U.S. Equity Market Radar (July 30, 2012)

Sunday, July 29th, 2012

U.S. Equity Market Radar (July 30, 2012)

The S&P 500 Index rose 1.71 percent this week as the equity market shrugged off weak earnings reports and focused on potential monetary policy easing from both the Federal Reserve and European Central Bank (ECB), which could come as early as next week. The telecom services sector led the way, followed by financials and industrials. The materials sector was the only sector in negative territory for the week.

Strengths

• The telecommunication services sector was the best performer this week rising 4 percent, driven by much-better-than-expected earnings reports from MetroPCS Communications and Sprint Nextel. MetroPCS was the best performer in the S&P 500, rising by more than 40 percent.
• The financial sector was predominately led higher by the investment banks and brokerage stocks, which were among the worst performers last week. JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup all rose by more than six percent.
• The industrial sector also performed well as key stocks outperformed, including Caterpillar and General Electric.

Weaknesses

• The materials sector lagged as Dow Chemical disappointed along with Vulcan Materials. Cliffs Natural Resources was the worst performer in the group on continued weak iron ore prices.
• Other areas that were weak included education services, casino and gaming, construction materials, and coal.
• DeVry, the for-profit education company, was the worst performer, falling 29 percent as the company warned of higher costs and declining enrollment.

Opportunity

• The market shifted its focus from earnings to central bank policy late in the week and that should be the focus next week as we could see action from the Fed, the ECB or both.

Threat

• While policy-makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China recently cut interest rates for the second time in a month, which likely indicates that conditions on the ground remain challenging.

Tags: Dow Chemical, Earnings Reports, ECB, Education Company, Education Services, Financial Sector, Goldman Sachs, Industrial Sector, Investment Banks, Iron Ore Prices, Market Radar, Materials Sector, Metropcs, Morgan Stanley, Negative Territory, Profit Education, Sprint Nextel, Telecom Services, Telecommunication Services, Vulcan Materials
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U.S. Equity Market Radar (July 23, 2012)

Saturday, July 21st, 2012

U.S. Equity Market Radar (July 23, 2012)

The S&P 500 Index rose 0.43 percent this week as the second quarter earnings season kicked off in earnest this week. Energy, technology and materials outperformed as cyclical areas outperformed. Financials were the big underperformers this week, falling more than two percent on disappointing earnings reports.

Strengths

• The energy sector was the best performer this week, rising 2.56 percent and is now the best-performing sector over the past month. Oil & gas drilling and equipment were the best performers, led by Baker Hughes and Schlumberger on the back of strong earnings reports and low expectations.
• The technology sector was led higher by the computer storage and equipment industry group along with internet software and services. SanDisk, eBay and Google were all standout performers on strong earnings reports.
• The best individual stock performer this week was SanDisk, which rose 10.38 percent as the company reported earnings and an outlook that positively surprised street expectations.

Weaknesses

• The financial sector lagged as heavyweights Bank of America, JPMorgan Chase and Morgan Stanley all fell sharply. Earnings or guidance disappointments were the primary culprits, but after a relief rally on last week’s earnings, JPMorgan Chase gave it all back this week falling by more than 6 percent.
• The consumer staples sector was brought down by record high grain prices which negatively impact “protein” companies such as Tyson, which fell 6.56 percent, as well as packaged goods companies such as ConAgra Foods, which fell 4.55 percent.
• Chipotle Mexican Grill was the worst performer, falling 19.21 percent as second quarter sales were less than expected.

Opportunity

• It is all about earnings right now with another heavy week scheduled for next week. While the week ended on a sour note, the market has weathered the current environment pretty well considering expectations coming into the week.

Threat

• While policy-makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China recently cut interest rates for the second time in a month, which likely indicates the conditions on the ground remain challenging.

Tags: Baker Hughes, Bank Of America, Computer Storage, Conagra, Conagra Foods, Consumer Staples, Earnings Reports, Earnings Season, Ebay, Gas Drilling, Google, Grain prices, Jpmorgan Chase, Low Expectations, Market Radar, Morgan Stanley, Packaged Goods Companies, Second Quarter Earnings, Second Quarter Sales, Street Expectations
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Don’t Like the Real Data? Just Pretend!

