The Lewison Letter

    6/24/12              

              Welcome to this week’s addition of the renowned Lewison Letter.  Since my last writing on Wednesday night, we saw on Thursday the S&P falling 30 points, to only rally the next day 10 points, ending the week lower by only 20 points.  This week will be another tough week for the indices, with many important economic reports due out.  Monday we will get a housing gauge with new home sales due out, along with consumer confidence coming out on Tuesday at 9:00am.  As usual, Wednesday will bring the important crude inventories number at 9:30am.  I’m expecting inventories to once again be up, sending oil prices lower on tails of Saudi Arabia opening the spigots and keeping oil supplies ahead of demand.  Thursday is important, as we will weekly initial claims numbers along with Q3 GDP estimates due out at 7:30am.  Finally, on Friday, we will find out what the Chicago PMI number is, along with the bi-weekly Michigan Consumer Sentiment report.  That only caps the news out of our country.  Everyday this week, expect something out of Europe that will once again have a great influence on our markets.  With all that being said, I still see the S&P trading in a range of 1300-1360.  I do want to point out that I think the lows of the year have been made on June 4 at 1266, and I’m going to tell you why you should absolutely be a buyer against that level.  June 4 marked the first time all year that Jim Cramer sounded bearish.  In fact, that was the bearish I’ve heard him in almost 12 months.  When a stock market bull, turns that bearish, that’s always a sign to me that the lows are in.  Since that time the S&P has rallied more than 70 points.  So thank Jim Cramer for that one.  That week of June 4^th put in a bullish engulfing line (when the body of the weekly bar, engulfs the entire body of the previous week).  Additionally, June 4^th was a daily hammer doji line indicating not only a key reversal, but that volatile price move is coming.  It just so happened the S&P rallied almost 100 straight points.  So I will reiterate my bullish call on stocks, but wait to buy until the market pulls back some more, closer to the 1300 level. 

                  Next I want to look back at the call I made on soybeans on Wednesday when I said look for a high of $14.65/bushel.  Friday’s high turned out to be $14.64/bushel, before sinking to $14.10/bushel as of this writing.  Trading the grains becomes easy now.  You should be a seller of agriculture stocks against that level, but as soon as soybeans break above $14.65, you should be a buyer as that level should act as support.

                  As of this writing, front month (August) crude oil is sitting at $79.82/barrel, up just $0.08 from Friday’s close.  If you followed the oil market on Friday, it made a huge bounce of the low of $77.56, rallying almost $3.  Normally I would say that this particular move is a significant reversal, however, I’m calling this a dead-cat bounce off the lows since it still finished the week down almost 8% or $5.35/barrel.  Worldwide demand is still not even close to the amount of oil available in the world, especially with Saudi Arabia covering any Iranian shortfall.  I still see crude oil falling to $76/barrel, with a high of $81.53/sahre (this was the low of a triple bottom breakdown that acted as support before oil really broke down).  I will say one thing that crude has going for it, is a double bottom at $77.56, which equals the low put in on October 3, 2011.  Friday’s move down to that level was the first retest before bouncing, only what I think will be a level that is retested later this week, so get short!

                  Remember earlier when I was talking about June 4^th as being the low of the year for the S&P?  Well, one other important date to remember is June 1^st, which was the high the US Treasury market, with 10-year interest rates falling to 1.46%.  Since then, rates have rallied 19 basis points to 1.65%, above the key 1.50% level.  In terms of points, Treasuries are down almost 2 full handles from the high.  Looking at a daily chart, the 10-year has built a long head-and-shoulders formation at all-time highs, which I think will finally represent the end to the 30-year bull market.  The way that the stock market has traded, Treasuries should be much high, but they aren’t which means that we may have finally hit a level where interest rates are so low that investors no longer want to own them, but instead look for corporate bonds or high dividend paying stocks.  For those who can’t buy/sell Treasuries in the futures market, you should be a buyer of the TBT, which is the short side of US Treasuries. 

                  Full disclosure: I am currently long gold, short S&P puts, and long Cat Calls. 

Jeff Lewison 

Fed Wednesday

  6/20/12                

                 Welcome to this special Fed edition of the Lewison Letter.  As I’m sure all of you are already aware, Big Ben and the Fed decided to extend “Operation Twist” through all of 2012, in a move to help boost up the U.S. economy in the face of poor economic data and a disaster in Europe.  In this type of stimulus, the Fed will be selling short-term Treasuries (i.e. 3 years or less) and buying back long-dated bonds (i.e 6 years or longer).  The Fed plans on buying $267B in long-dated Treasuries by the end of the year.  In doing so, the idea is that long-term interest rates continue to stay low, stimulating growth in businesses and job creation.  The central bank also maintained its guidance that rates will stay near zero until 2014 and revised down U.S. GDP from 2.2% to 1.9%.  In addition to “Operation Twist,” the Fed expects unemployment to stay between 8-8.2%, an increase from the previous estimate of 7.8-8%.  At the same time, the Fed raised their unemployment outlook for 2013 from 7.3-7.8% to 7.5-8%. 

