Housing and Employment
Could Crush The Market

By Christian Hill

Tuesday
Economic Reports: Consumer Confidence, Case-Shiller Home Price Index

I expect the Consumer Confidence report to beat expectations based on the Michigan Sentiment report from last week and improving Personal Income. There is a growing consensus that the worst in the economy may be past us. However, the Case-Shiller Home Price Index will likely show continued deterioration in the housing market. Until foreclosures slow, prices will continue to drop.

Wednesday
Economic Reports: ISM Index, Pending Home Sales

The ISM Index report is expected to show a slight improvement since last month. The index is slowly making its way towards the magical reading of 50, which would indicate expansion of the manufacturing sector. If this report disappoints, and the Factory Orders on Thursday do as well, it could be tough going for the market.

Pending Home Sales are also expected to post a slight improvement since last month. I don’t think this report will beat expectations. All the housing reports last week fell below expectations, I think this one will follow suit.

Thursday
Economic Calendar: Factory Orders, Non-Farm Payrolls,

As with the ISM Index, there is a possibility of some encouraging news in the manufacturing sector. If the both the ISM Index report and the Factory Orders report meet expectations, there could be a real turnaround afoot in the manufacturing sector. The industry is not yet out of the woods, but production should start improving..

Expectations are for another 370k jobs lost this month, continuing the string of consecutive months. While the market expects losses, if the report comes in much worse than expected, and the other reports I have highlighted fall below expectations, the market could get crushed.






Respectfully,

Christian Hill

Wow - this guy's comments below!   

June 29 (Bloomberg) -- Every investor is pondering the same question: Has the stock market’s spring rally fizzled?

After rising 41 percent from March 9 through June 12, the market started to sputter. From June 12 through June 22, the Standard & Poor’s 500 Index declined 5.6 percent. Since then it has bounced back, but remains below the June 12 level.

I believe the rally that began in March is sustainable at least into early 2010. The main reason: The economy is recovering.

The best-known index for predicting the U.S. economy, the Conference Board’s index of leading economic indicators, rose in April and May after falling in nine of the previous 10 months.

Ned Davis Research Inc. has its own set of a dozen predictive indicators. It said this month that the final piece had fallen into place, so that all 12 indicators now point to a recovery. The firm expects the recession to end as soon as August.

Specific items I find encouraging are monthly auto sales for U.S.-made cars (up 14 percent since February) building permits (up 4 percent in May after being down in nine of the previous 10 months), and the pattern of interest rates, often called the yield curve (which is normalizing).

Rally’s Oomph

In addition to the turn I see coming in the economy, I have three other reasons to think that the current market rally has legs that will carry it into 2010:

-- Valuations on stocks are normal.

-- Interest rates are pleasantly low.

-- Market history puts the odds in investors’ favor.

Let me elaborate, beginning with valuations. The market (as measured by the S&P 500) sells for 14.5 times earnings, two times book value (corporate net worth) and 0.94 times revenue. The dividend yield is 3 percent.

What’s remarkable about those numbers is how strikingly normal they are. An investor who grew up watching “Father Knows Best” on a black and white television set would feel right at home with them.

It’s worth noting that these multiples are not multiples of peak earnings (or book value or revenue) but of depressed earnings. So there’s room for further improvement.

Yields currently are about 3.5 percent on 10-year Treasury bonds, 0.4 percent on one-year Treasury bills, and 5.4 percent on 30-year fixed-rate mortgages. We can fret about how rates may increase, spurred by the need to finance a nasty federal deficit. For the moment, though, the rates are fine.

As for market history, I wrote in February (when I predicted a rally within a month) about what has happened in the past after waterfall declines -- that is, declines of 20 percent or more within a few weeks. The fall 2008 plunge was the 11th waterfall decline since the beginning of 1929.

History’s Pattern

In all 10 previous cases, the big decline was followed by a basing period, then a rally. In nine of the 10 cases the rally lasted at least a year. In the sole exception, 1929-1930, the market stayed roughly flat. While history doesn’t come with guarantees, the pattern suggests an uptrend continuing at least until next spring.

What happens after that depends on how forceful, and how lasting, the recovery is. An onerous federal deficit, high personal debt, a persistent fall in home prices, or ripple effects from high unemployment could all keep a damper on the recovery, or shorten it.

Contrary Signs

To be sure, not all signs point to the rally continuing. A Deutsche Bank report released last week said there is only a “dim light at the end of the tunnel” for the U.S. economy. It said that “many hard data series….such as payrolls, production, and employee tax withholding receipts, are still declining.”

The bank added that inventories remain high compared with sales, and that some laid-off workers are now seeing their unemployment benefits run out. The economic recovery, it concluded, is “expected to occur in slow motion.”

On balance though, I think the evidence favors continued gains, pockmarked with occasional rude interruptions. If you share my view, here are a few recovery plays you might want to consider adding to your portfolio.

Commercial Metals Co., based in Irving, Texas, makes, recycles and trades steel and other metals. It has been profitable in each of the past 20 fiscal years. Whether it will extend its streak by logging a profit for the fiscal year that ends in August is hard to say. Still, I find its record impressive, and believe that the company is a logical beneficiary of a stronger economy.

Garmin, Ladish

Garmin Ltd., based in the Cayman Islands but traded on Nasdaq in the U.S., makes portable global positioning system (GPS) devices. Since GPS systems are a discretionary purchase, I would expect sales to improve as the economy does. Meanwhile, the stock sells for 8.5 times earnings and yields 3.2 percent in dividends. Garmin’s earnings fell about 17 percent in the recession last year, but the stock dropped 80 percent. I think investors punished it much too harshly.

Ladish Co., based in Cudahy, Wisconsin, makes engineered metal parts for jet engines, helicopter blades, missiles and industrial applications. The stock is trading below book value and at seven times earnings. I believe that aircraft engine makers such as General Electric Co. and United Technologies Corp. like having Ladish as an alternative supplier to Precision Castparts Corp. Ladish has roughly a 20 percent market share to Precision’s 40 percent for certain engineered parts. I like both Ladish and Precision, but find Ladish more of a bargain.

Disclosure note: For clients and personally, I own shares in Commercial Metals, Garmin and Ladish.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

Last Updated: June 29, 2009 00:01 EDT