Thursday, June 21, 2012

A Macro View: Michigan Inflation Expectations (17)

In one of my recent articles based on the ISM reports it used lagged linear regressions to derive at a group of stocks that should perform well in a variety of markets and especially well under rising ISM indexes (picking stocks based on the ISM Manufacturing Index with lagged indicators). This time I want to get back to exploring inflation based regressions in choosing stocks similar to the article using the PPI Index. Results from prior regressions on sector returns versus inflation indicators showed that the headline PPI had the highest degree of correlation.

But those regressions did not consider inflation expectations but just recorded levels of inflation backward looking. The University of Michigan Inflation Expectation (MICH) is one such index that takes a survey of consumers based on 1 year forward inflation expectations. Below is a graph of the MICH and CPI headline numbers and core CPI year over year for CPIs. While the MICH index shows to have a low correlation with CPI indicators, inflation expectations could exhibit a stronger predictor of stock movements as current prices are derived from the present state and also the expected state of being in the future. (Click to enlarge)

The first back-test (August 2000 to May 2012) used the 5 lag model as mentioned for the ISM reports. The results showed promise with over an 11% annualized rate of return and over 5% annualized differential return over the flat S&P index. This did mean higher volatility with bigger draw-downs and much bigger gains. But an expectation index is very unlikely to need to incorporate lags to capture delayed effects from events (changes in the index).

The second back-test (August 2000 to May 2012) (results below) used the basic Fama-French 3 factor model with the MICH index as the factor tested against. The results were an impressive 12.3% annualized return and 5.2% annualized return over the flat S&P 1500. The models sharpe ratio vs. S&P 1500 flat-weighted was at a healthy 0.46 and the simple Sharpe ratio was 0.32 during the back-test period. The mean monthly return was 1.29% vs. 0.91% for the S&P 1500 flat and median monthly return was 1.52% vs. 0.57% for the S&P 1500 flat. Stock picks below, divided by Sabrient's Strong Buy and Buy ratings, are based on results of the MICH index for April 2012 and rebalanced on June 13, 2012.
Strong Buys:
Deluxe Corporation (DLX)
Wyndham Worldwide Corporation (WYN)
Discover Financial Services (DFS)

Concur Technologies, Inc. (CNQR)
Carpenter Technology Corporation (CRS)
Helix Energy Solutions Group, Inc. (HLX)
Snyder's-Lance, Inc. (LNCE)
Newfield Exploration Company (NFX)
Norfolk Southern Corporation (NSC)
Smithfield Foods, Inc. (SFD)
Safeway Inc. (SWY)
Universal Health Services, Inc., (UHS)
The Western Union Company (WU)
Health Management Associates, Inc. (HMA)
Humana Inc. (HUM)
Masco Corporation (MAS)
Myers Industries, Inc. (MYE)

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
DFS STRONGBUY 32.83 LargeCap 99 63 79 98
DLX STRONGBUY 23.90 MidCap 64 65 28 65
WYN STRONGBUY 51.68 LargeCap 32 26 42 62

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
CNQR BUY 67.75 MidCap 65 8 86 83
CRS BUY 43.90 MidCap 80 80 93 35
HLX BUY 15.28 MidCap 79 86 43 39
LNCE BUY 25.42 MidCap 43 34 46 65
NFX BUY 26.56 MidCap 52 89 65 24
NSC BUY 71.07 LargeCap 89 66 84 72
SFD BUY 20.67 MidCap 53 83 25 45
SWY BUY 17.64 MidCap 45 91 66 29
UHS BUY 39.79 MidCap 97 98 90 67
WU BUY 16.37 LargeCap 88 72 75 57

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
HMA BUY 6.51 MidCap 64 89 55 49
HUM BUY 79.32 LargeCap 89 82 77 35
MAS BUY 13.83 MidCap 39 12 61 99
MYE BUY 16.78 SmallCap 68 31 71 83

Friday, June 01, 2012

A Macro View: ISM May

Overall the ISM reports presented good news although not great with the markets reactions being overshadowed by the poor jobs reports of last week. Even though Tuesday was a light calendar day, the non-manufacturing sectors good news only translated to a slight improvement in the markets sentiment. More specifically, the good news was that the new orders index of both reports rose 2 points or nearly 2 points to 55.5 and 60.1 for non-manufacturing and manufacturing respectively. Also pricing pressures have continued to subside which is discussed below.

The headlines indexes were fair to middling even with the strong headwinds of the Euro crisis and questions about China's continuing growth. Manufacturing PMI was below the market consensus of 54 at 53.5 but on the top end of the consensus range of 51-54.5 by Econoday. The non-manufacturing index was above the consensus of 53.5 by Econoday and MarketWatch with an index of 53.7.

Even with new orders coming in strongly, employment was not for the better. Non-manufacturing dropped the most with a drop of 3.4 to 50.8 and manufacturing dipping 0.4 to a respectable mid 50s range of 56.9. Thus, the services sectors being the bulk of the economy has slowed its growth of hiring last month by respondent. One respondent said, "Reduction of excess FTE [full-time equivalent] capacity and organizational consolidation" which collaborates what the jobs reports stated as increased reliance on part-time staff. Below is a graph of the non-manufacturing employment index since December 2009 with a so-called trend line. Since January the index has trended downward and if it continues will drop below the 50 mark indicating contraction in hiring.

Prices Collapsing
The price index for both reports dropped below 50 since July 2009 at 49.8 and December 2011 at 47.5 for non-manufacturing and manufacturing respectively. The drop was most dramatic for the manufacturing sectors with the drop in the index by 13.5 and net (those responding higher prices vs. those reporting lower prices) dropped from positive 22 to negative 5. Also commodities rising in prices was surpassed by commodities down in price for the manufacturing sectors which is a rare event over the last 3 years. All these facts bring up the dreaded signs of deflation. While slow steady increasing prices are best, falling prices are not good for the economy overall. If the Fed is looking at this data, QE3 might be more attractive or necessary moving forward.

Stock Picks based on ISM Manufacturing Index with Lagged Indicators
The regressions used this time was a continuation of the formulas used from the last report in April but corrected some data issues with the data base. The results were much better than the last backtest results with about a 5% higher annualized rate of return than the flat-weighted S&P index and nearly a 12.5% annualized return. The results showed no overlapping stocks with the last pick selections but on the other hand the turnover rate during this backtest was 7.5% or lower per quarter. Which means that even though turnover was low it did not correlate with the last stock picks. The list below is also filtered by Sabrient's rating system of Strong Buys only. These choices should outperform the market and do especially well if the manufacturing sectors perform well over the next 6 months.
Cascade Corporation (CASC)
Deluxe Corporation (DLX)
Helix Energy Solutions Group, Inc. (HLX)
MarineMax, Inc. (HZO)
Masco Corporation (MAS)
Protective Life Corporation (PL)
SYNNEX Corporation (SNX)
Tyson Foods, Inc. (TSN)
Wyndham Worldwide Corporation (WYN)

New orders gaining momentum should propel the overall index higher for the near future as well as the stock picks above. The strength in new orders must be mostly from domestic sources as new export orders dropped significantly with a drop of 5 for non-manufacturing and 5.5 for manufacturing. Both export indexes stayed above the 50 mark with manufacturing at 53.5 and non-manufacturing at 53 which shows growing export orders but at slower pace. Respondents comments were mostly favorable including Anthony Nieves from the non-manufacturing report stated, "The majority of the respondents' comments are positive and optimistic about business conditions and the direction of the economy."

ISM Non-manfucturing Addendum: 24 Stocks...
In the last post (9 Stocks That Should Perform Well When The ISM Index Rises) about the ISM reports for May, I included the results from regressing stock returns in the S&P 1500 versus the ISM manufacturing report headline index (PMI) with 5 additional factors being 5 lags. This post will present some of the findings based on the non-manufacturing ISM report.

