Tuesday, July 31, 2007

The End Of A Wild July

"Perhaps the secret to effective action lies in how you interpret the length of the "day" in Carpe Diem. If it's a moment, or a day, you're cutting down the odds for success. But if you recognize that in business as in sports (or any of life, for that matter), there's a "season" made up of several opportunities, those odds go up considerably.

The most successful business people are those who realize that they are going to take some hits in the process of searching out the big scores - those who know that performance over the long haul is what counts. If you can seize the day, great. But never forget there are days yet to come."

Bill Walsh, "Carpe Diem - Or the Diem After That," Forbes, October 25,1993

Great words spoken by a great man and a great teacher. So many of the coaching concepts Bill Walsh covers in his book Finding The Winning Edge are so easily applied to business, trading, and life as a whole. It is natural to feel sad when someone who has made an impact on your life and thoughts passes away. The right thing to do is not to morn, but to celebrate their life and how they lived it. Thanks Bill, not only your contributions to football but thank you for being the great Teacher and communicator for all that you experienced and learned on your journey. You left the world a better place than when you found it.


Below is a chart of the S&P 500. The top pane is the Advance/Decline Moving average showing the strength of the sell off last week. The strong selling last week is not something that will be overcome in a few days, no matter what the potentates on television say. The index is close to an important level (1476.76) established from the opening range created in the first week of January 2007. If the market can get above this level, it can make an attempt to get back to the 1500.43 level; a big "IF" right now. This area should prove to be resistance.

The next chart shows the intra-day 5minute chart of the S&P 500 Futures from Friday and Monday. The data from Monday's opening range is marked with two black lines. The width of this range gave us the expected swing size for the day. The series of green lines show these levels and how they acted as targets and support when reached. Monday was a series of short squeezes as the low from Friday could not be taken out, the bottom red rectangle. The two green boxes show prices holding the bottom of the opening range, and then breaking above to start the short cover rally.

An interesting Bloomberg article covered Pimco's Corporate Opportunity Fund(PTY). This fund pays a 9.4% dividend and is probably viewed as extremely risky except for the fact that Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., invested $1.5 million in the fund after the shares fell to the lowest since its inception five years ago.

Below is the chart showing how far this fund has fallen and where the buys by Mr.Gross occurred. He is a very smart guy, might buy a little early, but well worth following, especially with a nice dividend cushion. Bill Gross bought 4,900 shares in the Pimco Corporate Opportunity Fund at $13.80, 50,000 shares at $13.85 and another 50,000 at $13.90 on July 25, according to a filing with the Securities and Exchange Commission.

PIMCO Corporate Opportunity Fund operates as a diversified, closed-end management investment company. It invests primarily in the United States dollar-denominated corporate debt obligations of varying maturities and other corporate income-producing securities. The fund's investment portfolio primarily consists of investments in airlines, apparel and textiles, automotive, banking, chemicals, computer services, diversified manufacturing, electronics, energy, financial services, financing, food services, healthcare, hotels/gaming, insurance, multi-media, oil and gas, paper products, retail, telecommunications, transportation, and utilities sectors.


Bill Walsh Interview - Starts at around the 20min mark, so you have to fast forward some.

Monday, July 30, 2007

Energy Companies Paying Dividends

Previous articles compared the overall market to baskets of specific types of stocks. One such basket was multinational large-cap stocks which benefit from a falling dollar and a strong global economy. The second basket of stocks that was created was made up of regional bank stocks paying a dividend greater than 4 percent. This group has been extremely weak lately, due to potential bad mortgage exposure and a slowing housing market.

The chart below compares a basket of energy stocks paying dividends greater than 5 percent to the S&P 500 Index. The red line in the middle pane represents this basket of stocks. The performance mapped out in the chart does not take into account the dividends paid out to shareholders.

The lower pane in the chart shows the spread ratio, energy dividend stocks divided by the S&P 500. There isn't a lot of information in the spread ratio, because almost all energy stocks have outperformed since the beginning of the year. However, the chart below shows the ratio between this basket of stocks and that of the Oil Service ETF - OIH.

