Typically, light-volume pullbacks within an uptrend are healthy. They allow stocks to migrate into stronger hands as short-term holders take profits, and they allow big funds to accumulate at lower prices. As long as the pullbacks are contained, they make it more likely for further upside.
That is what saw today. But a late spike caught the bears leaning the wrong way after several failed intraday bounces. We had a decent recovery and ended up with just mild losses. The perma-bulls love that the bears are so inept, but it makes for dangerous conditions when there is so little fear.
Disinterest is what really kills a market, and you have to wonder what is going on as volume on the NYSE continues to descend to levels not seen in a very long time.
You would think that a market that has been trending up for weeks and is close to its highs would be generating increased interest, but we seem to be going in the opposite direction, which makes the persistent bids seem more manipulative than indicative of real accumulation.
Ultimately, price action is what matters and it is hard to argue with a market that closed the way this one did today. We had a number of failed bounces and looked ripe for the weak finish, but the dip-buyers wouldn't stand for it. I suspect that the computers had something to do with the energetic close, but it just goes to show that you really have to be careful fighting this market.
Tuesday, February 14, 2012
One To Watch
TROX manufactures titanium dioxide and is one of five companies with the technology to produce it via the chloride method, which is cost-efficient and environmentally friendly. Tronox recently announced a merger with a division of Exxaro Resources [EXX.South Africa], a South African company that mines titanium dioxide feedstock. This will make Tronox vertically integrated. The acquired business has a 1.5-million-ton stockpile of ilmenite, the feedstock, which is in tight supply.
Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn't understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide [KRO], a Tronox competitor, which adds credence to the buy idea on TROX.
Tronox came out of bankruptcy court last year. Why did the company go broke?
It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since 2011. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. Analyst had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of the prior estimate and adding the tax assets and the next 12 months' free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.
Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn't understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide [KRO], a Tronox competitor, which adds credence to the buy idea on TROX.
Tronox came out of bankruptcy court last year. Why did the company go broke?
It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since 2011. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. Analyst had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of the prior estimate and adding the tax assets and the next 12 months' free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.
Moodys, that forward-looking thoughtful ratings agency, has reduced the debt ratings of six European countries including Italy, Spain and Portugal and has revised its outlook on the U.K.'s and France's top Aaa rating to "negative."
A rumor has it that Saudi tanks have approached the Jordanian border, giving a 72-hour ultimatum to Syria.
Today's tweet of the Day is from Hedge Eyes' "Keithy" Keith McCullough: "It appears to me that the old broken glass/economic growth model of Keynes has met its burning buildings #Greece."
The Greece deal is really no deal but rather a slow-motion train wreck to bankruptcy.
Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors....
The European Central Bank's ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank's capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis....
We have replaced meltdown of the type we saw after Lehman/AIG with "melt-up" of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size....
We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.
-- David Kotok, Cumberland Advisors (Feb. 11, 2012)
A rumor has it that Saudi tanks have approached the Jordanian border, giving a 72-hour ultimatum to Syria.
Today's tweet of the Day is from Hedge Eyes' "Keithy" Keith McCullough: "It appears to me that the old broken glass/economic growth model of Keynes has met its burning buildings #Greece."
The Greece deal is really no deal but rather a slow-motion train wreck to bankruptcy.
Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors....
The European Central Bank's ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank's capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis....
We have replaced meltdown of the type we saw after Lehman/AIG with "melt-up" of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size....
We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.
-- David Kotok, Cumberland Advisors (Feb. 11, 2012)
The bears had a good opportunity to build on Friday's weak action by selling the gap-up open, but they failed miserably once again. There was a brief dip in the first hour or so of trading, but the buyers didn't wait long, and they walked us back up the rest of the day.
Not only was the underlying support very impressive, breadth was quite strong, with 4,200 gainers to just 1,400 decliners. Volume was light, but the big-cap momentum favorites were lively, with PCLN, ISRG, AAPL, GOOG, AMZN and BIDU attracting attention. Small-cap oils were the favorite speculative play today, but there was no shortage of green on the screens.
