October 21, 2011

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MARKET OVERVIEW

Index
DJIA NASDAQ RUSSELL 2000 S&P 500

started week
11643.35 2653.32 707.69 1224.47

Thursday Close
11541.8 2598.62 696.42 1215.39

4 day change
-101.55 -54.7 -11.27 -9.08

4 day change %
-0.87% -2.06% -1.59% -0.74%

ytd
-0.31% -2.04% -11.13% -3.36%

Summary of VE Stock Universe

Stocks Undervalued Stocks Overvalued Stocks Undervalued by 20% Stocks Overvalued by 20% 82.06% 17.94% 50.67% 5.03%

SECTOR OVERVIEW
Sector
Aerospace Auto-Tires-Trucks Basic Materials Business Services Computer and Technology Construction Consumer Discretionary Consumer Staples Finance Industrial Products Medical Multi-Sector Conglomerates Oils-Energy Retail-Wholesale Transportation Utilities

Change
0.74% -0.66% 0.04% -0.29% -0.22% 0.13% -0.20% -0.25% 0.25% -0.32% 0.10% 0.06% 0.73% 0.21% 0.81% 0.00%

MTD
8.50% 16.10% 11.08% 10.49% 12.86% 15.49% 12.98% 8.53% 10.26% 13.19% 8.34% 12.46% 19.20% 11.96% 16.20% 7.21%

YTD
1.95% -31.77% -24.33% -9.93% -11.14% -25.91% -14.44% -16.11% -12.11% -18.63% -6.21% -14.00% -18.50% -3.95% -11.59% -4.96%

Valuation
18.35% undervalued 18.18% undervalued 22.67% undervalued 20.12% undervalued 22.45% undervalued 25.19% undervalued 20.50% undervalued 11.93% undervalued 20.38% undervalued 24.07% undervalued 24.17% undervalued 15.22% undervalued 19.09% undervalued 16.29% undervalued 15.80% undervalued 4.63% undervalued

Last 12MReturn
0.18% 0.36% -5.53% -4.08% -3.09% -16.48% -3.32% -2.00% -6.81% -1.76% -1.18% -2.76% 25.48% 9.11% -7.24% 13.30%

P/E Ratio
21.38 30.89 31.73 28.83 34.47 36.73 29.5 17.48 18.39 17.59 28.88 21.12 35.56 28.13 24.46 20.79

Sector TalkOil/Energy Stocks

Below, we present the latest data on leading Oil/Energy Sector Stocks from our Institutional software package (VEI). These results were filtered by market price and volume--no results below 3$/share or less than 100k shares/day volume.

Top-Five Oil/Energy Sector Stocks--Short-Term Forecast Returns

Ticker
BEXP EP ATLS SD CIE

Name
BRIGHAM EXPL CO EL PASO CORP ATLAS ENERGY LP SANDRIDGE ENRGY COBALT INTL EGY

Mkt Price
36.57 24.67 23.03 6.75 10.08

Valuation(%)
-11.37 33.4 -37.16 -69.97 -24.3

Last 12-M Retn(%)

82.12 88.18 142.93 26.17 9.33

Top-Five Oil/Energy Stocks--Long-Term Forecast Returns

Ticker
SD SLB PTR XOM ECA

Name
SANDRIDGE ENRGY SCHLUMBERGER LT PETROCHINA ADR EXXON MOBIL CRP ENCANA CORP

Mkt Price
6.75 67.99 120.98 78.71 20.18

Valuation(%)
-69.97 -31.71 N/A -14.21 -34.7

Last 12-M Retn(%)

26.17 7 -0.97 22.11 -27.12

Top-Five Oil/Energy Stocks--Composite Score

Ticker
VLO BHI MRO BP TSO

Name
VALERO ENERGY BAKER-HUGHES MARATHON OIL CP BP PLC TESORO CORP

Mkt Price
23.38 53.85 24.84 41.32 25.82

Valuation(%)
-36.34 -42.67 -33.64 -28.14 -27.26

Last 12-M Retn(%)

29.89 20.31 17.39 3.4 85.49

Top-Five Oil/Energy Stocks--Most Overvalued

Ticker
ATPG GLBL EVEP HDY COG

Name
ATP OIL & GAS GLOBAL INDS LTD EV ENERGY PTNR HYPERDYNAMICS CABOT OIL & GAS

Mkt Price
10.04 7.91 71.23 4.45 68.87

Valuation(%)
216.63 121.99 98.43 57.8 42.15

Last 12-M Retn(%)