This chart clearly shows that these companies, that pay strong dividends, outperform other oil related stocks when there is profit taking in the overall energy sector. In essence, the dividends paid cushion the blow and shows that the intentions of investors who purchased these types of energy stocks were looking for income along with price appreciation. This income from dividends helps provide a silver lining and gives investors greater holding power. Below is a similar chart comparing these stocks to the price of light sweet crude.

This chart shows that these companies really outperformed,green vs red trend-lines, when the price of oil was declining in the second half of 2006. These stocks could again start to outperform if the price of oil starts to consolidate. If crude continues to go higher, these stocks should participate in price along with paying a dividend. Below are a few charts showing the recent price performance of the 15 companies used to make up this basket.

Stocks like these are not a replacement for every stock in a portfolio, but one or two of these companies can provide exposure to the energy sector along with providing some level of fixed income. It is very important to watch the law with regards to taxation of dividends and partnerships. Changes in any tax law could cause a change in trend for companies likes these. Descriptions of the 15 companies used to create this basket are provided at the bottom of this article.

Below are updated charts of the regional bank dividend basket and the multinational stock basket compared to the S&P 500 Index.


KMR - Kinder Morgan Management, LLC is a limited partner in Kinder Morgan Energy Partners, L.P., and manages and controls its business and affairs pursuant to a delegation of control agreement. As of December 31, 2006, the Company owned approximately 27% of Kinder Morgan Energy Partners, L.P.’s limited partner interests. Kinder Morgan Energy Partners, L.P. is the owner and operator of an independent refined petroleum products pipeline system in the United States.

EEQ - Enbridge Energy Management, L.L.C. (Enbridge Management) is a limited partner in Enbridge Energy Partners, L.P. (the Partnership) through ownership of i-units, a special class of the Partnership's limited partner interests. The Company manages the Partnership's business and affairs under a delegation of control agreement, the Partnership and its general partner, Enbridge Energy Company, Inc. (the General Partner). The General Partner is an indirect, wholly owned subsidiary of Enbridge Inc. (Enbridge), an energy company located in Calgary, Canada.

APL -Atlas Pipeline Partners, L.P. is a limited partnership and a midstream energy services provider engaged in the transmission, gathering and processing of natural gas. The Company provides natural gas gathering services in the Anadarko Basin and Golden Trend area of the mid-continent United States, and the Appalachian Basin in the eastern United States. It provides natural gas processing services in Oklahoma. The Company also provides interstate gas transmission services in south eastern Oklahoma, Arkansas and south eastern Missouri.

EEP - Enbridge Energy Partners, L.P. (Partnership) owns and operates crude oil and liquid petroleum transportation and storage assets, and natural gas gathering, treating, processing, transportation and marketing assets in the United States. As of December 31, 2006, the Partnership’s portfolio of assets included approximately 4,900 miles of crude oil gathering and transportation lines and 24.5 million barrel of liquids (Bbl) of crude oil storage and terminaling capacity; natural gas gathering and transportation lines totaling approximately 11,000 miles; nine natural gas treating and 17 active natural gas processing facilities with an aggregate capacity of approximately 1,800 million cubic feet per day; trucks, trailers and railcars for transporting natural gas liquids, crude oil and carbon dioxide, and marketing assets that provide natural gas supply, transmission, storage and sales services.

KMP - Kinder Morgan Energy Partners, L.P. (KMP) owns or operates approximately 26,000 miles of pipelines and approximately 150 terminals. The Company's pipelines transport more than two million barrels per day of gasoline and other petroleum products, and up to seven billion cubic feet per day of natural gas. The Company operates through four segments: Products Pipelines, Natural Gas Pipelines, CO2 and Terminals.

TPP - TEPPCO Partners, L.P. (TEPPCO) is a common carrier pipeline of refined products and liquefied petroleum gases (LPGs) in the United States. In addition, the Company owns and operates petrochemical and natural gas liquids (NGLs) pipelines; TEPPCO is engaged in crude oil transportation, storage, gathering and marketing; it owns and operates natural gas gathering systems, and TEPPCO owns interests in Seaway Crude Pipeline Company, Centennial Pipeline LLC, Mont Belvieu Storage Partners, L.P., Jonah Gas Gathering Company and an undivided ownership interest in the Basin Pipeline. TEPPCO operates in three business segments: transportation, marketing and storage of refined products, LPGs and petrochemicals (Downstream Segment); gathering, transportation, marketing and storage of crude oil and distribution of lubrication oils and specialty chemicals (Upstream Segment), and gathering of natural gas, fractionation of NGLs and transportation of NGLs (Midstream Segment).

