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December 30, 2010

The ValuEngine Weekly is an Investor Education newsletter focused on the quantitative approach to investing and the tools
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VALUATION WATCH: Our models find that overvaluation is approaching


levels typically seen when a market correction is imminent. Overvalued
stocks now make up 62% of our universe and almost 30% of the universe is
calculated to be overvalued by 20% or more. 15 of 16 Sectors are now
calculated to be overvalued.

MARKET OVERVIEW
Index started week Wednesday 3 day change 3 day change % ytd
Close
DJIA 11572.81 11585.4 12.59 0.11% 11.03%
NASDAQ 2657.09 2666.93 9.84 0.37% 17.46%
RUSSELL 2000 786.9 790.26 3.36 0.43% 24.83%
S&P 500 1254.66 1259.78 5.12 0.41% 12.88%

Summary of VE Stock Universe


Stocks Undervalued 37.75%
Stocks Overvalued 62.25%
Stocks Undervalued by 20% 17.47%
Stocks Overvalued by 20% 29.92%
SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E
MReturn Ratio
Aerospace 0.16% 5.62% 24.91% 7.55% overvalued 30.97% 19.64
Auto-Tires-Trucks 0.19% 6.52% 57.31% 13.49% overvalued 48.07% 26.05
Basic Materials 1.02% 9.40% 36.98% 31.91% overvalued 69.20% 38.12
Business Services 0.25% 6.36% 14.77% 7.18% overvalued 20.93% 30.07
Computer and Technology 0.01% 5.73% 31.87% 7.83% overvalued 33.42% 43.79
Construction -0.04% 9.13% 14.04% 6.73% overvalued 11.09% 38.21
Consumer Discretionary 0.43% 3.68% 22.81% 5.48% overvalued 25.65% 31.17
Consumer Staples 0.20% 4.03% 11.68% 11.21% overvalued 17.41% 27.93
Finance 0.12% 6.26% 22.16% 8.75% overvalued 18.67% 25.06
Industrial Products 0.12% 7.27% 25.18% 16.13% overvalued 30.59% 26.24
Medical 0.06% 8.34% 20.00% 2.64% undervalued 20.00% 37.79
Multi-Sector Conglomerates 1.04% 5.43% 27.46% 15.20% overvalued 33.23% 29.73
Oils-Energy 0.77% 6.29% 20.12% 25.82% overvalued 36.01% 41.65
Retail-Wholesale 0.40% 3.37% 21.44% 10.66% overvalued 67.84% 22.32
Transportation 0.47% 3.83% 25.95% 12.26% overvalued 26.50% 42.71
Utilities 0.52% 2.79% 7.59% 7.42% overvalued 11.41% 25.55

Sector Talk-- Metals and Mining


Commodity metals and minerals have been in the news again this week with
Gold, Copper, Rare Earths, and other basic materials reaching high price levels with
no end in sight. Below, we present various top-five lists for various miners and metal
producers 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 Metals and Mining Stocks--Short-Term Forecast Returns
Last 12-M
Ticker Name Mkt Price Valuation(%)
Retn(%)
MSB MESABI TRUST 40.22 -13.52 232.67
CHOP CHINA GERUI ADV 5.85 2.2 3.91
TRE TANZANIAN ROYAL 7.32 N/A 113.41
AAUKY ANGLO AMER -PLC 26.03 39.83 21.64
URRE URANIUM RES INC 3.42 N/A 322.22
Top-Five Metals and Mining Stocks--Long-Term Forecast Returns
Last 12-M
Ticker Name Mkt Price Valuation(%)
Retn(%)
ABX BARRICK GOLD CP 53.08 12.97 34.96
MSB MESABI TRUST 40.22 -13.52 232.67
VALE VALE RIO DO-ADR 33.77 1.84 19.5
NEM NEWMONT MINING 61.19 9.38 29.23
FCX FREEPT MC COP-B 119.15 36.26 48.62

Top-Five Metals and Mining Stocks--Composite Score


Last 12-M
Ticker Name Mkt Price Valuation(%)
Retn(%)
MSB MESABI TRUST 40.22 -13.52 232.67
VALE VALE RIO DO-ADR 33.77 1.84 19.5
ABX BARRICK GOLD CP 53.08 12.97 34.96
NEM NEWMONT MINING 61.19 9.38 29.23
BVN BUENAVENTUR-ADR 48.91 9.41 47.41

