Two "Safe" Financials Free of the Subprime Contagion

The United States stock markets have been rocked by the Subprime Contagion. The Fed is aggressively cutting rates, there is a lot of Recession talk, and the US markets have fallen hard, heading towards Bear Market Territory.

After last weeks Capitulation Bottom, many pundits are starting to discuss whether it is time to buy beaten down financials. However, this is a risky and aggressive strategy.

For those who are less aggressive, is there a way to invest in Financials with less risk?

There are at least two financial stocks out there that either have no subprime exposure or actually benefit from the subprime problem. These two stocks are even near their 52 week high despite the large US stock market correction.

1. BlackRock (BLK)

Blackrock is a $28 Billion investment manager and also provides risk management and advisory services. CEO and Founder Larry Fink sounded upbeat during their January 2008 conference call. Blackrock announced profits jumped 90% to $322 million at a time when many other companies have blamed subprime for their bad earnings.

Blackrock not only avoided the subprime problem, they profited from it. Experts at Risk management, back in 2005, according to a Business Week Article, Blackrock foresaw the subprime meltdown and got out early, and made the firm's hedge funds make bets against real estate.

Now, with billions of dollars to invest, Blackrock can bottom feed, pick among the rubble, and even acquire companies that their competitors hedge funds are trying to unload.

Blackrock, 49.8% of which is owned by Merrill Lynch, looks like a good financial company worth looking into. The stock is near its 52 week high.

2. Hudson City Bancorp (HCBK)

Hudson City Bancorp is a $8 Billion regional bank serving the New York, New Jersey, and Connecticut areas. Fourth quarter profit rose 12% despite the financial meltdown and housing crisis.

Hudson City Bancorp has remained unscathed because of Hudson City's strict lending standards. According to Forbes magazine, which named Hudson City the Best Managed Bank of 2007, Hudson City ignored the call of exotic loans to people with subpar credit. Hudson City has been doing very well, and CEO of Hudson City, Ronald Hermance Jr., says HCBK is running on all cylinders.

Hudson City (HCBK) also benefits from speculation that foreign companies, such as Canadian banks might take them over. As the Canada based TD Bank buyout of Philadelphia area regional bank Commerce Bank ($8.5 Billion) in 2007 illustrates, once regional banks grow to a certain heft, they become major takeover candidates. The weak US Dollar also helps as foreign companies can get more "bang for their buck."

Hudson City Bank is near its 52 week high and like Blackrock, is definitely a good investment candidate even in these very trying times.

Reasonably Priced Survivor in a Bear Market Stock Investing Strategy

One Stock Market Strategy is to look at those stocks that have survived a large correction or bear market.

Near the bottom, the S&P 500 Stocks Above 50 day moving average went as low as 8% (historically very low). Just a day after the bottom, let us look at stocks that follow this criteria:

1. Price is Above 50 Day Moving Average.
   
2. Stock is less than 10% near 52 week high.
   
3. Forward PE is less than 20.
   
4. 5 Year Estimated Growth Rate greater than 15%
   
5. (The last two entries, means Price Earnings to Growth Ratio (PEG) should be less than 1.33)
   

Only fourteen stocks met that criteria today using Yahoo Finance Screener:

1. Blackrock (BLK) -- $27 Billion Financial company. Investment Manager.
   
2. Raytheon (RTN) -- $27 Billion Defense Company.
   
3. Tele Norte Lest (TNE) -- $8.8 Billion Telecom Company. Serves North America, Europe, Asia and Brazil. Operates Fixed Line and Mobile Telecom.
   
4. Hudson City Bancorp (HCBK) -- $8 Billion Regional bank with no subprime exposure.
   
5. Fairfax Financial Holding (FFH) -- $5 Billion property and casualty insurance and reinsurance, invesment management, and insurance claims management.
   
6. Quilmes Industrial SA (LQU) -- South American Drink and Soda Company. Subsidiary of Ambev (ABV).
   
7. Pan American Silver (PAAS) -- $2.7 Billion Silver Company.
   
8. Sierra Health Services (SIE) -- $2.4 Billion Managed Healthcare Company.
   
9. Mariner Energy (ME) -- $2 Billion oil and gas exploration, development and production company in West Texas and the Gulf of Mexico.
   
