Tech Talk for Thursday May 15th 2008

 

Pre-opening Comments for Thursday May 15th

 

9:15 AM EDT: U.S. equity index futures are slightly higher before the opening. Dow Jones Industrial Average futures advanced 24 points. Economic news released this morning had a neutral impact on futures. Consensus for the Empire State Index was 1.0 versus 0.6. Actual was -3.2.

 

Equity markets are waiting for a series of economic news events expected to be released at 9:15 AM and 10:00 AM.  In addition, Federal Reserve chairman Ben Bernanke is scheduled to discuss risk management and bank organizations in a speech starting at 9:30 AM EDT.

 

U.S. equity market futures were helped by better than expected first quarter earning by JC Penney. Consensus was $0.49 versus $1.04 per share. Actual was $0.54 per share. JC Penney has a mixed technical profile. Intermediate trend is neutral. Short term momentum indicators are neutral. The stock has been neutral relative to the S&P 500 Index during the past four months.

 

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

General Electric is higher this morning on news that T. Boone Pickens has ordered $2 billion of wind mill energy equipment from the company. General Electric currently has a negative technical profile. Intermediate trend is down. The stock trades below its 50 and 200 day moving average. However, the stock appears to be trying to form a base building pattern following is negative first quarter earnings surprise. A tight trading range between $31.50 and $33.60 has developed during the past month.

Chart courtesy of StockCharts.com                        www.stockcharts.cm

 

First Service is expected to open lower following a significantly lower than expected first quarter earnings report. Consensus was a profit of $0.06. Actual was a loss of $0.34 per share. Traders probably had a hint about the report just before the close yesterday when the stock fell sharply.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

Technical Action Yesterday

 

Technical action by S&P 500 stocks remains bullish. Another eight S&P 500 stocks broke resistance. Two stocks broke support. Defense stocks were notable on the list of stocks breaking resistance.

 

 

S&P 500 stocks breaking resistance

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Air Products                 APD                Up                   Up

Boeing                          BA                   Down               Neutral

Brown Foreman           BF.B                Up                   Up

Cooper Industries         CBE                 Down               Neutral

DTE Energy                 DTE                 Down               Up

EMC                            EMC                Down               Up

Lockheed                     LMT                Down               Up

Texas Instruments         TXN                Down               Up

 

S&P 500 stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

St. Jude Medical           STJ                  Up                   Neutral

Whole Foods               WFMI             Up                   Down

 

Technical action by TSX Composite stocks was quietly bearish. No TSX stocks broke resistance and four stocks broke support. Mining stocks were prominent on the list of stocks breaking support.

 

TSX stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

AGF                            AGF.B             Up                   Neutral

Anvil Mining                 AVM               Up                   Neutral

European Goldfields     EGU                Up                   Down

Inmet                            IMN                Up                   Neutral

 

 

 

Pre-opening Comments for Wednesday May 14th

(Charts have been updated to yesterday’s close)

 

9:15 AM EDT: U.S. equity index futures are higher this morning following release of a better than expected April Consumer Price report. Dow Jones Industrial Average futures added 45 points. Consensus for CPI was an increase of 0.3%. Actual was up 0.2%. Consensus for core CPI was an increase of 0.2%. Actual was up 0.1%.

 

Canada’s banks have started to pre-release negative surprises prior to releasing fiscal second quarter earnings at the end of this month. Royal Bank announced a surprise $855 million provision that will be included in second quarter results for the period ended April 30th. Other Canadian banks likely will take similar moves. Royal Bank is expected to open lower. Weakness could spill into other bank stocks. Royal Bank currently has a negative technical profile. Intermediate trend is down. The stock trades below its 200 day moving average. Strength relative to the TSX Composite has been negative during the past 14 months. Short term momentum indicators (RSI, MACD and Stochastics) are overbought and rolling over. A MACD sell signal could occur as early as today.

Chart courtesy of StockCharts.com                          www.stockcharts.com

 

Update: Tech Talk wasn’t sure whether to laugh or to cry! RY shares moved higher after analyst comments that the write down was less than expected. The only problem with that statement was that only Citigroup’s analyst had previously suggested publicly that RY likely would have a large write down in the quarter. Strength yesterday does not change the negative intermediate technical picture for RY or the financial service sector. In addition, more negative surprises by the sector, that have yet to be predicted publicly by analysts are likely to occur between now and the end of the month when fiscal second quarter earnings are scheduled to be released.

