valuengine weekly newsletter july 16, 2010

8/9/2019 ValuEngine Weekly Newsletter July 16, 2010

1/16

July 16, 2010The ValuEngine Weekly is an Investor Education newsletter focused on the quantitative approach to investing and the tools

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.

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AUXILIUM PHARMACEUTICALS (AUXL). AUXILIUM PHARMACEUTICALS is aspecialty pharmaceutical company that develops and markets products for urologyand sexual health. Auxilium markets Testim 1%, a topical testosterone gel, for the

treatment of hypogonadism. The company was recently in the news for thedevelopment of a drug called Xiaflex which treats a finger gnarling disease calledDupuytren's contracture.

Our forecast model ranks AUXL near the top of our entire database in terms ofshort-term forecast returns. It is fourth overall out of more than 5000 tickers. The tickerhas been on a rebound since July 6th. However, Investors remain unsure as to

whether recent drugs developed by the company will find big enough markets tojustify higher share prices.

The underlying fundamentals of the company make our models less sanguineover the long-term potential of the stock. Based on the lackluster one-year forecastreturns, ValuEngine has issued a HOLD recommendation for AUXILIUM

PHARMACEUTICALS. We feel that AUXILIUM PHARMACEUTICALS has the probability toROUGHLY MATCH average market performance for the next year. The companyexhibits ATTRACTIVE 5- year annualized return and risk, but UNATTRACTIVE

market/book ratio and price/sales ratio. However, as a short term play, AUXL haspotential according to our Forecast Model.
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2/16

The VE Detailed Valuation Report features advanced academic research thatbrings you superior investment strategies in an actionable format. The most

comprehensive and useful report available.

Weekly Subscribers can download a FREE Detailed Valuation Report on AUXLHERE.

If you have not subscribed and want to be able to receive a FREE $ 25.00 DetailedValuation Report, you can subscribe to our Free Weekly NewsletterHERE.

MARKET OVERVIEW

Index started week Thursday Close 3 day change 4 day change % ytd

DJIA 10199.24 10359.3 160.06 1.57% -0.68%

NASDAQ 2194.12 2249.08 54.96 2.50% -1.98%

RUSSELL 2000 627.64 634.62 6.98 1.11% 1.04%

S&P 500 1077.23 1096.48 19.25 1.79% -1.80%

Summary of VE Stock Universe

Stocks Undervalued 69.23%

Stocks Overvalued 30.77%

Stocks Undervalued by 20% 34.03%

Stocks Overvalued by 20% 10.70%

SECTOR OVERVIEWSector Change MTD YTD Valuation Last 12-

MReturnP/E Ratio

Basic Industries 0.05% 6.51% -7.57% 2.85% undervalued 42.72% 24.23

Capital Goods -0.54% 5.43% 4.94% 2.97% undervalued 35.48% 19.78

Consumer Durables -1.03% 5.20% 33.70% 5.13% undervalued 48.39% 23.52

Consumer Non-Durables -0.67% 3.33% 8.45% 6.03% undervalued 22.00% 17.72

Consumer Services -0.08% 4.62% -4.14% 6.33% undervalued 19.58% 17.41

Energy -0.37% 5.48% 0.30% 6.67% undervalued 38.02% 17.71

Finance -0.59% 4.96% 2.93% 7.85% undervalued 35.51% 20.87

Health Care -0.52% 4.87% 2.87% 10.76% undervalued 37.95% 21.33

Public Utilities -0.77% 4.92% 5.21% 11.61% undervalued 40.90% 27.7

Technology -0.31% 5.55% 1.58% 13.23% undervalued 53.39% 17.56

Transportation -0.20% 1.92% 1.75% 15.62% undervalued 24.48% 20.54
http://www.valuengine.com/rep/RepDownload?w=auxl9876http://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/rep/RepDownload?w=auxl9876


3/16

Sector Talk--Finance

There was a lot of big finance news this week. Congress finally passed the

reform bill despite GOP machinations. House Minority Leader John Boehner madestatements vis-a-vis a repeal if the GOP takes back Congress, but for now the law willstand. In other news, Goldman Sachs admitted wrongdoing in its SEC civil case andsettled for a whopping $550 million. This is one of the the largest settlements on record

for Wall St. malfeasance. Also, Citigroup reported lower profits-- but they were stillabove expectations.