Since the Institute for Supply Management has only recently presented the composite index (NMI) since 2008, it limits the ability to back-test over the desired 10 year duration. The underlying indexes have been supplied since around mid-1997 so a composite index is possible to derive from the data as the ISM states.
The new Non-Manufacturing Index, NMI, consists of:
Business Activity 25%
New Orders 25%
Employment 25%
Supplier Deliveries 25%

I ran two regressions from mid-2000 to May 2012 using the four indexes above and adding the price index. The price index would be the most likely to be non-linear and in any case we would expect a negative correlation with the market overall. The second regression I ran used the composite along with the 5 underlying indexes and achieved a 10% annual gain. Good but inflation being mixed in with the other with opposite expected signs could have limited its forecasting abilities.

The first regression used the 5 indexes and then added the business activities index again, which essentially doubled its input. The results were better with returns closely matching the ISM manufacturing at 12% annualized returns. Below are some of the picks from the first regression with the first set being Strong Buys rated by Sabrient Systems.
Cascade Corporation (CASC)
Deluxe Corporation (DLX)
Helix Energy Solutions Group, Inc. (HLX)
MarineMax, Inc. (HZO)
Masco Corporation (MAS)
Tyson Foods, Inc. (TSN)
Wyndham Worldwide Corporation (WYN)
As expected the results from manufacturing and non-manufacturing would overlap and the above list is simply a subset of the manufacturing list enumerated in the last blog post of Strong Buys from Sabrient Systems. The list below are Buys as rated by Sabrient Systems derived from the above regression.
Crocs, Inc (CROX)
Coventry Health Care, Inc.(CVH)
The Hartford Financial Services Group, Inc. (HIG)
JetBlue Airways Corporation (JBLU)
M/I Homes, Inc. (MHO)
Prudential Financial, Inc. (PRU)
PrivateBancorp, Inc. (PVTB)
Select Comfort Corporation (SCSS)
Skechers U.S.A., Inc. (SKX)
Wynn Resorts, Limited (WYNN)
Caterpillar Inc. (CAT)
Health Management Associates, Inc. (HMA)
Humana Inc. (HUM)
Myers Industries, Inc. (MYE)
Norfolk Southern Corporation (NSC)
Smithfield Foods, Inc. (SFD)
Stone Energy Corporation (SGY)

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
CAT BUY 83.26 LargeCap 77 92 81 36
HMA BUY 5.99 MidCap 60 94 57 32
HUM BUY 77.12 LargeCap 85 82 67 44
MYE BUY 16.46 SmallCap 61 33 53 87
NSC BUY 63.69 LargeCap 86 73 81 61
SFD BUY 19.09 MidCap 62 82 34 39
SGY BUY 21.61 MidCap 52 66 48 44
wynn scss crox pvtb hig mho jblu pru skx cvh
hma cat mye hum nsc sfd sgy
Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
CROX BUY 16.10 MidCap 79 58 75 40
CVH BUY 30.46 MidCap 89 71 72 65
HIG BUY 16.10 LargeCap 58 97 27 10
JBLU BUY 4.93 MidCap 98 91 89 83
MHO BUY 12.69 SmallCap 56 25 43 90
PRU BUY 44.75 LargeCap 61 97 36 29
PVTB BUY 13.39 SmallCap 71 50 47 80
SCSS BUY 25.71 MidCap 98 64 79 66
SKX BUY 16.49 SmallCap 81 58 53 83
WYNN BUY 98.17 LargeCap 63 59 80 43

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
CASC STRONGBUY 43.80 SmallCap 98 94 92 47
DLX STRONGBUY 22.38 MidCap 59 67 25 56
HLX STRONGBUY 15.83 MidCap 84 86 55 33
HZO STRONGBUY 9.04 SmallCap 41 8 55 96
MAS STRONGBUY 11.73 MidCap 40 13 60 100
TSN STRONGBUY 18.59 LargeCap 60 60 36 49
WYN STRONGBUY 47.59 LargeCap 48 34 46 68

Econoday Report: PMI Manufacturing Index June 1, 2012

PMI 54
Non 53.5

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
CASC STRONGBUY 43.80 SmallCap 99 93 91 51
DLX STRONGBUY 22.38 MidCap 60 67 25 57
HLX STRONGBUY 15.83 MidCap 86 86 54 44
HZO STRONGBUY 9.04 SmallCap 41 7 56 97
MAS STRONGBUY 11.73 MidCap 39 15 60 99
PL STRONGBUY 24.98 MidCap 96 78 73 95
SNX STRONGBUY 32.72 MidCap 91 88 75 37
TSN STRONGBUY 18.59 LargeCap 60 58 37 51
WYN STRONGBUY 47.59 LargeCap 47 37 45 63

Cascade Corporation (CASC)
Deluxe Corporation (DLX)
Helix Energy Solutions Group, Inc. (HLX)
MarineMax, Inc. (HZO)
Masco Corporation (MAS)
Protective Life Corporation (PL)
SYNNEX Corporation (SNX)
Tyson Foods, Inc. (TSN)
Wyndham Worldwide Corporation (WYN)

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in May

Service Companies Grew at Faster Pace in May | Business |

Calculated Risk: ISM Manufacturing index declines in May to 53.5

America’s jobs crisis | Felix Salmon

New Hires Getting Left Behind on Pay - Real Time Economics - WSJ

Misc Links:
The Capital Spectator: A (Partial) Antidote For Today’s Disappointing Jobs Report

What the Jobs Report Means for the Fed -

A Lagging Recovery -

Even Mediocre Job Growth Coming From Wrong Places - Real Time Economics - WSJ

Broader Jobless Rate Jumps to 14.8% - Real Time Economics - WSJ

Economists React: ‘What a Jobless Recovery Looks Like’ - Real Time Economics - WSJ

CARPE DIEM: Today's Employment Report

Unemployment Rate Rises to 8.2% Over Eurozone Fears | Business |

America's flagging recovery: Third time unlucky | The Economist

America’s jobs crisis | Felix Salmon

The Capital Spectator: Another Month Of Slow Job Growth In May

Calafia Beach Pundit: Jobs growth still moderate

David Smith's Weak data everywhere

Calculated Risk: Trulia: Asking House Prices Unchanged in May

TaxVox » Blog Archive » Billions in Tax Refund Fraud–and How to Stop Most of it

Greg Mankiw's Blog: Barro on the Slow Recovery

Calculated Risk: CoreLogic: House Price Index increases in April, Up 1.1% Year-over-year

Environmental and Urban Economics: The Rural Windfall from Leasing Land to Energy Extraction Companies

Culpability: Is it Barack Obama's economy? | The Economist

CARPE DIEM: The Dakota Model: Booming North Dakota Led the Country in 2011 with Real GDP Growth of 7.6%

Vital Signs: Falling Factory Orders - Real Time Economics - WSJ

Calculated Risk: WSJ: Spain Warns of Losing Access to Markets for Borrowing

Teachers and Income: What Did the Kindergarten Study Really Find?, Bryan Caplan | EconLog | Library of Economics and Liberty

Bruce Bartlett: Rich Nontaxpayers -

CHART OF THE DAY: Here's The Real Reason Obama's Poll Numbers Are Crashing - Business Insider

Why the Euro Zone Could Unravel Shockingly Fast | Business |

Stumbling and Mumbling: Is equal opportunity feasible?

The Danger of External Debts - Philipp Bagus - Mises Daily

Sunday, May 13, 2012

RSY: Buy CNAF, CMO, Optional Options, Update

The rejection of the offer by Covington to purchase all outstanding shares of Advocat (AVCA) represents a missed opportunity for capital gains in this position for the RSY portfolio. Covington luckily has kept the offer open and have written a letter to shareholders expressing their position in support of the buyout (Reprinted below.). If the offer was dead, then we might expect a drop to pre-offer levels at around the mid $4 range as even stated in the letter. That exposes the portfolio to volatility, but with that possible opportunities to unload either the first tranche or the complete position as stated in the last RSY post.

