Bloomberg Quote of the Day: “I can’t complain, but sometimes I still do.” – Joe Walsh (The Eagles)…complain?…have you ever heard TB COMPLAIN?
…yesterday was the day of the fundamentalist (investment analyst that is), so today let’s hear it for the techies…which have been much more sensible then those who barter in fundamental valuation measures lately.
Today’s Topics:
1. Fourth failure to break out for stocks…sans Energy
2. A tale of three banks…the good, the not so good, and the ugly
1. Technicals. TB has made much of the three rally failures and how he expected the fourth to fail…and it did yesterday. Let’s see what went wrong…besides assumptions that the worst is behind us. Think of a major earthquake that continues to have massive aftershocks…that is the rosy scenario…or worse, a secondary quake as TB experienced in the 1971 L.A. quake…and that one was under his apartment!
*Volume NEVER has confirmed the rally which has been in place since March 10 as indicated by a new low close on the Dow (but not a new low), and the S&P 500 which then suffered a cycle low on March 17 with the close just 3 points above the 3/10 close. The average volume of the past six months is 1.59 billion shares…fairly typical. From 12/26 to 3/10, from the start of the rare yearend selloff to just before the fourth attempt began average volume was 1.67B shares, and from 3/10 to 3/24 it jumped to 1.9B shares ranging from 1.56B to 2.77B shares…but from 3/24 thru yesterday it averaged just 1.35B shares with the highest being 1.7B…the day of the April Fool’s rally, and a 2008 low of 1.12B shares on 4/21!
That folks, is a rally without conviction!
*The ratio of new 52 week highs to lows has turned positive just four times this year…coinciding with the end of each rally…none were significantly positive and lasted 1-2 days…except this one that had three ending on Monday…looks like a pretty good indicator of peaks and suggest we are in a bear market!
*Advance/Declines and Breadth have shown ratios of 3, 4, 5, or even higher negatives on selloff but hardly ever get above 2x positive on rallies…the Breadth being the higher of the two due to large stocks and options strangles…remember GE’s earnings when it’s volume was 25% of the NYSE volume?
*Volatility…this has been the toughest due to options hedging by the major spec accounts. They trade the ranges while buying out of the money puts and calls for insurance thus lowering the ratio of puts to calls and making things look better…above 30% is a negative on the VXN (NDQ 100) and 25 on the VIX (S&P 500)…both moved up yesterday but remain below these levels: 24.54 and 20.87 respectively but that is a false reading…as indicated by Friday’s options expiry volume of just 1.48B shares, very low.
*Moving averages…the 40 day m/a has proven formidable resistance and as in the other three rallies when we get above it there is a failure within 2-3 days wiping out all of the prior gains. In a bull market the 40 day provides support…bear market it is resistance…hence four countertrend rallies! Also, many stocks are below their 200 day which is below the 40 day and in itself a negative.
*Long term trendlines…going back to 2003 when the rally began…most stocks have broken their long term trend lines or are 2 or more standard deviations below the mean…interesting to chart.
*Inside/Outside/Reversal days…where are the reversal days (higher high, lower low and close above or below the high/low of the previous session)? Inside days (lower high, higher low) are indicative of a lack of conviction on the trend, while outside days (higher high, lower low, close within prior day’s range) have been rare and have disappointed a day or two later…most have been to the upside too.
*Breakouts…we have had a series of lower highs and higher lows confirming the downward trend since October which was a secondary top having surpassed July (to that point we had had higher highs and just one lower low on 8/16/07. But since October and more importantly since 12/26 when we had that rare seasonal selloff ahead of yearend, the rally of last week only managed to take out the triple tops created in the three prior rallies by inches…and then gave it all back yesterday…that is truly weak!
*Movers…the movers for the most part have been the same stocks…you know who they are: XOM, AAPL, RIMM, GOOG, SLB…and a few others. The entire 700 plus member AMEX Composite is driven by just two stocks…BTI and IMO…the rest barely move…is this sane?
To those of you who think TB is losing his memory since he wrote similar to this last Tuesday, it is restated because of the failure of the fourth attempt to breakout…actually a false breakout due to taking out the triple tops mentioned above. Note also the return of the four horsemen on Monday, only to see most of them slammed yesterday…Google being the only survivor which despite the rally on strong earnings is still down 26% from the 11/7/07 high and 10 points below the 200 day m/a (the 40 day had provided support after bottoming at 412 on 3/17 until the gap up of 88 points (19%) on 4/18. While that 19% sounds impressive it is rare while the number of stocks who have fallen more than 10% on weaker than expected earnings of forecasts has been not uncommon.
