Earnings Preview: Almost Time To Play Ball!

Next week is the official kick off for second quarter earnings. There will be just 77 firms reporting next week, but that includes 23 S&P 500 firms. What is lacking in quantity of firms reporting is more than made up by quality. The firms reporting are some of the biggest and most important bellwethers of the economy and slice across a wide spectrum of industries.

As always, leading off will be Alcoa (AA: 10.94 +0.22 +2.05%), but the lineup includes heavy hitters like Bank of America (BAC: 15.11 +0.25 +1.68%), CSX Corp (CSX: 51.76 +1.00 +1.97%), Google (GOOG: 467.49 +10.93 +2.39%), General Electric (GE: 14.95 +0.12 +0.81%), Intel (INTC: 20.24 +0.14 +0.70%), J.P. Morgan (JPM: 38.85 +0.69 +1.81%) and Yum! Brands (YUM: 40.27 +0.29 +0.73%). While it will not be definitive, by the end of the week we should have a pretty good idea about how the second quarter earnings season is going to shape up.

In addition to the start of earnings season, there will be a fairly heavy dose of economic data, starting with the twin deficits on Tuesday and including important reports on inflation and industrial production. We also get a glimpse into the thinking at the Federal Reserve when the minutes of their last meeting are released.

Monday

• No reports of significance.

Tuesday

• The trade deficit is expected to be unchanged in May at $40.3 billion relative to April. It is the trade deficit, not the budget deficit, that drives how indebted we are to the rest of the world. About half of our trade deficit is due to our oil import bill.
• The Budget Deficit for June is expected to come in at $72.0 billion.

Wednesday

• Retail sales are expected to have declined by 0.3% om June, on top of a 1.2% decline in May. This is a very broad measure of sales, and includes auto dealerships as well as the malls. Excluding autos sales are expected to have declined by 0.1% after a 0.8% decline in May.
• The Federal Reserve's Open Market Committee meeting minutes become available, which provides a look at the thinking behind the Fed's decision to keep rates unchanged. It includes the economic forecasts of the Fed staff as well. No hard number to forecast, but it makes for some very interesting reading.

Thursday

• Weekly initial claims for unemployment insurance come out. They fell 21,000 in the last week, to 454,000. After a huge downtrend from mid-April through the end of 2009, initial claims have become very erratic so far in 2010. Look for them to rise again next week, as we are now near the bottom of the range they have been in for several months. Longer term, we have made good progress, but not good enough. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but still have a ways to go.
• Continuing claims have also been in a steep downtrend of late. Last week they fell by 224,000 to 4.413 million, and down 2.514 million from a year ago. Part of the longer term decline is due to people simply exhausting their regular state benefits, which run out after 26 weeks. Federally paid extended claims fell by 344,000 to 4.577 million. However that is due to even the extended claims running out as a bill to further extend benefits has been stalled in the Senate. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 8.990 million, which is down 568,000 from last week. The total number of people getting benefits is now, for the first time, below year-ago levels with a drop of 866,000. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• The Producer Price Index (PPI) is expected to have risen by 0.1%, partially reversing a 0.3% decline in May. Inflation is extremely well contained, and indeed the bigger threat the economy faces right now is deflation. Stripping out food and energy prices to get to the core PPI, it is expected to have also risen by 0.1% after a rise of 0.2% in May.
• The Empire State Manufacturing index, one of the regional variations on the ISM type data is, expected to have fallen to 18.5 in Ju7ne from 19.57. That would indicate that manufacturing activity in New York State is still increasing (and positive reading indicates expansion) but at a slower rate than in May. In contrast, the Philadelphia Fed index is expected to rise to 8.6 from 8.0. The level of growth is lower in the mid Atlantic states than in New York, but it is expected to show a slight acceleration from May.
• Industrial Production growth is expected to have slowed to 0.2% in June from a robust 1.3% growth in May. However be careful to also look at the growth in Manufacturing output as well. The total Industrial production numbers include Utility output, which is often as much a function of the weather as it is of economic activity.
• Capacity Utilization is expected to have edged up to 74.2% from 74.1%. As with the Industrial Production numbers, be sure to look at the utilization in Manufacturing, as the overall number can be skewed by Utilities and the weather. The overall level of utilization is much improved from a year ago, but still at very depressed levels. Low levels of capacity utilization probably have far more to do with why businesses are not spending than any uncertainty about taxes and regulation. Why buy new machines when your existing machines are sitting idle? Why put up a new office building when the one across the street is half vacant?

Friday

• Inflation at the Consumer level is also expected to be very well contained. The Headline Consumer Price index (CPI) is expected to be unchanged in June after falling 0.2% in May. If food and energy costs are stripped out to get core inflation the index is expected to have risen 0.1%, matching its rise in May. Housing makes up more than 30% of the overall index and about 40^ of the core index and is a key reason that inflation is very well contained. Indeed the bigger risk to the economy at this point is deflation. The low inflation numbers give the Fed plenty of leeway to keep interest rates low for a very long time. Indeed they argue that the Fed should be even more aggressively handle monetary policy though quantitative easing.
• The University of Michigan Consumer Sentiment index is expected to fall in June to a reading of 72.0 from 76.0. In theory the consumer sentiment and confidence indexes should be important since the consumer comprises 71% of the economy. However there is often a disconnect between what people say on these surveys and their actual behavior. Generally lower gasoline prices and higher stock prices drive the number higher, and higher gasoline and a lower stick market drive it down. Since the last survey, gas prices are down, but so is the stock market. 