One stock to look at more closely is Commercial National Financial Corporation (CNAF). It has above average forensic accounting score with low downside risk that should outperform the market over the medium term. Sabrient gives CNAF excellent marks in growth and momentum that are rated over 88 both (ratings 1-100). And importantly to the RSY portfolio it has 71.6 in value, 94.4 in earnings, and a fundamental score of 80.5.

Another stock that shows great potential is Capstead Mortgage Corporation (CMO) which is a REIT in the Real Estate Operations Services. Just like CNAF, CMO has higher growth potential with lower risks and above average forensic accounting score. The Sabrient Fundamental Score is the broad measure of a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality. With a Sabrient Fundamental Score of 95.8, Capstead Mortgage is substantially higher than the average of its industry group, which carries a Sabrient Fundamental Score of 59.8.

Even though CNAF is a regional bank like our position in PULB and BRKL, and CMO is a REIT in the Real Estate Operations industry like IVR, RSY recommends getting long positions in both but of limited size with a limit order of 200 shares of CNAF at a price of $25.01 (GTC). And place a limit order of 300 shares of CMO at a price of $13.21 (GTC).

Optional Options...
KRO expired this Friday worthless and the RSY pocketed the $1.45 per contract at 400 shares for around $569.00. This obviously gives us a chance to write another covered call which RSY recommends writing 4 contracts of KRO Nov-12 $17.50 call options at a limit price of $3.3 (GTC), 1 contract of ARLP Dec 22 '12 $60 call options at a limit price of $4.00, and 4 contracts of IVR Oct 20 '12 $18 call options at a limit price of $0.70 (GTC). Both KRO and IVR are rated Strong Buys by Sabrient Systems and RSY recommends holding on to these two. ARLP is rated a hold now but even though down from initial purchase, but have maintained close to break even with dividends and options sold.

Transactions Update
The table below shows the RSY model portfolio transactions since the beginning of this year, and below that our current positions in the model portfolio and lastly the open letter from Covington to shareholders of AVCA.

(Click to enlarge.)

Dear Fellow Shareholder:

We are extremely disappointed by the response of Advocat Inc.'s Board of Directors on May 14, 2012, rejecting our proposal to acquire all common stock of Advocat for $8.50 a share in cash. Just two business days after our letter and press release on May 11, 2012, the Advocat Board released a letter that says it has thoroughly evaluated Covington's proposal and rejects it in favor of pursuing its own strategic plan. Advocat's letter states that the Board takes its fiduciary responsibility seriously and has thoroughly reviewed our proposal, but it appears to us that the evaluation of Covington's high premium offer was done without obtaining outside advice from an independent financial advisor.

Our proposed price of $8.50 a share represents almost a 100% premium to the unaffected share price and values Advocat at premium multiples compared to other publicly traded skilled nursing facility companies. We believe it is a compelling proposal. Advocat's Board indicates our offer is inadequate, but does not articulate how its strategic plan (which, as indicated in the Attachment to this letter, has not significantly evolved in years) will achieve more value in the foreseeable future. As shareholders, you have a right to understand the clear basis for the Board's determination of the inadequacy of our offer.

Advocat also indicates its stock is undervalued. We believe that the unaffected stock price reflects the uncertainty of Advocat's strategic plan and that, in the absence of our offer, it will stay at or around the unaffected price based on the Company's performance. We are offering a near 100% premium to the unaffected price to finally allow shareholders to achieve a return at a full and fair price. One need only look at a stock chart to recognize the shares have not appreciated in value and have traded in a fairly tight range for the last several years in spite of the strategic plan referenced by the Company. Our offer also eliminates the substantial industry and strategic execution risks facing the Company.

Advocat in its letter states that its strategic initiatives and investments will generate value that "will be realized over the next several years." We disagree. These strategic initiatives have been discussed by the Company in its quarterly earnings calls and SEC filings for the past several years. However, recent quarterly earnings do not show any track record of significant improvement. Moreover, the Company's own proxy statement filed on April 30, 2012, points to declining financial goals in terms of setting the bar for executive compensation. Specifically, the proxy states that 40% of the bonus for executive officers is based on operating income performance. It then states that the budgeted operating income, as adjusted, for 2012 is $9,299,000. This compares to the budgeted operating income in the 2011 proxy for determining executive bonuses of $11,556,000, a 20% decrease. Actual operating income, as adjusted, for 2011 was $6,127,000. How long must shareholders wait for things to improve such that value in excess of $8.50 a share is created for shareholders? And why should shareholders accept operating income levels for determining bonuses that actually decrease? The Company appears to be aiming lower not higher.

Rather than seeking independent shareholder input on our proposal, Advocat put forward that the opinions of its Chairman and Vice Chairman of the Board "serve as useful proxies for the views of many of [Advocat's] shareholders." We think it is important that the Board consider what is in the interests of all shareholders, not just "two of [its] significant shareholders" who have financial interests as directors that are not the same as the other shareholders. Moreover, contrary to the Company's assertion, the objection of these shareholders is not determinative of the successful conclusion of a negotiated merger transaction, and should not be a legitimate reason to support a decision not to engage with us. We do not understand how the Board can put a "not for sale" sign on the Company, especially in the face of an offer with such a significant premium relative to the Company's strategic plan which simply has not materialized.

In its letter, Advocat implies that it has engaged with Covington by referring to a meeting with two directors solely "in their capacity as significant shareholders" of the Company. However, they did not say anything or ask questions at this meeting. In our view, a one-sided conversation does not amount to engaging with us, and we remain perplexed at the Company's continuing refusal to do so.

Please join us in expressing your dissatisfaction with the Advocat Board's decision. Specifically, we encourage you to call or write the directors and management urging them to engage in meaningful discussions with Covington regarding our proposal. As stated previously, we remain interested in a mutually agreeable and negotiated transaction. The contact details are:

Advocat Inc. 1621 Galleria Boulevard Brentwood, TN 37027-2926 Ph: (615) 771-7575 Fax: (615) 771-7409

It is clearly in the interests of all shareholders for the Board to take prompt action to allow shareholders to realize compelling value for their shares now.



John E. McMullan President Covington Investments, LLC

Optional Options
IVR {2+2} Oct 2012 @ $18 for 0.70
ARLP {1} Dec at $60 for $4.4
KRO expires this week, {4} Nov 2012 @ 22.5 for 1.75

CODI-Sucks Nov 2012, 0.50


OLN {5-6?, 2-8}:
AGR 61
StockScouter: 9
Sabrient: V 94.1, G 88,
Fun 89.7, Balance 33.2, Earnings 64.3

ARLP = $1080.75 15.4% profit
Bought 1-13-2011


RSY XXXXVIII: 96% Premium, time to sell AVCA

Friday we learned that Covington Investments, LLC proposed an acquisition Advocat Inc. (AVCA) at a price of $8.50 per share which represents a 96% premium over last Thursday's close. Before the opening on Friday, the merger was announced, which resulted in a day's gain of over 57% for AVCA but far short of the bid and ending the day at $6.82.

Trading volume on Friday was nearly ten-fold over normal trading. This showed considerable interest in this transaction, but considering that the closing price represents another 25% premium to the offer, the markets are tentatively considering this proposal. Either the arbitragers are seeing considerable significant levels of collapse of negotiations or the market has not fully reacted to the 4th proposal by Covington since February 27, 2012.

The RSY Portfolio loves value stocks and while we evaluate stocks mostly on how the markets views values, this correlates with the value that other businesses place on these valuable companies. If this merger goes through, this will be the second position that RSY went long and was bought out, with the first being Lubrizol (LZ). Since AVCA does not have options available, and the next ex-dividend date is June 27 for just 5.5 cents, then this offer looks like a time to reduce our exposure or unload our position. RSY recommends to put in two bids with half the position in each bid (200 from the original 400 recommended). The first being a limit order of 200 shares at an asking price of $7.49 (GTC), and the second being a limit order of 200 shares at an asking price of $7.99 (GTC). If the offer holds for the next few days, the limit price of $7.49 should be easily met as the high on Friday was $7.54, and the limit price of $7.99 would still represent a little over 5% premium to the offer for others that wish to take the risks.