10. Walter Industries (WLT) -- $2 Billion Coal Mining and Methane Gas company in the US, Europe, Turkey and Africa.
    
11. Buckle Inc (BKE) -- $1.2 Billion Retailer that offers casual apparel, footwear and accessories for young men and women.
    
12. CBIZ Inc (CBZ) -- $624 Million Business to Business company focusing on financial services, employee services, medical management professionals and national practices.
    
13. MTC Tech (MTCT) -- $354 Million Defense Company provides modernization and sustainment, professional services, command, control, communications, computers, intelligence, surveillance and reconnaissance and logistics solutions primarily to the defense, intelligence, civilian and the federal government agencies.
    
14. GP Strategies (GPX) -- $180 Million Company provides training, enginering, and consulting services mainly in the US, Canada, the UK, Mexico, Singapore, Malaysia and India.
    

That Was a US Stock Market Capitulation Bottom. Next: Follow-through Rally then Re-Test of Lows.

What a crazy two days in the U.S. Stock Market!

On Sunday, January 20, 2008, the stock market was very oversold by many metrics, and we were due for a bounce. This blog mentioned on that day:

"All signs seem to indicate an S&P 500 Bounce may be coming soon (possibly after some sort of gap down, high volume down day, then a massive rally, for a capitulation bottom)." - TechFarm Blog

Monday, January 21, 2008 was a US Holiday. During this time, the worldwide stock market was selling off very heavily. Before the market started on Tuesday, January 22, the Dow Futures were down over 500. News reports from CNBC and other areas suggested that the Sky Was Falling.

For those anticipating a capitulation bottom, this was a good sign. There was a feeling that people would start to panic and sell at the lows. This is needed to help establish a capitulation, crescendo selloff bottom.

On Tuesday, January 22, the market gapped down (opened lower than the previous close), and the S&P 500 went down over 51 points (1325 down to 1274) for a decline of almost 4%. Then towards the end of the day, the S&P 500 recovered 36 points for a nice rally.

On Wednesday, January 23, Apple (AAPL) reported bad numbers, and the S&P 500 sold down very heavily, going down all the way to 1270 (re-testing the bottom on Tuesday). Then towards the end of the day, the stock market had a massive rally, going up 68 points for an over 5% swing on the S&P 500.

This looks like a classic capitulation bottom.

But does this mean we have an all clear?

This capitulation bottom might mean that we will have some sort of near term rally. We need some good follow-through.

In the previous post, we speculated that the S&P 500 might re-trace around 38.2% to 50% of the drop from the top. With the updated short to medium term bottom of 1270 on the S&P 500, we could re-trace and rally up to 1387 to 1423 or so before we go down and eventually re-test the lows.



Since V-bottoms are not the norm, we can expect a re-test of the lows at least once. During each re-test, the S&P 500 could pass (bounce off that support), or the S&P 500 could fail (continued breakdown to new lower support levels).

Do you feel Bearish?

If you feel bearish about the market, you can sell the upcoming rally, raise cash, rotate to defensive stocks. Once the market successfully re-tests, an investor could start thinking about going long on stocks again (profit from a stock when the stock price goes up.)

Today's Stock Chart

Time for a US Stock Market Bounce on the S&P 500?

The US stock market has been going down for a while and the stock market has broken down below previous strong support of 1363. Is it time for a bounce on the S&P 500?

The S&P 500 may be oversold right now, and the S&P 500 seems to have bounced at the new support level of 1326.

According to different stock market bottom indicators, the S&P 500 may be oversold right now.

1. Ratio of S&P 500 Stocks Above 200 Day Moving Average to Stocks Above 50 Moving Average: 2.21. [Start looking for bottom after this number spikes above 2.0]
   
2. S&P 500 Stocks Above 200 Day Moving Average: 19.04% [Start looking as percentage goes below 40%]
   
3. S&P 500 Stocks Above 50 Day Moving Average: 8.62% [Start looking as percentage goes below 20%]
   
4. 10 Day Moving Average of Put-Call Ratio: 1.17. [Start looking as number goes above 1.1]
   
5. S&P 500 High-Low Index: 0.95%. [Start looking as number spikes below 10%]
   

All signs seem to indicate an S&P 500 Bounce may be coming soon (possibly after some sort of gap down, high volume down day, then a massive rally, for a capitulation bottom).