Earnings Calendar

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
Alcoa Inc	AA	201006	$0.11	($0.26)	-16.67%	20100712	AMC	10.72
Arbor Rlty Trst	ABR	201006	($0.33)	($1.00)	N/A	20100712	BTO	5.03
Amer Apparel	APP	201006	($0.07)	$0.06	0.00%	20100712	BTO	1.49
Csx Corp	CSX	201006	$0.96	$0.72	13.04%	20100712	AMC	50.76
Infosys Tec-Adr	INFY	201006	$0.56	$0.55	5.26%	20100712	AMC	61.34
Novellus Sys	NVLS	201006	$0.60	($0.41)	6.82%	20100712	AMC	26.34
Shaw Group Inc	SHAW	201005	$0.54	$0.57	2.08%	20100712	BTO	34.59
Audiovox Corp	VOXX	201005	($0.01)	$0.02	-999.00%	20100712	AMC	7.26
Wegener Corp	WGNR	201005	N/A	($0.06)	N/A	20100712		0.15
Aar Corp	AIR	201005	$0.30	$0.51	5.88%	20100713	AMC	17.17
Fastenal	FAST	201006	$0.44	$0.29	15.15%	20100713	BTO	51.2
Healthcare Serv	HCSG	201006	$0.20	$0.18	-15.00%	20100713	AMC	19.38
Hi Tech Pharma	HITK	201004	$0.55	$0.41	34.00%	20100713	BTO	22.7
Heartland Exp	HTLD	201006	$0.16	$0.16	18.18%	20100713	DMT	15.04
Intel Corp	INTC	201006	$0.43	$0.18	13.16%	20100713	AMC	20.1
Novagold Rsrcs	NG	201005	($0.03)	($0.02)	N/A	20100713		6.28
Ocean Power Tec	OPTT	201004	($0.57)	N/A	-17.02%	20100713	BTO	5.13
Yum! Brands Inc	YUM	201006	$0.54	$0.50	11.32%	20100713	AMC	$40.00
Acergy Sa	ACGY	201005	$0.26	$0.40	N/A	20100714		16.1
Adtran Inc	ADTN	201006	$0.35	$0.30	7.41%	20100714	BTO	28.2
Adams Express	ADX	201006	N/A	$0.01	N/A	20100714		9.4
Asml Holding Nv	ASML	201006	$0.58	($0.34)	3.13%	20100714	DMT	30.05
Banesto Sa-Adr	BNSTY	201006	N/A	N/A	N/A	20100714		4.2
Corus Entmt-B	CJR	201005	$0.38	$0.33	-9.09%	20100714	DMT	18.26
Igate Corp	IGTE	201006	$0.17	$0.11	25.00%	20100714	BTO	13.07
Joes Jeans Inc	JOEZ	201005	$0.01	$0.02	0.00%	20100714	AMC	2.1
Jackson Hewitt	JTX	201004	$1.05	$1.69	-9.80%	20100714	BTO	1.03
Landstar System	LSTR	201006	$0.48	$0.37	6.25%	20100714	AMC	40.43
Marriott Intl-A	MAR	201006	$0.28	$0.23	10.00%	20100714	AMC	30.68
Medtox Scientif	MTOX	201006	$0.13	$0.04	0.00%	20100714	BTO	11.99
Progressive Cor	PGR	201006	$0.35	$0.37	18.92%	20100714	BTO	19.68
Peregrine Pharm	PPHM	201004	($0.10)	($0.10)	N/A	20100714	AMC	1.97
Texas Inds	TXI	201005	($0.35)	($0.12)	-18.07%	20100714	BTO	28.9
Univl Fst Prods	UFPI	201006	$0.89	$0.83	500.00%	20100714	AMC	31.36
Alliance Finl	ALNC	201006	$0.55	$0.28	18.00%	20100715		29.19
Adv Micro Dev	AMD	201006	$0.06	($0.63)	200.00%	20100715	AMC	7.37
Angiodynamics	ANGO	201005	$0.13	$0.14	8.33%	20100715	AMC	15.06
Commerce Bancsh	CBSH	201006	$0.58	$0.49	0.00%	20100715	BTO	37.17
Cubist Pharm	CBST	201006	$0.41	$0.40	-2.86%	20100715	AMC	21.11
Cvb Finl	CVBF	201006	$0.15	$0.17	15.38%	20100715	AMC	10
Fairchild Semi	FCS	201006	$0.31	($0.03)	4.17%	20100715	BTO	8.84
Gsc Investment	GNV	201005	$0.08	$0.31	-30.00%	20100715	AMC	1.66
Google Inc-Cl A	GOOG	201006	$5.78	$4.66	4.12%	20100715	AMC	456.56
Grainger W W	GWW	201006	$1.50	$1.22	0.00%	20100715	BTO	101.57
Hunt (Jb) Trans	JBHT	201006	$0.35	$0.23	11.54%	20100715	AMC	34.03
Jpmorgan Chase	JPM	201006	$0.73	$0.28	17.46%	20100715	BTO	38.16
Kayne Andsn Egy	KED	201005	$0.35	N/A	196.55%	20100715	AMC	15.84
Kinder Morg Eng	KMP	201006	$0.40	$0.33	-2.27%	20100715	AMC	66.46
Mission West	MSW	201006	$0.14	N/A	23.08%	20100715		6.81
Mgic Invstmt Cp	MTG	201006	($1.00)	($2.74)	-10.94%	20100715	BTO	7.78
The9 Ltd-Adr	NCTY	201006	($0.39)	$0.02	25.53%	20100715	AMC	4.17
Novartis Ag-Adr	NVS	201006	$1.13	$0.89	-12.93%	20100715	BTO	49.72
Nexen Inc	NXY	201006	$0.32	$0.03	-10.26%	20100715	BTO	20.65
Peoples Utd Fin	PBCT	201006	$0.09	$0.08	0.00%	20100715	AMC	13.72
Polycom Inc	PLCM	201006	$0.21	$0.22	-22.22%	20100715	AMC	29.66
Ppg Inds Inc	PPG	201006	$1.43	$0.90	11.11%	20100715	BTO	64.25
Schwab(Chas)	SCHW	201006	$0.15	$0.18	-9.09%	20100715	BTO	14.11
Tcf Finl Corp	TCB	201006	$0.27	$0.08	136.36%	20100715	BTO	16.74
Tempur-Pedic	TPX	201006	$0.41	$0.22	41.94%	20100715	AMC	31.03
Meridian Biosci	VIVO	201006	$0.18	$0.21	7.14%	20100715	BTO	17.76
Valmont Inds	VMI	201006	$1.04	$1.69	-21.52%	20100715	AMC	78.41
Wolverine World	WWW	201006	$0.33	$0.27	14.29%	20100715	BTO	26.17
Atlas Cop-Adr A	ATLKY	201006	N/A	$0.15	N/A	20100716	DMT	15.5
Bank Of Amer Cp	BAC	201006	$0.22	$0.33	211.11%	20100716	BTO	14.86
Popular Inc	BPOP	201006	($0.06)	($0.71)	13.33%	20100716	BTO	2.75
Citigroup Inc	C	201006	$0.05	($0.60)	-999.00%	20100716	BTO	3.97
Rockwell Collin	COL	201006	$0.89	$0.91	6.90%	20100716	BTO	55.06
First Hrzn Natl	FHN	201006	($0.09)	($0.55)	43.75%	20100716	BTO	11.76
Gannett Inc	GCI	201006	$0.52	$0.46	21.95%	20100716	BTO	14.49
Genl Electric	GE	201006	$0.27	$0.31	31.25%	20100716	BTO	14.83
Genuine Parts	GPC	201006	$0.71	$0.65	1.61%	20100716	BTO	40.88
Knoll Inc	KNL	201006	$0.10	$0.21	-23.08%	20100716	BTO	12.42
Crystallex Intl	KRY	201006	N/A	N/A	N/A	20100716		0.4
Mattel Inc	MAT	201006	$0.15	$0.06	333.33%	20100716	BTO	21.84
Petrobras-Adr C	PBR	201006	$1.03	$0.96	N/A	20100716		36.12
Webster Finl Cp	WBS	201006	$0.06	($1.05)	27.27%	20100716	BTO	18.99
West Cst Bcp/Or	WCBO	201006	($0.05)	($0.41)	96.43%	20100716		2.68

