Demystifying Short Selling

Friday, July 20th, 2012

July 19, 2012

by Mark Eidem, CMT, CFA, Active Trader Market Manager, Charles Schwab

Key Points

• Learn how to execute a short sale and the risks involved.
• Find out how to research short sale candidates using StreetSmart Edge®.
• Understanding short sale mechanics may help you enhance your ability to identify changes in stock trends.

A common saying on Wall Street is: The bulls ride the escalator and the bears ride the elevator—meaning that markets tend to decline faster than they rise. Short selling is a technique that traders can use to profit during these periods when the markets in general or a stock in particular declines.

Here, we’ll take a look at how short selling works, as well as the risks involved. We’ll also discuss how to research potential short sale candidates using the tools in StreetSmart Edge.

What is short selling?
Many traders focus only on buying stocks, which is also referred to as “buying long,” because the shares are said to be held “long” in their account. In this scenario, the goal is to buy low and sell high.

Selling short is the same concept, but with the sequence reversed. Traders identify a stock that they think may decline. Then, they borrow the stock from their brokerage firm and sell it with the expectation of buying it back later at a lower price and thereby realizing a profit.

The mechanics of short selling
As we mentioned, in order to sell a stock short, the trader must be able to borrow shares of that stock from his brokerage firm to deliver to the buyer of those shares. As a result, short selling may only be accomplished in a taxable, margin-enabled account. Selling short may not be done in retirement accounts, where margin borrowing agreements are prohibited by IRS regulations.

Any short sale must be marked as such on the order entry ticket in order to distinguish short-sold shares from shares sold long from a trader’s account. For example, review the order entry in the StreetSmart Edge trading window below.

Order Entry: Sold Short

Source: StreetSmart Edge.¹ See disclosures below.

In order to close out a short sale, or “cover” a short position, a trader would simply buy shares of the stock. There’s no distinction between buying to cover a short position and buying to initiate a new long position.

The risks of short selling
It’s important to know the risks of short selling. The most obvious risk is that instead of declining the stock might rise, forcing the trader to buy it back at a higher price than the short sale was initiated, resulting in a loss of capital. On the surface, this seems no different than buying the stock with the expectation it will rise in value, only to see it decline instead. However, with short selling there’s a catch.

When you are long a stock, if it declines to zero, the most you can lose is 100% of your investment. If you are short a stock, the stock price can theoretically rise an unlimited amount, potentially resulting in more than a 100% loss.

This is the first of several reasons why I believe short selling is more difficult than buying long.

Now let’s turn our attention to the not-so-obvious risks of short selling. The first is that shares may be unavailable to borrow in order to sell short and the trader may not be able to initiate a short sale. In this case, shares are said to be “hard to borrow.”

Another not-so-obvious risk is that once shares have been borrowed and a short sale has been initiated, a trader can receive a “forced buy-in.” This means that the original owner of the shares borrowed through the margin account wishes to sell them, and no other shares are available to lend. The trader who shorted the borrowed shares is then forced to buy those shares back and cover his short position so that the original owner is not inconvenienced. The short seller has no control over this event and it may occur at any time.

Additionally, if the stock pays a dividend, the short seller is responsible for paying the dividend, which adds to the cost of a short sale and reduces the potential return.

The short selling process
In previous articles, we discussed trading as a four-step process:

1. Screen: Look for new companies to consider
2. Research: Analyze these companies using both fundamental and technical analysis
3. Execute: Plan and execute your trade
4. Monitor: Evaluate if the trade is still valid and adjust as needed

We can also apply this process to short selling, but we’ll be looking for companies possessing the opposite characteristics of those we would want to buy long. When we screen for new short sale candidates, we look for companies with poor and deteriorating business fundamentals and stocks in confirmed downtrends.

As we research these companies with an eye toward short selling, our mission is to confirm that the characteristics we spotted in the screen are, in fact, negative.

Then, as we plan to execute our trades, we need to identify entry points, price targets for potential profit, and most importantly—stop-loss points for exit. However, in the case of short selling our stop-loss exit is above our entry price and our price target is below. We must be mindful that the stock in question can potentially rise much more than it can potentially decline.

In monitoring short sales, traders must watch for any trend change back to an uptrend.

Short selling in action: StreetSmart Edge tools
Let’s take a more in-depth look at the second step in the process—research. StreetSmart Edge’s tools can help you streamline your trading and quickly evaluate both fundamental and technical data.

When you click on the “Launch Tools” button below, you can see a list of the tools in StreetSmart Edge. Here, we’ll look at the “Research” and “Chart” tools to help you understand the fundamental picture of a company and the technical prospects of its stock.

Launch Tools

Source: StreetSmart Edge.

Let’s first review the Research tool, which can help us evaluate how a company is performing as a business—often referred to as “fundamental analysis.” While there are many metrics in fundamental analysis, perhaps one of the most important is the earnings per share (EPS) growth. Eventually, a stock’s price is likely to move in the same direction as the company’s EPS—higher or lower. A closely related fundamental metric is, “sales growth over the past year and/or quarter.” When looking for short sale candidates, traders should consider companies with negative EPS growth and sales growth rates.

The Research tool has four tabs of fundamental analysis data and in the screenshot below, the “Metrics” tab has been selected. Please note that this is a partial screenshot and that more data is available on this screen.

In the example of Hewlett-Packard (HPQ) shown below, EPS growth has declined by over 36% year-over-year (yoy) and sales have declined by 3% both for the quarter and for the year. These are the attributes of a potential short sale candidate but before placing the order, we need to evaluate the trend in price, which is part of technical analysis.

Look at the Fundamental Metrics

Source: StreetSmart Edge.¹ See disclosures below.

While fundamental analysis looks at the business performance of the company, technical analysis can help evaluate how the stock itself is performing. Even if the fundamentals are poor, the stock could still be in an uptrend, especially in a bull market. Selling short into an uptrend is exactly the same problem as buying a stock that is in a downtrend—fighting the trend!

Another common problem that can make short selling more difficult is when the stock has already declined significantly. In this case, because the stock can only fall to zero, much of the move may have already happened. Remember that a stock will only go to zero in the case of total bankruptcy. But it can often limp along at low prices for years.