However, the bounce doesn't necessarily mean that we are forming the intermediate term bottom. We may retrace our recent downturn, back up to 1411 (38.2% Fibonacci Retracement) to 1443 (50% Fibonacci Retracement).



We may eventually re-test the S&P 500 lows, and possibly breakdown even more.

The US Stock Market (S&P 500) has Broken Down. Where is Support and Bottom?

Today, January 17, 2008, the US Stock Market as represented by the S&P 500 Index has broken down and broke a long term and important support level of 1363.98. On March 2008, the bottom of 1363.98 held. On August 2008, the bottom of 1370.60 held. Then on Thursday, January 17, 2008, the S&P 500 ($SPX) tested the bottom of 1363.98, and solidly broke below that level, closing at 1333.25. This is not good for the market.



Next Support Levels

Next major support levels are 1327, 1246 and 1219 on the S&P 500 ($SPX).

New Bottom Indicator: Ratio of Stocks Above 200 Day Moving Average to Stocks Above 50 Day Moving Average

Previously, we looked at several stock market bottom indicators such as the stocks above the 50 and 200 day moving average (low percentage means we are close to bottom).

We use this information to come up with another Stock Market Bottom Indicator. We take the ratio of Stocks Above the 200 Day Moving Average to the Stocks Above 50 Day Moving Average. When this ratio spikes above 2, the market is often near or at a bottom. Another way to look at this, is as the Stocks above the 50 Day Moving Average goes down very low in relation to the Stocks above the 200 day Moving Average, the stock market has been oversold and we start to form a bottom.

Currently, the $SPXA200R to $SPXA50R Ratio is at 1.83, and we are getting closer, but we are not there yet.

Other Oversold and Bottom Indicators

1. Overbought, Oversold, and Oscillators
   
2. Stocks Above 50 and 200 Day Moving Average
   
3. Put-Call Ratio
   
4. New High-Low Index

Current Stock Chart With Information Above

Stock Market Performance During Recessions

Common Wisdom often suggests that the US Stock Market indices go down during a US recession. How true is this?

According to National Bureau of Economic Research (NBER), there have been nine Recessions (*) from 1950 to 2007.



The S&P 500 Stock Market return during these nine recessions has averaged -0.4% with a low of -22.9% (1973 to 1975) to a high of +16.4% (1953 to 1954).

If we look at the return of the S&P 500 six months before the Start of the Recession to the Peak, the S&P 500 during this period returned an average of -3.7%.

If we look at the return of the S&P 500 six months before the Start of the Recession to the Trough, the S&P 500 during this period returned an average of -4.1%.

Any Positives?

The S&P 500 during US Economic Recession from 1950 to 2007 has been mildly flat to down, confirming common wisdom. However, we can take some positives from the data.

The average ratio between the length of time of an Expansion to the length of time of a Contraction, is 6.7. This means that for every month the US market contracts, (during this particular 1950 to 2007 period) the US market expands 6.7 months.

The S&P 500 return from Previous Trough to Current Trough (8 entries from 1950 to 2007) averages a whopping 80%. If we annualize this per year, the stock market S&P 500 returned 11.7% during expansion phase from 1950 to 2007.

(*) Definition of Recession According to NBER

According to NBER:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement on how the NBER's Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03.

Other Views of Stock Market Returns during US Recession

New York Sun Article.

MarketWatch's Mark Hulbert Article.

BestWayToInvest Article

S&P 500 Index Values used in Research

The NBER Cycle link only provides the month start and end of a Recession. S&P 500 prices were sampled at the first day of the month mentioned by NBER.

Revisiting Crocs (CROX), Fallen Growth Stock

Would you invest in the company which makes and sells these shoes?



If you didn't know much about these shoes, many of you might say, no, you would not invest in the company which makes these (ugly) shoes.