-34.25 32.72 108.21 47.35 126.7

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Free Report Download for Subscribers

As a bonus to our Free Weekly Newsletter subscribers, we are now offering a FREE DOWNLOAD of one of our $ 25.00 Detailed Valuation Reports.
This week's free download is our report on Bank of America (BAC,$BAC). Bank of America is one of the world's largest banks. This financial giant has been the poster-child for hubris and arrogance amongst large financial institutions throughout the financial crisis and has suffered from management stupidity and errors on a colossal scale. However, recent news now indicates that the US Federal Reserve Bank has taken an active role in assisting this giant institution with even more questionable behaviour. The Fed supports a recent management decision which will make the company's toxic derivatives a tax payer problem rather than a counter party problem. On Tuesday, Bloomberg reported that Bank of America holding company has shifted derivatives from Merrill Lynch over to the FDIC-insured banking division. This move came after Merrill was downgraded and thus the costs for servicing the bets increased considerably. While supported by the Fed, this move occurred despite the protests of the FDIC. The follow up to this story-- from the blog Naked Capitalism, reports that officials at Bank of America selected the worst/riskiest/most toxic derivatives for this transfer. This would shield counter parties from losses as they would be first in line to get paid if BAC were to go down the tubes. Thus, the speculators get paid first, then the FDIC has to pay the depositors once all the actual collateral is gone. In one fell swoop, the tax payers are now responsible for covering the losers who bet with Bank of America-BAC was reported to have held @ $75 TRILLION in derivatives back in June of this year.

Weekly Subscribers can download a FREE Detailed Valuation Report on BAC HERE. If you have not subscribed and want to be able to receive a FREE $ 25.00 Detailed Valuation Report, you can subscribe to our Free Weekly Newsletter HERE.

What's Hot
VE Capital Management's Brian Brogan
Brian Brogan is a portfolio manager and COO for Value Engine Capital Management. He specializes in risk management and technical analysis. Brogan served on both the retail and institutional sides for several leading financial firms including Morgan Stanley Smith Barney, LPL Financial, Revenue Shares ETFs, H.G. Wellington & Co. Inc, PNC Bank, ING America, US Allianz, and Morgan Stanley Dean Witter. Brogan has over 12 years of experience on Wall Street working with some of the largest fund managers in North America. Brian specializes in Behavioral Finance.

On Cult Stocks...
Last week, I had the pleasure of presenting to the AAII Chapter in Cleveland. Our discussion covered many market topics ranging from fair valuation of equities to behavioral finance. I had a slide in my presentation which I often utilize to discuss how some tickers often encourage a "cult-like" following among investors. This can be good sometimes--AAPL comes to mind--but in this case I was looking for problems when investors becoming too enamored of their winners. There are always momentum plays with growing companies, but with a "cult-like" stock you often see some uniquely behavioral aspects which are different from other momentum-growth stocks. One example of this sort of thing is Netflix (NFLX). This is a strong growth stock which garnered a "cult-like" following. You can make real money with these sorts of companies if you can identify them ahead of the crowd. In the case of Netflix, hedge fund manager David Einhorn --one of the brightest guys on Wall Street and one of the first to identify the issues with Lehman Brothers BEFORE the financial crisis, saw the problems and got short this stock. He went against the cult. Unfortunately for Einhorn, he got the analysis right-- as he usually does--but as is so often the case he failed to time his play properly. He got bit by one of the oldest maxims in investing: "the market can stay irrational longer than you can stay solvent!" It's extra hurtful when the timing is off, but reality tends to bite sooner or later. In the case of David Eihorn and Netflix, his hard work on the facts eventually cut through the fog of euphoria about the stock.

So, I found it ironic earlier this week to hear Einhorn discussing Green Mountain Coffee (GMCR). This cult-like stock has been a real favorite of investors of all-stripes of late. In fact, it is such a favorite that the company was even able to weather an accounting irregularity "incident" over the Summer. If you check the chart below, you can see how returns have a way of trumping bad information and can lead to a bandwagon effect.