BPL - Buckeye Partners, L.P. (the Partnership) is a master limited partnership. The partnership is principally engaged in the transportation, terminal ling and storage of refined petroleum products for integrated oil companies, refined petroleum product marketing companies and end users of petroleum products. The Partnership also operates pipelines owned by third parties under contracts with integrated oil and chemical companies, and performs pipeline construction activities, generally for these same customers. Buckeye GP LLC is the general partner of Buckeye Partners. The Partnership operates its business through three segments: Pipeline Operations, Terminal ling and Storage and Other Operations.

OKS - ONEOK Partners, L.P., formerly Northern Border Partners L.P., owns and manages natural gas gathering, processing, storage, interstate and intrastate pipeline assets, natural gas liquids (NGLs) gathering and distribution pipelines, and storage and fractionators, connecting much of the natural gas and NGL supply in the Mid-Continent region with various market centers.

MWE - MarkWest Energy Partners, L.P. (MarkWest Energy) is a master limited partnership engaged in the gathering, transportation and processing of natural gas; the transportation, fractionation and storage of natural gas liquids (NGLs), and the gathering and transportation of crude oil. MarkWest Energy is a processor of natural gas in the northeastern and southwestern United States, processing gas from the Appalachian Basin, and from East Texas, Gulf Coast and Michigan.

SXL - Sunoco Logistics Partners L.P. (the Partnership) is principally engaged in the transport, terminalling and storage of refined products and crude oil, and the purchase and sale of crude oil in 12 states located in the Northeast, Midwest and Southwest United States. The Partnership’s business comprises three segments: Eastern Pipeline System, Terminal Facilities and Western Pipeline System.

ETP - Energy Transfer Partners, L.P. (the Partnership) is primarily engaged in the natural gas midstream and transportation and storage business through its operating subsidiary, La Grange Acquisition, L.P. The Company is also a retail marketer of propane in the United States through its operating subsidiaries, Heritage Operating, L.P. and Titan Energy Partners, L.P. The Partnership's midstream, transportation and storage businesses own and operate approximately 12,000 miles of natural gas gathering and transportation pipelines, three natural gas processing plants, 14 natural gas treating facilities and three natural gas storage facilities located in Texas.

TLP - TransMontaigne Partners L.P. (Partners) is a limited partnership formed by TransMontaigne Inc. The Partnership is a refined petroleum products terminaling and pipeline company with operations in Florida and Midwest.

MMP - Magellan Midstream Partners, L.P. is principally engaged in the transportation, storage and distribution of refined petroleum products. As of December 31, 2006, the Company’s portfolio consisted of a 8,500-mile petroleum products pipeline system, including 45 petroleum products terminals, serving the mid-continent region of the United States, referred to as the petroleum products pipeline system; seven petroleum products terminal facilities located along the United States Gulf and East Coasts, referred to as the marine terminals; 29 petroleum products terminals located principally in the southeastern United States, referred to as the inland terminals, and a 1,100-mile ammonia pipeline system serving the mid-continent region of the United States.

NS - NuStar Energy L.P., formerly Valero L.P., provides terminalling services for crude oil and refined petroleum products to the producers of crude oil, integrated oil companies, chemical companies, oil traders and refiners.

PAA - Plains All American Pipeline, L.P. (Plains) is engaged in the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas, and other natural gas-related petroleum products (LPG). The Company operates through three segments: transportation, facilities and marketing.

Thursday, July 26, 2007

Rising Corporate Rates

"The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market."

This is a quote from Bill Gross in his August Investment Outlook. Of the many articles written lately, it is the best yet. It makes the point very clear that sub-prime problems are not over and its effects in other credit markets is going to carry on for some time. The free money times are gone, and this will effect many of the leverage buyouts and stock buybacks that have helped fuel the latest equity rally.