A short sale should be placed early in the downtrend or not at all. Remember the adage that, “Bears ride the elevator.” Downtrends tend to be sharper and steeper than uptrends and if you miss the early part of the move after the trend changes, your best bet may be to avoid a short sale.

This is exactly the case for Hewlett-Packard (HPQ), as shown in the chart below. The stock has dropped by half since the trend changed to down in March 2011, but the majority of the decline occurred within the first six months of the downtrend.

Look at the Trend

Source: StreetSmart Edge.

Bottom line
Short selling can be an interesting way to potentially profit in declining markets, but it’s important to understand the risks. In addition, I believe that as traders understand the concept of short selling and how to apply it, they may be able to improve their overall results by enhancing their ability to identify changes in stock trends.

Until next month, good luck and good trading!

Important Disclosures

1. All stock and option symbols and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

Past performance is no guarantee of future results.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

The information presented does not consider your particular investment objectives or financial situation, and does not make personalized recommendations. Any opinions expressed herein are subject to change without notice. Supporting documentation for any claims or statistical information is available upon request.

Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information please refer to your account agreement and the Margin Risk Disclosure Statement.

Schwab’s StreetSmart Edge® is available for Schwab Active Trading clients. To qualify as a Schwab Active Trading client, you must commit to making a minimum of 36 online equity or options trades per year. Call 888-245-6864 to qualify. Access to Nasdaq TotalView® quotes is provided for free to non-professional clients who have made 120 or more equity and options trades in the last 12 months, or 30 or more equity and options trades in either the current or previous quarter, or who maintain $1 million or more in household balances at Schwab. Schwab Active Trading clients who do not meet these requirements can subscribe to Nasdaq TotalView quotes for a quarterly fee. Professional clients may be required to meet additional criteria before obtaining a subscription to Nasdaq TotalView quotes. This offer may be subject to additional restrictions or fees, and may be changed at any time. The speed and performance of streaming data may vary depending on your modem speed and ISP connection. Access to electronic services may be limited or unavailable during periods of peak demand, market volatility, systems upgrades or maintenance, or for other reasons.

Tags: Brokerage Firm, Bulls, Buying Stocks, Charles Schwab, Declines, Elevator, Entry Ticket, Expectation, Focus, Irs Regulations, Margin Account, Mechanics, Periods, Retirement Accounts, Stock Trader, Stock Trends, Wall Street
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“One Way Pockets” (Saut)

Tuesday, July 10th, 2012

“One Way Pockets”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

July 9, 2012

“When a market fluctuates for several weeks or months within a narrow range, one of these three things is happening: pools and large operators are accumulating securities by absorbing the offerings of tired holders; or they are distributing certain stocks under cover of artificial strength in others; or the market is actually in a state of uncertainty and waiting a fresh impulse.”

… One Way Pockets by Don Guyon (1917)

This quote was taken from the book One Way Pockets, first published in 1917. As stated in the book’s more recent introduction – the author, who assumed the nom de plume of “Don Guyon” to avoid being identified with his wealthy clients – was associated with a boutique brokerage firm that had sizeable business with investors in all sections of the country. In 1915 he began an analytical study of the orders executed for certain active traders with the idea of determining the fundamental weakness, if any, in their speculative methods. The results were illuminating enough to afford corroborative evidence of general trading faults, which persist to this day. While I have found many of the book’s insights helpful to my investment process, and urge investors to study said book, there have been other investment methods of interest.

Perhaps the best way is to emulate some of the trading principles used by yesteryear’s legends, who beat the market no matter the emotions and mechanics of the institutional herd, is to study them. To wit:

Bernard Baruch – Eighty some years ago, he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price.

Baron Rothschild – His success formula was centered on the famous quote attributed to him – “I never buy at the bottom and I always sell too soon.”

Jesse Livermore – This legendary speculator profited enormously by calling the vigorous 1921 and 1927 advances correctly. In 1929 he reasoned that the market was overvalued, but finally gave up and became bullish near the top in the fall of that infamous year. He quickly cut his losses, however and switched to the short side. Livermore listed three major points for success: Sensitivity to mob psychology, willingness to take a loss, and liquidity (meaning that stock positions should not be taken that cannot be sold in 15 minutes in the market).

Addison Cammack – A broker from Kentucky, who swore by the two-point stop-loss. “If you’re wrong,” he said, “You might as well be wrong by two points as ten.” He followed this method successfully, and was one of the few bears to make a fortune on Wall Street and keep it.

Have we got you thinking about what trading strategy to follow? Well, we’ve been holding the best system for last. Here is the sure-thing formula for success, “Don’t gamble – take all savings and buy some good stocks, and hold them until they go up, then sell them … if it don’t go up, don’t buy them!” – Will Rogers

I first heard about One Way Pockets in the early 1970s when Merrill Lynch’s Chief investment Strategist referred to it as his “investment bible.” Since then, I have read the 64-page book a number of times and have always found it insightful. Obviously, the quote I began this report with has stuck in my mind and I think that quote is applicable for the current stock market because the S&P 500 (SPX/1354.68) has indeed been locked in a pretty narrow range since May 5th. Beginning with the June 29th Dow Delight (+277 points), however, it felt like the resolution of the two-month trading range might be to the upside because the SPX traveled not only above its 50-day moving average (DMA @1339.28), but broke above the 1360 – 1366 level that has contained recent rallies. Moreover, the trading action produced a fairly rare event in what a technical analyst would term a “bowtie.” Now a “bowtie” is created when there is a confluence of moving averages into what looks like a “bowtie” (see chart on page 3). In the current case the moving averages in question would be the 10/30/50-DMAs. While such a configuration does not tell us which way the stock market is going to go, it does tell us there is the potential for a move of some substance. For example, studying the attendant chart shows the “bowtie” of August 2011 preceded a ~14.5% decline. The quid pro quo is that the “bowtie” of mid-December 2011 kicked-off an ~18% rally. Regrettably, Friday’s employment numbers clouded the previously improving backdrop, yet participants should still not give up the bullish “ship” because one day does not make a trend. As stated in Friday’s verbal strategy comments, the upside breakout by the SPX had lifted it back into minor resistance and left it somewhat overbought in the very short-term. Therefore, a shallow pullback was not out of the question; and, the employment numbers served as the causa proxima for that pullback.