Thursday, April 19, 2012

A MacroView: ISM March

The experts got the general directions of the ISM reports correct this last month. While there is no break-out to indicate increased overall strength of the economy or the return to the dreaded double-dips, both reports showed consistent growth which should translate into economic growth of over 3.5% in GDP annually according to Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. The economists surveyed, predicted that the ISM manufacturing index would increase to around 53 to 53.5 and was in the consensus range by Econoday of 51.9-54.2% at the actual of 53.4%. On the non-manufacturing headline index, economists had stated the index would decline slightly to 57-56.8 from 57.3% and it declined to 56 but maintained within the consensus range by Econoday of 55.7-58%.

Respondents to the surveys were basically very upbeat about business conditions with two reservations. A respondent from Heath Care & Social Services expressed concerns that the healthcare reforms were going to drastically reduce revenue. And another from Computer & Electronic Products business was stable but they had concerns about China going forward. Naturally showing concerns about the discussions of hard or soft landing economically in China. The New Exports Orders index also showed weakness in both reports with manufacturing dropping 5.5 to 54% and non-manufacturing dropping 2 to 52.5% with both converging to low 50s.

The price index in both reports showed much needed relief downward but still maintained over 60 in both reports. The non-manufacturing price index dropped 4.5 to 63.9% and manufacturing edged lower by 0.5 to 61%. Below shows that the recent trend has reversed slightly.
(Click charts to expand)

The following two charts show recent upward trends from both reports for both total number of commodities rising in prices and multimonth commodities with price increases. It is not nearly as dire as during the spring of 2011 but something of concern if the economy starts heating up again and prices strangle economic growth. These indexes are not seasonally adjusted so we can expect this recent trend to continue up.

Stock Picks based on ISM Manufacturing Index with Lagged Indicators
Instead of using the sub-indexes of the manufacturing report as last month, this time I regressed changes in the ISM manufacturing index with additional lagged regressors. Lags refers to delayed effects of new information. In this case let us say the ISM for January affects the market not just this month but the next and the next, etc. These results produced slightly better returns with about an additional 1/2% return over the flat-weighted S&P.

Prior research had shown that at certain lags, the independent variable was significant and could add value to the adjusted R^2. In this case there were few p-values that were significant and no pattern stood out as to which lag might provide the best additional information. Which means that the model looked better without discovering any additional information about time-delayed aspects of the reports.

Below is the results from regression with repeats of last month first and then additional choices for this month.
Continuation from last re-balance:
American International Group, Inc. (AIG)
Cliffs Natural Resources Inc. (CLF)
Discover Financial Services (DFS)
Ford Motor Company (F)
Goodyear Tire & Rubber Company (GT)
Prudential Financial, Inc. (PRU)
Baker Hughes Incorporated (BHI)
Goodyear Tire & Rubber Company (GT)
Newfield Exploration Company (NFX)
Tesoro Corporation (TSO)
The Hartford Financial Services Group, Inc. (HIG)

Added to portfolio:
Huntington Bancshares Incorporated (HBAN)
Textron Inc. (TXT)
United States Steel Corporation (X)
Chevron Corporation (CVX)
Marathon Oil Corporation (MRO)

ISM - Media Release: March 2012 Manufacturing ISM Report On Business®

ISM - Media Release: March 2012 Non-Manufacturing ISM Report On Business®

Mish's Global Economic Trend Analysis: Eurozone Composite PMI® Signals Recession Says Markit; France in Renewed Decline, German Growth Weakens, Italy and Spain Contract Further

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in March

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
AIG STRONGBUY 31.17 LargeCap 40 56 5 85
CLF STRONGBUY 70.88 LargeCap 97 94 92 48
DFS STRONGBUY 33.70 LargeCap 95 68 69 100
F STRONGBUY 12.62 LargeCap 84 82 54 64
GT STRONGBUY 11.39 MidCap 80 96 79 42
HBAN STRONGBUY 6.56 LargeCap 84 60 46 90
HIG STRONGBUY 21.95 LargeCap 64 91 16 65
PRU STRONGBUY 64.50 LargeCap 97 90 74 79
TXT STRONGBUY 28.84 LargeCap 74 56 49 96
X STRONGBUY 30.26 MidCap 54 69 66 56
BHI STRONGBUY 42.46 LargeCap 59 97 79 22
CVX STRONGBUY 108.30 LargeCap 73 72 71 37
GT STRONGBUY 11.39 MidCap 80 96 79 42
MRO STRONGBUY 32.23 LargeCap 50 80 24 32
NFX STRONGBUY 35.22 MidCap 49 99 64 14
TSO STRONGBUY 26.80 MidCap 87 70 89 68

MarketWatch estimates:
PMI: 53.5%
NMI: 56.8%

CARPE DIEM: ISM Report: Manufacturing Comeback Continues; Real GDP Growth in Q1 2012 Could Be 3.6 to 3.7%

Mish's Global Economic Trend Analysis: German Manufacturing PMI Back in Contraction, New Orders Plunge, Price Inflation Up

The Capital Spectator: Manufacturing Activity Picks Up In March

Calculated Risk: ISM Manufacturing index indicates slightly faster expansion in March
This was slightly above expectations of 53.0%.

Political Calculations: Finalized: GDP Forecast for 2012Q1

Misc. Links:
The Tax Foundation - Scott Hodge on the U.S. Having the Highest Corporate Tax Rate in the World

The Tax Foundation - Monday Map: Tax Freedom Day by State

Mish's Global Economic Trend Analysis: Eurozone Unemployment Hits 15-Year High (and About to Get Much Worse) "Official Denial" In Spain

Calculated Risk: Wells Fargo on Housing: Better Days Ahead, Prices to bottom mid-year

I Love This Video! — Economics is NOT a science like physics & astronomy « Taking Hayek Seriously

Economist's View: No Sign of an Inflation Problem

Calculated Risk: Construction Spending declines in February

Calculated Risk: Over There: Unemployment rate at new high in Euro Zone

We’re #1! U.S. Officially Has the Top Corporate Tax Rate. Or Not. | Business |

Calculated Risk: ADP: Private Employment increased 209,000 in March

Calculated Risk: CoreLogic: House Price Index falls to new post-bubble low in February, Rate of decline slows

After Best Quarter in Years, How Long Will Car Sales Keep Rolling? | Business |

The Capital Spectator: Untangling Inflation Worries

Inflation fear and privileged service sector jobs — Marginal Revolution

CARPE DIEM: North Dakota: America's "Economic Miracle State"

Economist's View: "The Trend is the Cycle"

Mish's Global Economic Trend Analysis: Spanish Economic Drama: Nearly 57% of Budget Devoted to Pensions, Unemployment Benefits, and Interest; Unemployment Rate Hits 23.6%; Spain Warns of Soaring Debt

Stumbling and Mumbling: Demand or productivity?

Monday, March 26, 2012

RSY: XXXXVII: Buy AVCA at $5.59

Advocat Inc. (AVCA) is rated as a Strong Buy by Sabrient for its excellent value and growth scores of 92.9 and 83.8 respectively (top is 100). With less than average market risk it is expected to outperform the market significantly. AVCA's accounting and governance ranks it at the top for conservative practices, which is noted by Sabrient rating AVCA at 82.5 for its Fundamental Score. Beneficial owners have been accumulating positions in this micro-cap stock. Healthcare is a sector that RSY does not have a position in and would help balance the portfolio with this 4% dividend yielding stock.

Since it is a lightly traded stock, RSY recommends buying a small position of 400 shares at a limit price of $5.59 {good for the day}. The ex-dividend date is March 28, so this is a good time to capture a position in it now.