However, since it's IPO in early 2006 to October 2007, the stock has gone up from a low of $10.16 to a high of $75.21. How could a stock which makes the footwear above have a stock price that goes up to very high levels. Certainly, this must be a fad.

But Crocs (CROX) bulls say that everyone is using them from doctors to children to nurses. They say there is an international growth story, and that they patented their special soft "Croslite" rubber material.

On April 17, 2007, Wallstrip, the Financial Video Blog, created a good video on Crocs (CROX) and the Crocs Phenomenon:

WallStrip April 17, 2007 Video on CROX

However, the skeptical investor who thinks that rise of Crocs (CROX) with its "faddish" product is unwarranted, see their side validated when on November 1, 2007, CROX reports bad earnings and guidance. The conference call mentioned problems ramping up manufacturing and distribution to meet higher demand in Europe and Japan which cost the company about $30 million in lost sales. The conference call also mentioned the company was experiencing distribution issues, and seasonal slowdown due to the seasonality in Europe and Japan. The stock takes a huge hit.

CROX's stock price is further hit in January 2008. Rocky Mountain news reports problems with Crocs (CROX). The European Union declared one of CROX patents is not valid. Also, Crocs has distribution problems, and inventory is growing faster than sales. In April 2006, Crocs filed lawsuits against 11 companies citing patent infringement. (This foreshadows problems with copy-cats.)



So is CROX a buy right now? CROX currently has a forward PE ratio of 10.7 and there is still international demand. However, the stock has lost its momentum, and there are enough problems right now to consider.

And for those investors who are still skeptical, and still believe CROX is a fad, there is nothing wrong with just staying away from this stock.

Profit by Controlling Your Stock Market Losses

When managing your stock portfolio, do you get upset by positions which go badly against you? What can you do and how should you look at losses in your portfolio.

Jim Cramer's View

Jim Cramer, in his Book, "Real Money: Sane Investing in an Insane World" presents his Seventh Commandment of Trading: Control your Losses.

"Losses do you in. They always do you in. Controlling losses is the most important thing you can do. I don't really care how you do it. If it is to put on stops in trading, then so be it. If it is to decide that you are never going to let a position run a point against you, then fine. But you must heed the seventh of my 10 Commandments of Trading:
Control losses; winners take care of themselves."
- Jim Cramer

While Jim Cramer was talking about trading, the same concept applies to longer term investing.

Peter Lynch View

Peter Lynch, in his book "One Up on Wall Street" (page 75, paperback edition):

"People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. If they've done the proper homework on H&R Block and bought the stock, and suddently the government simplifies the tax code (an unlikely prospect, granted) and Block's business deteriorates, they accept the bad break and start looking for the next stock. They realize the stock market is not pure science, and not like chess, where superior position always win. If seven out of ten of my stocks perform as expected, then I'm delighted. If six out of ten stocks perform as expected, then I'm thankful. Six out of ten is all it takes to produce an enviable record on Wall Street." - Peter Lynch

Imagine that, all you need is six out of ten stocks to do well. That means even great investors such as Peter Lynch do make mistakes.

William O'Neil's View

Growth stock investor William O'Neil, founder of Investors Business Daily, often has sell rules such as sell when a stock goes down 7-8% below the proper buy point, or sell at a certain percentage down. He too has a discipline, to make sure his losses do not grow and ruin the portfolio. He also does not "marry" or become "attached" to a stock, a common mistake some investors make.

Investor's Business Daily mentions that "being a successful investor is just as much about limiting losses as it is about riding a winning stock. Downturns are part of life in the market, and you must act decisively to shield yourself form excessive losses. If your stock selection doesn't work out and you're faced with a loss, don't let your pride stop you from admitting you've made a mistake and activing quickly. Cut your losses early and move on. You must make rational decisions, instead of trying to rationalize your way out of a costly mistake."

Wall Street Saying: Cut your Losses Short and Let Your Winners Run

All the comments above reflect a common Wall Street Saying regarding Cutting your Losses short and Let your winners run. This is what every investor should do, but it often turns out that some investors do the opposite. They take profits quickly, and allow losses to start growing.