 

Lunar Cycle Batting Average Now Up To 73.1%

 

I know you're all sitting on the edge of your seats waiting for the results so here's the scoop. The Lunar cycle held for through one more phase, just by a hair. As the post below indicates, the S&P 500 Index needed to close above 1076.76 yesterday, up for the just ended Waning phase to a New Moon and it did, closing at 1077.95:

That brings the average to 19 out of 26 in sync phases, or a 73.1% average. That's a pretty good average in any sport, including betting on the stock market.

The next Full Moon will be July 26. It won't be a difficult challenge to continue adding to the average. My guess, though, is that we're due for a nice, juicy decline at or near the top end of the range. I'm looking for a decline of 5-6%, to around 1026.00 on July 26.

Pure speculation but, hey, you come up with a better one.

The Beginning Of A Bigger Downswing In Silver, Gold And MiningStocks?

 

You read a lot recently about "double dip" and it does not refer to two scoops of ice cream, or to the Jerry Seinfeld episode when George takes a large tortilla chip, dips it into a bowl of dip, bites into it and dips it into the bowl again, much to the utter disgust of the person standing next to him.

Yes, the financial meltdown has brought all kinds of new words into our lexicon.

The double dipping you have been reading about refers to recession - a double-dip recession, with a W shape on the chart. It is a recession followed by a short-lived recovery, followed by another recession.

We are half way into the year and it is a good time to ask ourselves if we are in fact facing another "double-dip" recession? And if so, what are the implications for precious metals?

There is certainly enough fear and angst on the subject if you read the financial pages. The word "fear" led the front-page headlines of The Wall Street Journal at least twice last week.

The London Financial Times reported this week that optimism among finance directors of the UK's largest companies about their business's prospects has dropped to a 12-month low.

Some of the world's leading hedge fund managers are positioning their funds for a double dip recession, saying there has been a dramatic shift in the macro-economic environment over the last month.