AVCA does not have options available but reviewing our open options shows that the Jun $80 Call for ARLP is down around $0.25 from our 1 option sold at $4.10. The bad news is that ARLP has dropped in price while capturing the option premiums. ARLP is rated a Buy by Sabrient and RSY recommends continuing to hold this position and wait for better prices to sell or covered calls again.

Both TESS and BRKL do not have options available, but are priced so that we can reduce our exposure while capturing some of the capital gains. RSY recommends selling half of each position as such: Sell 200 shares of TESS at $23.01 {GTC} and Sell BRKL 200 shares at $9.51 {GTC}. Sabrient rates BRKL as a Hold presently and TESS as a Buy. This will result in a small gain in BRKL but nearly $2300 in gains from TESS on the 200 shares sold and nearly 100% in gains!

AVCA 4% AI-100% StockScouter 8 Healthcare : Healthcare Facilities
Sabrient rates AVCA a Strong Buy for its excellent value and growth scores.
Value 92.9 Growth 83.8 Sabrient Fundamental Score of 82.5

LFVN-Lifevantage Corporation

OKS 4.36% 4-28-2018 of $0.61 AI-77 StockScouter 9 Utilities
Growth And Quality Don't Come Cheap At Oneok Partners
Value: A rank of 29.1 for the Sabrient Value Score implies that historical and
projected earnings are already priced into shares of ONEOK Partners.
Balance Sheet: 6.2 YUCK!!!

Sell 1/2 of
BRKL HOLD 400 shares
TESS HOLD 400 shares
No options.
Buy to cover ARLP option.

Sell NLY after April 1st

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Sunday, March 18, 2012

ISM Non-manufacturing stock picks...

My last post presented 22 Stocks That Perform Well When The ISM Index Goes Up along with some analysis of the ISM reports published in March. The picks were based on the manufacturing index along with 5 of the subindexes (employment, new export orders, new orders, and price). The following list of stocks are based on the most recent ISM report on the non-manufacturing sectors of the economy and the same subindexes. Since the composite/headline index was only added in early 2008, the subindexes were useful in allowing a backtest since early 2000.

As expected the stock picks this time should overlap with the last report as both the non-manufacturing and especially the manufacturing indexes are highly correlated with the overall growth of the economy. Even the backtested annualized returns were the same and above the S&P 1500 flat weighted. At this time, it might also be interesting to see the sector breakdown of the last regression. The sector limit was raised to 30 and some sectors still reached that limit.
Consumer Discretionary 30
Consumer Staples 21
Energy 22
Financials 30
Health Care 16
Industrials 30
Information Technology 3
Materials 25
Telecommunication Services 1
Utilities 26
The table above was just for the last rebalance date but over time there are some observations to notice. The ones that are at 30 (Consumer Discretionary, Financials and Industrials) stayed at the limit the whole time. Those not reaching the limit stayed under the limit and the low ones stayed low. So overall consistent across sectors over the rebalance periods. The two sectors that had the most variance across rebalance dates were Energy and Health Care. While both suffered the most during the spring and summer of 2008, Health Care took it on the chin in the spring of 2000 during the dot-com bust. Below are the picks based on the regression analysis of the non-manufacturing ISM index:
American International Group, Inc. (AIG)
Goodyear Tire & Rubber Company (GT)
The Hartford Financial Services Group, Inc. (HIG)
Principal Financial Group, Inc. (PFG)
Discover Financial Services (DFS)
Prudential Financial, Inc. (PRU)
Wynn Resorts, Limited (WYNN)
MetLife, Inc. (MET)
SunTrust Banks, Inc. (STI)
Coventry Health Care, Inc. (CVH)
Regions Financial Corporation (RF)
Cliffs Natural Resources Inc. (CLF)
Tyson Foods, Inc. (TSN)
Cummins Inc. (CMI)
Mattel, Inc. (MAT)
Marathon Oil Corporation (MRO)
EOG Resources, Inc. (EOG)
Macy's, Inc. (M)
WellPoint, Inc. (WLP)
Devon Energy Corporation (DVN)
Newfield Exploration Company (NFX)

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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Monday, March 05, 2012

A Macro View: ISM Regressions...22

Fair to Middling for Manufacturing, Good News for the Services Sectors
Manufacturing missed the consensus range of 54-55.5% by over 1.5 to 52.4% and well below the consensus point of 54.6%. Economists had predicted a rise in the index of 0.5 but got slack results in all the sub-indexes with new orders down 2.7, production down 0.4, employment down 1.1, supplier deliveries down 4.6, and inventories at break even. But according to Econoday, "... February's rates are respectable and not that much different than January." The most dramatic increase in the sub-indexes was prices with a rise of 6 to 61.5%. So the only good news was the exports index up 4.5 to 59.5%.

Non-Manufacturing ISM Report showed greater strength with the headline index rising 0.5 to 57.3% which was well above the consensus of 56 and on the high side of the consensus range of 54.5-58%. Econoday summary was a little more reasonable by claiming this report was "very positive". Although employment was down 1.7 to a good level of 55.7 and supplier deliveries was down 1.5 to 49.5%, business activity jumped 3.1 to 62.6% and new orders continued its strong upward trend since October 2011 (52.4%) with an increase of 1.8 to 61.2%.

Déjà vu on prices and inflation concerns
Even though the manufacturing report showed weakness across the board, the price index and numbers of commodities with rising prices did not subside last month. Below is a chart of the price indexes for both manufacturing and non-manufacturing from the Federal Reserve which shows a 5 month trend upward for both sectors.

The following two charts also shows recent upward trends from both reports for both total number of commodities rising in prices and multi-month commodities. It is not nearly as dire as during the spring of 2011. These indexes are not seasonally adjusted so we can expect this recent trend to continue up. It looks more subdued, but that could change during the spring thaws.

Stock Picks Based on Manufacturing Index with Subindexes
The regression formula I used for the following stocks picks included the headline index of the manufacturing index as well as 5 of the subindexes of the manufacturing report (employment, new export orders, new orders, and price) and all within the Fama-French 3 factor model. This creates quite a few regressors and along with raising the limits on sectors and industries, it created longer lists of potential candidates than previous runs. The list of "Lovers" (those that love a rising manufacturing index) was then weeded down to those stocks rated a Strong Buy by Sabrient Systems. (Complete list available upon request.)
Valero Energy Corporation (VLO)
Baker Hughes Incorporated (BHI)
Cummins Inc. (CMI)
Newfield Exploration Company (NFX)
Avery Dennison Corporation (AVY)
Tesoro Corporation (TSO)
WellPoint, Inc. (WLP)
EOG Resources, Inc. (EOG)
Mattel, Inc. (MAT)
Macy's, Inc. (M)
Ford Motor Company (F)
Cliffs Natural Resources Inc. (CLF)
SunTrust Banks, Inc. (STI)
Eastman Chemical Company (EMN)
MetLife, Inc. (MET)
Bank of America Corporation (BAC)
Prudential Financial, Inc. (PRU)
Wynn Resorts, Limited (WYNN)
American International Group, Inc. (AIG)
Discover Financial Services (DFS)
Goodyear Tire & Rubber Company (GT)
Principal Financial Group, Inc. (PFG)

Calculated Risk: ISM Non-Manufacturing Index indicates faster expansion in February

Non-manufacturing: 55.5%

Calculated Risk: Existing Home Inventory declines 21% year-over-year in early March

Misc. Links:
The Tax Foundation - U.S. Corporate Income Taxes: Countdown to #1

US Banks Between a Rock and Hard Place: Dodd-Frank and Basel III Compliance | e21 - Economic Policies for the 21st Century

Environmental Economics: The Lorax: An env-econ economist's review

How Entrepreneurship Can Fix Young America. Youth unemployment is a chronic problem across the globe. Entrepreneurship is the answer. | Business |

Monetary policy: Try overshooting for once | The Economist

Sectoral rebalancing: The Fed's Reagan recovery | The Economist

Taxation: OPEC and Uncle Sam | The Economist

The Capital Spectator: Will The ISM Services Sector Index's Feb Rise Spill Over To Friday's Jobs Report?