2. BANKS TB has only liked one bank (USB) enough to put his money where his mouth is (aside from a small disappointing adventure in PBKS). US Bancorp has a dividend yield of 5.1% and is not in need of raising capital nor is it cutting the dividend and has a 15% 5 yr growth rate of dividends. It sells at 13x earnings and has a P/E to growth rate of 1.57x which, while not cheap is only slightly overvalued which can be explained by money managers looking for good banks like PNC (which has a similar dividend) and have raised them this year…USB is -2.3% over the past 12 months PNC -8.7% with like p/e’s.
Now let’s look at three small banks…the reason being that it is small banks that stand the biggest chance of failure in this environment. Since 12/26 the Nasdaq Banks Index, iShares Regional Banks ETF (RKH) and KBW Bank Index are all off 10-11% (USB is up 2.6% and PNC +0.4%…5.4% and 2.5% respectively with dividends reinvested):
*Hudson City Bancorp (HCBK) which has been the darling of Jim Cramer and just reported stellar earnings yesterday is up 20.2% since 12/26…but the dividend is a paltry 2.4% reinvestment (but a 23.5% growth rate over 5 years) only gets you 20.9%. Now look at this: p/e is 29x trailing and 22.3x estimated earnings and the stock is up 38% over the past 12 months. Growth rate of earnings is 14% over the past five years and the peg is 1.55x. This stock looks expensive and begging to be bought out. Question: how can they outperform the industry so much? Market cap is just $9.5B. Their earnings announcement yesterday was mainly “we don’t do subprime or option ARMS.” Dandy…but how else did they do it? The point is that this bank is priced for a buyout…with capital at 24.1%…bet on it?
*Westamerica Bancorp (WABC) is a conservative Northern California bank that also does not do subprime loans…over the past 12 months it is up 24.7% (20.7% since 12/26). It too has a paltry dividend yield of 2.4%…has not raised its dividend in 5 quarters and has a dividend growth rate over 5 years of 8.1%…this bank has frequently rumored to be available for sale but that does not appear to be the case. Market cap is just 1.64B and the p/e is 19x trailing 18.2x estimated with a long term growth rate of just 5.1% and a hugely overpriced p/e to growth rate of 3.6x! Note that while the Beta (performance relative to the S&P 500 for the three stocks mentioned is .85 and thus defensive, but for WABC it is 1.2x which means it is susceptible to a weakening economy…as California definitely has!
*Provident Bankshares (PBKS)…a painful topic for TB…not only had the stock been dropping almost uninterrupted like a stone since 10/15/07 (-63%). It rallied in January contrary to the stock market but since that brief interlude ending 2/1 it is off 43% since then. So why did TB like and buy it? Because it had a dividend yield of almost 12% was in Maryland and surrounding states and also sold insurance…so after a miserable year it seem…would seem…to have all bad news built in. But after TB bought it along came an announcement of a big write-down…not in subprime but REITS! OK, TB could live with that due to market conditions but it must get better…well it didn’t. Furthermore that nice dividend …which, by the way had been raised by 1/2 cent each and every quarter since at least 1998 was cut by 60%!…and that was enough to make TB bail…oddly the stock rallied on the news…why? Because there was a huge short position that then covered! Still TB is glad to be out…Beta is 1.7x, P/E is 13.1x trailing and 35.6x estimated!!! LT Growth is 7.3% so the PEG is 4.85x…and that folks is to the moon! TB would not touch this stock with a 10 foot pole! See…he can be wrong…dead wrong!
I hope the above was interesting and illustrative of the problems we face…financials seem to be either overpriced or total dogs with a few pleasant surprises like USB (not to be confused with UBS…or any other brokers for that matter), and PNC. TB would not touch a Citi, BofA, or even a Wells as the problems will just keep coming…same for Wachovia with those option arms they got with Golden West. TB is not even advocating buying any financials unless you are a very big player and plan to scale in. As for brokers their condition has just enough transparency to make them opaque…and due to accounting gimmickry who knows what you are buying?…they certainly don’t!
AMBAC just reported and that is dismal…had an operating loss of $6.93 a share…on a stock that close at $5.94 yesterday!…and this group is insuring muni bonds???…thank you PaineWebber…not really but you get the point…insuring all those subprime derivatives just got very expensive…for shame!
EMC too disappointed…sure storage is crucial but they had delays due to financial services weakness. They beat on earnings, missed on revenues…says emerging markets are promising, “absolutely” has no plans to sell more VMWare stock (which rallied on the news), and “must :take more share than normal to make numbers”: EMC $15.59 -.30; VMW $58.02 +$1.95…such is life…TB owns EMC.
That’s enough humor for today…
Have a good day…and TB don’t hear no fat lady singing…. TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 23, 2008