Top-Five Metals and Mining Stocks--Most Overvalued


Last 12-M
Ticker Name Mkt Price Valuation(%)
Retn(%)
MVG MAG SILVER CORP 12.44 162.46 105.96
NGD NEW GOLD INC 9.63 117.04 163.84
AKS AK STEEL HLDG 16.27 116.14 -24.61
GMO GENERAL MOLY IN 7 103.12 230.19
UEC URANIUM ENERGY 6.29 97.84 70.92

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What's Hot--Suttmeier Releases 2011 Themes


Chief Market Strategist Sees Continuing Economic Challenges Ahead
This week our Chief Market Strategist Richard Suttmeier finished off 2010 by
releasing his top themes and predictions for 2011. Here are the economic and market
trends Suttmeier will be watching in the New Year:
1. Home Prices will resume a decline that began in mid-2006. We had the home
buyer tax credits expire in mid-2010, and government sponsored mortgage
modifications provided limited help. In 2011 we face continued foreclosure
issues including questionable documentation, and banks have a record high
Other Real Estate Owned (OREO). OREO is up to $53.2 billion at the end of the
third quarter, up 338.2% since the end of 2007. Depressed home sales are being
sold at a 30% to 35% discount, which reduces property appraisals at the county
level. Home builders will have to compete with these lower prices and we need
a mortgage modification program for all Americans, not just those at risk of
losing their homes. QE2 is not working and US Treasury yields are higher causing
mortgage rates to rise. “The Great Credit Crunch” began with housing, and
that foundation needs repair before Main Street can recover with sustainable
job creation.
2. Community Banks still have $1.43 trillion in commercial real estate loans that
require resolution. The FDIC’s List of Problem Banks rose to 860 in the third
quarter of 2010, which is 11.1% of all insured institutions. My analysis shows 2,485
or 32% of all banks overexposed to Commercial Real Estate loans, and 3,938 or
50.7% of all banks with real estate loan pipelines that are 80% to 100% funded.
This stress needs to be addressed before jobs can be created on Main Street
USA as housing and construction drive local economies. “The Great Credit
Crunch” will not end without a program to remove toxic real estate loans from
the books of community banks around the country.
3. The Banking System is supposed to de-lever risk, but it has not. When I look at
the Notional Amount of Derivative Contracts I cringe at the fact that since the
end of 2007 this risk category has grown $71.6 trillion since the end of 2007,
that’s an increase of 43.5% to $236.4 trillion at the end of the third quarter in an
environment where banks should be de-leveraging not adding to this risk where
financial time bombs are ticking.

4. Fannie Mae and Freddie Mac will continue to drain taxpayer money as the
Treasury provides unlimited lines of credit through 2012. The cost currently is
about $150 billion, by far the largest of any government bailouts. We need to
unwind the activities of these GSEs, and beef up Ginnie Mae as the go to
government agency that backs new mortgage issuance.

5. Because of the housing market depression and stress in the banking system the
Unemployment Rate will stay above 9% for all of 2011.

6. QE2, the $600 billion program where the Federal Reserve buys long dated US
Treasury Securities has been a failure so far. The yield on the 10-Year was 2.334
when Fed Chief Bernanke touted QE2 in October only to see the yield nearly
125 basis points higher in December. The primary intent of QE2 was to lower
longer-dated US Treasury yields. Yields held this week’s value level at 3.494
again on Wednesday. There is risk to 3.75 to 4.25 in 2011, but with or without this
weakness the 10-Year yield will decline to 2.75 to 2.50 during 2011.

7. Comex Gold has gone parabolic and therefore you cannot predict how high
gold prices can climb. I do know that corrections will be fierce and painful for
those that buy strength instead of weakness. The 2011 neutral zone is between
$1350 and $1450.

8. Nymex Crude Oil is headed back above $100 per barrel according to most
experts. I cannot rule that out for 2011, but the downside is more significant
given weekly closes below the $87 per barrel area. If gasoline stays above
$3.00 per gallon demand on Main Street will slow down and will be a drag on
economic growth and job creation.
9. Problems among the PIIGS nations denominated in euros will trump problems at
the state level in the USA. This will keep the euro versus the dollar in a trading
range. We will begin 2011 with a quarterly pivot around 1.3150.