By Friday’s closing bell the disappointing employment report had pressured the SPX lower by 12.90 points, but off only 7.48 points for the holiday-shortened week. While the selling pressure increased during Friday’s session, it did not turned any of my macro models negative, at least not as of yet. Moreover, my intermediate-term model on the SPX has turned “green” over the past two weeks. As can be seen in the chart (page 3), once this indicator begins to “trend” it does not give you very many false signals (BTW, green is good and red is bad). Ergo, as of now I expect any pullback to be shallow and hence contained by the support level visible between 1335 and 1345 basis the SPX. That said, we still have NOT had the decisive/sustained upside breakout I was hoping for, which continues to leaves the equity markets mired in the now two-month trading range. While I expect the markets to resolve themselves to the upside, they don’t run the various markets for my benefit. Accordingly, I think the best strategy is to continue to accumulate the non-market correlated stocks so often mentioned in these missives. Those names are favorably rated by our fundamental analysts and posses decent dividend yields. That list now includes: Allstate (ALL/$34.79/Strong Buy); Covanta (CVA/$17.28/Strong Buy); Johnson & Johnson (JNJ/$67.64/Outperform); Plum Creek Timber (PCL/$40.00/Outperform); Rayonier (RYN/$45.66/Strong Buy); and Stonemor (STON/$26.25/Outperform).

The call for this week: This morning I awoke to headlines “Asia Signals Drop In Global Demand,” “Euro Zone Fragmenting Faster Than EU Can Act,” “European Worries Send Shares Lower,” and “Investors Brace For Shaky Earnings Season.” Such musings have the S&P 500 futures off about six points. Somewhat offsetting these negative quips are these headlines, “Fed Officials Favor QE3” and “Obama To Seek One-year Extension For Some Of Bush Tax Cuts;” but alas, this morning the negatives are outweighing the positives. If the futures open where they are indicated it would push the SPX into the upper part of the 1335 – 1445 support zone. While I expect that level to “hold,” if it doesn’t more defensive action is warranted.

Click here to enlarge

Click here to enlarge

Tags: Active Traders, Baron Rothschild, Bernard Baruch, Brokerage Firm, Chief Investment Strategist, Don Guyon, Famous Quote, Faults, Fundamental Weakness, Herd, Investment Methods, jeffrey saut, Nev, Nom De Plume, One Way Pockets, Raymond James, Saut, Success Formula, Urge, Wealthy Clients, Yesteryear
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Frontrunning: (April 23, 2012)

Monday, April 23rd, 2012

• A Forecast of What the Fed Will Do: Stand Pat (Hilsenrath) – they finally realized that they have to leak the opposite…
• Draghi’s ECB Rejects Geithner-IMF Push for More Crisis-Fighting (Bloomberg)
• Wal-Mart’s Mexico probe could lead to departures at the top (Reuters)
• The Sadly Unpalatable Solution for the Eurozone (FT)
• US Regulators Look to Ease Swaps Rules (FT)
• Yuan, Interest Rate Reform to be Gradual: China Central Bank Chief (Reuters)
• Run, Don’t Walk (Hussman)
• Hollande Steals Poll March on Sarkozy (FT)
• Dutch Early Elections Likely After Wilders Opposes Budget (Bloomberg)
• China Lauds North Korea Friendship Despite Tensions (Reuters)

Overnight Media Digest:

WSJ

* French President Nicolas Sarkozy was thrust into a fight for his political survival after lagging behind Socialist candidate François Hollande in the first round of France’s presidential poll.

* Beam Inc is expected to announce Monday a deal to buy Pinnacle vodka and another brand from White Rock Distilleries Inc for around $600 million, according to people familiar with the matter.

* A group of former officials from the old brokerage firm E.F. Hutton & Co plan to start a new boutique financial-advisory firm under the same name.

* Customers of MF Global Holdings Ltd are pushing regulators to get tougher on JPMorgan Chase about money that went missing from accounts just before the firm’s collapse.

* Wal-Mart Stores faces significant legal risks after it disclosed that it is investigating its operations in Mexico for possible violations of the U.S. law that prohibits bribery in foreign countries, legal experts said.

* Avon Products Inc, famous for sending its representatives door to door, is losing traction in the U.S., where many time-stressed consumers are increasingly buying their cosmetics on the Web. Operating profit per representative in the U.S. has plunged 75 percent over the past decade, according to an analysis by Sanford C. Bernstein.

* US Airways Group Inc’s move to garner support from three unions at AMR Corp’s American Airlines for a merger between the two companies is designed to woo American Airlines workers but stop short of saddling a combined carrier with contracts that would hobble operations.

* Despite renewed fears about the euro-zone debt crisis, recent gains in U.S. Treasurys have been modest, likely owing to increasing doubt that the Federal Reserve will provide further stimulus for the U.S. economy.

NYT

* Across the television landscape, viewing for all sorts of prime-time shows is down – chiefly among 18-to-49 year olds, the most important audience for the business.

http://r.reuters.com/dun77s

* The entertainment entrepreneur Peter Chernin has made an arrangement with investors, who are taking a stake in the future earnings of his films and television shows and channeling him the money now.

http://r.reuters.com/fun77s

* China’s prime minister is touring Europe this week, and with a recent increase in direct investment in Germany, the country will occupy a special place on his itinerary.

http://r.reuters.com/kun77s

* The International Monetary Fund won significant pledges this weekend, but meetings ended without a consensus on how to speed up the economic recovery or stamp out the European debt crisis.

http://r.reuters.com/mun77s

* NimbleTV is the latest example of technology companies trying to break into the closed system of television distribution in the United States. The start-up is introducing a way to move a whole subscription’s worth of TV onto the Web, with or without the subscription company’s permission.

http://r.reuters.com/nun77s

* Amylin Pharmaceuticals is seeking a potential buyer, after it rebuffed an unsolicited $3.5 billion takeover offer from Bristol-Myers Squibb earlier this year, a person briefed on the matter said Sunday.

http://r.reuters.com/vyn77s

Canada

THE GLOBE AND MAIL

- Fiscal restraint is rippling through Canada’s national statistical agency, prompting it to start slicing surveys and warn staff of cost cuts and impending layoffs in what it calls a “year of sacrifice” at the organization.

