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Friday, December 29, 2006

Wouldn't It Be Nice



Wouldn’t it be nice...if the markets in 2007 are as good as they were in 2006? I certainly hope so! With a four-day weekend approaching, I think I’m going to pass on any market analysis today. Instead, I’d like to wish all of my readers a very safe and happy new year. See you Wednesday!

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – 75% long within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No “Buy” recommended sectors

Today’s Top “Buy” Recommended Stocks

RTI International Metals Inc. (RTI 10/11/06)
Alleghany Technologies Inc. (ATI 10/5/06)
Veritas DGC Inc. (VTS 7/28/06)
Volt Information Sciences, Inc. (VOL 11/6/06)
Robbins & Myers Inc. (RBN 8/10/06)
NBTY, Inc. (NTY 12/5/06)
Albemarle Corp. (ALB 8/9/06)
Deckers Outdoor Corp. (DECK 9/7/06)
Bradley Pharmaceuticals Inc. (BDY 8/25/06)
Joy Global Inc. (JOYG 11/13/06)

Today’s Top “Sell” Recommended Stocks

CONSOL Energy Inc. (CNX 12/15/06)
Chicago
Mercantile Exchange Holdings (CME 12/18/06)
Intuitive Surgical Inc. (ISRG 12/19/06)
Chico
’s FAS Inc. (CHS 12/6/06)
Whole Foods Market, Inc. (WFMI 11/2/06)

Thursday, December 28, 2006

Good Morning

Not wanting to miss the boat in the last week of the year, investors sought to allocate into the rally and squeeze out any remaining gains before the books are wiped clean next week. The buying frenzy coupled with good economic news drove the markets higher yet again. The Dow Jones Industrial Average vaulted 102.94 points, or 0.83 percent, to end at a record 12,510.57. The S&P 500 Index surged 9.94 points, or 0.70 percent, to finish at 1,426.84 and the NASDAQ Composite Index added 17.71 points, or 0.73 percent, to close at 2,431.22. With only a few trading days left for 2006, all three major U.S. stock indexes are in good position to end the year with double-digit gains.

Certainly investors should take into consideration end of year “window dressing” when examining the underpinnings of the recent rally. How sound are the gains of late with such low, albeit seasonal, volume? On the NYSE, only about 974.7 million shares were traded on Wednesday, well below last year’s daily average of 1.61 billion. Advancing issues outnumbered decliners by about 7 to 2. Conversely, on the NASDAQ, about 1.26 billion shares were traded, again significantly below last year's daily average of 1.80 billion, with an advance-decline ratio of 5 to 2.

The commodity market was mixed, with forecasts of continued mild weather offsetting geopolitical concerns between the West and Iran. U.S. crude oil for February delivery fell 76 cents, or 1.2 percent, to settle at $60.34 per barrel. January heating oil fell 1.45 cents, or 0.9 percent, to $1.6088 a gallon while January unleaded gasoline was up 1.53 cents at $1.5875 a gallon. COMEX February gold, however, added $3.40 to end at $630.30 an ounce.

Better than expected news from the Commerce Department, which reported new home sales up 3.4 percent in November, jumpstarted the market. Much to the chagrin of those still on the short-side of the homebuilders sector, the Dow Jones U.S. Home Construction Index ended the session up 1.9 percent. Several big name homebuilder companies ended higher, with shares of Lennar Corp. (LEN) up 2.7 percent while Toll Brothers (TOL) gained 1.9 percent.

The news casts doubt on whether the Fed will cut rates in early ’07, which in turn drove U.S. Treasury prices down and yields up. The 10-year Treasury note ended at 4.59 percent. Thirty-year bonds closed at 4.72 percent, five-year notes at 4.56 percent, and two-year notes at 4.71 percent. Looking at short-term rate futures, the implied chances for a first-quarter Fed cut retreated from 18 percent to 14 percent.