10. US stocks show strong technical characteristics. The S&P 500 is above the 61.8%
Fibonacci Retracement of the decline from October 2007 to the low of March
2009 at 1228.74. Dow Theory had a Buy Signal in early November and another
confirmation in December. The Dow Industrial Average – I project downside to
9,375 in the first half with a rebound to 11,500 in the second half. Strength
above 11,500 will return to 11,500, and the 2011 close will be at or below 11,500.

11. ValuEngine.com indicates that equity fundamentals are not cheap. Fifteen of
sixteen sectors will begin 2011 overvalued according to ValuEngine. The normal
range for the percent undervalued or overvalued stocks is 35% to 65%. We will
begin 2011 close to the low end of the range for undervalued stocks and
towards the high end for overvalued stocks. Because of the battle between the
technicals and fundamentals, stocks will be reversal-oriented in 2011 and be
little changed year over year.

Click the icon below to hear VE Chief Market Strategist Richard Suttmeier
on TheStreet.com's "The Real Story" Podcast
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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-- (3.466) – The Weekly value level is 3.494 has held on
weakness with a risky level at 3.264.

Commodities and Forex


Comex Gold-- Value level is $1387.4 with this week’s pivot at $1401.2 and monthly
risky level at $1443.5.
Nymex Crude-- Pivot is $91.38 with this week’s risky level at $93.28.

The Euro--Value level is 1.3060 with my quarterly pivot at 1.3318, which goes away at
the end of the year.

Major Indices
US stocks are overvalued fundamentally and overbought technically on both
daily and weekly charts. The major equity averages remain below this week’s risky
levels as the year draws to a close at: 11,629 Dow, 1269.4 SPX, 2682 NASDAQ, 5215
Dow Transports and 808.57 Russell 2000. Fifteen of sixteen sectors are overvalued
according to ValuEngine with only 37.7% of all stocks undervalued. At 35% the stock
market tends to find a top. Only 17.5% of all stocks are undervalued by 20% or more.

The Dow--
Daily: Remains extremely overbought on both daily and weekly charts. The five-
day modified moving average is 11,523 with daily and weekly risky levels at 11,618
and 11,629.

Housing
On Tuesday we learned that home prices are on the decline again according
to Case-Shiller, and that the Conference Board’s Consumer Confidence fell to 52.5 in
December. The National Association of Home Builders Housing Market Index remains
depressed at 16 when a reading of 50 is neutral. The Consumer Confidence reading
at 52.5 is depressed considering that 90 to 120 is the neutral zone.

• The 20-City Composite from the Case-Shiller Home Price Index fell 1.3%
sequentially in October and 0.8% year over year with Atlanta, Charlotte, Miami,
Portland, Seattle and Tampa hitting new lows since home prices began to fall in
mid-2006.
• Home sales are down 25% year over year and the supply of unsold homes is
up 50%, and housing starts are near thirty year lows.
• From the mid-2006 peak to current home prices are down 29.6%.
• The 20-City Composite is still 50% above its starting point at the end of 1999.
Upcoming Suttmeier Appearance
ValuEngine Chief Market Strategist Richard Suttmeier On the Road in
January
ValuEngine Chief Market Strategist Richard Suttmeier is a financial analyst for media such as Fox News,
CNBC,YahooFinance,the Wall Street Journal, New York
Times, CNNfn, and Bloomberg, Suttmeier has long been
one of ValuEngine's "power users," supporting his own
technically-focused analysis with VE's fundamentally-
based quant methods.

With all of the recent market


uncertainties, making the correct stock
decisions can be daunting. ValuEngine Chief
Market Strategist Richard Suttmeier will be
appearing at the AAII Orlando Chapter
meeting on January 19, 2011. We invite all VE
clients in Florida to attend. At the meeting,
Suttmeier will discuss the following topics:
• How ValuEngine.com can help investors adapt
to volatile and risky market conditions
• How to implement a hedge fund-type strategy for your own stock investment portfolio
• How ValuEngine’s research helped me call both the top and the bottom of the market over the
past five years

This meeting will take place at the University Club of Winter Park, 841 N. Park
Ave. Winter Park, FL 32789. It starts at 6:30pm. Again, all VE clients are invited. We
place a special call out to those seeking individual investment advice, assistance,
and portfolio management.
Happy New Year to All !

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