Professional Documents
Culture Documents
available from ValuEngine. In today's fast-moving and globalized financial markets, it is easy to get overloaded with information.
The winners will adopt an objective, scientific, independent and unemotional approach to investing. If you are not yet a member of
ValuEngine's stock analysis service, sign up now for a two-week free trial at ! www.valuengine.com
ATTENTION Advanced Investors and Finance Professionals:
If you are reading this you should download ValuEngine Institutional Software to see how VE's powerful quantitative tools
can increase your productivity and effectiveness.
If the tables in this email do not display properly, please CLICK HERE to download the newsletter.
January 22, 2010
MARKET OVERVIEW
SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E Ratio
MReturn
Basic Industries -3.26% -1.58% -1.58% 11.05% overvalued 86.42% 25.83
Capital Goods -1.74% 1.43% 1.43% 3.91% overvalued 46.72% 22.97
Consumer Durables -1.52% 0.27% 0.27% 11.48% overvalued 75.07% 23.21
Consumer Non-Durables -1.14% -0.71% -0.71% 1.27% overvalued 66.86% 19.87
Consumer Services -1.23% 0.69% 0.69% 0.28% overvalued 70.83% 23.27
Energy -2.56% -0.14% -0.14% 12.80% overvalued 65.60% 21.03
Finance -0.26% 1.73% 1.73% 0.54% undervalued 30.64% 18.38
Health Care -1.86% -0.17% -0.17% 7.29% undervalued 57.44% 20.54
Public Utilities -1.52% -2.42% -2.42% 0.34% undervalued 37.33% 16.87
Technology -1.15% 1.07% 1.07% 3.90% undervalued 75.11% 25.95
Transportation -1.46% -0.12% -0.12% 0.79% overvalued 41.27% 21.77
Sector Talk
--Health Care
Fallout from this week's special election in Massachusetts remains uncertain at this
time. Major health care providers saw some rallying in their share prices recently as the
proposed reforms proved to be far weaker than some had hopes--and others had feared.
Now, with passage of the modest reform package even doubt, some feel Health Care may
rally further.
Below, we present the key ValuEngine data points for the Health Care Sector from our
Institutional software package (VEI). Remember that our ratings system has a bias toward
larger market caps so big companies have a leg up to high ratings due to their size. This
helps to explain high ratings despite the lackluster forecast figures. We used some basic
liquidity criteria to filter our results--share price > $3.00 and Volume > 100k/Day. As always,
remember that in almost all years our ratings are predictive and 4 and 5-Engine stocks
outperform the broader markets.
As you can see, short and long-term forecast lists are dominated by drug makers and
biotech firms. The composite score leaders include some of the major health care providers--
which we categorize as "Services to Medical Profession." Medical Supply and Biotech firms
dominate our lowest composite score and most overvalued lists.
De-Noising: The first step is to filter out from the data all that is considered irrelevant for the
task at hand. Moving Averages are an example of de-noising--they filter out information
above a certain threshold. Previously, much of this de-noising was achieved with
conventional tools from digital signal processing (DSP) such as Fourier Transforms. But now,
Wavelets can do a much better job. Wavelets make digital image compression much more
efficient. Wavelets are also very good for the synthesis of musical instrument tones. While
they have not been able to fully replicate the sound of a Stradivarius or a 1959 Gibson Les
Paul, they can produce reasonable facsimiles of vintage guitar amplifiers such as the Fender
Twin Reverb and the Vox AC30
Sensitivity Analysis of Model Variables: Model variables need to be tested for sensitivity to
perturbation. i.e. what happens to the other variables when one variable is subject to change.
Traditional statistical tools cannot do a good job when it is realized that complex adaptive
systems exhibit 'emergent' properties viz 2+ 2 >4. Neural Nets-- with their synthetic synapses
and dendrites mimicking the human brain--can do a better job. The 'weights' in all synapses
change in a networked and non-linear way as some parameter is changed, and these weights
are measurable, thus making for a more accurate sensitivity analysis.
Pattern Recognition: The human brain can holistically sum up all the features of a face to let
you recognize someone you know. The new generation of digital cameras can recognize a
face, a smile, or a blink. Military software can differentiate between an enemy and a friendly
submarine. These pattern recognition tools contain classification and fuzzy logic algorithms
that allow for the identification of 'subtle signals'. In a world where Black and White are just
different shades of Gray, such tools are better for detecting subtle patterns laced with noise.
Classification: A major part of modeling consists of the act of classification. We have seen
from previous bulletins how Self-Organizing Maps (SOMs) can classify equities according to
their degree of similarity in a more natural way than the tools of traditional statistics--where
the results depend on your choice of parameters for defining the boundaries of each cluster.