In my discussion with Cleveland's AAII group, I used the above chart to illustrate my points about cult stocks, and I noted how with GMCR all the claims of "great coffee" and the K-cups were starting to take on a this time is different type of feel. Again, from a behavioral finance perspective, when high-flying stocks are paired with a well-loved/well-known product, it becomes easy for investors both retail and institutional to fall in love. And of course, as if often the case when you fall head over heels, you can get your heart broken! Now, some will argue that this sort of thing doesnt happen to smart people who read the 10-k, hold several degrees, and who trade for a living. But both past and recent history is rife with large mutual fund and hedge fund managers telling the world how much they "love" a stock and how the glaringly bad fundamentals should be pushed aside. This type of confirmation bias happens more often than most realize. Humans don't want to think about the bad things, it's not in our nature. We seek to have patterns and biases confirmed.

This past Monday, we saw a "Netflix moment" occur with GMCR. The stock took a real dive and all of the sudden, all the good coffee in the world couldn't stop the fall. Einhorn questioned the underlying fundamentals of the stock vis a vis slowing growth, expiring patents, free cash flow, new models of machines, etc. Like an intervention for an addict, sooner or later the reality becomes too glaringly obvious to ignore. At that point, you seek help. For investors, "help" means having an exit strategy and getting out of a trade when it is obvious the "cult" has come to its senses. Einhorn learned from his timing error with Netflix and in this case has done a better job. Investors are now taking a closer look at Green Mountains numbers and are selling first and asking questions later. Always remember that a main strength of a fundamentals-based quant system like ValuEngine is that we can rate and rank a huge universe of stocks. However, the models are only as good as their underlying data. If there are accounting issues, or if a stock's momentum overshadows other factors, it is possible for the model to get fooled. If you check a chart and you see a stock that is obviously in free fall to the down side, you don't want to catch the proverbial knife. Our systems run on analyst data and are dependent on such data for their calculations. When a stock takes a turn, it will take a bit of time for our systems to adjust. You need to use your head. You should never rely on any single mode of analysis for your investing. Fundamentals mean little if the technicals are bad, and one always has to factor in the overall state of the market. This is how we make our portfolio selections and trades at VE Capital Management, and it is how you should deploy ValuEngine research in your own investing as well.

Please contact us if you would like to put the power of ValuEngine to work for you at our new full-service money management firm
Info@VECapitalManagement.com (321) 215-4015 (610) 896-8823

Suttmeier Says
--Commentary and Analysis from Chief Market Strategist Richard Suttmeier
If you have any comments or questions, send them to Rsuttmeier@Gmail.com Treasury Yields 10-Year--((2.159) Daily, semiannual, quarterly and annual value levels are 2.301, 2.414, 2.669 and 2.690 with my monthly pivot at 2.222, and weekly, and semiannual risky levels at 2.033 and 1.672, which was tested on September 23rd. The 50-day SMA is 2.060. Commodities and Forex Comex Gold-- ($1622.3) Semiannual and annual value levels are $1469.9 and $1,356.5 with weekly, daily and semiannual pivots at $1625.8, $1638.3 and $1644.8, and quarterly and monthly risky levels at $1738.4 and $1811.4, and the September 6th all time high at $1923.7. The 200-day is $1546.0 with the 50-day at $1745.1. Nymex Crude--($86.31) The October 4th year-to-date low is $74.95 with my weekly pivot at $87.14, the 200-week at $83.54, the 50-day at $85.17, a daily pivot at $86.58, and monthly, quarterly and annual risky levels at $98.51, $100.34, $99.91 and $101.92. The Euro--(1.3778) Weekly, and quarterly value levels are 1.3202 and 1.2598 with daily, monthly and semiannual risky levels at 1.3888, 1.4579, 1.4752 and 1.4872. The 50-day, 200-day and 200-week SMAs are 1.3890, 1.4084 and 1.3991. Major Indices Equity Technicals The daily charts for the major equity averages remain overbought, and we need weekly closes above the five-week modified moving averages to keep the weekly charts positive: 11,301 Dow Industrials, 1184.6 SPX, 2542 NASDAQ, 2236 NDX, 4515 Dow Transports, 690.28 Russell 2000 and 362.43 SOX. We could have weekly closes straddling these levels which would be overall neutral. My call remains that the October 4th lows are the lows for the year, but we will not see higher highs in 2011.