In a resent earnings release IBM announced that is was borrowing $11.5 billion to repurchase its own shares. It is estimated that this buyback will account for the 2-3% increase in their earnings guidance. Fewer shares with same earnings equate to greater earnings per share. Its a great system when rates are artificially low, but is that really how you want a company to grow earnings?

So far this year, companies have announced over $415 billion in stock repurchases. Some might be a wise use of cash; some energy companies come to mind. Yet borrowing money to buy back stock is not a sustainable way to increase shareholder value. Eventually its going to get to the point where the company is going to have to grow earnings organically. With all the investment in buying back shares instead of research and development, where will this organic growth come from? Since the rates companies can borrow money has increased 150 basis points over the past 45 days, buy backs will not be so easily financed. In essence the Federal Reserve didn't need to raise rates to take away the punch bowl at the party, but they are to blame for this sub-prime mess we are experiencing. Taking rates to 1% was too much grain alcohol in the punch for too long. There will be hangovers.

Below is a chart of the S&P 500. It shows that things have reached an oversold area, but things could stay oversold for a long time. One short term trend line has been broken, and 1500.43 looks like the next support level based on the opening range system used in a previous post. Once below 1500, 1476.76 should be the next area to look for support.

Below is a chart of the S&P 500 compared to a basket of multinational companies. These stocks are still leading and could continue to keep the major index averages from getting hit too badly. It is the group to watch for weakness.

This group of companies benefit from the lower dollar, as it makes their goods and services cheaper over seas. Below are two charts of the U.S. Dollar Index, one short term and the other longer term. It can be seen the steady downtrend the dollar has had. It is a position which has many people playing the short side of this trade. It could be set up for a nice short cover rally, before rolling over and going lower..again.

Australian Dollar vs U.S.Dollar.

U.S.Dollar vs Swiss Franc

New Zealand Dollar vs U.S.Dollar

Euro vs U.S.Dollar

Tuesday, July 24, 2007

Erasing Friday's Sell-off or More to Come?

"Be Organized. It is critical that you make the best possible use of the available time and resources. Being organized is the single best way to avoid wasting either."

Bill Walsh - Finding The Winning Edge

This is a basic chart of the S&P 500 showing the advance/decline moving average in the top pane. This average shows that not every stock is participating in this latest leg up. It is important to watch how today reacts when testing some key areas in relation to Friday's sell off. Below is an intra-day chart showing the sell off Friday and the attempted recovery Monday.

A key reaction level to watch is 1550, it is the mid-point of the down move from Friday. To make any attempt at recovering from the negative momentum from this move, prices are going to need to get above this area and establish that they can hold, before an attempt will be made at new highs.

A couple charts to watch are the Broker-Dealer Index and the Dow Jones Transportation Index. The transports are holding strong, but a couple stems are showing on candles from the last few days. This in the past has acted as a decent caution sign.

The Broker-Dealer Index is significantly weaker than the transports. This is due to the concern over their exposure to the sub-prime mortgage fiasco and the fact that this problem is effecting the financing of lucrative deals for these brokers. In the past the market as a whole follows the health of these stocks. While the sub-prime issue is a domestic concern, these companies are still growing and doing significant business on a global scale. How bad things can get for these companies is yet to be seen, but use charts of Goldman Sachs and Morgan Stanley to get a gauge on what the best are doing.

Below is a chart of the Nasdaq Composite Index. It shows the expanding wedge that the current prices had escaped from but then retraced back into. This could prove to be a "throw-over" and eventually lead to prices retracing back down to the lower trend-line. It is hard to say at this juncture that this is the case, but more selling followed by an attempt to rally back to this upper line could prove to be a decent short entry spot.

The bottom pane shows a custom indicator that takes into account the daily pivot and volume. Divergences and zero line crosses are the two triggers used to set up trades. This indicator is similar to a type of money flow, but with a twist. This indicator will be discussed in later posts with examples of when it can be helpful.

Thursday, July 19, 2007

Dividends and Interest Rates

"If Economists were any good at business, they would be rich men instead of advisers to rich men."