 

Freddie Mac is trading higher in overnight trading following release of a lower than expected loss in the first quarter. Consensus was a loss of $0.91 versus a loss of $0.46 per share. Actual loss was $0.66 per share.

 

Deere is trading lower in overnight trading following release of fiscal second quarter results. Earnings were slightly higher than consensus, but the company offered negative guidance. On the charts, Deere has found resistance at its all time high at $95. Short term momentum indicators are rolling over.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

The price of zinc has moved sharply higher this morning on news that China has closed three zinc refineries until earthquake related difficulties are resolved. Zinc stock prices are expected to respond.

 

 

Consensus Second Quarter 2008 Earnings Estimate for TSX 60 Companies

 

Earnings estimates for TSX 60 Companies have declined slightly since our last survey on March 20th. Estimates have been increased for eleven companies and decreased for 13 companies. Average (median) gain is 4.9%. However, given the recent gain in commodity prices, estimates likely are low. Following is a summary:

 

Company        Quarter           Second Quarter          Consensus Second Change

                                                Earnings Reported     Quarter 2008  EPS  Since March 20

                                                In 2007                                                           

Ace Aviation    2                      N/A                               N/A

Agnico Eagle    2                      $0.27*                         $0.21*                         0.01

Agrium             2                        1.70*                           2.46*                         0.12

BMO               3                        1.28                             1.25

ScotiaBank       3                        1.02                             1.07

Barrick Gold    2                        0.54*                           0.56*                         (0.08)

BCE                 2                         0.56                            0.56

Biovail              2                         0.42*                          0.37*                         (0.02)

Bombardier      2                        N/A                             0.10*

Brookfield        2                         0.24*                          0.25*

Cameco           2                         0.55                            0.47                           (0.06)

Cdn. Imp.Bk.   3                         2.31                            1.68

Cdn.National    2                         0.95*                          0.98*

Cdn.Natural     2                        0.97                            1.16

Cdn.Oil Sands  2                         0.40                            0.82                           0.22

Cdn Pacific       2                         1.12                            1.18                           (0.04)

Cdn. Tire A      2                         1.35                            1.30

Enbridge           2                         0.36                            0.38

Encana             2                         1.80*                          1.50*                         0.33

Enerplus           2                         0.31                            0.86

First Quantum   2                         1.97                            3.84

Fording Coal    2                         0.87                             0.61

Gildan              3                          0.47                            0.44                         (0.21)

Goldcorp          2                          0.14*                          0.23*                        0.01

Husky Energy   2                          0.81                            1.08                          0.17

Imperial Oil      2                          0.76                            1.07                          0.19

Inmet                2                          2.62                            2.21                          (0.04)

Kinross            2                          0.09*                          0.12*

Loblaw             2                          0.60                            0.51

Lundin Min       2                          0.56                            0.21

Magna A          2                          2.56*                          2.05*                        (0.10)

ManuLife          2                           0.71                            0.73

MDS                3                           0.14*                          0.13*

National Bk.     3                           1.48                            1.40

Nexen              2                           0.69                            1.03

Nortel              2                           0.05*                         (0.02)*                      (0.11)

Nova Chem      2                           1.07*                           0.95*                      (0.08)

Penn West        2                           0.59*                           N/A

Petro-Can        2                           1.63                             2.01                        0.50

Potash Corp.    2                           0.88*                           2.38*                      0.32

Research in M  2                           0.39*                           0.85*                      0.13

Rogers Com.    2                           N/A                                         0.52

Royal Bank      3                           1.06                             1.04

SNC Lavalin    2                           0.27                             0.43

Shaw Com.      3                           0.20                             0.27

Shoppers**      2                           0.52                             0.60                        (0.01)

Sun Life            2                           1.04                             1.02

Suncor             2                           N/A                                         1.55

Talisman           2                           0.27                             0.49

Teck B             2                           1.01                             0.86

Telus                2                           0.77                             0.82

Thomson          2                           0.39*                           0.45*                      (0.07)

Tim Horton       2                           0.36                             0.40

TD Bank          3                           1.60                             1.50

TransAlta         2                         0.21                              0.26                        (0.01)

TransCdaPipe  2                         0.48                               0.53                        0.03

Uranium One    2                        (0.04)                              0.01

Weston            2                         1.24                               1.02

Yellow Pages   2                         0.24                               N/A

Yamana            2                         0.22*                             0.19*

        NA: Not available

*U.S. Dollars

      ** Median

Data sources: www.globeinvestor.com

 

Consensus Third Quarter 2008 Earnings Estimate for TSX 60 Companies

 

Data for third quarter earnings estimates remains sparse. Consensus is available for 45 of the TSX 60 companies. Average (median) gain based on available data is 16.7%.