Legendary investor George Soros recently told a banking conference in Vienna that the risk of a double-dip recession due to current European public finances woes can't be ruled out, as credit problems are forcing European countries to accelerate fiscal consolidation.

And then there is Robert Prechter of Elliot Wave International, who in a recent New York Times piece said we're headed for an even bigger crash than that of 2008 and 2009. He says the Dow could fall as low as 1,000 in the biggest bear market in 300 years. Here is his advice to investors:

I'm saying: 'Winter is coming. Buy a coat.' Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead.

Double Dip of Dismal News

It is understandable when you consider that stocks registered their worst quarter since the financial meltdown in the fourth quarter of 2008. The economy is weak and this is after trillions of dollars have already been pumped into it. Hiring is weak, consumers have lost confidence, stimulus dollars are running out and debt is spreading across Europe. Commercial real estate is in trouble and no new buyers are coming into the housing market. Banks are still reluctant to lend and businesses are loath to expand.  Automakers say they see no sign of recovery. Ten-year US Treasury notes are selling at the lowest yields in 14 months.

That's a lot of bad news to take it. But there's more.

Consider that Bush tax cuts are set to expire on January 1, 2011. Bush cut taxes in 2001 and again in 2003 in the face of a weak economy. Unless something changes, America is going to enact the largest tax increase in US history that will be matched by equally large tax increases and spending cuts by state and local jurisdictions. Unless Congress acts to make those cuts permanent, massive tax spikes will hit hard and could tip the U.S. back into recession. Research has shown that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is also true.

Another New Term-"Option ARMs"

Here is another new term for us to learn-"Option ARMS." These are Adjustable Rate Mortgages and are considered one of the riskiest kinds of loans made during the housing boom; they have left many borrowers owing much more than their homes are worth.
ARMs generally permit borrowers to lower their initial down payments if they are willing to assume the risk of interest rate changes. Many ARMs have "teaser periods" when the ARM bears an interest rate substantially below the fully indexed rate.

Billions in Option ARM resets are scheduled to take place in 2010, which might make the subprime crisis look like a cakewalk. These are the loans that made it easy for consumers to buy houses they couldn't afford. About $750 billion-worth of Option ARMs were issued between 2004 and 2007 and they will all begin resetting shortly.

Does the government have the money to bail out the next batch of banks that will fail as a result of these Option ARMs? We should brace ourselves for more bank failures, job losses, foreclosures, delinquencies, and economic adversity.

To make matters even more unsettling, let's not forget that the world's governments met recently in Canada and pledged to reduce their countercyclical spending. If they follow through, it could result in the private sector and the public sector de-leveraging at the same time, which means another crisis. When governments begin to tighten at the same time that the private sector is tightening, the effect could push the world into a sharper, deeper recession. On the face of it, cutting back on spending seems like the prudent thing to do. But the move may not be enough to reduce sovereign debt levels, but still might have enough kick in it to tip several national economies into depression.
Having frittered away trillions in bailouts and confidence-building exercises, it will be nearly impossible for those same maneuvers to work again if the economy turns lower and defaults pick up again.

The likely scenario is that there will be wave of bankruptcies at first with inflation to follow.

Fascinating Crossroad in Modern Financial History

Albert D. Friedberg, of Friedberg Mercantile in Toronto, is one of the most respected hedge fund managers in Canada. In a private quarterly report he just sent to his investors Friedberg said: "In my view, we stand at a fascinating crossroad in modern financial history."

We would like to quote directly from his newsletter:

Massive quantitative easing for the past 18 months, at least in the U.S. and the U.K., has not led to an explosion of money as one would have expected. In effect, the money multiplies has shrunk dramatically; banks have build up record excess reserves and the asset side of their balance sheets has experienced a slight shrinkage, as loans have declined at a precipitous rate and Treasury holdings have only partially offset this decline. Clearly, banks are nervous about extending new credit…

If banks continue to hang on to their excess reserves, money supply will begin to drop in accelerated form and bring down with it asset prices and the economy. As it is, MZM (money of zero maturity, a proxy for transaction type money) has contracted at an annual rate of 6.9% over the past 13 weeks, while broader money (M2) has contracted at a 0.4% rate over the same span. The money contraction is puzzling in that they have occurred during a time when the Fed has made every conceivable effort to expand money to avoid the consequences of the 1930s. Recall that monetarists like Milton Friedman charged that the 30% contraction of money during the 30s was the principal cause of the depression. At the same time, fiscal profligacy in the U.S., Europe and Japan, is forcing the Treasuries of these countries to retrench in a massive way, implying rising taxes and a freeze on spending for years to come. The monetary drama in play at this time puts the continuation of the upswing in doubt.

The U.S. U.K., Eurozone and Japan are delicately poised between two very serious dangers; a once in a generation deflation and an accelerating inflation rate. Either a lack of oxygen or too much of it will kill the patient. The deflationary, the more likely scenario, would be deadly almost right way. The inflationary scenario on the other hand, on the other hand, would take a huge toll on the developed economies, but it would be likely to take some time.

Friedberg, a prudent investor, says he placed a modest amount of chips on the deflation table and fair sized short positions in stock indices. A gold bull, he also placed a "fair sized" long position in gold, which he says is becoming a safer international asset by the day.