Thursday, April 26th, 2012

Tags: Bulls, Clue, Conclusions, Confirmation Bias, Corporate Earnings, Credibility, Critical Thinking, Denial, Downside, Earnings Reports, Economic Collapse, Investment Decision, Jeff Miller, Observers, Profit Margins, Rebound, Recession, Recovery Period, Simple Solution, Workforce Reductions
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U.S. Equity Market Radar (April 16, 2012)

Sunday, April 15th, 2012

U.S. Equity Market Radar (April 16, 2012)

The S&P 500 Index fell 1.99 percent this week, the biggest weekly drop this year as concerns mounted over a global economic slowdown and financial imbalances in southern Europe.

Strengths

• Supervalu was the best performer within the S&P 500, rising 25 percent. The company reported earnings that are more or less even with expectations, but the stock appears to have benefited from a significant short squeeze.
• Consumer discretion was the best performing sector, as the homebuilders bounced back from last week’s weakness to be the top industry group this week.
• Other strong performers for the week include Hewlett-Packard, Starbucks and Safeway.

Weaknesses

• The financial sector was the worst performer this week as European concerns resurfaced and initial earnings reports within the sector met expectations.
• The energy sector was also weak on concerns of global economic weakness.
• F5 Networks was the worst performer this week, falling by more than 10 percent as a sell side-analyst raised concerns that the company may have had to push really hard to close deals at the end of the quarter, potentially increasing the odds of an earnings miss.

Opportunity

• The market didn’t respond positively to early earnings reports and suffered its worst week of the year. This may set a precedent for next week as earnings releases are set to pick up.

Threat

• The S&P 500 is arguably still overbought in the short term and could be vulnerable to profit taking after the rally in the first quarter.

Tags: Amp, Discretion, Earnings Releases, Earnings Reports, Economic Weakness, energy sector, European Concerns, Financial Sector, First Quarter, Global Economic Slowdown, Hewlett Packard, Homebuilders, Industry Group, Market Radar, Miss Opportunity, Safeway, Short squeeze, Southern Europe, Starbucks, Supervalu
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Earnings Season Cometh (Bespoke)

Wednesday, April 11th, 2012

Tags: Aa, Alcoa, Analyst Estimates, Decline, Earnings Estimates, Earnings Report, Earnings Reports, Earnings Season, Interactive Earnings, Next Level, Quarterly Report, Report Database, Report Users, Snapshot, Stock Price, Stocks, Surprise, Time Period
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U.S. Equity Market Radar (January 23, 2012)

Sunday, January 22nd, 2012

U.S. Equity Market Radar (January 23, 2012)

The domestic stock market as measured by the S&P 500 Index was higher this week by 2.04 percent. We have seen a global rally in January with much of this performance coming this week. When trying to decipher the underlying cause it is often helpful to look at significant government policy actions.

On December 21, 2011 the European Central Bank (ECB) implemented the first tranche of the three-year long-term refinancing operation (LTRO) of approximately $635 billion, as the ECB attempted to secure long-term funding for banks that would allow them time to work through their current difficulties without the fear of a run on the bank. Another round of funding is scheduled for February. The chart below compares the timing of the current LTRO to the Federal Reserve’s quantitative easing and TARP program in 2008. The LTRO program is a form of quantitative easing and judging by the effect on the global equity markets, it appears to be working. The chart below looks at the global equity risk premium as a proxy for equity risk aversion and as can be easily seen in the chart , the end of 2011 was a very fearful time for equity investors. If 2008 and 2009 set precedent, then 2012 is shaping up to be a good year.

Strengths

• The information technology sector was the best-performing sector this week as several bellwether technology companies reported earnings that were well received by the market.
• The semiconductor equipment group was particularly strong, increasing by more than 8 percent as strong earning results combined with increased orders or capital expenditure announcements from Intel and Taiwan Semiconductor.
• The investment bank and brokerage industry group was also strong with Goldman Sachs and Morgan Stanley both up around 10 percent for the week on the back of well received earnings reports.

Weaknesses

• The utilities sector underperformed and was the only sector to post negative performance for the week, as the market rotates away from defensive areas.
• The auto parts and equipment industry group underperformed as Johnson Controls lowered guidance on weak European production and currency effects.
• The educational services group also underperformed as talk surfaced on possible legislation that would reduce incentives for for-profit colleges to target and aggressively recruit veterans and service members.

Opportunities

• Early earning results have been encouraging so far and the market has responded, and we move into the heart of earnings season next week.