Kirk Kerkorian


Yesterday's article dealt with the creation of a custom basket of stocks that represented a group of large-cap multinational companies. These companies have aided the market rally along with energy and other companies that deal in natural resources. It is easy to see the rise of these stocks, but what could be the next group to gain some attention? One scenario that could result from the sub-prime mortgage weakness is that the Federal Reserve could be forced to cut rates. If rates start going down, the dollar will get weaker and the same multinational sector created yesterday could benefit. With lower rates there could also could be a rotation into stocks paying a dividend greater than 3.75 - 4 percent.

The chart above is a weekly view of the S&P 500. In the middle section of the chart, is a basket of stocks from the S&P 500 Index that pay a dividend greater than 3.75 percent. These stocks include banks, utilities, and drug companies. The chart shows that in the strong down move starting in 2000 this basket was the recipient of capital rotating out of technology stocks and into safer more stable areas. The scenario could possibly play out again.

The chart below shows the S&P 500 Index in relation to a custom basket of regional bank stocks paying dividends greater than 4%.

This shows the strength that these banks had in a very strong sell off. During this sell off, interest rates were also declining, so these stocks both generated income in the form of dividends along with strong performance. They are not as exciting as Google or Juniper Networks but if you can keep a few of these stocks on the radar during large market sell offs, they can be a silver lining in an awful market. In the long term the dividends alone can make holding a few stocks like these worth while.

Using a program like TeleChart can make it easy to scan for both fundamental data, like dividends, and chart patterns that work together to form a powerful risk-reward situation. It is not necessary to buy the entire basket of stocks, finding the one or two with strong chart patterns gives the best results. Below are two charts from back in 2000 that shows the moves these stocks made in a tough market.

Both Comerica and National City both had strong rallies in price, but even if the price had just held steady, the owners of these companies would have collected a dividend while the rest of the tech market felt like it was going to zero. This does not mean that the next time the same thing will happen, but stocks that pay strong dividends usually have some support when the market feels like its going to hell. So next time there is a sell off and you feel like jumping out a window..think about some of these stocks that pay strong dividends year after year. They are boring, but your pillow will feel softer at night when times are bad.

Below is chart comparing the S&P 500 Index to a basket of utilities paying greater than a 4% dividend.

Below is a chart showing the patterns of the 10year Treasury yield in relation into the basket of regional banks paying strong dividends.

With the weakness in the housing market and the sub-prime mortgage issues, some of these companies are going to be punished by the market. Some are going to be sold because of what sector they are in. It pays to do the research to find the ones with little mortgage exposure. It also is worth considering to try to avoid owning a group of regional banks in the same area of the country. Look for the healthiest one or two in each area. Below is the list of 11 stocks used to make up the basket used in this article.

BBT - BB&T Corporation (BB&T) is a financial holding company. BB&T conducts its business operations primarily through its commercial bank subsidiary, Branch Banking and Trust Company (Branch Bank), which has offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C.

ONB - Old National Bancorp (Old National) is a financial holding company. The Company, through its wholly owned banking subsidiary, provides a range of services, including commercial and consumer loan and depository services, investment and brokerage services, lease financing and other traditional banking services.

NCC - National City Corporation (National City) is a financial holding company. The Company's core businesses include commercial and retail banking, mortgage financing and servicing, consumer finance and asset management. National City operates through a banking network primarily in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri and Pennsylvania.

USB - U.S. Bancorp operates as a financial holding company and a bank holding company. It provides a range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services. It also engages in credit card services, merchant and Automated Teller Machine (ATM) processing, mortgage banking, insurance, brokerage and leasing.

HBAN - Huntington Bancshares Incorporated is a multi-state diversified financial holding company. Through its subsidiaries, the Company provides full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, private mortgage insurance, reinsuring credit life and disability insurance, and other insurance and financial products and services.

CMA - Comerica Incorporated (Comerica) is a financial holding company. The Company's principal activity is lending to and accepting deposits from businesses and individuals. Comerica has aligned its operations into three lines of business: the Business Bank, the Retail Bank, and Wealth & Institutional Management. In addition to the three lines of business, Comerica also operates through a Finance Division.

FNB - F.N.B. Corporation is a bank holding company. The Company has four business segments: Community Banking, Wealth Management, Insurance and Consumer Finance. The Company, through its subsidiaries, provides a range of financial services, principally to consumers and small to medium-sized businesses in its market areas.