- Federal officials are considering privatizing some of VIA Rail’s longest and most scenic routes – including the quintessentially Canadian journey between B.C. and Ontario, and the Rocky Mountain run between Jasper and Vancouver.

Reports in the business section:

- Canada’s insurance brokers have lodged a complaint with the country’s banking regulator, alleging that two big banks are flouting Ottawa’s rules by promoting insurance on their websites.

- North America’s largest garbage hauler, Waste Management Inc, is looking for Canadian partners to help create new technology that will convert waste to energy.

NATIONAL POST

- Quebec’s gun-control advocates were buoyed Friday by a strongly worded Quebec Superior Court judgment that recognized the recently abolished long-gun registry as an effective and economical crime prevention tool, laying the groundwork for a long legal battle with Ottawa.

Reports in the business section:

- In late September 2004, just three days before Air Canada emerged from bankruptcy protection, the airline’s then-chief executive Robert Milton made some bold proclamations about the company’s future.

- Junior miners have always brought with them a high risk-reward ratio. For every success there are easily a dozen failed firms that never see their projects go further than a few drill samples.

European Economic Summary:

• France Own-Company Production Outlook for April -4. Previous 6. Revised 8.
• France Production Outlook Indicator for April -14. Previous -15.
• France Business Confidence Indicator for April 95 – lower than expected. Consensus 96. Previous 96. Revised 98.
• France PMI Manufacturing for April 47.3 – lower than expected. Consensus 47.4. Previous 46.7.
• France PMI Services for April 46.4 – lower than expected. Consensus 50.1. Previous 50.1.
• Switzerland Money Supply M3 for March 6.60%y/y. Previous 6.40% y/y.
• Switzerland Real Estate Index Family Homes for March 410.4. Previous 404.6.
• Germany PMI Manufacturing for April 46.3 – lower than expected. Consensus 49. Previous 48.4.
• Germany PMI Services for April 52.6. Consensus 52.3. Previous 52.1.
• Euro Area PMI Composite for April 47.4 – lower than expected. Consensus 49.3. Previous 49.1.
• Italy Consumer Confidence Ind. s.a. for April 89.0 – lower than expected. Consensus 96.2. Previous 96.8. Revised 96.3.
• Euro Area PMI Manufacturing for April 46.0 – lower than expected. Consensus 48.1. Previous 47.7.
• Euro Area PMI Services  for April 47.9 – lower than expected. Consensus 49.3. Previous 49.2.
• Euro Area Euro-Zone Govt Debt/GDP Ratio for April 87.2%. Previous 85.40%. Revised 85.3%. Record high

Tags: Avon Products, Avon Products Inc, Beam Inc, Brokerage Firm, Central Bank Chief, E F Hutton, Financial Advisory Firm, French President Nicolas, French President Nicolas Sarkozy, Global Holdings, Hussman, Mf Global, Nicolas Sarkozy, President Nicolas Sarkozy, Presidential Poll, Socialist Candidate, Us Airways, Wal Mart, Wal Mart Stores, White Rock Distilleries
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“Street Smarts” (Saut)

Tuesday, March 6th, 2012

“Street Smarts”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

March 5, 2012

Some people can have a lot of experience and still have good judgment. Others can pull a great deal of value out of much less experience. That’s why some people have street smarts and others don’t. A person with street smarts is someone able to take strong action based on good judgment drawn from hard experience. For example, a novice trader once asked an old Wall Street pro why he had such good judgment. “Well,” said the pro, “Good judgment comes from experience.” “Then where does experience come from?” asked the novice. “Experience comes from bad judgment,” was the pro’s answer. So you can say that good judgment comes from experience that comes from bad judgment!

. . . Adapted from “Confessions of a Street Smart Manager” by David Mahoney

Years ago I read a book that a Wall Street professional told me would give me good stock market judgment by benefitting from the bad experience of others who had suffered various hard hits. The name of the book was “One Way Pockets.” It was first published in 1917. The author used the non de plume “Don Guyon” because he was associated with a brokerage firm having sizable business with wealthy retail investors and he had conducted analytical studies of orders executed for those investors. The results were illuminating enough to afford corroborative evidence of general investing faults that persist to this day. The study detected “bad buying” and “bad selling,” especially among the active and speculative public. It documented that the public tends to “sell too soon,” and subsequently repurchase stocks at higher prices by buying more stocks after the stock market has turned down, and finally liquidate all positions near the bottom; a sequence true in ALL similar periods.

For instance, the book shows that when a bull market started the accounts under analysis would buy for value reasons; and buy well, albeit small. The stocks were originally bought for the long-term, rather than for trading purposes, but as prices moved higher on the first bull-leg of the rally investors were so scared by memories of the previous bear market, and so worried they would lose their profits, they sold their stocks. At this stage the accounts showed multiple completed transactions yielding small profits liberally interspersed with big losses.

In the second phase of the rally, when accounts were convinced the bull market was for real, and a higher market level was established, stocks were repurchased at higher prices than they had previously been sold. At this stage larger profits were the rule. At this point the advance had become so extensive that attempts were being made to find the “top” of the market move such that the public was executing short-sales, which almost always ended badly.

Finally, in the mature stage of the bull market, the recently active and speculative accounts would tend not to over-trade or try to pick “tops” using short-sales, but would resolve to buy and hold. So many times previously they had sold only to see their stocks dance higher, leaving them frustrated and angry. The customer who months ago had been eager to take a few points profit on 100 shares of stock would, at this stage, not take a 30-point profit on 1,000 shares of the same stock now that it had doubled in price. In fact, when the stock market finally broke down, even below where the accounts bought their original stock positions, they would actually buy more shares. They would not sell;, rather the tendency at this mature stage of the bull market and the public’s mindset was to buy the breakdowns and look for bargains in stocks.

The book’s author concluded that the public’s investing methods had undergone a pronounced, and obvious, unintentional change with the progression of the bull market from one stage to another; a psychological phenomena that causes the great majority of investors to do the exact opposite of what they should do! As stated in the book, “The collective operations of the active speculative accounts must be wrong in principal [such that] the method that would prove profitable in the long run must be reversed of that followed by the consistently unsuccessful.”