FT Alphaville » A game of krónur

Calculated Risk: HAMP for Investors

David Smith's Service sector slips but still quite strong

CARPE DIEM: Online Job Demand Improves in February and Supply/Demand Ratio is Lowest Since Nov. 2008

How Much Do Income Taxes Affect Our Behavior? A New Study by Christina Romer and The National Bureau of Economic Research has new answers. | Business |

Vital Signs: Incomes Adjusted for Inflation - Real Time Economics - WSJ

How Much Do Income Taxes Affect Our Behavior? A New Study by Christina Romer and The National Bureau of Economic Research has new answers. | Business |

Mish's Global Economic Trend Analysis: Disingenuous Recession Explanations from ECRI Regarding Coincident Indicators; An Email Response From ECRI; Does the ECRI Even Believe Its Own Indicators?

Saturday, February 18, 2012

A Macro View: Stock Picking based on PPI Index

The recent release of the PPI index and core PPI has sparked some interest in how it is related to stock market returns. Calafia Beach Pundit thinks that the
PPI inflation Of 3.5% points to higher yields ahead.

From my regression research, the PPI index has the highest correlation with stock market returns by sector versus the CPI indexes of core and headline. Results for back-testing over the last 10 years also resulted in greater returns for the PPI over the CPI although core CPI does better than the headline CPI. But for the PPI versus core PPI, the results for the core PPI are very weak and much lower than the S&P 1500 flat weighted. Even when adding core to the headline PPI results in lower returns than just PPI.

The above regression analysis was in regards to sectors and stocks that performed well when the index was going up, that is, inflation heating up on the consumer side or the producer side also called "Lovers". This week's stock picking is based on a regression back test from July 2000 until the latest release in February for January's numbers. It performed better than the S&P 1500 flat weighted and achieved nearly 10% annualized return over the back test period. The following stock picking list is the "Lovers" list and filtered by Sabrient's Strong Buys and Buys.

Assurant, Inc.,AIZ, STRONGBUY
Peabody Energy Corporation,BTU, STRONGBUY
Nabors Industries Ltd.,NBR, STRONGBUY
Baker Hughes Incorporated,BHI, BUY
BB&T Corporation,BBT, BUY
ConocoPhillips,COP, BUY
CSX Corporation,CSX, BUY
Halliburton Company,HAL, BUY
Helmerich & Payne,HP, BUY
International Paper Company,IP, BUY
PerkinElmer,PKI, BUY
Pioneer Natural Resources Company ,PXD, BUY
SunTrust Banks,STI, BUY
Zimmer Holdings,ZMH,BUY

CARPE DIEM: U.S. Manufacturing Is Open for Business and Doing Well; Despite, Not Because of, Government Policy

CARPE DIEM: Chart of the Day: Drill, Drill, Drill = Jobs, Jobs, Jobs

Symbol Rating Price * Market Cap SABRIENT SCORES
Value Growth Momentum
AIZ STRONGBUY 43.97 Mid-Cap 88 33 63
BTU STRONGBUY 35.96 Large-Cap 97 65 15
NBR STRONGBUY 19.16 Large-Cap 98 86 41
BHI BUY 47.9 Large-Cap 98 83 32
BBT BUY 29.65 Large-Cap 62 59 97
COP BUY 72.81 Large-Cap 74 49 24
CSX BUY 21.94 Large-Cap 92 78 43
HAL BUY 36.14 Large-Cap 98 90 32
HP BUY 59.31 Large-Cap 78 95 53
IP BUY 33.02 Large-Cap 70 38 93
PKI BUY 26.07 Mid-Cap 44 94 78
PXD BUY 111.85 Large-Cap 18 87 71
STI BUY 22.28 Large-Cap 96 33 87
ZMH BUY 61.25 Large-Cap 54 72 70

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Tuesday, February 14, 2012

ISM Reports January 2012, With Heteroskedasticity

The recent jobs reports was such good news for the economy and the markets that it overshadowed the good news contained in the ISM reports. My latest ISM article on the ISM reports was lukewarm at best, but this month has more silver linings. The biggest upside surprises occurred in the non-manufacturing index where the headline index jumped up 3.8 to 56.8% beating the consensus of 53.3-53.5% and the consensus range of 52-54%. This was even after revisions in December upward of 0.4%. The manufacturing headline also bumped up one percent to 54.1% but after a revision down last month of 0.8%. Econoday succinctly stated a summary of the market reactions to the report.
The manufacturing sector is a bulwark of the economy and, despite troubles in Europe and slowing in Asia, continues to expand, underscored by a faster rate of expansion for new export orders which rose 2 points to 55.0. Despite the strength in orders, there's little initial reaction to today's report.

The chart above comes from the WSJ at World-Wide Factory Activity. From that sample of countries, it shows that the US is leading the world in economic development. We may be the first to recover from the great recession while other countries are facing their own set of economic problems.

Prices and Employment
Price pressures have receded in recent months but there are concerns about prices going forward. Prior experiences in this economic cycle has shown that every time segments of the economy start heating up, that this is followed by pricing pressures in those sectors. Manufacturing price index jumped 8 points to 55.5%. Slow price increases is a positive sign but this trend in the price index started in October 2011 when the index dropped to 41%. But commodity for manufacturing show no signs of causing problems in the near future. Commodity prices in non-manufacturing also showed no signs of increasing for the near future, but price index increased 1.5 to 63.5% indicating price and cost pressures going forward. On a sector wide basis this pricing pressure is wide as 13 sectors reported increases in prices and only 3 reporting decreases with 31% reporting higher prices and only 5% reporting lower prices.

During the "Great Recession" the manufacturing sectors have led the employment index. But unfortunately most job creation strength is in the "services" sectors. But that situation may have changed last month. The chart above shows the dramatic increase in the non-manufacturing index last month and the trends in the index since December 2009. A few months ago I lamented that the upward trend line had decayed but hopefully this recent report is a portent to future strength in the non-manufacturing sectors. Obama should be pleased. Even if this jump is a fluke, reversion to the mean will continue to indicate employment strength in the mid-50s range.

It is also worth noting that the new export orders increased for both indexes to acceptable mid-50s range with manufacturing increasing 2 to 55% and non-manufacturing increasing 5.5 to 56.5%. New orders index also showed continued strength with manufacturing increasing 2.8 to 57.6% and non-manufacturing increasing 3.6 to 59.5%. Both indexes and especially new orders is a portent to positive future reports.

Heteroscedas?? what? (Wonkish-stock picks below.)
Last month I introduced a simple regression model based on the ISM manufacturing index changes. This month's regression results will be based on changing the model in two important ways.

The first is to try to correct for any presence of heteroscedasticity in the model runs. Technically that is too much variance in the error terms and thus the model does not reflect minimum variance. Or another way of looking at is that expecting values become unstable. If you were expecting returns of 5-6% but next year the expected returns changes to 1-11%. While the results might not be biased they become less reliable for predicting the future from the sample even if the sample size is very large. The problem may not be as significant in time series data like stock returns and manufacturing indexes, but the reduction of heteroscedasticity should increase the reliability of the model over the long term.

The model now checks for heteroscedasticity and then tries to correct on the runs that we reject the test for no heteroscedasticity. Preliminary runs resulted in slightly improved performance for the Lovers group.

The second tweak to the model was incorporating a factor into the model that indicates the level of the headline index. It is not so much the change in direction of the index (i.e. going up or down) as the last model did, but also whether the index is above or below the 50% mark. This is the dividing line between expansion or slowing of the sector (manufacturing) of the economy and also correlated with the overall growth of the economy.