Global markets rallied as well; several indexes closing at all time highs including the MSCI All-Country World Index at 368.6 points, Hong Kong's Hang Seng at 20,001.91, and Australia's S&P/ASX 200 at 5,673.7 points. The MSCI Asia Ex-Japan Index ended higher by 0.7 percent, the Nikkei Average was up 0.01 percent and the TOPIX Index was up 0.12 percent at 1,678.91. In Europe, the FTSEurofirst 300 Index was flat early Thursday while Germany's DAX reached 6,625.55 points.

Wachovia Securities sees energy as the only significant sector opportunity for 2007.

Daily link fest from Abnormal Returns.

Barry Ritholtz on the significance of a 2% correction.

Are mutual funds soon to be obsolete?

Adam begins a discussion of option lingo.

Larry delves into the new tax law.

Excellent insight on trading from Dr. Brett.

Lindsay and crew on Adobe (ADBE)

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – Between 66.6% and 75% long within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation

Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No "Buy" recommended sectors today.

Today’s Top “Buy” Recommended Stocks

RTI International Metals Inc. (RTI 10/11/06)

Alleghany Technologies Inc. (ATI 10/5/06)

Veritas DGC Inc. (VTS 7/28/06)

Volt Information Sciences, Inc. (VOL 11/6/06)

Robbins & Myers Inc. (RBN 8/10/06)

Daktronics Inc. (DAKT 10/31/06)

NBTY, Inc. (NTY 12/5/06)

Deckers Outdoor Corp. (DECK 9/7/06)

Albemarle Corp. (ALB 8/9/06)

Joy Global Inc. (JOYG 11/13/06)

Today’s Top “Sell” Recommended Stocks

CONSOL Energy Inc. (CNX 12/15/06)

Chicago Mercantile Exchange Holdings (CME 12/18/06)

Intuitive Surgical Inc. (ISRG 12/19/06)

Whole Foods Market, Inc. (WFMI 11/2/06)

Chico’s FAS Inc. (CHS 12/6/06)

Wednesday, December 27, 2006

Master List Updated for 2007

The markets are off to a great start today, which I still appreciate despite being a bear. Our model, as you may know, turned bearish on December 8th. We made the decision then not to adopt a completely defensive posture, which would include a combination of money market and inverse-correlated investments. That turned out to be a good decision, at least up to this point. We have slowly reduced our allocations, took some profit and reduced exposure to the more volatile investments. We’ve also isolated several inverse funds, both Rydex and ProFunds, that might be used instead of money market funds if we get a serious down-turn. We would need “buy” recommendations on these funds prior to commitment however.

You might notice that there’s a fairly significant difference between the top “buy” and “sell” recommended securities listed today and those listed over the last few weeks. I also list IAH as a “buy” recommended sector, which has not been listed before on the blog. The reason is that we just completed updating our master list of securities for 2007.

Typically we update the master list annually during the last weeks of Q4. On the equity side we start with the S&P 1500 and then isolate those stocks that pass our fundamental screening. On the fund side we add any new Fidelity (NTF), ProFund or Rydex mutual funds with at least one year of data. With so many ETF’s released, we use a bit more discretion when selecting which ones to add, but all new entrants must also have at least one year of data. The total list of securities analyzed daily for alpha is now 1906, up from around 1700 last year. We’re considering making this a quarterly process instead of annually, at least with regard to ETF’s since so many interesting ones were released this year.

On the alpha front, I’m afraid we’re still not seeing a preponderance of buying opportunities. With regards to sectors, there are no “buy” recommendations other than IAH. Financials (IYG, IYF, IXG), Telecom (IXP, IYZ) and Utilities (IDU) have made their way to the top of our rankings, but are only “neutral” recommended currently. We’re managing the model portfolios day-to-day, with no real allegiance to the bulls or the bears. The objective is to be prepared for a downturn without sacrificing returns if the rally continues. It’s a narrow path to walk for sure, but I think it’s possible with the right strategy.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – Between 37.5% and 75% long within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – Internet Architecture HOLDRS (IAH 8/16/06)

