We mainly covered the oil markets and S&P500.
Continuing from last weeks commentary we believe that S&P500 will hold support levels on mixed earnings from top names mainly:
Financials:
GS
JPM
C
BAC
Health Care:
JNJ
Tech/Communications:
Goog
Nok
Intc
Conglomerates:
GE
Retail:
Yum
There were other important earnings that could potentially move markets, though we choose to focus on these main 7 equities.
Without going into much detail:
Technical Health
Bullish stocks:
1. GS
2. JNJ
3. Yum
Bearish:
1. C
2. GE
Neutral:
1. BAC (slightly more bearish)
2. JPM (slighty more bearish)
3. Nok
4. Goog
Fundamental Health:
Financials:
Again we only briefed through some of the financial statements. We felt GS earnings would be best of the financial this week, we cite their ability for their workers to be paid an average of $65,000+ despite poor conditions in the financial sector. Unless management is rotting within, such a decision much be supported with stronger earnings.
For JPM we felt their commercial side would be supported by increased personal savings (unfortunately we did not get to look at quarterly reports to see if deposits and loans had increased). Though the chart for JPM was quite questionable.
For BAC we felt that personal savings would also support their commercial side, and we cite that BAC holds 14% of Americas deposits. Though we felt that management within BAC is questionable and the Merill Lynch acquisition maybe a drag in the short term.
For C, we felt poor management, poor culture, and an unhealthy chart were all reasons to be bearish on C. Though one may make the argument that lots of capital flows going to Asia may have supported their business. However, we know on the C in China mainly functions for corporate banks and may not be well positioned to advantage of any deposit growth vs the larger Chinese banks.
Overall, we expect financial equities to be above or inline with analyst estimates with the exception of C.
Health Care:
We felt JNJ overall with its broad base involved in many industries should perform well. If anything be inline with analyst estimates.
Retail and Tech:
We felt Nok and Yum would give some insight into broader markets as they are well positioned in all regions Americas/Euro/Asia Pacific. Though Nok maybe facing tough competition in Americas it certainly should be holding up in Europe and Asia. Yum despite it being on a higher standard in Europe and Asia for Pizza Hut, other major names such as KFC is standard. From a micro perspective, Yum can be seen as a normal good, so in this recession we feel that Yum should perform inline or above estimates.
Though there is the risk that commodity input prices may have cut into earnings, but commodities are starting to stall with the past few months weak dollar and may lead to some improvement in the third quarter (though we cite a weak dollar in the thrid quarter may not bode well for their 4th quarter earnings).
Goog:
We felt goog is having a tough time with their ad sales, but in general we do not see a huge lost in market shares and possible support from their android business segment.
Conglomerates:
GE we feel is just a bad stock and technically is ugly.
On a whole we see mixed earnings with some of the bigger neutral names being announced towards the end of the week (JPM Goog Nok)
Mixed earnings may lead to more sideways trading on the S&P500 along with support holding at 875-877 (depending on your view). Currently the Risk/Reward profile remains in favor of the bears, though arguably there are convincing evidence for both sides.
We would also like to cite very quiet volume these past few weeks, though mid may there seems to be looks of bearish/bullish volume seen in different individual stocks. Though on a whole for the index trading volume is quite light, which may lead to further evidence of support holding.
To see a technical analysis perspective CLICK HERE
Price targets are at a low of 880 to high 885 (out of 3 analyst estimates)
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Crude Oil:
All in all due to a high correlation in oil markets we see oil bouncing off support of 55-60 and ending up around a low of around 57 and a high of 65 with the average estimate of 61 (2 out of 3 different analysts' opinions)
For a brief technical view on oil"CLICK HERE" and scroll down to the oil section (towards the bottom)
Natural Gas:
Due to the recent low correlation between oil and natural gas we opted out to forecast in the futures market. However, we are seeing different dynamics in the ETF market where possible regulation limits and speculation are pushing NG higher. On a whole UNG NG is far from is 52 highs, and may find support of around 12-13. For the whole market NG has been the winner along with retail this past month in June.
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FUNDAMENTALS FOR CRUDE OIL
Where is Oil Going?
By: Patrick Ambrus
July 14, 2009
Price volatility:
Where is the price of crude oil heading? As we exam this, the first thing to keep in mind is oil’s rise to almost $73.50 from $30/barrel in the first quarter. This is the biggest quarterly price rise in 19 years (since 1990), up 41% in quarter 2. Also, see the sharp two-week price decline to the current $59-60 per barrel. This is important in showing how volatile this commodity has been over the past two weeks. The key is to figure out if crude is a supply or demand story.
Another piece of information on oil’s price increase to $73.50 to retain is the story of the rogue trader at PVM. Apparently on Tuesday June 30th at the 1 p.m. (NY) there were 16M barrels traded, an unjustified amount, which led to a $2/barrel price increase. Many traders became weary and by the end of the week combined with the jobless claims the sell-off began. The rally was killed before it had a chance to take off.
Supply and Demand factors:
First let us exam some economic numbers: On Wednesday July 1st Crude inventories fell by 3.7M barrels/day (1%) to 350.2M b/d. If the supply is cut why does the price continue to decline? We took a closer look into the industry to see what oil refiners are saying about supply. XOM, according to their most recent SEC filing, capital and exploration spending increased from $5.5B to $5.8B last in the second quarter (5% increase).
On the demand side, the International Energy agency claims global demand for light-sweet crude will decline 3% in 2009 from 2008 levels. This is the most severe year over year contraction in demand since the 1980’s. Also, since the Jobless Claims (615.25 jobs lost) came out on July 2nd, the price has declined from 69.32 by 13.73%. These stats suggest that demand among consumers still may not have recovered. Which says more about the recovery of the U.S. economy as a whole.
Legislation:
On June 7th 2009 Gary Gensler of the Commodities Futures Trading Commission proposed to place “speculative limits” on futures contracts. Specifically, He wants to limit the volume of contracts that pure financial investors would be able obtain. Mr. Gensler also announced his agency’s intentions to secure disclosure on aggregate trades from hedge funds and financial traders. Long –term this type of regulation may push activity out of the oil and commodities markets while traders speculate in less regulated markets (derivatives anyone?).
In his budget, Barack Obama included cap & trade legislation, which would make large corporations such as airlines pay for the right to pollute. This will force airlines to spend more money (which they don’t have) on new technology and penalize them for using crude oil. This legislation could severely affect the demand for oil in the U.S.
Conclusions:
Short-term (2 weeks) I see a target on crude for $55-57/barell on New York trading. This has more to do with economic factors than anything else. If the markets do not believe in growth and inflation from underlying economic and or financial reports there will be no demand for higher prices. Additionally, there has been a very strong pairing between Crude and the S&P 500 over the last two weeks. I believe traders are waiting to see signs of recovery in the equity markets before crude prices go any higher.
Long-term (2-3 months) I see a price target of $75-80/barell. Much of my opinion is based on a recovery in the economy and the equity markets. Already, 3rd quarter earnings have been solid with Alcoa, Intel, and Goldman Sachs. This leads me to believe we will find positive equity market movers in the next few weeks. Additionally, jobless claims and unemployment should begin to ease as Obama’s Stimulus money is digested. Hence, I do see rising inflation in the 3rd and 4th quarters.
Authored: by Alex and Pat
Contributors: Kell and Clark
Please comment for questions or concern, or if you have other questions you can contact us at GroupANLZ@gmail.com
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