It is extremely tempting to keep trying to call a top in this market, but by now it should be painfully clear that sticking with the trend as long as you can is the way to go.
Not only was the underlying support very impressive, breadth was quite strong, with 4,200 gainers to just 1,400 decliners. Volume was light, but the big-cap momentum favorites were lively, with PCLN, ISRG, AAPL, GOOG, AMZN and BIDU attracting attention. Small-cap oils were the favorite speculative play today, but there was no shortage of green on the screens.
It is extremely tempting to keep trying to call a top in this market, but by now it should be painfully clear that sticking with the trend as long as you can is the way to go.
Saturday, February 11, 2012
It' been a long time coming but today we saw the worst action of 2012. We've had only one other bad day this year, Jan. 26, where we sold off all day and closed near the lows. Despite a last-minute spike, we not only sold off and closed near the lows, but it was the biggest point loss of the year.
The big question is whether this is an indication of a major change in market character and an intermediate top, or long overdue profit-taking that will give us a healthier market as we shake out recent excesses. It's been amazingly one-sided for so long that it was inevitable the streak would end.
While it's probably a good idea to lock in gains after the big run, it's premature to conclude that the uptrend is over and a major breakdown will ensue. In fact, it can be argued that this is merely a return to normality and a little downside is healthy. The market needs to shake out overly exuberant bulls now and then to rebuild skepticism and attract new buyers.
Earnings season is basically over and we are heading into a weaker time of the year seasonally. The issues in Europe are not improving, so the bulls will have some headwinds to contend with going forward.
The big question is whether this is an indication of a major change in market character and an intermediate top, or long overdue profit-taking that will give us a healthier market as we shake out recent excesses. It's been amazingly one-sided for so long that it was inevitable the streak would end.
While it's probably a good idea to lock in gains after the big run, it's premature to conclude that the uptrend is over and a major breakdown will ensue. In fact, it can be argued that this is merely a return to normality and a little downside is healthy. The market needs to shake out overly exuberant bulls now and then to rebuild skepticism and attract new buyers.
Earnings season is basically over and we are heading into a weaker time of the year seasonally. The issues in Europe are not improving, so the bulls will have some headwinds to contend with going forward.
Thursday, February 9, 2012
The dip-buyers did their thing for a third straight day but they weren't as enthusiastic. Fortunately for the bulls, AAPL kept us in positive territory. Although the bulls managed minor gains, breadth was slightly negative and we closed a little soft.
The market continues to hold up remarkably well, which may be due in part to so many folks looking for a pullback. Every time it looks like we may finally see a little downside momentum, the dip-buyers jump in and put the squeeze back on. Any bear that feels confident isn't paying attention to the action.
Even if you are bullish and don't expect a top to occur soon, it is a challenge to keep chasing higher and higher. Many bulls are rooting for some downside to get a better opportunity to put cash to work.
The market continues to hold up remarkably well, which may be due in part to so many folks looking for a pullback. Every time it looks like we may finally see a little downside momentum, the dip-buyers jump in and put the squeeze back on. Any bear that feels confident isn't paying attention to the action.
Even if you are bullish and don't expect a top to occur soon, it is a challenge to keep chasing higher and higher. Many bulls are rooting for some downside to get a better opportunity to put cash to work.
Wednesday, February 8, 2012
The flight to safety continues to buoy fixed income.
The 10-year U.S. note auction came in at 2.02%, 1 basis point below the when-issued yield.
The bid-to-cover at 3.05 was a bit lighter than past auctions, and direct and indirect bidders were in line.
Greece will be resolved (in the fullness of time), but austerity and a lot of heavy lifting lies ahead for the eurozone. This malaise spells weaker-than-expected economic growth ... for years ahead.
The 10-year U.S. note auction came in at 2.02%, 1 basis point below the when-issued yield.
The bid-to-cover at 3.05 was a bit lighter than past auctions, and direct and indirect bidders were in line.
Greece will be resolved (in the fullness of time), but austerity and a lot of heavy lifting lies ahead for the eurozone. This malaise spells weaker-than-expected economic growth ... for years ahead.
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