We obviously agree that going long the gold market is the right move for investors to prepare themselves for the coming storm. Remember that the first goal always is not to lose money while waiting for the next opportunity train to leave the station. Gold is the ultimate money.  We wrote in last week's Premium Update that there is only one reason not to invest in gold. You should not invest in gold or silver if you believe that Somewhere Over the Rainbow skies are blue, sovereign debt problems will disappear and economic recovery is just around the corner.

This week, however, we will turn to silver as this market provides us with particularly interesting long-term calls. Consequently, let's begin with the very-long-term chart (charts courtesy by http://stockcharts.com.)

The above chart has been featured in our updates several months ago when we discussed long-term targets for silver and gold.

Just like it was the case back then, it seems that silver prices would need to correct previous upswing twice before moving to new highs. Please note that once a new high is reached after a rally, there is a typical correction and then a move close to the previous high that does not take silver higher. It seems that this is what we have just seen.

Once this second trial fails, price corrects once again - at least 50% of the preceding upswing (as marked on the chart above) before moving much higher.

This means that if we have seen the second top for silver now (which is likely the case) then silver might need to move down to $14 - $15 level before it ignites a rally that takes it to new highs.

We realize that this is very discouraging news to silver and gold investors but it is our obligation to report what our analysis determines. Gold and mining stocks may also go substantially lower but confirmation from other techniques or signals is needed before validating this option as highly probable.

The upper section in this first chart for silver provides conclusive calls long-term. The Trix indicator normally does not imply a final bottom until a downward move has been followed by a correction and then an addition decline. This would be near the zero level for the Trix indicator. Above we see that we are beginning the second part of a corrective phase. This precedes our next rally and we expect to see a zero eventually. This would correspond to a final bottom possibly along with a possible decline to the $14 - $15 level.

This discussion has not been provided to scare you out of the precious metal sector. We do wish however to emphasize that the situation is quite serious. It is most important now to monitor all developments daily and react accordingly. Sunshine Profits has the tools and the expertise to keep our Subscribers informed. This is always our first priority.

The above chart indicates that we might be close to a local bottom, as the price of silver is right at the 200-day moving average. The Stochastic Indicator points towards the bottom possibly being in. The RSI however does not confirm this. So what does all this mean? The signals are presently mixed and unclear and we do not feel this benefits entering with speculative capital at this time.

This final chart for silver points to the bottom being in and a technical turning point also at hand. The Stochastic Indicator also identifies the bottom and a probable move upwards to follow.

Summing up, even though precious metals will likely move upwards slightly in the coming days, this may be the beginning of a bigger downswing in silver, gold and mining stocks. We caution that these moves higher may only be temporary (particular caution is necessary if one wishes to trade this move), as they are driven to a great extent by possibility of a consolidation in the Euro Index. Please note that this is not the end of the bull market for silver; in fact.

Crude Oil Tracks Stocks Upward To Close Week Above $76 A Barrel

 

Crude oil futures finished the week on a positive note, tracking stocks upward after hitting the low for a month earlier in the week.

The benchmark West Texas intermediate contract settled Friday at $76.09 a barrel, up 65 cents on the day. On Tuesday, the contract declined for the sixth session in a row, closing at $71.98, its first dip below $72 in a month.

Crude oil finished last week at $72.14 a barrel after falling 8.5% in the course of the week.

The Dow Jones Industrial Average surged above the 10,000-point level again this week, indicating a brighter economic outlook and buoying oil prices. The Dow climbed 511.55 points on the week, or 5.3%, to close Friday at 10,198.03, its strongest weekly increase in a year.

A substantial decline in oil inventories, reported on Thursday in a holiday-shortened week, pushed oil prices up nearly 2% on the day. The U.S. Energy Information Administration reported crude inventories down by 5 million barrels, compared with consensus forecasts of a 1.8 million-barrel decline. A string of weekly increases in oil stocks had been weighing on prices.

The International Monetary Fund on Thursday revised its forecast for global growth this year upwards, to 4.6% from 4.2%, lending further support to oil prices. The rosier forecast came in spite of the fiscal crisis in Greece that has rocked the euro area and unsettled markets.

The IMF said the revision came after "stronger activity" in the first half. The multilateral lending agency left is growth forecast for 2011 unchanged at 4.3%.

Still, analysts were waiting for clearer signals about the future direction of the economy, and are looking now to the beginning of corporate earnings season next week.

The oil inventory decline was attributed in part to delays in imports because of Hurricane Alex, so some analysts predicted an increase in oil stocks next week as the delayed oil is delivered.

Also, a new tropical depression in the Gulf of Mexico that might have nudged oil prices higher with the threat of further disruption to production and shipping failed to develop into tropical storm Bonnie and hit the coast at the Mexican-Texas border, bypassing offshore platforms.

Is The Apollo Group Stock Undervalued?

 

 

Apollo Group (APOL: 44.44 +0.38 +0.86%) has been in and out of the magic formula screen for quite some time now. It appeared in 2008 when the stock hit multi year lows and traded in the low $40′s. As the market rebounded, Apollo's stock rebounded tremendously and more than doubled to almost $90. It currently sits in the low $40′s and appears on the top 30/50 million magic formula screen. It caught my attention about a month ago as it's the second largest company (by market cap) on the list, behind Forrest Laboratories (FRX: 28.39 +0.07 +0.25%). Usually,  but not always, when a large company appears on this screen, the stock is undervalued. But, like any stock, it is important to do the homework and analyze the opportunity and risks involved with the company.