Threats

• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Brokerage Industry, Capital Expenditure, Domestic Stock Market, Earnings Reports, Equity Investors, Equity Risk Premium, Global Equity Markets, Goldman Sachs, Good Year, Government Policy, Industry Group, Information Technology Sector, Investment Bank, Market Radar, Morgan Stanley, Policy Actions, Risk Aversion, Semiconductor Equipment Group, Set Precedent, Taiwan Semiconductor
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Conditions Continue to Improve, but Risks Remain (Doll)

Monday, November 21st, 2011

Conditions Continue to Improve, but Risks Remain

November 21, 2011

Markets Weaken on Uncertainty

Last week was a tough one for equity markets. Investors grew uneasy in the face of renewed uncertainty about the state of the European debt crisis as well as growing indications that the US Congressional “super committee” charged with a massive deficit reduction task gave indications that they would be unsuccessful. For the week, the Dow Jones Industrial Average lost 2.9% to close at 11,796, the S&P 500 Index was down 3.8% to 1,215 and the Nasdaq Composite fell 4.0% to 2,572.

Concerns Over Europe Remain Key

In our view, the European debt situation remains the most important variable affecting the global financial markets. Concerns over Europe’s debt situation have been outweighing the positives coming from robust earnings reports and better-than-expected economic data as investors remain concerned over the possibility of a financial meltdown that could trigger a significant global economic slowdown or recession. Despite the ongoing fears, we do believe that some progress is being made.

The changes in government that have occurred in both Greece and Italy seem to be positive signs as new Prime Ministers Lucas Papademos and Mario Monti are well respected and are widely regarded as technocrats who appear committed to solving their nations’ debt problems. The question, of course, is whether or not any solutions implemented throughout Europe will take place fast enough to prevent widespread contagion.

US Super Committee Poised for Failure?

The Congressional super committee has been dominating headlines of late and current indications are that the committee may soon announce that it has failed to produce a framework for identifying the needed $1.2 trillion in deficit reduction that it was charged with. We had long suspected that the committee would pass on the toughest issues, but we had thought it was possible that the group would be able to identify cuts and savings of around $400 to $600 billion, coming up with a sort of half-victory. At present, the odds of the committee announcing that they have reached absolutely no deal are rising, which would set the stage for an across-the-board automatic set of cuts that would commence in January 2013.

Although the uncertainty surrounding the super committee is a concern for investors, it is important to remember that, unlike the debt ceiling debate that occurred over the summer, there is no looming threat of a government shutdown or any sort of debt default associated with the committee’s plans. As a result, the market impact of the committee’s plan (or lack thereof) should remain relatively contained. To us, the more important issue is whether or not Congress will be able or willing to extend unemployment benefits and payroll tax reductions. If these extensions do not occur, it would act as an economic drag into 2012.

Economic Acceleration Continues (For Now)

Although the news has been overshadowed by events in Europe and the anticipation of the super committee’s announcements, economic data has continued to be broadly encouraging. Retail sales for October were stronger than expected and initial unemployment claims recently fell to their lowest level since early 2011. A broader look back over the course of this year shows that economic growth has been accelerating. First-quarter gross domestic product ??grew by 0.4%, second quarter growth was 1.3%, third quarter growth was 2.5% and analysts are currently forecasting fourth-quarter growth of around 3.0%. While we do not expect this pace of economic acceleration to continue into 2012, we do think the data shows that the fears of a double-dip recession have largely passed.

Outlook Continues to Hinge on Europe

Notwithstanding last week’s market setback, conditions have improved noticeably over the last couple of months. In late summer, many were predicting that there was a greater-than-50% chance that the United States would sink back into recession, Europe was on the verge of falling apart and there were widespread fears of a hard economic landing in China. Today, it is growing more clear that not only has the United States avoided a recession, but it is actually showing signs of growth acceleration, Europe is showing signs of progress (although much more needs to be done) and China appears poised for a soft landing. As a result, equity markets in most parts of the world have appreciated by double-digit percentages since the height of these problems.

The question for investors, of course, is whether these sorts of gains will continue. We lean toward the optimistic side of this question, but recognize that it takes no small amount of faith to do so. We are hopeful that the economic momentum from the United States and elsewhere will remain a tailwind, but, as has been the case for months now, much hinges on the outcome of Europe’s debt problems.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 21, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Contagion, Debt Crisis, Debt Problems, Debt Situation, Deficit Reduction, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Earnings Reports, Economic Data, Financial Meltdown, Global Economic Slowdown, Global Financial Markets, Mario Monti, Nasdaq Composite, Positive Signs, Prime Ministers, Recession, Technocrats, Trillion
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The Economy and Bond Market Radar (November 21, 2011)

Saturday, November 19th, 2011

The Economy and Bond Market Radar (November 21, 2011)

Treasury yields ended the week mixed, with short-term yields rising modestly while long-term rates moved lower. Europe dominated the news again this week as market worries move from one country to the next, with the focus this week on Italy, France and Spain. The European concerns led to an exodus to the safest assets, including the U.S. dollar and Japanese yen which appreciated versus most currencies.

