Weekly hotline Update #50 - 01-15-08
1/15/2008 8:40:50 AM

Going into the end of the year we were looking for a rally. The rally stalled out on the 24th. Since Christmas day the NASD has closed down nine out of twelve trading days. Other indices have faired a little better in terms of days up vs. down, but all of them have fallen precipitously. To make matters worse, from a seasonal stand point, the end of December through the first week of January is one of the most consistently positive times of the year.

Of the 112 years of the Dow's existence, as of the 13th, 2008 is the fourth worst start for the Dow ever. The only years that were down more as of Jan 13 are 1978, 1939, and 1991. The good news is those three years cover the entire spectrum of the past century. Note that two of them were late in a decade, 78 and 39, as we currently are. In 1991 the price action was heavily influenced by the first Gulf war and was followed by a very rapid recovery. Unfortunately, current circumstances are similar to 78 and 39 rather than the anomalous 1991.

Typically when a year starts off as weak as this one has, the recovery process develops very slowly. To illustrate and emphasize the point, look at the chart below. It shows the Dow's performance for the worst 25 starts ever, based on the Dow's Percent change as of January 13.

Looking at the spectrum of outcomes above, it is clear that historically, when the market gets off to a bad start, the negative mood tends to linger. The two positive exceptions are 1991, discussed above, and 1998. After those two, the next best return as of mid-March is +1.6%, which was in 1902.

This quick historical review shows us how difficult it is for the market to recover after failing to perform well during the end of year - first of year time frame, one of its seasonally strongest periods. Also note: The Dow finished the year higher only 7 of the 25 years shown above, 28% of the time. In the other 87 years the Dow finished the year higher 74% of the time. There is some validity to the famed January Barometer.

The problems the market faces at present relate to the consumer and the consumers willingness to spend. At the end of the day, fuel and energy costs in conjunction with ever rising medical and food costs, plus persistently rising taxes (outside of income tax, think property taxes and the like) continue to squeeze consumers. Rising mortgage rates proved to be the proverbial straw that finally broke the consumers back. As I once said, you can't sell houses the way Best Buy sells big screen TVs with no money down and no interest until 20##. They did, 20## has arrived, and no one can pay the bill, the end.

How will the situation be resolved? Well, don't expect a "quick fix" as so many politicians would like you to believe. In time the issues (read: debt issues) will be re-absorbed back into the US economic/ financial machine. The politician that is on duty at the time will get the credit for the recovery, but most likely it will be a case of being in the right position at the right time and nothing more.

So, what is a trader or investor to do when the economic climate is expected to remain somewhat hostile towards the market? Well, for starters, caution is advised. If you have new cash that you are itching to put to work at bargain prices, be patient. Things that look cheap now could get a lot cheaper very quickly.

That said, I remain respectful of the message coming from the 3-Month PRS Time Plane.

The green areas on the chart represent the best buying opportunities over the past 12 years, and the 3-Month PRS Time Plane Buy signal light is on. The overall message is that from a general market stand point, the market's near-term downside potential should at worst be somewhat limited. On a 3-month basis, overall returns should improve over the balance of January.

While we will be looking for some improve stock market action over the balance of the month, the unfortunate aspect of the rapidly deteriorating macro economic backdrop will weigh on the US markets like a wet blanket. In keeping with historical precedents, we are unlikely to see the indices recoup the year's losses until early spring.

New Entries for January: In January we have seen a number of stocks come into our entry criteria. FCX, BHP, and OII are the only ones I find particularly favorable at this time.

FCX (Freeport McMoran Corp) produces copper, gold, and silver through Freeport Indonesia and PT IRJA eastern minerals in Papua, Indonesia. This is a huge precious metal mining company with over 2,813,089 metrics tons of proven probable recoverable ore reserves.

IBES earnings: 2006a $6.83; 2007e $9.43; 2008e $10.71. This is a straight up play on Gold. If the price of gold continues its run higher, FCX will continue to profit and the stock should continue its current out performance. In December 07, FCX raised their dividend to $1.75 per share.

FCX is in the PRS buy zone with its 3-month PRS having fallen into the buy zone while its 6-month and 12-month PRS ranks remain remarkably high. Its 6-month PRS rank is 85 meaning it is up more than 85% of all stocks over the past six months.

The following stocks have been removed from the Open Active Table: ASIA, HLIT, BKX, TSO, RS, SPEC, NVTL, PCR, MTRX, CYPB, OIIM, TPX, and LFL.

Stocks, which if weaken further, may be removed from the open active table: KCI, and GSOL

The Table below lists fifteen of our favorite Open Active Recommendations:

Portfolio Update:

In Portfolio #1 we are closing CBEY, and SPEC. SPEC reported bad earnings and the stock suffered. CBEY was hit hard on January 8th, but there is no material news to account for the price action.

Portfolio #2: We are closing ININ, SIGM, ANAD, TPX, and SPEC.

With the heart of earnings season dead ahead, the greatest concern is not whether a company will meet earnings expectations, it is how confident the CEO will be when it comes to discussing forward looking guidance. With well known US economic troubles as front page news, the idea of under promising on forward guidance seems extremely attractive such that we may be in for a highly disappointing earnings season. The upside is that reduced expectations should set the stage for some impressive reports later in the year.

"We would accomplish many more things if we did not think of them as impossible." - C. Malesherbez