So don't forget to Control your Stock Losses!

Revisit Activision (ATVI). ATVI may be a Buy here.

After revisiting Activision (ATVI) right now, ATVI looks like a Buy:

1. Even before Vivendi bought a majority stake of ATVI around Dec. 20, Activision's "Guitar Hero" and "Call of Duty" continue to outperform.
   
2. Recently, (Dec. 20, 2007), company revised outlook upwards.
   
3. The Blizzard/Activision combination is great, and Blizzard does have a great reputation in online gaming, and online gaming, especially MMORPGs (Massively MultiPlayer Online Role Playing Games) and online gaming in the rest of the world especially East Asia is a big growth area.
   
4. The free model (with players paying money for items in the game) of Shanda Interactive (SNDA) seems to be working well. And we'll see what kind of business models will be used by Electronic Arts (ERTS) and Activision (ATVI)
   
5. Forward PE of ERTS and ATVI are both around 30.
   
6. ATVI has broken out out of a flat base, and is breaking out to new highs, with a forward PE of only 30 with a growth rate of about 23 for a reasonable PEG of 1.30.
   

ATVI/Blizzard looks like a good buy and could be poised for greatness over the next few years if they execute on their growth plan.


JC Comments about Activision (ATVI)

The above post was inspired after poster "JC" had these comments:

"Personally, I'd add Activision (ATVI) to the list of videogame stocks to watch out for.

Vivendi Universal (the company that owns Blizzard/World of Warcraft) and Activision are merging, and when you look at their combined game portfolio, I sincerely believe that they represent a much healthier combination of games than Electronic Arts.

Electronic Arts has so much money tied into console gaming (which is still in a transitionary cycle to the next-gen consoles), and the jury is still out whether their investment into Mythic's Warhammer Online is even going to pay out.

EA has such a piss-poor history with online gaming, that I'm not confident at all that they're going to be able to make as much growth as Activision/Vivendi.

I mean, looking forward, Blizzard accidentally let it slip out that they are working on a new MMORPG outside of the Warcraft space (which is huge, and speculation that it will be based either on Starcraft or Diablo). I think with Blizzard's reputation, that an MMO with either of those two properties will be huge! (in Asia as well as North America).

Looking at EA..., all they have in the online pipeline (that I know of) is Warhammer Online. While I realize that there are many Warhammer lead minature game stores across the company, I'm not entirely convinced that Warhammer translates well into a MMORPG, or that enough of those tabletop board gamers who are fans of the game will pick up a subscription based game for something that they do for free...IMO, the attraction of Warhammer is the purchase, creation and painting of an army, and then playing that army against real-life friends. ....so I just don't see those people ditching their nerdy social circle (which is totally fine for them, don't get me wrong) to interact with a bunch of anonymous 12 year olds screaming "Sparta!!!" and "Chuck Norris rulez!" in global broadcast chat in an online game..."

- JC

Anti-Recession Stocks that can survive a US slowdown.

Diversifying your portfolio is often a good idea. Whether we have a Recession in the US or not, each portfolio should have some stocks which hold up during a recession. Often, two sectors mentioned are Consumer Staples and Healthcare.

Here are a few interesting stocks that may be good stocks to hold even when the US experiences a recession.

1. Procter and Gamble (PG)

Everyone around the world knows and uses Procter and Gamble products. They make consumer staple products such as Gillette, Head and Shoulders, Pantene, Crest, Vicks, Oral-B, Pringles, Folgers, Downy, Tide, Bounty, Charmin, and Pampers. This $223 Billion company operates three Global Business units: Beauty, Health and Well-Being, and Household Care. PG has a forward PE of 18.37, 5 year estimated growth of 13, a PEG ratio of 1.41 (reasonable for a consistent growth company), has a yield of 1.9%, and is within range of its 52 week high.


2. Unilever (UL, and UN)
   
   Unilever is a well known and large company based in England and the Netherlands. They provide many well known products including fast moving consumer goods, food, home and personal care. They own the brands Knorr, Country Crock, Ben and Jerry's Ice Cream, Klondike, Posicle, Lipton Tea, SlimFast, Dove, Suave, Vaseline, Close Up toothpaste, Comfort, Snuggle, and Surf. Forward PE is 17.48 and its yield is 2.60%. The stock is within range of its 52 week high.
   