Negative headlines abound, but an interesting positive dynamic continues under the surface as U.S. economic data continues to be positive. This can be summed up in the chart below which depicts the Conference Board’s Leading Index. The index has resumed its uptrend, rising 0.9 percent in October, and is at the highest level in over a year. As a leading indicator, this bodes well for economic prospects over the next several months and confirms many of the positives that have come out of the recent third quarter earnings reports.

Strengths

• Weekly initial jobless claims fell again to 388,000, hitting a seven-month low, suggesting that hiring may be on the upswing.
• Industrial production rose 0.7 percent in October, ahead of the 0.4 percent expected. This was driven by a ramp up in auto related production.
• October retail sales rose 0.5 percent, possibly confirming the recent improvement in the job market.

Weaknesses

• The eurozone grew a very modest 0.2 percent in the third quarter and a recession appears almost a forgone conclusion.
• The European sovereign bond markets remain in turmoil as yields rose, and specifically yields on 10-year Italian and Spanish bonds approach seven percent.
• Chinese exports to Europe have taken a hit in October as manufacturing-centric Guangdong Province reported a year-over-year decline of 8.7 percent.

Opportunities

• After another good week of economic data, fourth quarter GDP estimates may begin to creep higher with a possibility of three percent growth.
• With the holiday-shortened week, data will be front-end loaded with durable goods orders, Federal Open Market Committee minutes and initial jobless claims key data points for next week.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately it is politically driven and difficult to predict outcomes and ramifications.

Tags: Bond Markets, Chinese Exports, Earnings Reports, Economic Prospects, European Concerns, Eurozone, Forgone Conclusion, Gdp Estimates, Guangdong Province, Initial Jobless Claims, Italy France, Japanese Yen, Leading Indicator, Market Pulse, Market Radar, Market Worries, Negative Headlines, Quarter Earnings, Quarter Gdp, Term Yields, Treasury Yields, Uptrend
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Crescendo? (Saut)

Tuesday, November 1st, 2011

Crescendo?

by Jeffrey Saut, Chief Investment Strategist, Raymond James

October 31, 2011

Webster’s defines the word “crescendo” as, “The peak of a gradual increase; or a climax.” And, that’s the climatic feeling I got last Thursday when the D-J Industrials (INDU/12231.11) sprinted some 340 points on the European euphoria to close above 12000 for the first time since August 2, 2011. Such action caused one old Wall Street wag to exclaim, “Buy on the cannons and sell on the trumpets!” Clearly we bought on the “cannons” back on October 4th when the indexes broke below their respective August 8th and 9th selling-climax lows. That “call” was driven by the belief the October 1978/1979 analogues would continue to play. Recall those late 1970s patterns saw the averages slightly undercut their “selling climax” lows before the bottoming process was complete. Accordingly, we termed this year’s October peek-a-boo “look” below the early August lows as an undercut low and advised participants to buy the index of their choice.

Gotcha’ Nouriel Roubini … Gotcha’ Harry Dent … Gotcha’ Robert Prechter, for while such pundits were contemplating the end of financial life as we know it, the S&P 500 (SPX/1285.09) looks to have posted its biggest monthly gain since October 1974 (~16%); and likely the tenth best month since 1928. Verily, from the October 4th intraday low (1074.77) into last Thursday’s intraday high (1292.66) the SPX has gained ~20.3% with many investment vehicles doing much better than that. The culprits for the massive move have been better than estimated economic reports (which have taken recession fears off of the table), a kiss and makeup from Merkel and Sarkozy, and great 3Q11 earnings reports. In fact, as of this morning, the 323 companies in the S&P 500 that have reported thus far have showed year-over-year earnings up 24.3% with revenues better by 12.8%. That’s a company earnings “beat rate” of 64.7% combined with a revenue “beat rate” of 63%. The result has left the SPX’s consensus 2012 earnings estimate nestled around $109, implying a forward P/E ratio of 11.7x. Given such metrics I’ll say it again, “To an underinvested portfolio manager (PM) the current news environment is a nightmare.” Yet surprisingly, the world remains profoundly underinvested in U.S. stocks.