 

Following are consensus estimates for the S&P/TSX 60 companies for the third quarter of 2008 relative to the same quarter last year:

 

Company        Quarter           Third Quarter Consensus Third

                                                Earnings Reported     Quarter 2008  EPS

                                                In 2007                        Estimate

Ace Aviation    3                      N/A                             N/A

Agnico Eagle    3                      0.27*                           0.25*

Agrium             3                      0.48*                           1.21*

BMO               4                      1.42                             N/A

ScotiaBank       4                      0.95                             N/A

Barrick Gold    3                      0.39*                           0.59*

BCE                 3                      N/A                             0.56

Biovail              3                      0.42*                           0.28*

Bombardier      3                      0.05*                           N/A

Brookfield        3                      0.25*                           N/A

Cameco           3                      0.74                             N/A

Cdn. Imp.Bk.   4                      2.28                             N/A

Cdn.National    3                      0.96*                           1.02*

Cdn.Natural     3                      1.10                             1.27

Cdn.Oil Sands  3                      0.75                             0.81

Cdn Pacific       3                      1.23                             1.31    

Cdn. Tire A      3                      1.30                             1.39

Enbridge           3                      0.22                             0.28

Encana             3                      1.27*                           1.44*

Enerplus           3                      0.72                             0.83

First Quantum   3                      2.79                             N/A

Fording Coal    3                      0.56                             3.76

Gilden              4                      0.38                             0.50

Goldcorp          3                      0.12*                           0.27*

Husky Energy   3                      0.91                             1.06

Imperial Oil      3                      0.88                             0.94

Inmet                3                      2.38                             2.56

Kinross            3                      0.07*                           0.19*

Loblaw             3                      0.56                             0.58

Lundin Min       3                      0.28*                           N/A

Magna A          3                      1.38*                           1.52*

ManuLife          3                      0.70                             0.76

MDS                3                      0.09*                           N/A

National Bk.     4                      1.34                             N/A

Nexen              3                      0.75                             1.02

Nortel              3                      0.08*                           0.21*

Nova Chem      3                      1.16*                           0.77*

Penn West        3                      0.57*                           N/A

Petro-Can        3                      1.29                             1.82

Potash Corp.    3                      0.77*                           2.89*

Research in M  3                      0.50*                           0.90*

Rogers Com.    3                      N/A                             0.45

Royal Bank      4                      1.01                             N/A

SNC Lavalin    3                      0.41                             0.46

Shaw Com.      4                      0.23                             0.28

Shoppers**     3                      0.66                             0.77

Sun Life            3                      1.00                             1.06

Suncor             3                      1.27                             2.01

Talisman           3                      0.27                             0.50

Teck B             3                      1.27                             1.61

Telus                3                      0.94                             0.96

Thomson          3                      0.48*                           0.43

Tim Horton       3                      0.36                             0.42

TD Bank          4                      1.40                             N/A

TransAlta         3                      0.33                             0.42

TransCdaPipe  3                      0.57                             0.57

Uranium One    3                      (0.04)                           N/A

Weston            3                      1.03                             1.26

Yellow Pages   3                      N/A                             N/A

Yamana            3                      0.20*                           N/A

        NA: Not available

*U.S. Dollars

      ** Median

Data source: www.globeinvestor.com. 

 

Interesting Charts

 

The S&P 500 Index and NASDAQ Composite Index are testing their 200 day moving average. Given that short term momentum indictors for both indices are overbought, short term resistance would not be unusual. The Dow Jones Industrial Average recently found short term resistance at that level. 

 

Chart courtesy of StockCharts.com                         www.stockcharts.com

Chart courtesy of StockCharts.com                        www.stockcharts.com

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

 

 

 

 

 

 

 

THE CASTLEMOORE “CLASS” PORTFOLIO

 

What does CastleMoore think its typical Canadian investors should be invested in NOW?

