Federal Reserve action is NOT a final action taken just before the U.S. economy begins again an expansion cycle.  Our economy is not on the starting blocks of an expansion cycle.  This is NOT how things looked in March 2003, when the last bull-market rally really started – once the invasion of Bagdhad appeared to be a success.  Then, the market was primed for a major advance and once the uncertainties lifted, stock prices rallied very strongly – giving investors who understand investing as we present in our S.I.M.P.L.E. Stock Investing Method, VERY strong returns.How do things look now compared to the market bottom in March of 2009, when we also engaged stocks VERY strongly for powerful returns?  The DOW had fallen by over 50% in value and the U.S. Federal Reserve was in the FIRST INNINGS of introducing very stimulative monetary policy.  That spelled OPPORTUNITY for stock investors!  NOW, the U.S. Federal Reserve is continuing to find creative means to attempt to stimulate the economy (to the degree that they can = there ARE limits to what monetary policy can do for the economy in the face of grievous federal government fiscal policy).In March of 2009, stocks like Alcoa (AA $9.13) which had been selling for ABOVE $40/share were available for purchase at $4.90/share!  Alcoa shares rallied to $18/share (we participated very strongly in that rally), and have now sunk back to $9.13/share as the realities of slack demand and correspondingly weak metals prices trump all efforts that the company is making to remove aluminum smelting capacity from the market.  China is the world’s manufacturing center (although the U.S. still manufactures A LOT of goods) and sales are down hard as Europe orders much less due to their own CURRENT recession in which they find themselves.Please click here for our Successful Investing Video that reviews how a stock like Alcoa looks over the last decade.
  

  There are pockets of strength and “oversold” conditions that we at Stock Market Companion will engage in – like our recent and first Facebook investment and our investment in Arena Pharmaceuticals and its NEW appetite suppressing, prescription diet drug – and others to come (with time).

• Please click here for the Employment Situation – August 2012 – presented by the U.S. Bureau of Labor.
  

  
  Please observe this measure of total unemployed- buried in the Bureau of Labor’s report – which measures more than 14% (but still an improvement over last year).  This measure is known as “U6”.  This is an eye opener.  There are over 6.5 million Americans who would like to be working, and are not.
  

• At Stock Market Companion, we remain focused on our S.I.M.P.L.E. Stock investments that offer us a clear “story” which includes expanding earnings and a catalyst for change that we can understand.  This year, the “pickings” have been pretty thin – but we have been successful identifying eBay, Mitek, Apple, 3-D Systems, Arena Pharma, Hovnanian this year – which have moved very significantly – although some for only a brief period of time. We have also made mistakes – particularly in the basic materials sector with Alcoa, and in the manufacturing sector with Ford.  Active trading without a clear understanding of catalyst and expanding earnings is a failed proposition.