SOMs have been used for the classification of wines, classification of credit card holders, and
the classification of shopping habits according to factors such as gender.
Forecasting: Decision-making often involves an imagination of future scenarios. It is
hardwired into us to try and predict--even if we lack a firm empirical basis for our predictions.
One possible way to overcome this is by a 'consensus' of models; i.e. your forecast is more
likely to be accurate if it is an average or median of the forecast of a group of experts. Swarm
intelligence is one way to apply these theories to a forecast. Swarm intelligence is the
collective intelligence of autonomous, distributed, self-organizing systems--such as ant
colonies, a flock of Birds, a school of Fish, human beings in a traffic jam, etc. ''Bots' can be
created-- each seeded with the objective of maximizing profit--and let loose to behave and
inter-act with each other. The winning Bot--or the average result of the Bots-- can be used as
a forecast.
Optimization: Optimization used to be about Linear Programming-- as in Operations
Research, or Gaussian steepest descent (going down the slope of steepest descent in a
multi-dimensional model landscape). But the current use of Genetic Algorithms is a quantum
leap for optimization. Multi-objective optimization is now much easier to do. Multi-optimization
is often seen in the optimization of transportation systems capacity such as railways and
airlines where there has to be compromise between different objectives. Genetic Algorithms
breaks the task down into the construction of strings of genes comprising model variables and
parameters, giving them a purpose in their Life and a measure of fitness for survival. There
are many algorithms for the weeding out of unfit individuals-- some of which harken back to
the discredited eugenics programs of the 20th century.
Evolutionary Algorithms: All complex adaptive systems are continuously evolving and--
indeed--co-evolving. Co-evolution means taking into account the agent's effect on its
environment, the response of the environment, and the further response ad infinitum of all
parties. In the past, trading systems were back-tested, which could provide insight but also
was subject to a variety of flaws and fallacies--forward looking bias, survivorship bias, data
snooping, etc. Then there was testing using 'hold out' samples. Now, with evolutionary
algorithms, we can have walk-forward testing, where each step of the time series evolves
before being tested.
--The ValuEngine Forecast 22 MNS Newsletter
For a market neutral strategy with significant volatility-reducing benefits, our newsletter
continues to perform remarkably well. In fact, this product has been so successful it was
recently selected by Forbes.com for inclusion into its stable of newsletter products.
Our average monthly return is @1.5%, our Sortino Ratio--"good" volatility--beats the
S&P 500 by @50%, our max drawdown is 1/3 the S&P's, and our annual volatility is
@30% less than the S&P 500!
For more on the VE Forecast 22 Market Neutral Strategy Newsletter Portfolio, Click the
Logo Below
Suttmeier Says
--Commentary and Analysis from Chief Market Strategist Richard Suttmeier
If you have any comments or questions, send them to Rsuttmeier@Gmail.com
Treasuries
The daily chart for the 10-Year yield shows potential to the 50-day
and 200-day simple moving averages at 3.56 and 3.45. This yield began the year testing
monthly support at 3.868. Next week the Treasury yield curve faces $118 billion in supply,
Tuesday, Wednesday and Thursday.
Commodities and Forex
Gold is below its 21-day and 50-day simple moving averages at $1117 and $1135 with
the December 22nd low at $1075. The Gold Bubble has popped and a weekly close below my
quarterly support at $1084.9 indicates risk to my annual support at $938.7.
Crude oil is below my annual support at $77.05, and a close today below the 200-week
simple moving average at $76.13 indicates risk to quarterly support at $67.22. This would be
a sign of a weaker than expected global economy.
The euro is trending below my quarterly pivot at 1.4327, which indicates risk to the
200-week simple moving average at 1.3848.
Major Indices
The Ascending Wedge Support is Broken for the Dow, giving Round 12 to the Bear.
The Dow traded below 10,570 on Wednesday, which breaks the uptrend that goes
back to the March 2009 low. I decided to track the first three weeks of the year as though it
was a "Title Bout" between the Bull and the Bear. The Bear thus won the twelfth round of the
fight-- making the score card 9-to-3 in favor of the Bull.
The Dow Industrial Average opened today below my annual support at 10,379.
The bulls still say that the strategy is to buy weakness. I began the year in
disagreement suggesting to investors on Main Street to sell strength. After Thursday’s
drubbing, the score became 9-to-4--still favoring a wobbly kneed Bull.
With today’s open below 10,379, I declare a TKO with the Bear as the victor of the Title
Bout. The daily chart for the Dow is now negative. My nearest support is the five-month
modified moving average at 9,631. The downside risk continues given weekly closes below
my annual pivot at 10,379. Keep in mind that my quarterly support is 6,705.