Today’s Top “Buy” Recommended Stocks

Veritas DGC Inc. (VTS 7/28/06)
Robbins & Myers Inc. (RBN 8/10/06)
Volt Information Sciences, Inc. (VOL 11/6/06)
NBTY, Inc. (NTY 12/5/06)
Deckers Outdoor Corp. (DECK 9/7/06)
Albemarle Corp. (ALB 8/9/06)
Bradley Pharmaceuticals Inc. (BDY 8/25/06)
ElkCorp (ELK 12/4/06)
Joy Global Inc. (JOYG 11/13/06)
Savient Pharmaceuticals, Inc. (SVNT 8/9/06)

Today’s Top “Sell” Recommended Stocks

CONSOL Energy Inc. (CNX 12/15/06)
Google Inc. (GOOG 12/18/06)

Chicago
Mercantile Exchange Holdings (CME 12/18/06)
Carpenter Technology Corp. (CRS 10/26/06)
SanDisk Corp. (SNDK 10/20/06)

Tuesday, December 26, 2006

Alpha in Healthcare

As we enter the last week of 2006, projections and forecasts for 2007 are becoming more and more prevalent. One of the recurring themes I’m hearing is that the healthcare sector is primed to outperform in the months ahead. I don’t usually put much credence into projections; in part because our active management strategy has more of a near-to-intermediate term focus and also because we prefer to manage money on quantitative analysis rather than on conjecture.

Nevertheless, as I prepared this post and examined the “buy” recommended issues we analyze, I did see that of our top 50 securities, nine (18%) are in the medical / healthcare sector. That’s a fairly significant percentage by an measure. Unfortunately, only 15.37% of the securities we analyze daily have “buy” recommendations today, which is a testament to the weakening market.

We use the iShares Dow Jones U.S. Healthcare ETF (IYH) in our analysis, which is graphed below. Since late-September, the sector has been relatively range-bound after experiencing a multi-month rally that began in mid-July. Our analytic produced a “buy” recommendation fairly early in the rally, and we saw the sector appreciate by about 7.50% before it was down-graded to “sell” status. In hindsight, the analytic was pre-mature by about three weeks in it’s downgrade, but I can live with that.

Listed below are nine “buy” recommended stocks that investors might look to within the healthcare / medical sectors. Obviously these are very broad sectors, so some of these stocks might be better characterized as biotech or pharmaceutical related. But looking at their returns over the last week its apparent that alpha within these sectors is beginning to emerge, which supports the projections. Several of the stocks below were upgraded very recently, so I suggest patience before allocation. With trading this week likely very muted, and the sector still only carrying a "neutral" recommendation, investors might be better suited waiting a bit before putting any capital to work.

Short-Term Indicators

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – Between 62.50% and 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No “Buy” Recommended Sectors Today

Today’s Top “Buy” Recommended Stocks

Veritas DGC Inc. (VTS 7/28/06)
Robbins & Myers Inc. (RBN 8/10/06)
Volt Information Sciences, Inc. (VOL 11/6/06)
NBTY, Inc. (NTY 12/5/06)
ElkCorp (ELK 12/4/06)
Bradley Pharmaceuticals Inc. (BDY 8/25/06)
Joy Global Inc. (
JOYG 11/13/06)
Credence Systems Corp. (CMOS 11/6/06)
Martin Marietta Materials Inc. (MLM 11/6/06)
Lexmark International Inc. (LXK 9/21/06)

Today’s Top “Sell” Recommended Stocks

SanDisk Corp. (SNDK 10/20/06)
Jabil Circuit Inc. (JBL 11/15/06)
LCA-Vision Inc. (LCAV 6/7/06)
Whole Foods Market, Inc. (WFMI 11/2/06)
Carpenter Technology Corp. (CRS 10/26/06)

Sunday, December 24, 2006

AAS Top Six on December 15, 2006

The graphs below represent our top rated investments within six different categories as of Friday, December 15, 2006. The analytics we use to rate and select investments are based on a time-weighted alpha rating score that seeks to highlight investments beginning a bullish trend and generating alpha. All six investments have positive returns with an average gain of 20.04% since the initial “buy” or “short/sell” recommendation.