                  Overall, the markets, for the most part, were fairly muted.  Initially, interest rates on Treasuries dropped dramatically before rallying back, the Down dropped almost 100 points before rallying positive on the day, gold sold off sharply before returning to pre-announcement levels shortly afterwards.  When polled, almost 45% of investors expected the Fed to perform another round of “Operation Twist,” which is why the markets didn’t really react favorably to the news.  I also expected another round of Twist, however I don’t think that it will have a lasting affect on the economy or markets.  When you look back at the previous rounds of stimulus, here’s what you get: QE1 turned in an 80% gain, QE2 that was announced near the end of 2010, produced a 33% gain, “Operation Twist 1,” which was announced last year, produced just a 22% gain in the markets.  The more the Fed is doing, the less impact it is having on the markets and economy, so don’t expect this round to produce anything dramatic.  The reality is that this market is trading on the ups and downs in Europe and unless they turn their act around (which is not happening anytime soon), the markets will continue to be rocky, no matter what kind of stimulus Ben puts out there. 

                  Here’s how I’m looking at the markets right now: We need stimulus in Europe, and I’m not talking about bailing out the banks in Spain or Greece.  What needs to happen is the U.S. Fed stops “bailing out” the U.S., but instead spends that money bailing out Europe.  If the situation in Europe gets better, consumers will become a lot more confident in the global economy, start spending more, and will even start taking on mortgages at these record low interest rates.  At the same time, businesses will become more confident that consumers are starting to feel better about things, which should stimulate job creation.  We saw the initial reaction on the Spanish bank bailout and the Greece “pro-bailout” party win, where the markets opened sharply higher on the news, but quickly sold off because of continuous worries about the overall European economic picture.  If you bail out Europe, you bail out the world.

                  While the Fed announcement was big, that was not the only thing that happened today.  If you closely follow the commodities markets like I do, you would have soon a complete disaster in the oil markets, as August crude oil dropped almost $3/barrel to close at $81.45/barrel, which is the lowest close since September of last year.  The oil market is in a complete freefall, especially after the EIA reported crude oil supplies were up almost 3 million barrels, which was way off from the expected 600,000 barrel decline.  Not only is that incredibly bearish for oil prices, but it also tells me the worldwide demand for oil is shrinking which is bearish for world economies, but great for U.S. companies.  Lower oil prices lead to lower prices at the pump, which means that consumers have more money to spend on goods and services.  The other thing that has changed over the last couple weeks, is that oil is no longer trading hand-in-hand with the stock market, which is good, because my price target on WTI (West Texas Intermediate) Light Sweet Crude Oil is $76/barrel, which would be the lowest it’s been since September 2009.  I would stay away from energy plays like Exxon Mobil or Conoco Phillips, but instead stick with energy transport stocks like Kinder Morgan Energy Partners, a stock that pays a hefty dividend and has good growth. 

                  Another market that has gotten my attention is in the grains, where soybeans have rallied more than 10% ($1.21/bushel) since the beginning of June.  This particular market has two things going for it: 1) a strong technical formation and 2) a major heat wave across all of America forcing bean planters to re-grow their crops.  As for the technicals, Soybeans built a long-dated inverted head-and-shoulders at the bottom of a 5^th wave down, which is about as bullish as it gets.  Future weather conditions point to cooler temperatures but still very little rain, all bullish for soybean prices.  I’m looking for another 27 cents in beans before hitting resistance at $14.65/bushel.  That means that agriculture plays are still good to invest in, such as CF Industries (my long time favorite), Potash (one of my previous recommendations that has only gotten cheaper), and Mosaic.  I think all three are still very cheap and have a lot of room to the upside.

                  As for now, despite a nice rally off the lows of the year, I am still cautiously optimistic about the stock market, as there are still plenty of reasons for stocks to go lower, especially since the situation in Europe is a mess.  I’m looking at the S&P to trade in a range of 1326-1363 (today’s high).  Look for a sell-off tomorrow on the heals of what I think will be a disaster of a Spanish Bond auction. 

                  Full disclosure: I am currently short S&P puts (i.e. long S&P) and long CAT calls. 

Jeff Lewison    

The Lewison Letter

I’ve decided to make a change to my writings each week.  Instead of just recommending a particular stock, I’m going to offer my market opinions from markets ranging from the indices to crude oil to cotton, and how they affect individual stocks.  I feel this type of format will give people a better idea of what to look for when investing.  This new format is called The Lewison Letter. 

