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Tuesday, September 21, 2010

Brainstorming Tuesday

1. The Jupiter Uranus conjunction went into the expected wild top gear and forced even the SPX above the 1130 resistance as the leading index NDX counts 11 - 2 new highs to go. Test of the 2000-10 gap area is mandatory short term and a correction after this steep 3 week rally should follow after the full moon.

In the mean time its no suprise that Munger has lost all dignity as well since Berkshire was one of the biggest beneficiaries of the bailout as their biggest position was financials and heavy loaded with short put positions they made at least 10 bil. by the bailout.


Munger Tells 25 Million Americans To "Suck It In", And To "Thank God For Bank Bailouts" As BRK Benefits From $95 Billion Of TARP Funding

2. We also a rallyhave another myth being pushed forward which is if GOP wins congress that will trigger a rally? I rather think we are lining up for a severe correction to say the least. Although the recession was declared over by June 2009 officially yesterday ( what a blunt and pathetic lie) we are in still in the early depression mode as the almost dead patient gets drugged up and looks like he is alive and doing better. Most statistcal means will not work in manipulated markets as Sep. is the worst month usually - this year it has a spectacular bullish run. Apparently no coincidence as the biggest IPO in history takes place with many others waiting to happen these days. Last year Sep was also a bullish month - hence this statistical evidence is not worth a lot since you have to make money now. Apple is about to top out which is the top performer by fundamental and market means around 290-300 together with insane Amazon around 155-60 the next 3 - days which is a high correlation that all markets are about to see a correction of at least 5 % - but we have another 1-.2% to go on average before the correction starts.


Shock Waves for Stocks If GOP Wins Congress: John Dorfman

Bloomberg Opinion

John Dorfman

A power shift in November favoring Republicans would send shock waves of varying strength through U.S. stock markets. If the GOP regains control of Congress, look for these consequences:

-- Stocks would likely surge for a week or two. Wall Street likes Republicans. And many investors, wary of the large federaldeficit, may believe that Congress would try harder to restrain government spending with the GOP in charge of the Senate and House.

-- The stock market might be stronger for the next two years than it otherwise would have been. Stocks historically have performed best when a Democrat occupies the White House and Republicans control Congress, according to Ned Davis Research.

-- Defense stocks would get a boost. Republicans traditionally favor higher military spending than Democrats.

-- Financial stocks might rally. More fiscal restraint, a possible result of a GOP win, would be good for bank stocks in particular.

-- Health-care stocks would become volatile, see-sawing as investors try to determine whether a Republican Congress will reverse the health-care overhaul passed this year.

Shaky Health Stocks

Health-care reform was championed by President Barack Obama, and he will certainly veto any attempt to repeal it. In my opinion, Republicans might have enough votes to pass a bill attempting to repeal the health-care legislation, but would lack the votes to override a presidential veto.

So look for health insurers -- a group that has been burdened by additional costs under the new law -- to rally temporarily, and then recede. Drug companies, probably net beneficiaries of the legislation, would do just the opposite by first fading, then reviving.

Later in this column, I’ll name specific stocks I think could be helped by a GOP win. First, though, let’s take a look at the Ned Davis Research data on market performance under various permutations of political power.

When a Democrat occupied the White House and Republicans controlled Congress, the Dow Jones Industrial Average advanced an average of 9.6 percent a year, the research firm found.

If Democrats had control of both Congress and the White House, the average annual advance was 7 percent.

Power Shifts

When power was split between a Republican president and Democratic Congress, the average gain was 4.3 percent.

Finally, if Republicans held both the White House and Congress, the result dropped to 1.6 percent, the lowest of any combination.

The Ned Davis statistics cover the period between March 4, 1901, and Sept. 15, 2010. They measure the price change in the Dow Jones Industrial index, and don’t include dividends.

Picking specific stocks that would be helped or hurt by a change in the political winds is tricky because so many forces influence the success of a stock. These include valuations, the competitive landscape, economic momentum and investor psychology.

Defending Defense Stocks

I think defense stocks are good buys now regardless of politics, and they will become even more attractive if Republicans gain additional clout. Pure plays in the defense industry such asLockheed Martin Corp. of Bethesda, Maryland; Raytheon Co. of Waltham, Massachusetts; and General Dynamics Corp. of Falls Church, Virginia, are trading at 10 times earnings or less.

Companies for which defense is important, but not the whole story, include Boeing Co. of Chicago; United Technologies Corp. of Hartford, Connecticut: Babcock & Wilcox Co. in Barberton, Ohio, and Precision Castparts Corp. in Portland, Oregon.

Of those four, I prefer United Technologies. It makes Sikorsky helicopters for the military, and also manufactures products such as elevators for office buildings. At 14 times earnings it looks reasonably priced. As mentioned in a previous column, I would stay away from Boeing, whose debt is four times its equity.

Turning to the banking industry, some stocks worth considering are JPMorgan Chase & Co., Bank of Hawaii Corp. and Arrow Financial Corp.

When the government arranged a shotgun wedding for Bear Stearns Cos. two years ago, it was New York-based JP Morgan that officials asked to be the groom. The stock sells for 12 times earnings and slightly less than book value (assets minus liabilities per share).

Bank Bets

Honolulu-based Bank of Hawaii experienced only slightly lower profits during the recession. It is now benefitting from resurgent tourism on its home island.

Arrow Financial, of Glens Falls, New York, is parent of Glens Falls National Bank & Trust Co. and Saratoga National Bank & Trust Co., both located in upstate New York. It posted a 1.24 percent return on assets last year, ranking among the nation’s better banks, and sells for moderate valuations. The shares trade at 12 times earnings and the dividend yield is 4 percent.

For those who may wonder whether any political bias affects the way I view the election’s impact on the market, I consider myself a Democrat with an independent steak.

Disclosure note: I own shares of General Dynamics personally and for clients. I have no long or short positions in the other stocks discussed in this column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

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