Not much has changed from 1917 and 2012, just the players, not the emotions of fear, hope, and greed; or, supply versus demand, as we potentially near the maturing stage of this current bull market. Of course stocks can still travel higher in a maturing bull market, but at this stage we should keep Don Guyon’s insight about maturing “bulls” in mind. Verily, this week celebrates the third year of the Bull Run, which began on March 9, 2009 and we were bullish. With the S&P 500 (SPX/1369.63) up more than 100% since the March 2009 “lows” it makes this one of the longest bull markets ever. As the invaluable Bespoke Investment Group writes:

“Going all the way back to 1928, the current bull market ranks as the ninth longest ever. Even more impressive is the fact that of the nine bull markets that lasted longer, none saw a gain of 100% during their first three years. Based on the history of prior bulls that have hit the three-year mark, year four has also been positive.”

Now, recall those negative nabobs that told us late last year the first half of 2012 would be really bad? W-R-O-N-G, for the SPX is off to its ninth best start of the year, while the NASDAQ (COMPQ/2976.19) is off to its best start ever! In seven out of the past ten “best starts,” the SPX was higher at year-end, which is why I keep chanting, “You can be cautious, but don’t get bearish.” Accompanying the rally has been improving economic statistics and last week was no exception. Indeed, of the 20 economic reports released last week, 15 were better than estimated. Meanwhile, earnings reports for 4Q11 have come in better than expected, causing the ratio of net earnings revisions for the S&P 1500 to improve. Then too, the employment situation reports continued to improve. Of course, such an environment has led to increased consumer confidence punctuated by the February’s Consumer Confidence report that was reported ahead of estimates at 70.8, versus 63.0, for its best reading in a year. And that optimism makes me nervous.

Nervous indeed, because the SPX has now had 42 trading sessions year-to-date without so much as a 1% Downside Day. Since 1928 the SPX has only had six other occasions where the SPX started the year with 42, or more, trading sessions without a 1% Downside Day. Worth noting, however, is that in every one of those skeins the index closed higher by year’s end. Still, in addition to the often mentioned upside non-confirmations from the D-J Transportation Average (TRAN/5160.13) and the Russell 2000 (RUT/802.42), seven of the SPX’s ten macro sectors are currently overbought but the NYSE McClellan Oscillator is now oversold, Lowry’s Short Term trading Index has fallen 12 points since peaking on January 25th (which interestingly is the day before the Buying Stampede ended), the Operating Company Only Advance/Decline Index (OCO) has nearly 1,000 fewer issues than where it was on February 1st, suggesting the rally is narrowing, the number of New Highs confirms the OCO (last April the index had similar readings right before a correction), and sticking with the April 2011 comparison shows a striking similarity to the December 2010 – February 2011 trading pattern for the SPX and we all remember how that ended (see chart on page 3). And then there’s this from my friend Jim Kennedy of Atlanta-based Divergence Analysis, whose proprietary algorithms I use on a daily basis:

“The currently developing negative divergence pattern by our Risk Indicator is a model event that historically leads to a correction phase. This correction ‘is not in play’ now, as the Risk indicator (historically) turns up again to show the final surge of the rally. Once Risk reverts down after that, the correction phase is ‘in play’. For your review a picture of the 2007 Risk negative divergence pattern and resulting correction.In 2007 this negative development led first into a smaller, trading range correction, a new higher top (with Risk diverging), and then the larger price correction of approximately 150 S&P points.This one may play out differently, but we have a nice guide to show the way.”

The call for this week: I am at the Raymond James 33rd Annual Institutional Conference this week and suggest you exercise “street smarts” in my absence. While I remain cautious (not bearish) there are still things to do. For example, I continue to like the strategy of looking at companies whose share price has collapsed for a one-off event. Recall, this was the case with Acme Packet (APKT/$30.26/Strong Buy) back in January, where in our analyst’s view the stock swoon had taken a lot of the price risk out of the equation. A similar sequence occurred last week with Vocus (VOCS/$13.52/Strong Buy), where our fundamental analyst maintains his positive view. For further information on either of these companies please see our fundamental analysts’ recent reports. I will speak with everyone next week.

Déjà vu?

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Copyright © Raymond James

Tags: Bad Experience, Bad Judgment, Brokerage Firm, Chief Investment Strategist, Confessions, David Mahoney, Faults, Good Stock, jeffrey saut, Non De Plume, Novice Trader, One Way Pockets, Periods, Raymond James, Retail Investors, Saut, Sizable Business, Smart Manager, Stock Market, Street Smarts, Wall Street
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“Fun, Fun, Fun” (Jeffrey Saut)

Tuesday, February 28th, 2012

“Fun, Fun, Fun”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

February 27, 2012

“… and she’ll have fun fun fun ‘til her daddy takes the t-bird away.”

… The Beach Boys, 1964

Except in this case it should be “fund, fund, fund” because I am in the Washington/Baltimore area speaking at conferences, renewing contacts on Capitol Hill, and seeing mutual fund managers. Some of the folks I will be seeing hang their hats at Friedman, Billings & Ramsey; aka, FBR & Co. I remember when in 1989 Manny Friedman scraped together $1 million and departed the Washington-based brokerage firm of Johnson, Lemon & Co. to formed FBR with his two partners Eric Billings and Russ Ramsey. The firm became a research boutique focusing on financial companies spurred by Manny’s prescient “calls” on the banks and real estate. That focus continues to this day, punctuated by a sagacious portfolio manager named David Ellison, captain of the FBR Small Cap Financial Fund (FBRSX/$18.31). I used to chat with David back in the 1980s when he was at Fidelity managing Fidelity’s Select Financial Fund. Interestingly, David currently owns a number of the smaller banks I have commented on in these missives. Even more interesting is that David is my kind of investor since when he can’t find attractive investment opportunities he is content to hold cash. Case in point, unable to find attractive investments going into the 2008 financial fiasco David held 60% of his fund in cash. Indeed, my kind of investor. Accordingly, participants wanting to fill the financial sleeve of their asset allocation model should consider David’s fund.