                  As of this writing the markets got a huge boost from the $125B bailout of Spanish banks with the S&P futures up 15 points, Dow up 127 points, the Euro up 132 points and oil up $2.30/barrel.  When looking at the S&P (cash) or SPX, a key level I’m looking at is the low put in on June 4, of 1266.75.  That day represents the low for this recent sell off and a level to trade against.  I’m bullish the stock market until it breaks that level, a level which I think holds.  On a candlestick chart, that particular day put in a doji line (a move when the market opens and closes at nearly an identical level, but trades above and below that level throughout the day).  That move indicates the market is at a turning point and that a volatile price movement is eminent.  That’s exactly what we got, with the S&P rallying 60 points, almost straight up.  Looking at a daily chart, the S&P, and Dow and Nasdaq for that matter, are building inverted head-and-shoulders at the end of a 5^th wave down (again, see previous letters for explanation on Elliot Wave Theory).  Both are extremely bullish and have put in a defined bottom to trade against, which is what I was looking for when I wrote last weekend.  I am now targeting a move to 1345 before hitting some resistance to the upside.  I know that I have said this many times, but the world leader, Apple, set all this up.  Looking at how Apple has traded since hitting all-time highs, it too put in an inverted head-and-shoulders at the bottom of a 5^th wave down.  This market can’t go higher without Apple participating, and as of this print, Apple is setting up to gap above its current resistance levels.  If Apple can hold the $585 level on Monday, look for Apple and the rest of the stock market to rally higher. 

                  While I have been a long time proponent of US Treasuries, the last couple weeks I have been more bearish treasuries, a market which I think may have peaked and needs to start being sold on an rally.  The 10-year Note is well off all-time highs with this past week’s sell off, and gapped lower Sunday night.  On a daily chart, the treasuries have built in a perfect head-and-shoulders at the all-time highs with a shooting star (when the market opens lower, trades higher, but fails and closes at or near the lows of the day, usually negative) that built out the right shoulder.  The 10-year Treasury has a floor at 132’110 (prices can be found at cmegroup.com).  If it trades below this level, there is nothing stopping it so look for that to be a key level to watch.  My belief is that any good news out of Europe will drop the treasury market below that level, which could come on the Greece election next week.  I reiterate that if you are still long treasuries (i.e. TLT), its time not only to sell out of that on any rally, but start looking at getting into the TBT (the short 20-year treasury ETF).

                  Now I’ll turn to a market that has been wild and crazy for almost a month now…gold.  Looking at the charts of gold, I think the market has put in a bottom at 1556.40, which was Friday’s bottom.  The gold market put in a massive hammer (a bullish formation the market opens near the highs, trades sharply lower to put in a new low on the move, only to rally and finish at or near the highs of the day.  At the same time, that day’s bar pierces the previous day’s body).  One thing to be aware of, the gold market is trading on fundamentals only known to the gold market.  In the past, gold was considered a safe haven, however those fundamentals seemed to have gone out the window since the year began.  I am looking for gold to trade in a range of a low of $1556.40 and a high of $1648.40, which is the 38.2% Fibonacci retracement.  The best way to play gold is through the GLD (Gold ETF).  Don’t bother investing in the gold miners like Goldcorp, Newmont Mining or Eldorado Gold, as you will subject to company specific risk.  If you’re bullish gold, buy the GLD.  If you’re bearish gold, stay out altogether. 

                  Another key market that I follow and is a good indicator of where the commodities and stock market is headed, is the Euro currency.  While the Euro has been demolished with everything that’s gone on in Europe, it has rallied sharply off the lows of 1.2288, to currently trade at 1.2629.  On May 31, the Euro put in a doji, only to again, be followed up with a sharp move higher (as seen with the doji on the S&P…shows the power of technical formations).  I think the Euro holds that low, which only holds well for US common stocks.  Additionally, as the Euro trades higher, the dollar goes lower, in turn, gold should go higher as well as most other commodities, since they will become cheaper to buy in US dollars.  I am now lowering my estimate for the dollar to $83.50, which is about $1.60 higher than its current levels.  I’m currently playing a European comeback through Caterpillar (CAT). 

                  Looking at the softs market (i.e. cotton, coffee, sugar and cocoa), they are all at or near multi-year lows.  While a stronger euro is partially bullish for those markets, they trade on completely different fundamentals.  With commodity prices sharply lower, you should be a buyer of companies like Starbucks, Macy’s, Nordstrom, TJ Max, Hershey, etc.  These are strong American companies, with great balance sheets and minimal European exposure.  I prefer SBUX, M, or JWN, as they have all experienced pullbacks, which represent good buying opportunities. 