Equity Fundamentals: Fundamentally stocks remain cheap with more than 80% of all stocks undervalued. 82.1% of all stocks are undervalued / 17.9% of all stocks are overvalued. In March 2009 we saw 91.1% of all stocks undervalued. All sixteen sectors are undervalued, fifteen by double-digit percentages, eight by 20.1% to 25.2%, as the 30-Year bond yield starts to rise putting a drag on valuations. Back in March 2009 the sectors were undervalued by 33% to 45%. Key Levels for the Major Equity Averages Dow --(11,542) The October 4th YTD low is 10,404.49 with annual, daily and weekly pivots at 11,491, 11,594 and 11,650, and monthly and quarterly risky levels at 12,091 and 12,507 with the YTD high at 12,876.00. Semiannual value levels are 9,635 and 8,468. The 50-day is 11,235 with the 200- day at 11,965. S&P 500--(1215.4) The October 4th YTD low is 1074.77 with semiannual value levels at 981.3 and 855.7, the 50-day at 1177.0, my annual pivot at 1210.7, daily and weekly risky levels at 1226.9 and 1230.6, and monthly, quarterly and annual risky levels at 1259.8, 1303.7 and 1562.9. The YTD high is 1370.58. NASDAQ (2599) The October 4th YTD low is 2298.89 with my annual value level at 2335, semiannual value levels at 2199 and 2049, the 50-day at 2518, daily, monthly, weekly, and quarterly risky levels at 2667, 2680, 2717, and 2807, and the YTD high at 2887.75. My annual risky level is 3243. NASDAQ 100 (NDX) (2306) The YTD low is 2034.92 with semiannual and annual value levels at 1951, 1861 and 1723, the 50-day and 200-day SMAs at 2215 and 2294, my monthly pivot at 2312, daily, weekly, and quarterly risky levels at 2372, 2427, and 2440, the YTD high at 2437.42 and annual risky level at 2590.

Dow Transports (4710) The October 4th YTD low is 3950.66 with semiannual value levels at 4335 and 3868, the 50-day at 4462, my weekly pivot at 4687, and daily, monthly, annual and quarterly risky levels at 4755, 4980, 5179 and 5359, and the YTD high at 5627.85. Russell 2000 (696.42) The October 4th YTD low is 601.71 with semiannual value levels at 577.47 and 530.04, the 50-day at 684.58, my weekly pivot at 713.00, and daily, monthly, annual and quarterly risky levels at 711.94, 778.77, 784.16 and 802.96, and the YTD high at 868.57. The SOX (363.88) The October 4th YTD low is 322.24 with annual and semiannual value levels at 270.98, 258.97 and 204.67, the 50-day at 356.66, my monthly pivot at 363.01, and daily, weekly and quarterly risky levels at 375.26, 392.52 and 417.63, and the YTD high at 450.79.
Note: For my technical momentum metrics--"MOJO"--I use whats called 12x3x3 slow stochastic readings from daily, weekly and monthly charts. The scale is zero to 10.0 where above 8.0 is overbought and below 2.0 is oversold.

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We provide a variety of means for accessing ValuEngine market analysis and other content. You can find us on some of the leading financial media websites as well as the more popular social media services. While our own website ValuEngine.com provides access to lots of analysis--and you can always sign up to receive email daily and weekly bulletins HERE, some users prefer to download PDF reports of content while others prefer to garner info while browsing the web. Our Chief Market Strategist Richard Suttmeier is a prolific market observer and you can find his content in a variety of places. His weekly column on Forbes provides insights into his "Buy and Trade" strategy while his daily market analysis can be followed and accessed at Scribd, Twitter, and Minyanville. Senior Editor Steve Hach re-posts PDFs and web-accessible copies of Daily and Weekly ValuEngine bulletins at Seeking Alpha and Scribd. In most cases, you can receive notification of VE content posting by Suttmeier and Hach by following the ValuEngine feed on twitter @ValuEngine. Links for this content are provided below, you may also find these links on our website HERE Intelligent Investing with Richard Suttmeier Articles by Richard Suttmeier | Articles by Steve Hach Newsletters, Articles and Other Research Pieces Articles by Richard Suttmeier | Articles by Steve Hach Get short, timely messages from ValuEngine Inc Daily Bulletin PDFs, Weekly Newsletter PDFs, and PDF Research Reports