Underinvested indeed, for as repeatedly stated, I could not find one European PM that had more than a 15% weighting in U.S. equities despite the fact their benchmark index has a ~43% weighting. Even here in this country most endowment funds have less than a 10% weighting in U.S. stocks. Ladies and gentlemen, there is no way an endowment fund can achieve its mandated return of 6% – 9% per year using 2.3%-yielding 10-year Treasuries. Manifestly, all we need is for PMs to realize this, and decide it’s time to reallocate money by switching out of fixed income and into equities, for the SPX to do better than most expect. To be sure, that’s what we expect, which should cause professional money to chase stocks higher driven by performance anxiety. Therefore, we continue to favor the strategy of buying “dips.”

That said, the upside skein has left the markets overbought in the short-term with 93.6% of the SPX’s stocks above their 50-day moving averages (DMAs). Back at the market lows that figure was only 4%. Additionally, the McClellan Oscillator remains about as overbought as it ever gets. Moreover, the “buying stampede” now stands at session 19. Readers of these missives know such stampedes tend to run 17 – 25 sessions, with only one- to three-session pauses and/or pullbacks, before they exhaust themselves on the upside. Therefore, with the major averages up against overhead resistance levels, as well as trading around their 200-DMAs, it would not be surprising to see a longer pause (or pullback) than the one- to three-session pattern we have been experiencing since the 10/4/11 lows. To us, the real question is – will the SPX get a pullback to the often mentioned pivot point of 1217, or will any pullback be short and shallow? Well, by our work the equity markets still have a lot of internal energy to power their way higher, so our sense is the SPX will keep pushing higher in the months ahead with only shallow pullbacks and sideways pauses along the way.

If that strategy proves correct, the question then becomes what to buy. In addition to the names so often mentioned in these reports, we turn to the invaluable Bespoke Investment organization and their “triple play” screen for a “shopping list.” Bespoke defines “triple plays” as, “Companies that have recently beaten their earnings estimates, beaten revenue estimates, and have raised forward earning guidance. Typically less than 5% of companies reporting during any given earnings season will report triple plays, which makes them extremely rare.” Names in that group, which have recently reported such metrics and are followed by Raymond James’ fundamental analysts with a favorable rating, include: Abbott Labs (ABT/$54.22/Outperform); Advanced Micro (AMD/$5.94/Outperform); Chubb Corporation (CB/$68.62/Outperform); Citrix Systems (CTXS/$73.37/Outperform); Extra Space Storage (EXR/$22.82/Outperform); Intel (INTC/$24.98/Outperform); McKesson (MCK/$84.41/Outperform); Panera Bread (PNRA/$133.96/Outperform); Select Comfort (SCSS/$20.53/Strong Buy); Tractor Supply (TSCO/$71.19/Strong Buy); and Vocus (VOCS/$20.27/Strong Buy). To further refine this list, we used our proprietary trading algorithms and found these names to be potentially the timeliest: ABT, CB, EXR, INTC, PNRA, SCSS, and TSCO.

As for the plethora of emails I received about, “Did we finally get a Dow Theory “buy signal?” It does appear that a “buy signal” has been registered with both the D-J Industrials and the D-J Transports rising above their respective recent reaction highs, as can be seen in the chart on page 3. That upside breakout came after both indices made new closing reaction lows on October 3, 2011; hence, the “buy signal” seems valid. This means the Dow Theory “sell signal” of August 4, 2011 should prove to be a false signal, as we have repeatedly opined for nearly two months. Of course, the longest keeper of Dow Theory, namely Richard Russell, has stated that there never was a sell-signal since he is using the July 2010 reaction lows of 9686.48 and 3906.23 to get a sell-signal, while I used this year’s closing lows of March 16th. If one follows Richard’s method it implies that he probably didn’t get a Dow Theory “buy signal” either since he likely would need both averages to travel above their respective 2011 reaction highs of 12810.54 and 5618.25. Recall, it was an upside non-confirmation from the Industrials, which failed to confirm the Tranny’s new all-time high of July 7, 2011 at 5618.25, that lead to the ensuing ~17% decline for the senior index. Let’s hope it doesn’t play that way again.