RF - Regions Financial Corporation (Regions) is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. The Company’s operations consist of banking, brokerage and investment services, mortgage banking, insurance brokerage, credit life insurance, leasing, commercial accounts receivable factoring and specialty financing. Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System

NYB - New York Community Bancorp, Inc., formerly Queens County Bancorp, Inc., is a bank holding company. The Company has 166 banking offices serving customers in all five boroughs of New York City, Suffolk and Nassau Counties on Long Island, Westchester County, and the northern New Jersey counties of Essex, Hudson and Union.

WM - Washington Mutual, Inc. is a consumer and small business banking company with operations in United States markets. It is a savings and loan holding company. It owns two banking subsidiaries, as well as numerous non-bank subsidiaries.

AF - Astoria Financial Corporation is the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association (Astoria Federal), and its consolidated subsidiaries. Astoria Federal’s primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one- to-four family mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities.

Wednesday, July 18, 2007

Global Exposure

"Devaluation...would be a lunatic self-destroying operation."

Harold Wilson in 1963; in 1967 he devalued the British pound.


The above chart of the S&P 500 Index compares the prices in the upper pane with the percentage of stocks trading above their 40 day moving average. Since the end of April the number of stocks above their 40day moving average has been in a decline, yet the rally has held and gone higher. This signifies that the market is being carried higher by fewer stocks, and the ones doing the lifting are larger capitalization stocks.

One way to see the true power of these stocks is to create a custom basket of selected stocks and in essence make our own index. Since most of these stocks we already know to be larger-cap stocks, the weighting of this custom index will be based on price alone. To avoid one or two stocks skewing the data, we will include in our index 16 multinational companies that are well known and trade with large volume.

The index will be made up of 16 stocks:

UTX - United Technologies Corporation
BA - The Boeing Company
CAT - Caterpillar Inc.
GE - General Electric Company
PCP - Precision Castparts Corp
PH - Parker-Hannifin Corporation
MO - Altria Group, Inc
JCI - Johnson Controls, Inc.
EMR - Emerson Electric Co.
ROP - Roper Industries, Inc.
SWK - The Stanley Works
TKR - The Timken Company
KMT - Kennametal Inc.
ITT - ITT Corporation
CMI - Cummins Inc.
MMM - 3M Company

Below is a weekly chart of the S&P 500 compared to the created multinational large-cap index. Since the spring 2003 it has doubled the performance of the S&P 500 Index.

Why have these companies performed so much better than the overall market? Well it can be assumed that they are well run companies and have great products and/or services. Importantly, they have two common traits that have both aided greatly to their success. One is they sell globally which takes advantage of strong global economic growth. Two, the weakening U.S. Dollar makes their goods and services more appealing in foreign markets.

The two charts below compare our custom created index to the U.S. Dollar Index and then to an ETF that tracks global markets. Both pictures help show that these companies, and there are others, have been thriving in a global economic expansion along with the weakening dollar.

As long as this group of stocks holds strong, it is going to be hard for the over-all market to really crack and take a hard fall. Creating custom indexes like this can be a helpful tool in assessing the internal strength of the market. If this group of stocks starts to weaken, then it sets up a different situation, and money coming out of this group will soon start to look for a new home of out-performance. The next post will deal with another custom index that might hold a key to where money might find a home in the future.


Description of companies used in this post's created index.

UTX - United Technologies Corporation (UTC) provides high-technology products and services to the building systems and aerospace industries. It has six segments: Otis, Carrier, UTC Fire & Security (UTC F&S), Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis includes elevators, escalators, moving walkways and services. Carrier includes heating, ventilating, air conditioning and refrigeration systems and equipment, and food service equipment. UTC F&S offers electronic security, fire detection and suppression, monitoring and response systems and services, and security personnel services. Pratt & Whitney includes military aircraft engines, parts and services, industrial gas turbines and space propulsion. Hamilton Sundstrand includes aerospace products and aftermarket services. Sikorsky offers military and commercial helicopters, aftermarket helicopter, and aircraft parts and services. In March 2007, Sikorsky Aircraft acquired aircraft maker, PZL Mielec, from the Polish Government.