We’ve color-coded the graphs to represent one of the three “recommendations” our analytic produces for each security. A red line coincides with a “Short/Sell” recommendation. A blue line represents a “Neutral” or “Hold” recommendation and the green line equates to a “Buy” recommendation.

The green arrow represents the first date that the security became an “AAS Recommended Buy” after previously being an “AAS Recommended Sell.” For the “Short/Sell” group, the red arrow represents the first date that the security became an “AAS Recommended Sell” after previously being “buy” recommended. Also included are the most recent recommendations of each security.

(Click on Chart/Graphs to enlarge)

Friday, December 22, 2006

Long-Term Market Model Weakens Further

The Long-Term Market Model weakened further after yesterday’s close with two more NASDAQ-related components shifting into negative territory. That coupled with sector weakness and the low number of AAS “buy” recommended securities unfortunately means increased allocations into money market investments.

We’re just not seeing any buying opportunities emerge to replace those securities sold, so rather than force the issue we’ve decided to take some profits and sit on the sidelines. Boring…yes; prudent…hopefully. As much as I dislike raising cash, it beats losing returns. Ideally we’ll get some “buy” recommendations on the inverse funds within the next few days, which we can then use to hedge our long positions.

I’ll post the AAS Top Six Investments as of December 15th over the weekend. Other than that, I want to wish all of my readers a very merry and safe Christmas and I’ll see you bright and early Tuesday morning!

Short-Term Technical Indicators – Each short-term technical indicator weakened after yesterday’s session.

Long-Term Market Model – Bearish since December 8th.

Investor Sentiment - The VIX and VXN edged higher yesterday and all three Put / Call Ratios lost ground.

Asset Allocation – 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No “Buy” Recommended Sectors Today

Today’s Top “Buy” Recommended Stocks

Veritas DGC Inc. (VTS 7/28/06)

Robbins & Myers Inc. (RBN 8/10/06)

NBTY, Inc. (NTY 12/5/06)

Volt Information Sciences, Inc. (VOL 11/6/06)

Joy Global Inc. (JOYG 11/13/06)

Bradley Pharmaceuticals Inc. (BDY 8/25/06)

ElkCorp (ELK 12/4/06)

Albemarle Corp. (ALB 8/9/06)

Martin Marietta Materials Inc. (MLM 11/6/06)

Credence Systems Corp. (CMOS 11/6/06)

Today’s Top “Sell” Recommended Stocks

SanDisk Corp. (SNDK 10/20/06)

Jabil Circuit Inc. (JBL 11/15/06)

EGL Inc. (EAGL 10/18/06)

Chico’s FAS Inc. (CHS 12/6/06)

LCA-Vision Inc. (LCAV 6/7/06)

Thursday, December 21, 2006

Good Morning

U.S. stocks ended lower on Wednesday, hurt by bellwether FedEx’s Q306 forecast and the consequent sell-off in the transport sector. Declines of 1.3 percent in United Parcel Service Inc. and 3.7 percent in Norfolk Southern Corp. led the Dow Jones Transportation Average down by 1.1 percent. The Dow Jones Industrial Average lost 7.45 points, or 0.06 percent, to 12,463.87. The S&P 500 Index slipped 2.02 points, or 0.14 percent, to 1,423.53 and the NASDAQ Composite Index fell 1.94 points, or 0.08 percent, to close at 2,427.61.

Trading on the Big Board was exceptionally light ahead of the Christmas Holiday, where about 1.38 billion shares changed hands, below last year's daily average of 1.61 billion. Advancing shares beat decliners on the NYSE by a ratio of about 5 to 4. On the NASDAQ, about 1.79 billion shares were traded, slightly below last year's daily average of 1.80 billion, with more than five stocks advancing for every four that declined.

The price of the benchmark 10-year Note lost ground for the second day in a row closing at 100-7/32 with a yield of 4.597 percent. Investors are anxiously waiting for the core personal consumption expenditure (PCE) price index to be reported on Friday, which is a favorite measure of inflation for the Federal Reserve.

