Back on January 11th we penned a piece called ‘Fundamentals of a Market Correction’, in which we recommended shares of Genworth Financial (NYSE:GNW), then trading at $13.10, along with the corresponding sale of her February 14 call options.  We expected the total take on the trade to be 11.37% in thirty days were the stock to be assigned.

And so it was upon expiry last Friday.  GNW shares traded higher than even we expected, closing at $15.35.

Because we spoke again two weeks ago regarding re-establishing a position in Genworth, we received a number of emails inquiring to that end over the weekend.  We responded in the negative at this juncture, for two reasons: 1) the calls aren’t nearly as rich as they were when the original trade was set, and 2) the stock has already seen a significant boost, hitting new highs as late as last Thursday.  To our eyes, it appears as if the risk/reward for the trade is decidedly not as favourable as it was back after New Year’s.

Take a quick look at Genworth here:

Genworth looks bullish but a little tired here.  We suspect it may take a few weeks to consolidate.  Volumes have fallen, and there’s a pronounced divergence between the last month’s price action and RSI.  We’ll consider re-entering should the shares fall back toward $14.00.

Not a call to sell your financials by any stretch.

Our reasons behind the no-go for Genworth have nothing to do with our sense that the current bull move is over.  On the contrary, we’re fairly secure that there’s plenty more upside to come.  And we’re not alone.

Here’s a chart showing analysts’ expectations for earnings heading in to Q4:

As you can see, prior to earnings season there was tremendous confidence on the part of analysts, 73% of whom raised expectations on the stocks they cover.

That would normally be a tad too optimistic for us, particularly as we’re just exiting a recession.  But the proof is in the pudding.  Check this one out:

Nearly 70% of all stocks beat those same analysts upgraded EPS estimates.  Moreover, the outperformance ranks among the best in the last decade.

Look Here:

Top line growth also came in stronger than analysts expected.  As the chart shows, sales for better than 70% of reporting companies beat expectations.

Which is all well and good, but can it continue?

The Fed Raises Interest Rates!?

Much of the investing public is under the impression that the Federal Reserve raised interest rates last week and that this may put a damper on prospects for the stock market and, potentially, the current economic expansion.

Nothing could be less true.  What the Fed did last Thursday, in fact, was to raise the discount rate by a quarter point to 0.75%.  This is the rate it charges for overnight loans to banks in emergency situations.  It does not affect the rate consumers pay for loans or the interest rate on government issued securities.  By our reckoning, those changes stand to take place in another six to eight months – if they happen at all – and will likely entail a nominal rise of roughly the same magnitude as this one.…

We are not ambulance chasers.

We must concede, however, that when the media worrywagon is in full blare, we relish the opportunity to take an investment position.  One of the greatest investors in history, the British Baron Rothschild, put it best. Amidst the panic of 1871 he declared, “Buy when there is blood in the streets.”

Our focus today is somewhat to the east of the French capital. On the other end of the European continent, there has been a great gnashing of teeth of late regarding the Greek government’s ability to service its national debt.

Just look at the New York Times:

“Europe Weighs Possibility of Debt Default in Greece”

and

“Is Greece’s Debt Trashing the Euro?”

The mostly sober Wall Street Journal led last week with:

“Fears Rise of Euro Government Default”

And here’s the ever-conservative Forbes magazine’s take on the issue:

“Greece Leads World Stocks Down as Doubts Resurface”

All told, there’s a good measure of anxiety over the situation, and it may be more than just partially responsible for the recent pullback we’ve seen in the broad stock market indexes.

Here’s the S&P 500 for the last three months.  Note the coincidence in the turn.

To be sure, Greece is not the only country with significant debt worries in the Eurozone.

They do lead the pack, but not by much.

Below is a visual that spells out the state of the nation for a half dozen other potential trouble spots.  Note that the information here is focused on this year’s projected budget deficits, and not on any particular nation’s ability to make good on its interest payments.  What is telling is that none of the countries depicted below appear in line to meet the EU’s target 3% maximum budget deficit.

In addition to Greece, significant worry surrounds the Ireland, Spain and Portugal triumvirate.

Greece: Europe’s Achilles Heel

The bottom line for Greece, however, is not likely a debt default.  No one can afford that, neither the Greeks nor their creditors in Central and Western Europe.  What will likely continue to happen is more of what we’ve witnessed in the last year – rising credit spreads vis-à-vis the benchmark European bond.  Look here:

Greece will simply have to pay more to borrow.  And that will hurt, no doubt, in a country where tax collection is notoriously lax, and loose fiscal spending habits have been the norm for decades.  A bloated public sector further adds to Greece’s woes.

The other likelihood is that there will be some sort of concerted bailout aimed to stave off any possibility of a Trojan Horse stifling the current Eurozone recovery.  The U.S. dollar should also benefit from the downward pressure the Greek crisis places on the Euro, which in turn should benefit all U.S. dollar denominated assets.

We repeat, however, that the danger of a default has been completely overblown.  Below is a chart that shows CDS prices (insurance costs) for Greece against a wide range of global government bonds.

In our opinion, Greece is now a screaming buy, or will be once the current market pullback is complete and the upward trend resumes – an event we expect to transpire anywhere between one to five weeks from now.…

A very interesting development is occurring in the market, and although signs of it first appeared some time ago, they revealed themselves with even sharper clarity this last Friday.  This is a development that we have alluded to several times in this space and that we have come to feel even more strongly about it with as it has come into maturity.

Last Friday, we witnessed the power and the speed with which the U.S. dollar can rise when economic conditions turn favorable.  In this case, a jobs report released by Washington revealed two important trends: a slow down in the number of jobless claims filed (we’re still losing jobs, but at a slower rate) and an improvement in the headline unemployment number.  Pictorially, it looks like this:

A mere 11,000 souls filed for first-time jobless claims, and the trend appears to have flattened.  The report also showed the unemployment rate declining to 10% (not on the chart).  Most were expecting no improvement from the previous month’s level of 10.2% – a 26-year high.

For those of us who read statistics for a living, there’s no reason to suspect the next few months won’t bring both positive job numbers and an increase in consumer confidence.

What’s important to note here is that neither of these numbers was expected. Furthermore, regardless of any future revisions or adjustments that are made to the figures, the impression they formed created and continues to create a great deal of anxiety among investors as regards the short and intermediate term price trends in commodities.  We will, however, return to that in just a moment.

For dollar bulls, both the news and the subsequent reaction were extraordinarily heartening.  Here is a picture of the U.S. Dollar action over the last six months:

It’s crystal clear that last week’s spike in the dollar constitutes the beginning of a break in the dollar’s slide, the start of a renewed confidence in a restored American economy, and the opening shots in the coming battle to renew the dollar’s role as the currency of choice for global investors and speculators.

What’s it mean for gold?

Sorry to say, but it appears that gold is going to take it on the chin here (along with commodities in general).  Not tomorrow or the day after, but over the course of the next six to eight weeks, as the dollar firms, we expect to be watching a very swift retreat on the part of the gold buggerers.  It will be a process, mind you, so the turn is going to be tricky, coming in fits and starts. This will convince everyone to stay dollar-short and gold-long, even though that is a sure recipe for financial suicide.

Equally certain is the fact that there will be money to be made in some very sharp jags in the currency/gold sphere in the coming months.  We personally prefer to stay wide of those sort of trades, but for those with the cohones and the pocketbook to back it, now is the time.…