BA - The Boeing Company is involved in the design, development, manufacturing, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services. The Company operates in five principal segments: Commercial Airplanes, Precision Engagement and Mobility Systems (PE&MS), Network and Space Systems (N&SS), Support Systems and Boeing Capital Corporation (BCC). PE&MS, N&SS and Support Systems comprise the Company’s Integrated Defense Systems (IDS) business.

CAT - Caterpillar Inc. operates in three principal lines of business: Machinery, Engines and Financial Products. Machinery deals with the design, manufacture, marketing and sales of construction, mining and forestry machinery. Engines business deals with the design, manufacture, marketing and sales of engines. Financial Products, consists primarily of Caterpillar Financial Services Corporation, Caterpillar Insurance Holdings, Inc., Caterpillar Power Ventures Corporation and their respective subsidiaries.

GE - General Electric Company (GE) is a diversified industrial corporation. It is engaged in developing, manufacturing and marketing a variety of products for the generation, transmission, distribution, control and utilization of electricity. During the year ended December 31, 2006, GE completed the sales of its Advanced Materials business by Industrial and GE Life, its United Kingdm-based life insurance business. During 2006, GE acquired IDX Systems Corporation, ZENON Environmental Inc. and Biacore International AB. In November 2006, GE Fanuc Embedded Systems acquired Radstone Technology PLC. In December 2006, Energy Metals Corporation's subsidiary, Golden Predator Mines Inc., acquired Springer Mining Company from GE. On March 15, 2007, GeoEye Inc. acquired M.J. Harden Associates, Inc., from GE. In May 2007, Smiths Group PLC sold its aerospace businesses to GE. In May 2007, STV Partners Corporation, the Japanese unit of GE, acquired a 97.15% interest in SANYO ELECTRIC CREDIT CO., LTD.

PCP - Precision Castparts Corp. (PCC) manufactures complex metal components and products, investment castings, forgings and fasteners/fastener systems for aerospace and industrial gas turbine (IGT) applications. The Company also provides investment castings and forgings for general industrial, automotive, armament, medical and other applications; specialty alloys, waxes and metal processing solutions for the investment casting industry; metal-injection-molded and ThixoFormed parts for automotive and other markets; sewer systems, and metalworking tools for the fastener market and other applications.

PH - Parker-Hannifin Corporation is a full-line diversified manufacturer of motion control products, including fluid power systems, electromechanical controls and related components. It has three business segments. The Industrial Segment produces motion-control and fluid systems and components used in manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. The Aerospace Segment designs and manufactures products and provides aftermarket support for commercial, military and general aviation aircraft, missile and spacecraft markets. The Climate & Industrial Controls Segment manufactures motion-control systems and components for use in the refrigeration and air conditioning and transportation industries.

MO - Altria Group, Inc. (ALG) is primarily a holding company. The Company, through its wholly owned subsidiaries, Philip Morris USA Inc. (PM USA) and Philip Morris International Inc. (PMI) are engaged in the manufacture and sale of cigarettes and other tobacco products. ALG’s 89% owned subsidiary Kraft Foods Inc. (Kraft) is engaged in the manufacture and sale of packaged foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, maintains a portfolio of leveraged and direct finance leases.

JCI - Johnson Controls, Inc. (Johnson Controls) is engaged in the building efficiency business. It is a global supplier of heating, ventilation, and air-conditioning (HVAC) mechanical equipment and services. The Company operates in three primary businesses: building efficiency, automotive experience, and power solutions.

EMR - Emerson Electric Co. is engaged in designing and supplying product technology and delivering engineering services in a range of industrial, commercial and consumer markets.

ROP - Roper Industries, Inc. (Roper) is a diversified growth company that designs, manufactures and distributes energy systems and controls, scientific and industrial imaging products and software, industrial technology products, instrumentation products and services, and radio frequency products and services. Roper operated in four segments: Industrial Technology, Energy Systems and Controls, Scientific and Industrial Imaging, and RF Technology. The Company markets its products and services to selected segments of a range of markets, including RF applications, water, energy, research and medical, and general industry.