Crude oil prices rose slightly, settling near $64 a barrel on a larger-than-expected drop in U.S. oil inventories in the past week. U.S. crude oil for February delivery rose 26 cents to settle at $63.72 a barrel on the NYMEX while in London, Brent February crude rose 36 cents to $63.17. COMEX February gold settled at $624.30 an ounce, down $1.10.

The global currency market was fueled Wednesday by comments from European Central Bank President Jean-Claude Trichet who warned that higher inflation in 2007 would likely result in higher Euro zone interest rates. Higher rates make the Euro attractive to yield-seeking investors. The Euro was up 0.14 percent at 156.00 yen but lost ground against the dollar, slipping 0.10 percent to $1.3175 from $1.3189 late Tuesday. Against the yen, the dollar was up 0.24 percent at 118.38 yen from 118.10 yen late in Tuesday's session.

Weakness in the yen gave investors the incentive to buy shares of major Japanese exporters, which in turn led to a 234.16 point gain in the Nikkei Average to end at 17,011.04, its highest close since May 9. M&A news also boosted European shares, with the FTSEurofirst 300 Index gaining 0.23 percent to close at 1,481.33.

Short-Term Technical Indicators – Despite a lower close across the board, we saw strength in five of the ten indicators yesterday. Unfortunately, weakness in the Stochastic Indicators for all three indexes, coupled with weakness in the Relative Strength indicator for the Dow, outweighs any gains yesterday. I’m expecting up and down days like we’ve had this week for the remainder of the year.

Long-Term Market Model – Bearish since December 8th.

Investor Sentiment - Volatility eased a bit yesterday, but there was an increase in the Index Put / Call ratio.

Asset Allocation – 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No “Buy” Recommended Sectors Today

Today’s Top “Buy” Recommended Stocks

RTI International Metals Inc. (RTI 10/11/06)

Veritas DGC Inc. (VTS 7/28/06)

Daktronics Inc. (DAKT 10/31/06)

Robbins & Myers Inc. (RBN 8/10/06)

Joy Global Inc. (JOYG 11/13/06)

NBTY, Inc. (NTY 12/5/06)

Bradley Pharmaceuticals Inc. (BDY 8/25/06)

Martin Marietta Materials Inc. (MLM 11/6/06)

Albemarle Corp. (ALB 8/9/06)

Volt Information Sciences, Inc. (VOL 11/6/06)

Today’s Top “Sell” Recommended Stocks

SanDisk Corp. (SNDK 10/20/06)

LCA-Vision Inc. (LCAV 6/7/06)

Rogers Corp. (ROG 12/6/06)

Whole Foods Market, Inc. (WFMI 11/2/06)

Valassis Communications Inc. (VCI 5/10/06)

Wednesday, December 20, 2006

Inverse Funds

Doing my morning analysis / reading, I came across this entertaining video via David Fry and Greg Newton of Sam Zell’s views of the past year and his forecasts for 2007. Basically he argues that on a global spectrum, demand by baby-boomers for income has increased liquidity, which in turn reduces the cost of capital, thus fueling global market growth until equilibrium is reached.

Each year, Mr. Zell build’s intricate voice boxes (I think that's what you call them), which is what the man with the umbrella is part of, and sends them to his friends and associates. One of our former associates was lucky enough to be on the receiving end of these gifts from Mr. Zell, so our office was full of them. It’s a pretty cool way of sharing thoughts, which coming from Mr. Zell are very insightful. Not only that, but it sounds like B.J. Thomas is actually singing the song.


With our long-term market model turning defensive almost two weeks ago, I’m paying close attention to investments that generate alpha in down-trending markets. For the record, the AAS Model portfolios are still long, but we’ve reduced the allocation in the fund portfolios to 75% long, 25% cash and in the stock portfolio we’re 70% long with 30% in cash.

We still don’t have any “buy” recommendations on our inverse mutual funds, but as you can see from the chart below, some are performing on par with the broad-markets, and others are beginning to generate alpha. Over the last week or so, several have been upgraded to “neutral” status. When and if we get “buy” recommendations on the inverse funds, we might shift some of the 25% cash allocation into them.