Below, we present various top-five lists for the Finance Sector from our

Institutional software package (VEI). We included liquidity or share pricerequirements of 100k shares/day and $2 share in our screen and we only includedresults that had full data--forecast and valuation figures present.

Top-Five Finance Sector Stocks--Long-Term Forecast Returns

Ticker NameMkt

PriceValuation(%)

Last 12-MRetn(%)

WTNY WHITNEY HOLDING COMPANY 8.27 -26.09 -11.83

FAF FIRST AMERICAN CORPORATION 13.5 6.89 N/A

GGAL GRUPO FINANCIERO GALICIA 6.17 -20.52 80.41

KFN KKR FINANCIAL HOLDINGS LLC 7.96 -51.42 688.12

RDN RADIAN GROUP INC 8.49 -50.84 289.45

Top-Five Finance Sector Stocks--Short-Term Forecast Returns

Ticker Name MktPrice

Valuation(%) Last 12-MRetn(%)

WTNY WHITNEY HOLDING COMPANY 8.27 -26.09 -11.83

RDN RADIAN GROUP INC 8.49 -50.84 289.45


ABR ARBOR REALTY TRUST, INC 5.84 -44.94 271.97

BEE STRATEGIC HOTELS & RESORTS INC 4.18 2.01 294.34

Top-Five Finance Sector Stocks--Composite Score

Ticker NameMkt

PriceValuation(%)

Last 12-MRetn(%)


FCE.A FOREST CITY A 12.19 -47.29 110.54

FFG FBL FINANCIAL GROUP - CLASS A 21.2 -39.27 142.84

UTR UNITRIN INC 26.25 -29.41 115.16

AMP AMERIPRISE FINANCIAL INC 39.2 -27.51 63.88
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4/16

Top-Five Finance Sector Stocks--Most Overvalued

Ticker NameMkt

PriceValuation(%)

Last 12-MRetn(%)

WCBO WEST COAST BANCORP / OREGON 2.65 300 48.04

DDR DEVELOPERS DIVERSIFIED REALTY CP 10.6 218.3 119.92

CLP COLONIAL PROPERTY TRUST 15.53 127.02 101.69

ETFC E*TRADE FINANCIAL CORP 13.58 117.43 6.09

FCH FELCOR LODGING TRUST INC 5.19 96.11 118.07

VE Premium Website Stock Analysis subscribers can find complete valuation,

forecast, and ratings data on every individual equity in the Finance SectorHERE.

Not a ValuEngine Premium Website member? Then please consider signing up

for our no obligation, two-week free trial today.To Sign Up for a FREE TRIAL, Please Click the Logo Below

--New FREE Daily Newsletter NowAvailable

Richard Suttmeier is ValuEngine's Chief Market Strategist.

With our new FREE ValuEngine Four-in-Four DailyNewsletter, you'll start your trading day with criticalmarket information from the Chief Market Strategist

who:

1. Correctly called the bottom of the market

downturn in March, 2009

2. Warned of an impending housing meltdown inearly 2005

3. Predicted the most recent market correction inApril, 2010.
http://www.valuengine.com/ve/ResearchSymbol?Action=1&IndustryName=SOFTWARE+&+EDP+SERVICEShttp://www.valuengine.com/pub/main?p=33http://www.valuengine.com/ve/ResearchSymbol?Action=1&IndustryName=SOFTWARE+&+EDP+SERVICES


5/16

Our Four-in-Four brings you ValuEngine Chief Market Strategist RichardSuttmeier's latest thoughts and analysis onmarket trends, key indices, individualstocks, the regulatory environment, and much, much more.

Richard uses his 35 years of experience as a bond-trader, technical analysis, and thefundamentally-powered, quant-based systems at ValuEngine to write his Four-in-Four

newsletter every trading day. We are offering it FREE to you now because Richard'sinsights have been so helpful to the investment strategies of our clients in the past.

With our NEW Four-in-Four Daily Newsletter, you'll get Suttmeier's latest analysisdelivered right to your desktop ABSOLUTELY FREE!