I spoke with yet another fund manager last week when I hosted a conference call for our financial advisors with Tom O’Halloran, who manages Lord Abbett’s Developing Growth Fund (LAGWX/$21.85). In its space LAGWX is the number one performing fund on a five-year basis according to Morningstar [replay (855) 859-2056; password 49023178]. While that fund is currently closed to new investors, the good folks at Lord Abbett have started another fund run by Tom using the same investment style. The fund is called The Growth Leaders Fund (LGLAX/$15.67) and is representative of the “smaller more nimble” funds I have championed for more than 12 years. The conference call began with some comments from me about the current state of the economy and the stock market. I concluded by noting that while the economy is not going to slip back into recession, GDP is also not likely to grow by more than 3.5% for awhile. In such an environment companies that can increase their revenues and earnings at a decent rate should produce good investment returns; and with that I turned the call over to Tom.

He began by talking about the four traits necessary for great companies. First, they must have a great business model. Second, the management team has to be competent and credible. Third, they must be operating in a healthy industry. And fourth, the company needs to demonstrate a competitive advantage. Tom believes that growing revenues, and earnings, at an outsized rate leads to stock outperformance and I agree. Interestingly, Tom uses technical analysis as an overlay to support his fundamental views. This is not an unimportant point because in this business price is reality! Ladies and gentlemen, I have seen a plethora of portfolio managers stay with losing positions far too long because they ignored the fact the share price was breaking down rather dramatically in the charts. By the time they saw the fundamentals deteriorate, the shares were off some 50% when if they would have had some kind of technical analysis discipline the loss would have been contained at 15% – 20%, but I digress.

Tom then discussed some themes like the Internet, the cloud, software, servers, social networking, the Internet gone mobile, healthcare, Americanism, the reindustrialization of America, etc. If that sounds a lot like me it should given this paragraph from last week’s letter:

“In addition to the theme that technology is making building more for less a reality, other themes I am encouraged by include: companies making products for American consumption are moving jobs back to the U.S.; the reindustrialization of America; Americanism; a move toward energy self sufficiency that will shrink our trade deficit; and then there are the themes outlined in the book Abundance: Why the Future Will Be Much Better Than You Think written by Peter H. Diamandis and Steven Kotler.”

Tom then proceeded to discuss select companies in the Growth Leaders Fund and why he owns them. Names mentioned included: Apple (AAPL/$522.41); Continental Resources (CLR/$94.75/Strong Buy); Google (GOOG/$609.90/Outperform); EMC (EMC/$27.52/ Strong Buy); Fortinet (FTNT/$26.99/Outperform); and Zynga (ZNGA/$12.93). Almost as if it were a “planted” question, one of our financial advisors stated, “You buy the kind of stocks that my clients should have some exposure to, but I am afraid to buy them because of their volatility.” My response was, “Precisely, and that is why you want to own this fund and let Tom manage the risk.”

Speaking to Tom’s position in Continental Resources, a lot of our energy stocks have gone parabolic over the past few weeks, including CLR. If you had followed our recommendation and made CLR shares a 3% position in a $100,000 portfolio when our fundamental analyst initiated research coverage, holding all the other stocks in said portfolio at a constant price shows that your position in CLR has now grown into a 16% portfolio “bet.” Accordingly, it makes asset allocation sense to rebalance that position back towards a smaller weighting and let some long-term capital gains accrue to the portfolio. The same can be said of other portfolio positions that have grown into too big of a weighting in portfolios. Also of note, our long-standing love affair with Wal-Mart (WMT/$58.79/Market Perform) ended last week with Budd Bugatch’s downgrade of WMT from Strong Buy to Market Perform, which has now become another rebalancing candidate.

As for the stock market, last week the S&P 500 (SPX/1365.74) eclipsed its previous reaction high, recorded on April 29, 2011 of 1363.61, and now stands at its highest level since June 6, 2008. The closing high, however, came on very low volume and with numerous divergences. The two most egregious are the lack of upside confirmation from the D-J Transportation Average (TRAN/5139.14) and the Russell 2000 (RUT/826.92). While there are clearly other divergences like the non-confirmation from the Operating Company Only Advance/Decline Line, the fact that there have been no 90% Upside Days this year, the narrowing leadership, too many three-digit stocks, etc., the Trannies and the Russell are indeed the two most worrisome. That’s because the RUT is more than 5% below its one-year high, while the Transports are ~9% below their one-year high. Historically, when the S&P 500 was at a fresh 52-week high, but the Russell 2000 and the DJ Transports were more than 5% below their respective 52-week highs, stocks have been vulnerable. Therefore, if I am going to err it is going to be by being too cautious (not bearish), consistent with Ben Graham’s mantra – The essence of investment management is the management of risks not the management of returns. Good portfolio management begins (and ends) with this tenant.

The call for this week: There have now been 37 trading sessions in 2012 and so far the S&P 500 has yet to experience a 1% Downside Day. This 37-session, or more, skein has occurred 11 other times in the past 84 years and has on every occasion except one seen the equity markets higher by the end of the year. Still, the rise since the “buying stampede” ended, which stopped on January 26, 2012 at Dow 12841.95, has felt unnatural to me. Surprisingly, the Industrials reside only 141 points above their intraday high of January 26th, causing one market maven to exclaim, “no wonder I feel like we’re in the Trading Twilight Zone.” Maybe there will be a resolution to that “unnatural feeling” this week when we experience Leap Day (February 29th). As our friends at Bespoke write, “There have been 21 leap days in which the market was open since 1900. … The average performance of the Dow on leap days has been -0.05% with a median return of -0.22%. … There have been three leap days that fell on a Wednesday (as it does this year) since 1900, and the index has risen once and fallen twice. The last leap day was February 29, 2008, and that day the Dow had a big fall of 2.51%.” I’ll speak to you next week.

Copyright © Raymond James

Tags: Asset Allocation Model, Attractive Investment Opportunities, Attractive Investments, Baltimore Area, Brokerage Firm, Chief Investment Strategist, David Ellison, Eric Billings, Fbr Small Cap, Fbr Small Cap Financial Fund, Friedman Billings, Fun Fun Fun, Halloran, jeffrey saut, Lord Abbett, Missives, Morningstar, Mutual Fund Managers, Portfolio Manager, Saut, Two Partners, Washington Baltimore
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U.S. Equity Market Radar (December 28, 2011)

Tuesday, December 27th, 2011

U.S. Equity Market Radar (December 28, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 3.74 percent. All ten sectors of the index increased. The best-performing sector for the week was energy, which gained 5.44 percent. Other top-three sectors were financials and industrials. Technology was the worst performer, up 2.01 percent. Other bottom-three performers were consumer staples and consumer discretion.

