– The Stock Market Companion –

15Minute Market Update

October 23, 2012

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

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-Executive Summary-

• Markets DOWN HARD.   The markets gapped-down at the open on negative news about Spain and due to weak earnings reports from companies like Dupont (DD $45.25).  S&P 500 (-1.44%); DOW (-1.88%); NASDAQ (-.88%).  
  
• Market Overview =  As we have been reporting for some time now, there is little to be excited about this market. We are VERY CAUTIOUS here.
  

  We know that manufacturing in China has been contracting for over 5 months, based on the Purchasing Manager’s Index published by the leading financial institution – HSBC.  Please click here for the HSBC website. We also know that Europe has been in a recession for at least a year.  Low European consumption has been one of the major catalysts for the slowdown in manufacturing in China and also trouble in Japan. In July, we reported how Japan’s exports had shrunk -25% and were at their worst levels since the late 1970’s.

  In the USA, our gross domestic product was expanding at a very modest  rate of +2% last February, but since the late spring has been contracting.  Our GDP measures now are at approx. +1.2% – and subject to downward revision.  What has driven the markets higher in the USA over the last 3 months has been an anticipation of Quantitative Easing III – which we have reported in detail.  Effective Yesterday and TODAY –   the broader market has now officially ERASED all gains made since the explosive move higher by the markets when the Federal Reserve announced QE III.

• Today we sent out an SMC Intra-Day Alert announcing our selling of our holdings in Arena Pharmaceuticals at $8.58/share, for an overall approx. -1% loss.  Allowing for few exceptions, there is little sense in holding stocks when the market begins to show VERY SIGNIFICANT weakness as we saw today.
  

  On the other hand, Radio Shack (RSH $2.57) has our continued attention as the shares are down at decade lows and caught buyer enthusiasm this morning after report unfavorable earnings.
  

  
  Last week, we wrote this about Radio Shack – “Over the last week, we have been looking closely at Radio Shack (RSH $2.37).   According to several interviews that we have had with different managers from different retail locations, we have learned good things (not stellar, mind you) – like the company sells more cell phones than anyone else.  The stores are clean.  Good customer flow.  Debt load is unfortunately high, but the company also has significant cash, inventory, and receivables to offset the debt.
  

   The company also has motivated franchise owners.  The company recently lost its CEO, but the shares did not drop on the news.
  

   The obvious problem for this company is that is just doesn’t have a clear market draw or differentiating element that draws customers, that would separate it from all of the other brick and mortar retail operations that are fighting against web based powerhouses like Amazon.com.  On the other hand, the company DOES a good job selling phones.  How long will that last?  Is there enough growth to propel the shares out of this abyss?  Can the company hire a CEO who can somehow identify a strategy that works, going forward?
  

  An investment strategy for risk tolerant investors would be to buy the shares here and place a stop-loss below $2/share and see if the shares can slowly climb higher.  Risk tolerant investors in RSH in the past have been rewarded with solid 100% gains over time.  Of course, past performance is no guarantee of future returns.”

• Two weeks ago, Alcoa (AA $8.71) announced their quarterly earnings – which were a major disappointment.  Alcoa validated everyone’s concerns that China’s economy continues to shrink, by reducing their own (Alcoa) aluminum global growth forecast by 1%.  Alcoa is still anticipating global aluminum growth to be approx. +6%.   Alcoa is a well run company.  There have been mistakes made over the last years, but we think at SMC that Alcoa will  be a great purchase on real weakness – if we get it.  Back in March of 2009, we purchased shares of Alcoa at approx. $5/share and the shares climbed above $12/share within a few months.
  

  Growth IS growth, even if it is low.  However, investors are wise NOT to risk much exposure to these markets.

• The markets are weak because of concerns centered on real (actual) CONTRACTION in the European, Chinese, and Japanese economies AND DUE TO THE UPCOMING “Fiscal Cliff” situation and UNCERTAINTY that it brings with it in the USA.  The “Fiscal Cliff” is a valid concern that unless the U.S. Congress takes action, in January the Bush era tax cuts automatically go away AND the automatic deficit reduction measures established last year by congress go into effect.  The combination of these two items would severely impact our economy.  Yesterday, JP Morgan Chase CEO Jamie Dimon said that his bank had set up a “situation room” in order to prepare for the worst case scenario related to the “Fiscal Cliff”.
  
• Besides  the  concerns for the “Fiscal Cliff” in the U.S., we also have a lot of uncertainty centered around the U.S. presidential election AND a continual shrinking of our own gross domestic product over the last 6 months.  All of these elements are leading to weakness in our equities (stock) markets.
  

   

• 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.
  

  
  

• We are watchful for an opportunity emerging with Hewlett Packard, Co. (HPQ $14.57).  The opportunity is not yet clear. From last week …”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 = 3.68
  

   

  This 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.

• 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.