                  Finally, the last market I really focus on is West Texas Intermediate Light Sweet Crude Oil.  While you may not have seen prices at the pump drop as dramatically as you would have liked, oil prices have fallen off a cliff since hitting their highs on March 1, falling a good $24.  The recent low on March 4^th, which coincided with the stock market low, seems to be a level to trade against.  While the formation at the lows looks like oil has put in a temporary bottom, I disagree.  I see inventories continuing to be at multi-year highs with the unemployment situation in the US unemployment situation still in the gutter.  This week will be very important for Crude as the IAEA and OPEC will come out with their inventory/usage estimates.  I think both reports will show that there is no shortage of oil and that they will be bearish, driving the price of crude oil sharply lower.  In addition, Crude has finished lower for 5 of the last 6 weeks, a trend which I see continuing.  I would continue to stay away from names in the energy sector, save for MLPs such as Kinder Morgan Partners, LINN Energy, etc…

                  I hope this report was useful and hopefully more useful than just reporting on one stock.  Again, to follow the futures and commodities markets, check cmegroup.com for 15 minute delayed quotes. 

                  Full disclosure: I’m currently long AAPL, UNP, CAT, KORS, V and short S&P puts and crude oil. 

Jeff Lewison   

Cash

6/3/12              

    I wanted to wait until Sunday night to send this out in hopes that Mr. Obama actually decides to do something positive for the economy over the weekend, but I guess that was just wishful thinking.  This week is going to be a different report than the rest, in that I simply cannot recommend buying anything at this point in time, not even the TLT or high dividend payers like Verizon or McDonalds.  If you’ve been following the markets, everything and their mother has been getting hammered, including Apple.  As of this writing, the S&P futures are getting hammered again, down 10.25 points, with the Dow down 108 points.  Unless something miraculous happens in Europe overnight, I expect another down 20 day in the S&P, and don’t see much upside anytime soon. 

                  Right now, the only things you can be long, and be long with confidence are the US Dollar and the US Treasuries.  I still expect the dollar to rise another $2 from it’s current levels, which translates into a the Euro going much lower, in turn boosting US Treasuries to continue to make new all-time highs.  With the yield on the 10-year Treasury falling below 1.50% on Friday, it’s way too late to jump into the TLT trade right now.  If you followed my advice from when I first recommended the TLT, I would look to take some profits as I am calling for a low on the 10-year yield to drop to 1.35%.

                  If you’ve been following the commodities space, you would know that if you ARE long, you are WRONG.  Crude oil has no bottom in sight, so don’t’ go out buying Exxon or Conoco.  China and India are not buying the grains anymore so don’t go out buying CF Industries or Dupont.  Housing in the US is still a bust, so copper plays like Freeport McMoran is a no touch.  Natural Gas prices have dropped for two straight weeks so Chesapeake Energy is out too.  Cotton, sugar, coffee and cocoa prices are at multi-year lows, so it’s safe to buy companies like Starbucks or TJ Max, right?  Wrong!  Investors are pulling profits from those types of companies, driving the stocks lower.  Apple is as recession proof as it gets so you should be safe there, right?  Wrong again!  As much as I like Apple at these levels, like I said before, everything and anything is getting whacked. 

                  So you’re probably asking yourself, “if I shouldn’t be in the TLT and I shouldn’t be in stocks, what the hell is left?”  As much as I hate being in cash, that is actually the best place to be right now, and will continue to be the best place to be until we see some sort or resolution in Europe and more signs of the US economy creating a little more than the embarrassing 69,000 jobs.  What needs to happen is very simple; The US needs to get rid of our current leader and replace him with someone who will embrace natural gas and support business growth.  That should solve the unemployment issue.  To solve the European issue, Obama and Bernanke need to bail them out, or the EU needs to kick Greece out already and be done with it.  Until those two things happen, cash is the only thing I can recommend being long.  I’ve been asked over the weekend whether or not gold is a good play right now, and the answer is flat out, no.  Despite the incredible rally in gold on Friday, it’s not clear whether investors are using it as a safe haven as they have in the past, and until that becomes clear, I can’t endorse being long gold when it’s up one day and down the next, uncorrelated to the markets. 

                  The big question is what to do with your current portfolio.  If you’re not already in bonds, then stay out because it’s too late.  I am not going to sit here and tell you not to sell anything, because I wouldn’t blame you one bit.  But if you’re investing for the long-term and can stomach a rollercoaster ride over the next few months, then stay with what you have.  If you’re investing, it may be time to get your losers and wait until the bottom is put in.  I think we could be looking at another 60 S&P points to the downside, with a bottom being put in at about 1205, which is the Egypt low and the 38.2% retracement from the October low to the March highs.  If you’re following the Dow, look for a low to be put in at 11,500, another 500 points from here. 

                  Full disclosure: I am currently long AAPL, CAT, M, KORS, V, UNP, S&P Put options    

Jeff Lewison