Apollo Group's Line of Business (Google Finance)

Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through its wholly-owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix), Western International University, Inc. (Western International University), Institute for Professional Development (IPD), The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus). The Company has a joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments primarily in the international education services industry. During the fiscal year ended August 31, 2009 (fiscal 2009), Apollo Global completed the acquisitions of BPP Holdings plc (BPP) in the United Kingdom, Universidad de Artes, Ciencias y Comunicacion (UNIACC) in Chile, and Universidad Latinoamericana (ULA) in Mexico.

Apollo's Financial Position

By most accounts, Apollo seems to be financially solid. It currently has about 900 million in cash and equivalents compared to about 115 million of long term debt. Revenues continue to grow in the mid teens for each 3 year period in the past decade. Free cash flow and cash from operations are growing at a lower pace for each 3 year period in the past decade, around 11% and 9% respectively. While cash flow looks good, what you do with it is even more important. As such, looking at an efficiency ratio such as CROIC is very important. Apollo's CROIC seems to be great as it's usually above 30%.  But there are times when CROIC goes negative. This occurred in 2001, 2003, 2008 and the trailing twelve months (ttm), which are also the years in which Apollo's stock traded at or below the mid $40′s. (click on image below to see all 10 years).

Apollo Magic Formula Numbers

Apollo's magic formula numbers look great by both measures. My guess is that it currently ranks in the top 5.

Risks Associated with Apollo

Risks associated with Apollo come from its business model. Most of a for profit university's revenue comes from government financed student loans. Unfortunately, along with the increasing revenues, comes a pretty large number of defaults on those loans. This first came to my attention when doing a bit of research and the latest comments on a Gurufocus thread in which several members point out the problem of generating huge profits and at the same time providing a sub-par education. As such, any investigation by the federal government might lead to some serious damage. With this in mind, while the stock might look undervalued, I will simply pass and move on.

Divergences Give Warning Signs Of U.S. Stock Market Reversals

 

I frequently post updates on NYSE Market Internals positions when looking at the S&P 500 because knowing what's "Under the market's hood" is extremely important just just for day traders, but also for swing traders.

This post takes a look at the three market turns in June 2010 and specifically highlights the market internal divergences that forecast these turns.

Let's first start with the June 8th bottom:

 

Rather than make this a text-filled post, I am going to let the charts speak for themselves.

All charts will show the S&P 500 15-min chart (candles) and then the ADD (Breadth) along with VOLD (Volume difference of Breadth).

While you may not be able to view VOLD in your charting platform, you can certainly view Breadth, which is the difference in NYSE Advancing Stocks minus Declining Stocks - it's $NYAD in StockCharts.com.

Divergences occur when price goes one way and internals goes the other - and divergences are warning signs of a likely reversal.

They don't guarantee a reversal, and it's often best to wait for a break in an established trendline before shifting your trading strategy, but if you do not incorporate market internals into your short-term trading strategy, you are missing valuable clues that you can't get anywhere else.

Both Breadth and VOLD bottomed on June 4th, though the S&P 500 formed its final swing low at 1,045 on June 8th, which marked a short-term swing low and tradeable long (buy) opportunity that produced a strong upside move.

However, that upside move itself ended in a massive negative divergence in internals as seen in the major market turn on June 21.

 

If you look extremely closely, market internals actually peaked on June 10th - a technicality - but one worth noting.

We had a second, lower peak in internals at the close of June 15th, where I began the arrow.

Notice the crystal clear drop-off in internals - actually turning negative on June 16th's up day - that is a MAJOR warning sign of caution.

However, the SPX did not reverse as was forecast by the market internals divergence - internals are not magic indicators that work 100% of the time - nothing does.

So the market rallied higher and higher, to peak on a "Finger" or "Exhaustion" gap at 1,130 on June 21st.

Look closely to see that Breadth and especially VOLD formed crystal clear negative divergences - traders caught long - or who bought on this peak - did so on extremely thin ice… and when the ice broke, the avalanche began.

Market Internals Matter!  The longer a market is stretched thinly higher on declining market internals, the higher the probability for a major downward resolution of the divergences - we're talking mini-crash/reversal as opposed to a typical retracement.  And that's exactly what happened.

However, even that multi-down day series ended on its own crystal clear positive internals divergence on July 1:

 

Looking closely at the chart, we see the massive down-day on June 29th resulted in new lows for Breadth and VOLD - lows that held despite the market falling to the 1,010 level.

When the market hit 1,010 - a confluence support area - Breadth and VOLD both showed higher lows in a classic positive internals divergence.

And the market rallied exactly as expected from this divergence in internals.

Now, we're facing declining market internals as the market continues its rally, which signals caution for the bulls and potential upcoming opportunity for the bears.

 

Before You Get Wildly Bearish About U.S. Stocks, Here’s Some Important Positives And Perspective

 

Although the stock market plunge last week was certainly unsettling, history and a slew of positive leading indicators show that this may just be part of a normal pattern with better news ahead.