Courtesy Thomson Reuters
A close on Friday below my annual support at 10,375 confirms the Bears' knockout
victory.
Housing
Below, we provide our VE data points for the Home Building Industry.
Last 12- Forecast Forecast
Mkt Valuation VE P/E
Ticker Name M 1-Month 1-Yr
Price (%) Rating Ratio
Retn(%) Retn(%) Retn(%)
AXR AMREP CORPORATION 14.3 38.49 1 -51.74 -28.25 -87.9 N/A
BROOKFIELD HOMES
BHS 6.92 N/A N/A 116.25 -7.71 -79.29 1.37
CORPORATION
BZH BEAZER HOMES 4.38 -75 3 256.1 -2.88 -36.16 N/A
COMSTOCK HOMEBUILDING COS
CHCI 0.94 N/A N/A 235.68 -5.95 -50.31 N/A
INC
CVCO CAVCO INDUSTRIES INC 36.37 51.48 2 55.36 -2.42 -20.03 N/A
DHI D R HORTON INC 11.55 -25.43 3 85.69 -0.95 -15.9 N/A
DWAHY DAIWA HOUSE IND LTD 111.89 20.29 2 21.62 -1.82 -21.41 29.88
DESARROLLADORA HOMEX SAB
HXM 33.6 -28.18 3 72.22 -2.34 -29.84 11.26
DE CV
KBH KB HOME 14.96 -58.27 3 29.08 -1.91 -22.82 N/A
LEN LENNAR CORPORATION 15.31 -45 3 119.66 -0.04 -17.14 N/A
MDC MDC HOLDINGS 33.34 -14 3 14.93 -1.46 -13.83 N/A
MHO M/I HOMES INC 10.85 -46.44 2 19.63 -1.24 -22.31 N/A
MTH MERITAGE HOMES CORP 20.19 -10.5 3 104.15 -0.71 -18.38 N/A
NVR NVR INC 721.5 60.88 3 69.14 -2.23 -15.84 23.84
OHB ORLEANS HOMEBUILDERS INC 1.75 N/A N/A 57.66 -2.95 -37.98 N/A
PGTI PGT INC 2.2 25.65 2 122.22 -3.52 -34.98 N/A
PHM PULTE HOMES INC 10.52 -27.18 3 -0.75 -0.59 -15.34 N/A
RYL RYLAND GROUP INC 20.94 -13.99 2 28.7 -1.51 -19.69 N/A
SKHSY SEKISUI HOUSE LIMITED 9.91 -75 3 14.97 -21.47 -76.66 N/A
SPF STANDARD PACIFIC CORP 3.71 -75 3 159.44 -1.78 -32.28 N/A
TOL TOLL BROTHERS INC 18.66 -19.48 3 2.13 -0.9 -10.57 N/A
Consumer Confidence
The ABC News Consumer Comfort Index fell to -49 last week down 8 points since the
beginning of 2010. This index is approaching the Recession and record low reading of -54,
set a year ago. 45% of Americans say their personal finances are positive, which is below
50% for 75 of the past 78 weeks, another record by far. Only 33% say is a good time to
spend, which is 14 points below average and only 9% rate the economy positively, 29 points
below average.
We have updated the FDIC Report to include the latest VE datapoints on all problem
banks as well as Suttmeier's latest predictions for the US banking system and economy.
There are currently 759 publicly traded FDIC insured financial institutions
overexposed to CD Loans or Nonfarm Non-Residential Real Estate loans as per the
FDIC's own guidelines.
As of January 8, 2010, there were 221 banks overexposed to C&D and/or CRE loans in the
ValuEngine database with full data coverage. Of these overexposed banks, 82 were rated “1-
Engine” Strong Sells, 73 were rated “2-Engine” Sells—all of which are predicted to under
perform the markets as a whole, 63 were rated “3-Engine” Holds—which are predicted to
roughly match the overall market, 3 were rated a “4-Engine” Buy, and none held our highest
rating of “5-Engine” Strong Buy—with the 4 and 5-Engine stocks predicted to out perform the
overall market.
This means that there are currently 155 banks rated Sell or Strong Sell that are also
overexposed to C&D and/or CRE loans.
There are 198 overexposed institutions with only partial ValuEngine coverage and thus
those banks have no rating--these are included in the problem bank list.
There are 341 additional institutions carrying C&D and/or CRE loans in excess of the
FDIC guidelines that do not appear in the ValuEngine database. These are also listed in
the report following the VE List of Problem Banks.
For more on the ValuEngine Quarterly FDIC Report, Click the Image Below