SWK - The Stanley Works (Stanley) is a worldwide producer of tools for professional, industrial and consumer use and security products. The Company’s operations are classified into three business segments: Consumer Products, Industrial Tools and Security Solutions.

TKR - The Timken Company (Timken) is a global manufacturer of engineered bearings, alloy and specialty steel and related components. The Company is a manufacturer of tapered roller bearings and alloy seamless mechanical steel tubing and a North America-based bearings manufacturer. Timken had facilities in 27 countries on six continents as of December 31, 2006.

KMT - Kennametal Inc. (Kennametal) is a global supplier of tooling, engineered components and advanced materials consumed in production processes. It provides metal cutting tools and tooling systems. Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. It also manufactures and markets a line of tool holders, tool holding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys.

ITT - ITT Corporation (ITT), formerly ITT Industries, Inc. is a global multi-industry company engaged, directly and through its subsidiaries, in the design and manufacture of a range of engineered products and related services. It operates in three business segments: Fluid Technology, Defense Electronics & Services, and Motion & Flow Control.

CMI - Cummins Inc. (Cummins) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems. The Company operates in four segments: Engine, Power Generation, Components and Distribution.

MMM - 3M Company (3M) is a diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications. The Company manages its operations in six operating business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services, and Electro and Communications.

Monday, July 16, 2007

Shift In The Force

"To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing."

Bill Gross - July Investment Outlook

This is a chart comparing the S&P 500 Index to the Broker/Dealer Index. The broker dealers are the ones who own the laboratories that many of these toxic petri dishes are kept. If they don't have first hand exposure to them, the have second hand exposure to them. Bill Gross' July Investment Outlook makes a very plain case for the trouble, caused by leverage in relation to the mortgage market, not being over and will effect other sectors because there will be a restriction to extend credit in other areas.

"Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction. If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels." - Bill Gross

In a somewhat unrelated topic, the chart below is of the S&P 500 Index, with the bottom pane showing the percentage of stocks trading above their 40 period moving average. This shows that as we have made these new highs and headlines, fewer and fewer stocks are carrying the load. This does not mean the rally is invalid by any means, it just means that stock selection is important.

This compared to the broker/dealer index not making a new high with the market, could mean it's time to tighten stops and/or re-balance holdings to reduce risk by ensuring that concentrations in a few outperforming assets are not out of balance.

Below is a graph showing the returns of Stanford's Endowment over the past year, along with a graph showing the 10 year averages.

As can be see everything pretty much followed the benchmarks until you see the 61.2% gain in their exposure to natural resources. According to there asset allocation, they have a 7% exposure to natural resources in their endowment. Without going into the individual holdings they might have, the make up of the endowment at the end of June would have a greater than 7% exposure to natural resources because of its tremendous gain. This requires the endowment to enact the discipline to trim out of some of its great winners and re-balance to the original asset allocation model.

This re-establishing of the original asset allocations might seem like a small thing, but it is what makes the difference in the long run to outstanding out-performance. It is not rocket science, but it does take discipline to sell winners and buy into lagging areas. This is best done when you are selling high and buying low, rather than being forced to do the re-allocation in times of adverse moves when you are forced to sell lower and buy higher. David Swensen's, who runs Yale's endowment, book was mentioned in the previous post is a great source of information on this topic.

Below is a chart comparing the CRB Index(commodities), S&P 500 Index, and the U.S.Dollar Index from 1992 to current.

It clearly shows the inverse relationship between the U.S Dollar Index and commodities. Supply and demand aside, if the dollar loses 30% of its value, a commodity would gain in dollar terms to just account for the currency it is traded in. The demand for commodities is shown in the growth of economies which translate to the growth in equity earnings, which show up in the prices of stocks. It then makes sense that commodities would have a lead in appreciation before this growth might show up in improved stock earnings. This can be seen in 1993 and in 2002 in the chart above. The next few weeks should hold for some interesting times. The U.S.Dollar index is testing an important low, commodities seem to be at an inflection point. Some are coming off great runs and could be due for consolidation. Oil still makes new 11month highs as we come into hurricane season. Boring is the one things it shouldn't be over the next few weeks. Below are some commodity charts along with one of China's exchange.