Within the energy sector the best-performing stock was Nabors Industries, up 8.96 percent. Other top-five performers were Baker Hughes, Murphy Oil, Marathon Oil, and Tesoro.

Strengths

• The healthcare facilities group was the best-performing group for the week, up 13 percent, led by the group’s single member, Tenet Healthcare. This increase may be an example of a low-priced stock with a relatively high beta (1.20) reacting to a stock market rally this week.
• Three groups related to home sales and home construction outperformed this week. The building products group, the household appliances group, and the home furnishings group rose 11 percent, 10 percent, and 9 percent, respectively. Sales of existing homes in the U.S. rose in November to a 10-month high. Housing starts in the U.S. reached a 19-month high in November. Sales of new U.S. homes rose in November to a seven-month high.
• The education services group gained 9 percent. This week the U.S. Department of Education announced the appointment of Georgia Yuan as Deputy Under Secretary, replacing James Kvaal who transitioned to President Obama’s reelection team earlier this year. A major brokerage firm report stated its belief that this appointment will help the Education Department to increasingly shift to an approach that is based on outcome metrics rather than on ideology.

Weaknesses

• The home furnishings retail group was the week’s worst-performer, down 6 percent, led by its single member, Bed Bath & Beyond. The retailer sold off after reporting third-quarter earnings above the consensus and revenue slightly below the consensus. The earnings figure was aided by a lower tax rate. Same-store-sales were below consensus for the quarter, and sales comparisons become more difficult in the current quarter.
• The systems software group underperformed, down 4 percent, led down by Oracle which reported fiscal second quarter earnings and revenue below the consensus estimates.
• The airlines group lost 1 percent, led by its single member, Southwest Airlines. This week, the Federal Aviation Administration (FAA) released new rules on pilot fatigue. The rules, which take effect in two years, reduce the hours that pilots can work and give them longer rest breaks. The new rules will likely result in higher costs for the airline industry.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Baker Hughes, Brokerage Firm, Consumer Staples, Deputy Under Secretary, Domestic Stock Market, Education Services Group, energy sector, Facilities Group, Healthcare Facilities, Household Appliances, marathon oil, Market Radar, Market Rally, Murphy Oil, Nabors Industries, Outcome Metrics, Performing Group, Retail Group, Tenet Healthcare, U S Department Of Education
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U.S. Equity Market Radar (December 12, 2011)

Sunday, December 11th, 2011

U.S. Equity Market Radar (December 12, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 0.88 percent. Nine sectors of the index advanced and one declined. The best-performing sector for the week was financials which increased 1.68 percent. Other top-three sectors were technology and industrials. Materials was the worst-performer, down 0.11 percent. Other bottom-three performers were energy and telecom services.

Within the financials sector, the best-performing stock was Morgan Stanley, up 5.54 percent. Other top-five performers were Comerica, Genworth Financial, Goldman Sachs and Ventas.

Strengths

• Healthcare facilities was the best-performing group for the week, up 6 percent, led by its single member, Tenet Healthcare Corp. A brokerage firm report stated that all six of the publically-traded hospitals saw a sequential decrease in unemployment in their respective areas from September to October. The report views unemployment trends as a potential precursor to changes in the level of hospital business.
• The specialized consumer services group outperformed, gaining 6 percent on strength in its single member, H&R Block. The tax-preparation company increased its dividend by 33 percent, and it also introduced some new features including tax preparation apps for iPhone and Android phones and tablets.
• The homebuilding group gained 6 percent. A major brokerage house report on the homebuilding industry stated that it has become increasingly apparent that the pieces are beginning to fall in place for a housing rebound in 2012.

Weaknesses

• The real estate services group was the worst performer for the week, losing 6 percent on weakness in the group’s single member CBRE Group. Investor sentiment on the stock of this commercial real estate sales and leasing firm may have been affected negatively by a study of U.K commercial real estate by an English university. The study reported that U.K. commercial real estate investors are unable to refinance about 85 billion pounds to 114 billion pounds of debt because the loans are too high compared with collateral property values.
• The casinos & gaming group underperformed, down 5 percent, led by the group’s largest member, Wynn Resorts. A major brokerage firm lowered its earnings estimates and price target on the stock, saying that Wynn Resorts may not be able to keep up with the overall growth rate in Macau.
• The home entertainment software group declined 4 percent, led by its single member Electronic Arts. Shares of video game publishers declined after one publisher, THQ, lowered its revenue guidance for the holiday quarter.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011 and 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Brokerage Firm, Brokerage House, Consumer Services Group, Domestic Stock Market, Estate Services Group, Genworth, Genworth Financial, Goldman Sachs, Homebuilding Industry, Hospital Business, Investor Sentiment, Iphone, Market Radar, Morgan Stanley, Performing Group, Real Estate Sales, Telecom Services, Tenet Healthcare, Tenet Healthcare Corp, Unemployment Trends
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U.S. Equity Market Radar (December 4, 2011)

Sunday, December 4th, 2011

U.S. Equity Market Radar (December 4, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 7.39 percent. All ten sectors of the S&P 500 advanced. The best-performing sector for the week was energy which increased 10.08 percent. Other top-three sectors were financials and materials. Utilities was the worst-performer, up 3.93 percent. Other bottom-three performers were consumer staples and telecom services.

Within the energy sector the best-performing stock was Alpha Natural Resources, up 28.18 percent. Other top-five performers were Newfield Exploration, Peabody Energy, Denbury Resources, and Consol Energy.

Strengths

• Some of the best-performing groups this week were cyclically-related groups, many of which had sold down in the face of the macro concerns pressuring the market in recent months. The coal & consumable fuel group, the best-performing group for the week, was a good example of this type of group. It was up 18 percent with all three of its members (Peabody Energy, Alpha Natural Resources, and Consol Energy) advancing.
• The tires & rubber group, another cyclical group, advanced 18 percent, led by its single member, Goodyear Tire.
• The steel group was also typical of this week’s cyclical outperformers, rising 15 percent, led by U.S. Steel in price performance, but with the other four group members also displaying significant gains.