Last month our picks resulted in 100% winners on the "Lovers" side as expected if the ISM reports continued to be positive. Considering that the broader market {S&P up over 4%} also increased during that time, it was not unexpected. This also drove most of the "Haters" to positive returns but below Lovers. Below is a summary of the returns.
(SCSC) ScanSource, Inc 9.2%
(VCI) Valassis Communications, Inc. 21.4 %
(RHT) Red Hat, Inc. 13.75%
(GPOR) Gulfport Energy Corporation 13.25 %
(GCI) Gannett Co., Inc. 1.25%
(LAD) Lithia Motors, Inc. 16.8%
(LNC) Lincoln National Corporation 10%
(SNX) SYNNEX Corporation 9.4%
(HIG) Hartford Financial Services Group, Inc. 8.25%
(AGCO) AGCO Corporation 5.7%
(PRU) Prudential Financial, Inc 10.2%
(HCP) HCP, Inc. 1.5%
(LLTC) Linear Technology Corporation 11.6%
(VRSN) VeriSign, Inc. 4.1%
(CTXS) Citrix Systems, Inc. 5.7%
(SHAW) Shaw Group Inc. 5.8%
(T) AT&T Inc. -0.15%
New Picks based on ISM manufacturing index:
The Lovers and Haters lists are in no particular order but only contain Sabrient rated Strong Buys for the Lovers and Strong Sells for the Haters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Forecast Friday Topic: Heteroscedasticity « Insight Central

MarketWatch Forecast:
ISM Manufacturing: 54.5%
Non-Manufacturing: 53.5%

Misc. Links:

Calculated Risk: ISM Manufacturing index indicates faster expansion in January

The Capital Spectator: Continued Improvement For Manufacturing Activity In January

Vital Signs: Strength in U.S. Manufacturing - Real Time Economics - WSJ

Strong Factory Hiring? Don’t Bet On It - Real Time Economics - WSJ

Calculated Risk: CoreLogic: House Price Index declined 1.4% in December to new post-bubble low

Calculated Risk: Weekly Initial Unemployment Claims decline to 367,000

Econbrowser: Net Exports, Exports, Real Exchange Rates and Manufacturing

The real unemployment rate? — Marginal Revolution

Broader Unemployment Rates, by State - Real Time Economics - WSJ

Calculated Risk: U.S. Light Vehicle Sales at 14.18 million annual rate in January

January Downshift Shouldn’t Be Surprise - Real Time Economics - WSJ

Bring down the rent to boost fairness - The Washington Post

David Smith's A good start for manufacturing

Vital Signs: Consumer Confidence Inches Down - Real Time Economics - WSJ

The Capital Spectator: ADP: Job Growth Slows In January

The Capital Spectator: Major Asset Classes | Jan 31, 2012 | Performance Update

Human Capital — Marginal Revolution

Vital Signs: Falling Jobless Claims Decline - Real Time Economics - WSJ

Did Economy Really Create 500,000 Jobs? - Real Time Economics - WSJ

Economists React: Jobs Report ‘Positive in Every Way’ - Real Time Economics - WSJ

Good News: Unemployment Falls to 8.3% as U.S. Adds 243,000 Jobs | Business |

CARPE DIEM: Highlights from Today's Employment Report

CARPE DIEM: Highlights from Today's Employment Report

The Capital Spectator: Private Payrolls Post A Surprisingly Strong Gain In January

Good News All Around In January Jobs Report

Fantastic news on jobs | Felix Salmon

Calculated Risk: January Employment Report: 243,000 Jobs, 8.3% Unemployment Rate

Economists React: Jobs Report ‘Positive in Every Way’ - Real Time Economics - WSJ

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Sunday, February 05, 2012


It's about time to add to our positions and provide an update to the RSY portfolio.

ACNB Corporation (ACNB) looks like a strong candidate to add to our dividend producing portfolio and now is opportune as the next ex-dividend is on February 28th for 19 cents. ACNB has very conservative accounting practices with below average market risks. Last year showed the insiders eagerly adding to their positions. Since it is a lightly traded stock, no big purchases were made and we will have to consider this when deciding how many shares to invest. Sabrient Systems rates ACNB a strong buy for its outstanding value profile at 86.1 even though it was weak in momentum. (Scores out of 100 with 100 best.) The RSY portfolio considers value the most important aspect but also it has marks for the Fundamentals Score at 78.6 and above average Balance Sheet Score at 66.

Other than being a Micro-Cap stock, we also need to be concerned about sector concentrations in the RSY portfolio. Although the individual portfolio positions in the Financial Sectors are small, we do have a couple in the Regional Banks industry as ACNB is also. Depending on your current positions, you may or may not want to add to your portfolio with ACNB. RSY recommends a buy limit order of 200 shares at $14.01 (GTC). Odd size lots are OK since no options are available.

The table below shows transactions since inception of the portfolio. It is interesting to note that dividends account for over half the gains in the portfolio currently. RSY also sold (wrote covered calls) 4 options that the notional value is $2276 after transaction costs. (Click images to enlarge.)

Below is a table of the current RSY model portfolio with options included. It is worth remembering that the FL option is going to expire this month. Hopefully your position was not called out before the most recent dividend on January 11th and you had a chance to roll over the option. RSY will consider it closed after the expiration date. There is plenty of opportunity to reap some of the gains so far, but RSY will hold onto the present positions for now.

Div: 2-28 for 19 cents Yield 5.5%
Audit Integrity Score: 84 down from 95 -- very conservative
Stock Scouter: 5 mediocre but low risk
ACNB's excellent value profile earns it a Strong Buy rating, despite the stock's current lack of momentum.
high value score of 86.1
Earnings Score low at 35 but
Balance sheet at 66.2
Fundamental at 78.6

Last portfolio update: August 11, 2011


Thursday, January 12, 2012

RSY: Options...

A new year creates new possibilities and RSY is suggesting a few covered calls to enhance returns. The RSY portfolio is still suggesting to hold onto the current positions as none have been lowered in the Sabrient ratings to Sell or Strong Sell. Currently the portfolio has 4 Strong Buys and 4 Buys including KRO which was recently picked for Sabrient’s 2012 Baker’s Dozen. Here are some suggestions for writing call options if you have not already sold some for tomorrow's opening (GTC):
KRO: MAY-12 $25.00 CALL 4 @ $1.45
TAL: JUL-12 $35.00 CALL 4 @ $2.50
ARLP: JUN-12 $80.00 CALL 1 @ $3.95
DLX: JUL-12 $25.00 CALL 2 @ $1.65

If it is good enough for Carl Icahn it should be good enough for Rock Solid Yield investors. Well actually we don't follow individual investors, no matter their track record at Sabrient. RSY does find common interest with Icahn in CMC...
CMC facts:
AuditIntegrity: 78
StockScouter: 8
Insider Buying *
Two or more executives, directors or major shareholders purchased a large number of shares recently. Very positive

Basic Materials : Iron & Steel
Dividend: .12 for date of 1-18
Icahn also increased his bets in Commercial Metals (CMC)
Carl Icahn's Top Undervalued Q3 Picks - Seeking Alpha
An Open Letter to Carl Icahn.

TAL: APR-12 $30.00 CALL 4@ $2.00
KRO: MAY-12 $20.00 CALL 4@ $1.65
ARLP: JUN-12 $80.00 CALL 1@ $2.95 or JUN-12 $75.00 CALL 1@ $5.2
CODI: Sucks
DLX: JUL-12 $25.00 CALL 2@ $1.55
Or: JUL-12 $20.00 PUT 2@ $2.00
IVR: Sucks
STM: Sucks

AMERISTAR CASINOS INC COM ASCA in Baker's Dozen. Ex-dividend Feb 25???

Record Dividends in 2012 Should Help Consumers - Real Time Economics - WSJ

Wednesday, January 11, 2012

A Macro View: ISM November/December, Haters and Lovers

The MacroView has discussed the Institute for Supply Management (ISM) reports and explored the relationships between the reports and the general health of the economy over the last two years. After first exploring the December reports, this post will explore a new area of research along with some stock suggestions related with the ISM research.