Stocks were hammered on Tuesday as a negative revision to an economic report out of China and fears over European bank funding set off a global firestorm of selling. A very weak consumer confidence report didn't help matters.

The major U.S. stock indices fell through critical support levels, with the S&P 500 returning to levels first reached last August. That's almost an entire year of stock market appreciation out the window.

In the end, the Dow Jones Industrial Average lost 2.7%, the S&P 500 lost 3.1%, the NASDAQ lost 3.9%, and the Russell 2000 lost 4%. Large-cap stocks outside the United States fell 3.5%, while emerging market stocks fell 4%. Some of the European exchanges fell the most, including iShares MCSI Spain Index ETF (EWP: 35.29 +1.94 +5.82%), down 5%, and iShares MCSI Switzerland Index Fund ETF (EWL: 20.43 +0.41 +2.05%), down 6%.

The S&P 500, as you can see in the chart above, landed at support at the 1,040 level that has held the index over the last nine months. This is the neckline of the big head-and-shoulders pattern we've been talking about. I had expected the right shoulder to be made at 1,040-1,050 but it appears that holders were so anxious to flee the scene of the crime that the right shoulder is a bit stunted.

More disheartening for bulls in the week was the crushing blow suffered by big-cap consumer staples stocks like The Coca-Cola Co. (KO: 50.40 +0.35 +0.70%) and Pepsico Inc. (PEP: 61.55 +0.02 +0.03%), down 2%-plus. Procter & Gamble Co. (PG: 59.55 +0.17 +0.29%) also sank under its 200-day average for the first time since early last summer; last time it crossed below the 200-day was at the start of the rout in September 2008.

Elsewhere in this vein, Colgate Palmolive Co. (CL: 79.007 +0.287 +0.36%), Pfizer Inc. (PFE: 14.28 +0.14 +0.99%), Microsoft Corp. (MSFT: 23.921 +0.651 +2.80%), Alcoa Inc. (AA: 10.35 +0.35 +3.50%), Johnson & Johnson (JNJ: 59.46 +0.38 +0.64%), Hewlett Packard Co. (HPQ: 43.89 +1.08 +2.52%) and Cisco Systems Inc. (CSCO: 21.64 +0.51 +2.41%) all declined. Each is now well below their 200-day line and showing few signs of life, as you can see in the chart above (from top, MSFT, PG, AA, PFE, KO). The upshot: Weakness is broadening and becoming pervasive. It's not persistent or profound yet, but it's headed in that direction.

So what's going on? It's not one thing, it's an accumulation. Fears of a second recession are growing more palpable and investors are feeling panicky. The CBOE Volatility Index (CBOE: VIX), which was quiet on Monday, surged 20% Tuesday — its largest one-day gain since June 4. Investors flocked to perceived safe haven assets like gold and bonds — in fact, the yield on 2-year Treasury notes fell below 0.6% for the first time. Commodities were hit hard: Copper lost 5.1% and crude oil fell 3%.

Shares of some of the companies most closely tied to the global economic recovery — were thrown to the ground like penny stocks. Citigroup Inc. (C: 3.892 +0.102 +2.69%) lost 5.2%, though a mysterious -17% down-spike was excised from the record. Textron Inc. (TXT: 16.64 +0.57 +3.55%), a defense and industrial conglomerate, lost 10% as it fell out of its 10-month trading range; a lot of other defense contractors such as General Dynamics Corp. (GD: 59.54 +0.84 +1.43%) and Northrop Grumman Corp. (NYSE:NOC) also look like this, or worse. International Paper Co. (NYSE:IP) lost 6.7%; The Boeing Co. (NYSE:BA) lost 6.3%; Ford Motor Co. (NYSE:F) lost 5.3%.

The market has now fallen into a very oversold short-term condition — just like late May and early June. Really, I mean it this time. The next move could be mildly down again on Tuesday morning as margin clerks force overleveraged, wrong-footed fund managers to come up with cash to meet borrowing covenants. That usually brings selling in big-cap stocks that have advanced the most, as that is where the vein of accessible profits lie. After that, say around 11 a.m. ET, the market will have a chance to levitate.

The bottom line for me is that the S&P 500 closed the month below its 12-month average. Since 1990, that sort of monthly close has been a rock-solid sell signal. It's the same cross that occurred in October 2000 and December 2007, and I know that a lot of major fund managers use it as a simple but effective cyclical sell signal.

Before we get too wildly bearish, though, let me tell you some important positives and give you some more perspective.

THE SOPHOMORE SLIP

Coming out of the past five recessions (1970, 1974, 1982, 1991, and 2001) increases in the ISM Manufacturing Index, corporate earnings, and consumer confidence all slowed considerably as the economy transitioned from cyclical economic recovery into slower secular economic growth, according to Merrill Lynch analysts.

It's no surprise that stocks don't tend to do much in the second year of recoveries when investors become increasingly worried about the potential for a quick return to recession, sometimes called a "double dip."

Just four months into the strong recovery of 1975, the S&P 500 lost 14% (the current correction has been worth 14% too). Although stocks subsequently recovered and GDP grew 4% in 1976, the S&P 500 didn't make any progress that year. In 1982-'83 stocks surged 63%, but then slumped in 1984 as GDP growth slowed in the second year of recovery, as shown in the chart above. In 1992, stocks only managed to gain 6.6% after digesting big recovery-fueled gains in 1991.