Weaknesses

• The healthcare facilities group was the worst-performing group for the week, up 0.24 percent, led by its single member, Tenet Healthcare. A major brokerage firm initiated coverage of the hospital company with a “Market Perform” rating, stating that while the opportunity for growth is real, the current valuation leaves little room for share appreciation.
• The specialty stores group underperformed, up 1 percent. Office supply store firm Staples Inc. increased while high-end retailer Tiffany & Co. declined. Tiffany reported quarterly earnings above the consensus estimate, but it guided fourth-quarter earnings below consensus.
• The soft drinks group underperformed, gaining 3 percent. Groups in the consumer staples sector, such as soft drinks, typically are more defensive groups and do not usually advance as much in strong up-markets as do cyclical stocks.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011 and 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Alpha Natural Resources, Brokerage Firm, Consol Energy, Consumer Staples, Denbury Resources, Domestic Stock Market, Facilities Group, Fuel Group, Goodyear Tire, Market Radar, Newfield Exploration, Office Supply Store, Peabody Energy, Performing Group, Quarterly Earnings, Share Appreciation, Staples Inc, Steel Group, Telecom Services, Tenet Healthcare
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U.S. Equity Market Radar (November 28, 2011)

Sunday, November 27th, 2011

U.S. Equity Market Radar (November 28, 2011)

The domestic stock market as measured by the S&P 500 Index was lower this week by 4.69 percent. All ten sectors of the S&P 500 declined. The best-performing sector for the week was consumer staples which decreased 2.40 percent. Other top-three sectors were utilities and healthcare. Energy was the worst-performer, down 6.24 percent. Other bottom-three performers were financials and materials.

Within the consumer staples sector the best-performing stock was Mead Johnson, up 0.50 percent. Other top-five performers were Reynolds American, Walgreen Co., Wal-Mart, and Kroger Co.

Strengths

• The hypermarkets & supercenters group was the best-performing group for the week, down 0.73 percent, led by its largest member, Wal-Mart. A major brokerage firm report stated that Wal-Mart management believes that Black Friday sets the trend for the holidays, and that the retailer has an aggressive plan to win the weekend.
• The restaurants group outperformed, declining by 1.58 percent. Yum! Brands Inc. announced that it will separate its India business, creating a separate reporting division called Yum! Restaurants India in order to continue to drive aggressive international expansion.  Yum! Brands also announced that it will open fast-food chain restaurants in gas stations run by China Petrochemical Corp.
• The health care technology group outperformed, dropping by 1.61 percent, led by its single member, Cerner Corp. The stock of this software company, which develops electronic medical records software, sold off sharply recently, but appeared to stabilize this week.

Weaknesses

• The coal & consumable fuel was the worst-performing group, down 10 percent. All three members of the group declined.

• The steel group underperformed, losing 10 percent with all five group members declining. On Monday, the World Steel Association reported steel production for 64 countries in October increased 6.2 percent year-over-year, indicating higher supply amid softer U.S. and European demand for steel.
• The other diversified financial services group lost 9 percent. All three group members (Bank of America, Citigroup, and JPMorgan Chase) lost more than six percent. These three large banks will be among the banks undergoing a new “stress test” prescribed by the Federal Reserve.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011 and 2012.  Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Brokerage Firm, Cerner Corp, Chain Restaurants, China Petrochemical, Consumer Staples, Domestic Stock Market, Electronic Medical Records, Health Care Technology, Health Care Technology Group, Kroger Co, Market Radar, Mead Johnson, Medical Records Software, Petrochemical Corp, Steel Association, Wal Mart, Walgreen Co, Yum Brands, Yum Brands Inc, Yum Restaurants
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U.S. Equity Market Radar (November 21, 2011)

Saturday, November 19th, 2011

U.S. Equity Market Radar (November 21, 2011)

The domestic stock market as measured by the S&P 500 Index was lower this week by 3.81 percent. All ten sectors of the S&P 500 declined. The best-performing sector for the week was consumer staples which decreased 1.16 percent. Other top-three sectors were utilities and telecom services. Financials was the worst-performer, down 5.57 percent. Other bottom-three performers were materials and energy.

Within the consumer staples sector the best-performing stock was Reynolds American, up 3.11 percent. Other top-five performers were Philip Morris International, PepsiCo, Sysco, and Lorillard.

Strengths

• The construction materials group was the best-performing group for the week, up 5 percent, led by its single member, Vulcan Materials. The largest producer of construction aggregates in the U.S. made a presentation this week at the Stephens Inc. Fall Investment Conference.
• The tobacco group outperformed, gaining 1 percent. Reynolds American and Philip Morris International both advanced during the week.
• The gas utility group outperformed, rising 1 percent on strength in its largest member, ONEOK, which made a presentation this week at the RBC Capital Markets Master Limited Partnership Conference.

Weaknesses

• The health care facilities group was the worst-performing group for the week, down 13 percent, led down by its single member, Tenet Healthcare. Health care providers are waiting to see what kind of budget cuts the “Super Committee” might make, or whether cuts would be made by sequestration. In September, Tenet Healthcare estimated that sequestration would result in a $40 to $54 million cut to its annual cash flow.
• The coal & consumable fuel group lost 12 percent. In a coal industry report this week, a major brokerage firm stated that, in its view, the stocks are discounting too high of a price for coking coal, and that thermal coal fundamentals are also showing signs of weakness that could surprise the market.
• The oil & gas refining & marketing group underperformed, losing 12 percent. U.S. refiners declined on an announcement that the direction of flow in the Seaway pipeline will be reversed. This may increase the cost of crude oil and thus decrease refining profit margins.

Opportunities

• There may be an opportunity for gain in merger & acquisition transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Brokerage Firm, Coal Industry, Construction Aggregates, Construction Materials Group, Consumer Staples, Domestic Stock Market, Facilities Group, Fuel Group, Health Care Facilities, Health Care Providers, Market Pulse, Market Radar, Master Limited Partnership, Oneok, Partnership Conference, Performing Group, Philip Morris International, Rbc Capital Markets, Stephens Inc, Thermal Coal, Tobacco Group, Vulcan Materials
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