The call for this week: I will be traveling again this week, both in the country and out of the country, so these will be the only strategy comments until next Monday. If past is prelude, something dynamic should occur within the markets during my travels. My guess is that it will be some sort of trading top given all the aforementioned metrics. However, despite the near-term overbought condition, the stock market has staged a strong upside breakout above the now two-month trading range, as well as above the Dow’s 200-DMA (11973.09). This is remarkably similar to what happened in the October 1978 and October 1979 analogues. The upside skein from the October 4th lows has also been accompanied by four 90% Upside Days and two consecutive 80% Upside Days. The breakout has been confirmed by the advance in the Cumulative Net Points and the Cumulative Net Volume indexes suggesting the rally is sustainable. Given this, we continue to favor the strategy of buying “dips” rather than selling strength.

Click here to enlarge

Copyright © Raymond James

Tags: Analogues, Cannons, Chief Investment Strategist, Company Earnings, Crescendo, Culprits, Early August, Earnings Reports, Economic Reports, Harry Dent, Indu, Investment Vehicles, jeffrey saut, Last Thursday, Massive Move, Raymond James, Recession Fears, Roubini, Spx, Verily
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U.S. Equity Market Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Wall St. looking east from Nassau St., c. 1911 – click image to enlarge

U.S. Equity Market Cheat Sheet (October 24, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 1.12 percent. Eight sectors increased and two decreased. The best-performing sector for the week was financials which increased 3.92 percent. Other top-three sectors were energy and utilities. Technology was the worst performer, down 2.15 percent. Other bottom-three performers were materials and telecommunication services.

Within the financials sector the best-performing stock was State Street Corp., up 14.40 percent. Other top-five performers were Travelers Co., Morgan Stanley, ACE Ltd. and AON Corp.

The financial sector has been the best performer over the past month as investors appear to be looking past a potential financial crisis in Europe. The U.S. Global domestic equity funds have been significantly underweight financials and this has hampered performance in recent weeks. We believe government policy is a precursor to change and until there is true clarity on what steps governments will take to resolve the current situation in Europe, we will follow our models and largely stay on the sidelines.

At U.S. Global Investors we employ a “GARP” (growth at a reasonable price) approach to investing. At a very basic level, we look for companies growing revenues by at least 10 percent and generating high returns on capital. We use this model to initially select investments and to monitor existing positions to determine whether or not they still conform to the model. So far this earnings season, with one exception, holdings have continued to meet the model based on the new third quarter earnings reports with many posting revenue gains well in excess of 10 percent. The one exception was a health care stock which was subsequently sold.

Strengths

• The consumer electronics group was the best-performing group for the week, gaining 15 percent on strength in its single member, Harman International Industries Inc. The firm reported quarterly earnings which handily exceeded the analysts’ consensus estimate.
• The oil & gas storage & transportation group outperformed, up 14 percent on strength in member El Paso Corp. The pipeline company rose approximately 25 percent after Kinder Morgan agreed to buy El Paso in a cash and stock deal valued at $21.1 billion.
• The homebuilding group gained 9 percent. On Wednesday the Commerce Department announced that U.S. housing starts in September increased 15 percent from August levels to 658,000 starts at an annual rate, above the consensus expectation of 590,000 starts. This was the highest annual rate since April 2010.

Weaknesses

• The casinos & gaming group was the worst-performer, down 7 percent on weakness in member Wynn Resorts Ltd. The firm reported quarterly revenue and earnings below the consensus estimate. Strength in the firm’s Asian operations was offset by weakness in its Las Vegas operations where net casino revenue was down 8.3 percent year-over-year.
• The computer hardware group underperformed, falling 6 percent, led down by the group’s largest member, Apple. The firm reported quarterly revenue and earnings below the consensus estimates. The shortfall was due largely to consumers postponing purchases of the iPhone in September in anticipation of a new model expected to be introduced in October. ExxonMobile has now regained its position as the largest company by market capitalization with Apple’s fall this week.
• The gold group gave up 6 percent, led down by its single member, Newmont Mining Corp. The price of gold declined for the week.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
• We are right in the midst of earnings season and many bellwether companies are reporting next week including Caterpillar, Dupont and ExxonMobil.

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: Ace Ltd, Aon Corp, Cheat Sheet, Consumer Electronics Group, Domestic Equity Funds, Domestic Stock Market, Earnings Reports, Earnings Season, Financial Sector, Gold, Government Policy, Harman, Harman International, Harman International Industries, Harman International Industries Inc, Morgan Stanley, Nassau St, October 24, Performing Group, Precursor, Quarter Earnings, Sidelines, State Street Corp, Telecommunication Services, U S Global Investors
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