Something similar could be happening right now. Since the recession unofficially ended last July when GDP growth flipped to positive, we're now about to enter the second year of this recovery, so it seems that a slippage in the market is just par for the course. Aggravating, sure. But not the end of the world.

We've sure seen the data points soften over the last couple of months. New homes sales plunged to a 40 year low in May. Lumber prices are down 43% over the last two months. The money supply has stopped growing. Job growth is anemic. Unemployment benefits are about to expire for millions of people after the Republicans in Congress blocked a renewal — taking $45 billion worth of annual purchasing power off the table. And the ISI Group's company surveys have moved to a 14-week low as business confidence has waned. These are all signs of a slowdown. But …

ROOM FOR CONFIDENCE

…. There are also some promising signs that the economy is on a growth path. These signs don't get as much PR these days, so be sure to equally weight them in your mind.

General Motors (which is eyeing an IPO) announced that it won't have its usual summer production shutdown. Mercedes, BMW, and Audi are all adding staff to boost summer production too. Apartment rents are on the rise. Mortgage rates continue to drop to new record lows, making houses more affordable than ever. Railcar loadings increased 0.6% last week over the previous week and are up 17% from their recession lows. Overseas data has also been strong, with solid employment readings from Brazil, Germany and Taiwan and good industrial production numbers in Singapore.

Moreover, the economics team at the ISI Group in New York notes that wages and salaries have been growing at a 4.1% annual rate over the last five months. Why? Over this period, more than 1.5 million new jobs have been created. The trend is set to continue with the latest Business Roundtable survey of CEOs on their employment plans increasing to the highest reading since 2006.

Overall, Deutsche Bank AG (NYSE:DB) economist Joseph LaVorgna notes that only when the year-over-year growth rate of the Index of Leading Economic Indicators — which looks at 11 indicators including new orders, average workweek, and building permits — turns negative should people worry about the economy. Although the three-month growth rate has slowed from a peak of 14% last July, it's still growing at a very fast 7.2%, as shown above. The 12-month rate is down from 11.6% to 9.2% now. All are well above zero.

LaVorgna believes that these growth rates "conservatively imply real GDP gains in the 3.5% to 4% range." Likewise, the ECRI Weekly Leading Index that I have shared with you many times, shows that the economy is slowing down to cruising speed, not crashing.

In short, I realize that with market prices falling so fast lately it's easy to extrapolate out a lot of end-of-world scenarios, but really the picture is not that bleak.

WEEK IN REVIEW

Monday: Personal income continued to grow in May, rising 0.4% over April. Consumer spending also increased. Both are great signs that consumers are slowly regaining purchasing power as the job market slowly starts putting people back to work.

Tuesday: Thanks to an increase in activity from the government's now expired homebuyer tax credit, home prices increased 0.7% month-over-month in April. More recent data on sales suggest May should see another set of price increases before another soft patch is hit as the post-stimulus slowdown forces prices down again. Separately, consumer confidence plunged in June, with the Conference Board's measure falling more than 16% — a decline of a size normally associated with an economic shock. Much of the decline was due to regional weakness related to the oil spill in the Gulf of Mexico.

Wednesday: The Chicago Purchasing Managers Index indicated business activity continued to grow in June, and new orders are increasingly being put into production. As a result, factory managers are being forced to hire new workers: the employment sub-index increased five points to 54.2. Any reading over 50 indicates hiring.

Thursday: A busy day. Motor vehicle sales fell to an 8.4 million annual rate, down from 8.9 million in the previous month. The ISM Manufacturing Index continues to reflect month-over-month growth in the manufacturing sector, albeit at a slower rates. The index fell to 56.2 in June from 59 previously. New orders fell seven points to 58.5. Production and hiring remained strong. The worst news of the day was the 30% plunge in the Pending Home Sales Index for May — which suggests that housing is in the midst of a new leg down. The good news was that the Monster employment index increased seven points to 141 in June — indicating rising online job demand.

Friday: The June payroll report was disappointing. Total nonfarm payrolls fell by 125,000 as the government let all those temporary Census workers go. Removing that effect, private payrolls increased 83,000 for the month following a 33,000 rise in May. That was below analysts' expectations of a 105,000 advance in private payrolls. The manufacturing sector added 9,000 workers for the third straight month of gains.

Also, hours worked and average earnings both fell. The unemployment rate dropped to 9.5% from 9.7% previously, but only due to a sharp drop in the number of people looking for work.

The week ahead

Monday: Markets closed for observance of Independence Day.

Tuesday: ISM Non-Manufacturing Index will provide a look at the level of activity in the all important services sector of the economy in June. Analysts expect the level of activity to increase over May, but at a slower rate of growth.

Wednesday: The Mortgage Bankers' Association will release its latest Purchase Application Index. Expect the results to be weak if recent housing data points are any guide. Earnings reports: Family Dollar Stores Inc. (NYSE:FDO)

Thursday: Chain store sales and initial weekly jobless claims will be released.

Friday: An update on the status of the inventory rebuilding cycle when the government releases the latest wholesale trade data. Inventory rebuilding has been an important driver of economic growth over the past few quarters. Earnings: Elan Corp. plc (NYSE:ELN).