Still Looking For That Bounce by Gregory Spear (11-OCT-05)
Just because the market was set up for a bounce didn’t mean it could actually pull it off. One should blame the list opportunity on the Delphi (NYSE: DPH) bankruptcy, which pressured the automakers, and the Xilinx (NASDAQ: XLNX) warning, which pressured the semiconductors. Gregory Spear spoke about Sunset Industries yesterday and the 85% drop in DPH shares in the last two days and this month’s 18% drop in GM are cases in point. Today we will get a peek at the FOMC minutes, which Spear does not expect to have a tonic effect on the market. In many ways, the Fed is the equity boogey man at this time and the market is afraid that the Fed will hike rates until it hurts.
Because the S&P 500 has now failed at the 200-day moving average, at a key uptrend line and has fallen below the halfway mark from the April to August rally, Spear’s target of 1150-1160 now appears more imminent, although he still expects a weak bounce to finally occur today before we head lower. A rally in Japan is boosting the index futures and Genentech’s results are boosting biotech. Remember, because the market is in a well-developed downtrend, strength from good news should generally be sold, not bought, and Spear will use this rally to add more short positions.
Genentech (NYSE: DNA) is slated to gap up about $4 this morning. This will put pressure on Spear’s BBH short sale as DNA represents a significant percentage of the BBH. Nevertheless, unless he and his team are grossly mistaken, the gap up in DNA and the BBH will be short-lived. It may last a few hours or a few days, but he doesn’t see a fundamental story in place that would protect a stock with less than $1.50 of annualized earnings and a P/E of 86 from meeting its technical destiny at $59, where a large gap beckons. Spear could be wrong; and if the BBH closes above $191 he will have to reassess his bearish stance.
Despite the rally in crude oil in 2005, the tankers have been tanking all year. Most tanker stocks pay high dividends because they lack internal growth and, unlike the contract oil drillers, are at the mercy of rather severe swings in spot day-rates. In fact, the average spot rate for Suezmax ships during the third quarter was about $25,000, a 20% drop from Q2 and less than half of what they were getting a year ago. Short-term, however, charter rates are on the upswing for the smaller tankers. Post-Katrina, spot rates are now back to those rather extraordinary second-half of 2004 levels. GMR has 43 ships operating and about 75% of their voyage days are billed at spot rates, so Q3 should be a great quarter for them. Unlike oil prices, however, which Spear believes are in a secular bull market, tanker rates remain volatile. At a P/E of 4.5, GMR may nevertheless have a place in your income producing portfolio.
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