Short-Term Technical Indicators – Yesterday saw improvement in all the Dow Jones short-term technical indicators, with the exception of the Stochastic, which was unchanged. The S&P 500 and NASDAQ indicators didn’t fare too well however, with the On-Balance Volume % and both Stochastic indicators declining.

Long-Term Market Model – Bearish since December 8th.

Investor Sentiment - VIX, Total and Index Put / Call Ratios lost ground while the VXN and Equity Put / Call Ratio increased.

Asset Allocation – 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – iShares Dow Jones Energy (IYE 11/10/06)

Today’s Top “Buy” Recommended Stocks
  1. RTI International Metals Inc. (RTI 10/11/06)
  2. Veritas DGC Inc. (VTS 7/28/06)
  3. Daktronics Inc. (DAKT 10/31/06)
  4. Robbins & Myers Inc. (RBN 8/10/06)
  5. Joy Global Inc. (JOYG 11/13/06)
  6. F5 Networks Inc. (FFIV 9/20/06)
  7. Chaparral Steel Co. (CHAP 11/1/06)
  8. NBTY, Inc. (NTY 12/5/06)
  9. Albemarle Corp. (ALB 8/9/06)
  10. Brown Shoe Company Inc. (BWS 9/12/06)
Today’s Top “Sell” Recommended Stocks
  1. SanDisk Corp. (SNDK 10/20/06)
  2. Watsco Inc. (WSO 12/6/06)
  3. LCA-Vision Inc. (LCAV 6/7/06)
  4. EGL Inc. (EAGL 10/18/06)
  5. Whole Foods Market, Inc. (WFMI 11/2/06)

Tuesday, December 19, 2006

Good Morning

Short-Term Technical Indicators – As expected, we saw the majority of the short-term technical indicators slip lower Monday. The DJIA did seen gains in the MACD and the 15-Day Stochastic however, which also improved for the NASDAQ.

Long-Term Market Model – Bearish since December 8th.

Investor Sentiment – All five of the daily sentiment indicators increased yesterday, lead by a 149% increase in the Index Put / Call Ratio, the biggest one-day change since October 24th. All three ratios and the VXN closed above their respective values one week ago.

Asset Allocation – 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – iShares Dow Jones Basic Materials (IYM 10/16/06)

Today’s Top “Buy” Recommended Stocks
  1. RTI International Metals Inc. (RTI 10/11/06)
  2. Veritas DGC Inc. (VTS 7/28/06)
  3. Daktronics Inc. (DAKT 10/31/06)
  4. Robbins & Myers Inc. (RBN 8/10/06)
  5. F5 Networks Inc. (FFIV 9/20/06)
  6. NBTY, Inc. (NTY 12/5/06)
  7. Albemarle Corp. (ALB 8/9/06)
  8. Joy Global Inc. (JOYG 11/13/06)
  9. Brown Shoe Company Inc. (BWS 9/12/06)
  10. The Ryland Group Inc. (RYL 11/14/06)
Today’s Top “Sell” Recommended Stocks
  1. SanDisk Corp. (SNDK 10/20/06)
  2. Valassis Communications Inc. (VCI 5/10/06)
  3. Chico’s FAS Inc. (CHS 12/6/06)
  4. Watsco Inc. (WSO 12/6/06)
  5. Whole Foods Market, Inc. (WFMI 11/2/06)

Monday, December 18, 2006

Homebuilders Revisted

Certainly a dominant theme of 2006 is the housing/real estate bubble and its impact on homebuilder stocks. I briefly wrote about homebuilders in mid-September, basically saying that a small speculative position might not be a bad idea, but that I wasn’t yet comfortable with the sector to allocate heavily into it. I only mentioned one stock in that post, NVR, Inc (NVR), which we no longer analyze for alpha. However, since September 14th, NVR has outperformed the market by over 45%, with the stock up 12.28% compared to 8.42% for the S&P 500.

