– The Stock Market Companion –

15Minute Market Update

October 6, 2012

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

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-Executive Summary-

• Markets DIVERGENT and Quiet.  Markets have strengthened… Please see details, below…  S&P 500 (-0.03%); DOW (+0.26%); NASDAQ (-0.42%) 
  
• Market Overview = The markets have found support and have established underlying strength.  Anticipation for a favorable Jobs Report on Friday and then the final release of the unemployment numbers indicating a (SMC say’s “Possible Drop”) drop below the 8% unemployment threshold for September has provided a positive counter-balance to concerns of imminent slowing in the economy.   There is room in this type of climate for some individual strong stock investments to emerge.
  

  
  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.
  

  
  

• The recently released Chicago Purchasing Manager’s Index (Chicago PMI) for September showed WEAKNESS and measured 49.7.  This represents the lowest measurement level in over 3 years.  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.
  

   

• Hewlett Packard, Co. (HPQ $14.73) announced earnings this week on Wednesday, which were a major disappointment.  At $14.73/share, the share price of the company is at lows last seen in 2003… almost 10 years ago.  Yet, the company IS posting positive earnings (when it is not cleaning up its balance sheet and doing important financial work that looks TERRIBLE when reported in the press).  If the company earns approx. $1/share per quarter, and we estimate $4/share in annual earnings, then the company stock is now selling at a Price / Earnings ratio of $14.73/$4 = 3.68This share price is a huge discount to the overall market.Here’s how we are going to handle this –  A sustained move (daily close above $15.15/share) will probably get us in, with a stop below $13.90.  Special thanks to SMC member M. Joy for email this week!

  During the summer, we were reporting on HPQ and we showed quarterly investment fund reports to the SEC that showed heavy NEW investment in the shares by leading fund companies with the shares at or around $25/share or higher!  Many of these funds have either liquidated some of their holdings, or are now significantly “under water” on their investment.

  HPQ has a new CEO (Meg Whitman) AND is not just a PC manufacturer.  They have strong service and consulting business that have high operating margins.

• Our SMC Facebook (FB $21.66) shares have softened a bit.  We indicated early this week that the shares did not look “particularly geared to rush higher at this time.”  News was released this week that the number of FB users exceeded 1 billion and last 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.
  

  
  Facebook is scheduled to report quarterly earnings on October 23, 2012.
  

  
  The FB share price fell aggressively in the final hours of trading yesterday, below the $21 “threshold” that we have established at SMC as a critical line in the sand.  We are cautious at this time.  WE ARE INCREASING OUR STOP TO $19.90 to make sure that we capture some gains, if the shares cannot hold the $20 level.
  

  
  Last week we wrote … 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.

   

• 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
  

   

• 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 – September 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.