Good but is that Good Enough?
Both headline indexes increased month over month for December reports although non-manufacturing did not make up the ground it lost in November. The non-manufacturing increased .6 to 52.6% in December from a loss of .9 in November. The manufacturing index continued its rise of 1.2 to 53.9% in December after the gain of 1.9% which was on the high side of the consensus range of 52.5 to 54 with consensus point of 53.2%. The non-maufacturing was below the consensus of 53.4 but with-in the consensus range of 52 to 57.5%.

Although the economy is still apprehensive about the European debt crisis, there has been some recent good news on jobs and the unemployment rate with ADP reporting strong job growth in December and the unemployment rate dropping to 8.6%. The employment index in manufacturing continues to be the stronger of the two indexes and last month showed a strong increase of 3.3 to 55.1%, but non-manufacturing continued to be sub-50 at 49.4 even with an increase of 0.5% last month. Respondent comments are also not very encouraging on the jobs front.
Comments from respondents include: "Retirees not being replaced" and "Still in holding pattern; positions are available, but are not being filled."

Respondents' comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment."

"Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro zone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election." (Computer & Electronic Products)

This just shows that there is still economic uncertainty and the European situation along with a divided government has not helped to increase positive expectations. A hindrance with economic growth has shown signs of finally fading away for the moment, that is prices. The converging direction of the price indexes is good on both sides. After the dramatic drop in the manufacturing price in index in October 2011 by 15 points, last month continued its upward trend with an increase of 2.5 to 47.5%. While rising prices can hinder economic growth by raising uncertainty, declining prices does not necessarily translate to stable growth either. Stable prices over time is more consistent with maximum economic growth. The non-manufacturing price index was lower by 1.3 to 61.2% last month.

Along with the price indexes in the reports, the Macro View has also been interested in the total number of commodity prices going up and commodities that have multiple months of increasing prices. Nothing unusual about the non-manufacturing numbers with 3 multiple month commodities and 9 in total, but for manufacturing there were more commodities going down in price for both categories. Multiple month higher price commodities was 3 and 7 for lower prices and total number of prices going up was 9 compared to 10 in commodities with prices going down.

"Haters" and "Lovers" of the ISM Manufacturing Index
One of the tools we use at Sabrient to development trading models is regression analysis. We find sets of stocks that through back-testing perform better than the comparable index. One set is the lovers that, like the name implies, love the independent variable(s) as it goes up and the other set is a group of stocks that perform well when the independent variable is low (haters). In other words we find stocks that perform well when the economic index is high or rising and also stocks that perform well when the index is low or declining.

With a simplistic model, the non-manufacturing group performed badly in the lovers group and the haters beat the index. But since the data only goes back to the spring of 2005 and overall the manufacturing performed better, let me use that model to provide a few stock ideas based on a regression back test over the last 11 years. Since these results are independent of our ranking system, I also filtered for Strong Buy ratings by Sabrient on the lovers side and Strong Sell along with Sell ratings on the haters side. These results take into account the latest releases by the ISM which were positive as noted above. If the upward trend of the indexes and the overall manufacturing sectors continues to perform well then the lovers group would be expected to outperform the markets.
SCSC Strong Buy
VCI Strong Buy
RHT Strong Buy
GPOR Strong Buy
GCI Strong Buy
LAD Strong Buy
LNC Strong Buy
SNX Strong Buy
HIG Strong Buy
AGCO Strong Buy
PRU Strong Buy
HCP Strong Sell
T Sell

Disclaimer: The Rock Solid Yield portfolio newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Position None:
Full disclosure: The author does not personally hold any of the stocks mentioned in this edition of Rock Solid Yields.

ISM - Media Release: December 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index January 3, 2012

ISM - Media Release: December 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index January 5, 2012

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

MarketWatch December Forecast:
Manufacturing: 53.0%
Nonmanufacturing: 53.3%

Calculated Risk: Weekly Initial Unemployment Claims decline to 372,000

Calculated Risk: ADP: Private Employment increased 325,000 in December

Want a Job? Go to College, and Don't Major in Architecture -

Environmental Economics: Chronicle: Unemployment Varies by College Major

Good News On The Jobs Front?

The Capital Spectator: ADP: Job Creation Surged In December

CARPE DIEM: Jobless Claims End 2011 at 3.5 Year Low; And ADP Reports 325K Private Job Gain in December

Strong ADP Jobs Gain Needs Grain of Salt - Real Time Economics - WSJ

David Smith's Good news from UK manufacturing

Calculated Risk: ISM Manufacturing index indicates faster expansion in December

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

Vital Signs: Port Traffic Muted - Real Time Economics - WSJ

Vital Signs: More Hotel Rooms Filled - Real Time Economics - WSJ

Vital Signs: More Homes Going Into Contract - Real Time Economics - WSJ

Outside the Bubble, Public Investment Is Disappearing « Multiplier Effect

Personal finance: A layaway to save | The Economist

CARPE DIEM: ND Oil Boom Fuels Real Estate Sales in Arizona

Stumbling and Mumbling: Entitlements & ratchets

Kahneman, Greed and Success, Bryan Caplan | EconLog | Library of Economics and Liberty

The President’s Suspect Statistics We have too little upward mobility, but it has not declined.

Worthwhile Canadian Initiative: The concrete impacts of taxes

Leading Indicators Index Gets Overhaul - Real Time Economics - WSJ

Still in the Woods

ISM - Media Release: November 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index December 1, 2011

ISM - Media Release: November 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index December 5, 2011

World-Wide Factory Activity, by Country - Real Time Economics - WSJ

MarketWatch November:
ISM: 52
Non-Manufacturing: 53.9%
U.S. manufacturing lightly accelerates: ISM

The Capital Spectator: Will Manufacturing's November Revival Last?

Calculated Risk: ISM Manufacturing index indicates slightly faster expansion in November

Calculated Risk: Construction Spending increased in October

Misc Links:
Calculated Risk: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Calculated Risk: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

The U.S. Unemployment Rate Falls to 8.6%: Has America Avoided a Double-Dip Recession? - The Curious Capitalist -

Mish's Global Economic Trend Analysis: Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage"

The Tax Foundation - Overreaching: Time to Reconsider FATCA

What Does The Decline in Labor Force Participation Tell Us « Modeled Behavior

Mankiw: We Need Fiscal Hawks, Monetary Doves, Arnold Kling | EconLog | Library of Economics and Liberty

In Praise of Dirty Energy: There Are Worse Things Than Pollution and We Have Them « Modeled Behavior

Are These Recessions All the Same?, Arnold Kling | EconLog | Library of Economics and Liberty

CARPE DIEM: We Should Thank China for Its Currency Policy

Quotation of the Day…

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? -

If there is a recipe for growing too fast forever, I have yet to see it « Modeled Behavior

New evidence that being underwater on your house limits labor mobility — Marginal Revolution

Economist's View: "The Facts about Small Businesses and the Millionaire Surcharge"

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? -

Macro Musings That Drive Me Nuts « Modeled Behavior

Soros: World Financial System on Brink of Collapse - Real Time Economics - WSJ

CARPE DIEM: One-Year ARMs Fall to Historical Low

CARPE DIEM: How Terrible: Walmart Plans to "Dump" Six Stores, 1,600 Jobs and $21 Million in Charity on Wash. D.C.

Stumbling and Mumbling: Why stagnation matters

TaxVox » Blog Archive » Top Income Tax Rates and Revenue: A Historical Perspective

Vital Signs: Strong Private Hiring - Real Time Economics - WSJ

Time to Demand Transparency and Accountability at the Fed « Multiplier Effect

Calculated Risk: LPS: Mortgages In Foreclosure Process at an All-Time High

Thinking About CEO Pay, Arnold Kling | EconLog | Library of Economics and Liberty

Top Marginal tax rate of 70% ? | Angry Bear - Financial and Economic Commentary

Who’s Dropping Out of the Labor Force « Modeled Behavior

Mish's Global Economic Trend Analysis: Daily Show on "Free Money"

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in November

David Smith's Service sector growing

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