It’s hard to argue against the sector bottoming in July, especially when looking at the graph below. Anything is possible, which means a sudden shift to the down-side should at least be considered prior to investment. But after a few months of patience, and with the index ($RUF) recently crossing its 200-day MA, I’m more comfortable recommending exposure to homebuilders, especially going into 2007. There’s a lot of noise out there about private equity and hedge funds beginning to stuff their war chest with homebuilders, and although I’m not recommending a significant allocation, I do suggest finding some exposure ahead of the masses.

Below is a list of eight companies that investors should look to for homebuilder exposure. The first four are currently AAS “buy” recommended with the last four “neutral/hold” recommended. Also listed is the date of the most recent “buy” recommendation and the stock’s performance since that date.
  1. The Ryland Group, Inc (RYL Buy 11/14/06 13.77%)
  2. KB Home (KBH Buy 11/14/06 8.77%)
  3. Lennar Corp. (LEN Buy 11/15/06 8.31%)
  4. M.D.C Holdings Inc. (MDC Buy 11/10/06 10.39%)
  5. D.R. Horton Inc. (DHI Neutral 11/14/06 10.69%)
  6. Hovnanian Enterprises Inc. (HOV Neutral 11/15/06 14.37%)
  7. Meritage Homes Corp. (MTH Neutral 11/30/06 -2.35%)
  8. Toll Brothers Inc. (TOL Neutral 11/16/06 9.05%)
It might not be a bad idea to hedge a long homebuilder’s position by either buying puts or taking a short position in building/construction products. My thoughts are that if homebuilders revert again into a bearish trend, companies associated with building and construction will likely under-perform as well, making a short position profitable and somewhat mitigating the losses from the long holding. Possible short positions include:
  1. The Black & Decker Corp. (BDK Short/Sell 11/29/06 -7.63%)
  2. Fastenal Co. (FAST Short/Sell 10/31/06 -11.78%)
  3. The Stanley Works (SWK Short/Sell 10/20/06 -1.70%)
Short-Term Technical Indicators – Weakness in Breadth and Volume in the Dow is reason to be concerned the trend might be on its last legs. Of course there’s been weakness in those indicators for months now and we continue to see new highs. The MACD, Stochastic and Relative Strength indicators improved after Friday’s close, lending credence to higher futures this morning in all three major indexes.

Long-Term Market Model – Bearish since December 8th.

Investor Sentiment – Both the VIX and VXN edged higher on Friday, as did all three Put / Call Ratios. In terms of weekly sentiment indicators, the Odd-Lot Short Ratio and the Public Specialist Short Ratio gained ground while the Dividend Yield Spread remained unchanged. Additionally, the number of S&P 500 commercial hedger long contracts increased by over 35,000 for the week while the number of short contracts increased by almost 32,000, with the difference between the two decreasing from the prior week’s reading. This reflects institutional investor sentiment perhaps shifting to neutral ground.

Asset Allocation – 100% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – iShares Dow Jones Energy (IYE 11/10/06)

Today’s Top “Buy” Recommended Stocks
  1. RTI International Metals Inc. (RTI 10/11/06)
  2. Veritas DGC Inc. (VTS 7/28/06)
  3. Alleghany Technologies Inc. (ATI 10/5/06)
  4. Daktronics Inc. (DAKT 10/31/06)
  5. F5 Networks Inc. (FFIV 9/20/06)
  6. Robbins & Myers Inc. (RBN 8/10/06)
  7. Chaparral Steel Co. (CHAP 11/1/06)
  8. NBTY, Inc. (NTY 12/5/06)
  9. Albemarle Corp. (ALB 8/9/06)
  10. Brown Shoe Company Inc. (BWS 9/12/06)
Today’s Top “Sell” Recommended Stocks
  1. SanDisk Corp. (SNDK 10/20/06)
  2. Chico’s FAS Inc. (CHS 12/6/06)
  3. EGL Inc. (EAGL 10/18/06)
  4. Watsco Inc. (WSO 12/6/06)
  5. Cree Inc. (CREE 10/27/06)