 

Class Investor - Moderate Risk

Cash Equivalents:

 

13.0%

Canadian Equity Index:
Canadian Long-term bonds
Gold Bullion

 

62.0%
 0.0%
 0.0%

Non-Canadian Indices:

 

25.0%

United States (hedged)

United States (unhedged)
US Treasury Bonds

Foreign Equities

18.0%

 7.0%
 0.0%

 0.0%

 

TOTAL

 

100%

 

 

If you consider yourself a sophisticated investor, read on. Otherwise, we’ll see you next week.

 

In this column, we generally discuss the two types of accounts most of our clients have managed by us: the Class Portfolio, depicted above, and the Focus Portfolio, which is displayed every other week, alternating with the Class.

 

We also manage a type of account we call the “Two-way” account, so named because, as money managers, we have the prerogative of investing in the type of investments usually invested in by sophisticated investors: investments that profit when the stock market falls.

 

One of the vehicles we use in crafting some 2-way accounts account is the short sale. This is where you sell a security first, and then buy in back at (hopefully) a lower price in the future. Of course, being a sophisticated investor, you knew this already.

 

Short sales are often thought of as being riskier than long purchases since they have unlimited loss potential, but we’d like to demonstrate a few instances, when short sales can actually help achieve an investors goals without taking on additional risk.

 

1)       You have a huge, unrealized gain on a particular energy stock, but now you feel that the sector in overextended and is likely to fall. You don’t want to sell your position because in doing so, you create for yourself a large tax liability. So you can sell short another energy company, or the energy ETF (XEG). If the energy sector then continues to rise, you gain on the long position, but now you have a capital loss on your short position to offset the additional gain. But if you’re right and the energy sector goes down, you have a capital gain on your short position, which is likely to be much smaller than the gain you would have had had you sold your original position.

2)       You have exposure to the stock market though deferred sales charge mutual funds. Now you’d like to “get out of the market”, but, in addition to the tax liability you might face, as described above, you might also get hit with a significant sales charge, maybe 5% of the value (Although often you will have the option of switching funds without DCS, but you’d still pay the tax if you don’t own a corporate class structure). Instead, you can short the market portfolio EFT, the XIU for instance. As time goes by, you have the right to redeem a certain dollar amount of your fund without DSC. You would simultaneously unwind an offsetting amount of your short position.

3)       You like the US market but not the US dollar. Or, you live in Canada but much of your business revenue comes from the US. The rise in the Canadian dollar versus its US counterpart caused grief to many, us included. Hedging the US dollar where possible, would have prevented much of this.

4)       You’d like to increase your exposure to certain individual stocks you feel will outperform the general market, but you’re already 100% invested. You can short  the XIU, say an amount equal to 30% of your portfolio, and use the cash generated by the sale you buy additional shares of the stocks you expect to outperform (this is called a 130-30 strategy, and incurs the risk that your expected outperformers might, in fact underperform, though your overall market exposure would not have changed).

5)       You buy a broad market EFT such as the XIU in order to have a diversified portfolio, but you are not comfortable with the fact  that about 30% of the EFT is invested in banks; you be happier with, say, half of that, or 15%. So you can sell short the bank ETF, or XFN, a dollar value of 15% of the value of the diversified portfolio (this is obviously illustrative; the XFN has small positions in non-back financial companies).

 

The short sale is one strategy among many available to sophisticated investors, and can be used in many more ways than what we have illustrated. It is one of the reasons hedge products, particularly funds, have increased enormously in popularity over the last decade or so. But they are not for everyone.

If you like to receive our soon-to-be “hot of the press” (this week)  bi-monthly newsletter, know more about our model portfolios or access an audio file of our investment philosophy, “Modern Financial Fiascos”, click on the link http://www.formdesk.com/castlemoore/register . We are also accepting interest for seminar attendance as well

 

CastleMoore Inc. uses a proprietary Risk/Reward Matrix that places clients within one of 12 discretionary portfolios based on risk tolerance, investment objectives, income, net worth and past investing experience.  For more information on our discipline and methodology please contact us.

  CastleMoore Inc.

  Buy, Hold…and Know When to Sell    

 

www.castlemoore.com

 

Disclosure: Mr. Vialoux does not own securities mentioned in this report.

Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.