   
3. Pepsi (PEP)
   
   Everyone knows Pepsi brands including Pepsi, Doritos, Frito-Lay products, Ruffles, Quaker Oats products, Mountain Dew, Tropicana Juice drinks, Dole, Rice-A-Roni, and other products. Forward PE is 20, with a yield of 2%. The stock is within range of its 52 week high.
   
   
4. Altria (MO)
   
   Altria is a $158 Billion company that specializes in selling tobacco products (Philip Morris and related brands) and food products, and they used to produce products from Kraft (KFT). However, Altria has spun off Kraft (KFT), so Altria can concentrate on tobacco products. Altria (MO) has a forward PE of 16, and a forward yield of 4.0%. Kraft (KFT), makers of Oreo and Tang, has a forward PE of 16 and a yield of 3.40%. MO is within range of its 52 week high.
   
   
5. Gilead (GILD)
   
   Healthcare is also an important anti-recession sector and Gilead, a $43 Billion Biotech company, is a good company in this sector. They have a good pipeline and produce important products such as Tamiflu and medicines for AIDS related Kaposi's sarcoma. Forward PE is 24, a 5 year estimated growth rate of 17% for a reasonable 1.41 (under 2 is reasonable). The stock is also within range of its 52 week high.
   
   
6. Sun Healthcare (SUNH)
   
   Long term healthcare, especially those companies that cater to the growing population of senior citizens (Baby Boomers will be retiring), is another great anti-recession play. Sun Healthcare (SUNH), a $730 million company, does just that. It has a forward PE of 20, a 5 year estimated growth rate of 24%, for a very good PEG of 0.83 (a PEG under 1 is very cheap). The stock is within range of its 52 week high.
   

So even as the US slows, the companies above should stand to benefit. The companies above are good companies, and most of them are large companies with great international growth and presence. Some even have a decent yield to help cushion your portfolio.

Even if the US stock market does not experience a recession, your portfolio should still have a portion invested in good companies in Consumer Staples and Healthcare, two sectors that should be able to withstand a US slowdown.

Risks of US Recession may be Increasing

According to many sources, the risks and odds of a United States Recession may be increasing.

Here's an article from MSNBC.

Here's one from TheStreet.com.

According to the TheStreet.com article, different firms rate the odds of recession in the US:

1. Bill O'Donnell UBS 67%
   
2. Jack Ablin Harris Private Bank 65%
   
3. Kevin Giddis Morgan Keegan 60%
   
4. Greg Collins Fountain Hill Investments 60%
   
5. Robert Pavlik Oaktree Asset Management 45%
   
6. Tobias Levkovich Citigroup 40%
   
7. Fred Dickson D.A. Davidson 40%
   
8. Richard Sparks Schaeffer's Investment Research 20%
   
9. Neil Hennessy Hennessy Funds 0%
   

What are the Odds of Recession in USA Now (January 2008). Calculated Here.

Many people are concerned about the slowing economy and a possible US Recession.

Can we calculate the odds of a recession?

There are many models, but one of them is by the Federal Reserve Board's Jonathan Wright. It takes three items into consideration:

1. 10 Year Treasury Bond Yield
   
2. 3 Month Treasury Bond Yield
   
3. Federal Funds Rate
   

More information on this available here

Odds of Recession as of January 2, 2008

Current Numbers:

1. 10 Year Treasury Bond Yield: 3.91% (50 Day Moving Average: 4.17%)
   
2. 3 Month Treasury Bond Yield: 3.26% (50 Day Moving Average: 3.34%)
   
3. Federal Funds Rate: 4.25%
   

If we calculate using the current yields, the Odds of Recession as of January 2, 2008 over the next 12 months is 12%.

If we calculate using the 50 day moving average of the yields, the Odds of Recession as of January 2, 2008 over the next 12 months is 9.5%.

The Odds of Recession has gone down since we last calculated the odds on September 1, 2007 (23% odds of recession over the next 12 months from then).