Click HERE or on the logo below to Sign Up for Chief Market StrategistRichard Suttmeier's FREE Four-in-Four Daily Newsletter!

--Latest FDIC Report UPDATE is Posted

ValuEngine Chief Market Strategist Richard Suttmeier is an expert on the USBanking System and uses the health of the system as a leading economic indicator.

He distills his thoughts on the banking system in our FDIC Report. The latest update ofthe report is now available. Suttmeier remains bearish in his outlook for both US banksas well as the US housing market.

In his summary of the report he notes the following:

The FDIC Quarterly Banking Profile for the first quarter of 2010--which I coveredin detail a month ago, continued to show stress in the banking system, particularlyamong community banks. With the second quarter of 2010 in the books, we have to

wait until late August before I can dissect the next release of the most importanteconomic indicator for the US economy, the FDIC Quarterly Banking Profile, which isthe balance sheet of the US economy.
http://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/pub/WeeklySignuphttp://www.valuengine.com/pub/WeeklySignup


6/16

What we know is that there were 41 bank failures in the first quarter at a cost of

$6.5 billion to the FDIC Deposit Insurance Fund (DIF). In the second quarter, bankfailures totaled 45 costing the DIF another $11.1 billion. With 86 bank failures for the firsthalf of the year the DIF was drained by $17.6 billion. The DIF thus burned through theentire $15.3 billion DIF assessments from member banks for all of 2010. If this is not

evidence of continued stress in the banking system, what is?

In housing, the home buyers who qualified for the $8,000 or $6,500 tax credits

but failed to close by the June 30th deadline received a reprieve until September

30th. Since the expiration of that tax credit at the end of April, every economicstatistic related to the housing market has fallen off a cliff. At the same time,

government programs to keep families in their homes have failed to fulfill theirpromise. There is a huge backlog of foreclosures and 19% of all mortgage defaults arestrategic--e.g. the house is underwater, fears of job losses, etc. Home prices are

still 50% above where they were in 1999 / 2000 when the bubble began to inflate.Mortgages remain tough to get despite record low mortgage rates.

Other problems include unemployment at 9.5%-- versus 4.6% when theRecession began in December 2007, a failed economic stimulus plan, and Federal

Reserve policies which have not worked either.

Exacerbating these problems are the new regulatory rules encompassed in theproposed Congressional financial reform bill that will soon pass andin my opinion--

only make matters worse. Why implement a new regulatory regime which will beimplemented and controlled by the very same regulators who ignored the oldregulations and were oblivious to the original crisis?

We have begun the second leg of the multi-year bear market and the second

wave of The Great Credit Crunch. We now have 46 states facing fiscal crises whichwill necessitate the raising of revenues and the cutting of services. These measures willfurther batter Main St. and further exacerbate the economic difficulties.

A critical portion of this report is the ValuEngine List of Problem Banks. Problembanks are publicly traded FDIC insured financial institutions who are overexposed to

Construction & Development Loans and/or Nonfarm nonresidential real estate loans,with 1-Engine--Strong Sell, or 2-EngineSell. The report also includes a listing of all

other engine-rated banks-- and those with n/a ratings but forecast figure datapoints according to our models-- in violation of FDIC guidelines vis-a-vis loanexposures.


7/16

Our latest ValuEngine FDIC Report UPDATE is now posted. The report contains loanexposure and/or ValuEngine datapoints on valuation, forecast, and ratings for all of the

institutions on our List of Problem Banks.

Subscribers can download itHERE.

Others interested in the report may find out more on our website by clicking the imagebelow.
http://www.valuengine.com/nl/mainnl?nl=Chttp://www.valuengine.com/rep/mainrephttp://www.valuengine.com/nl/mainnl?nl=C


8/16

Catching Up with TK Ng

Explorations of Beta and Market Sentiment Continued

Former ValuEngine Analyst and Quant Guru Tk Ng published the following on his newblog Technifundamentals this week. It has been edited for presentation in ournewsletter. The complete version--along with other content of interest, can be foundHERE.

Editor's Note: The Following was published by TK Ng on July 10, 2010. Thepredictions provided apply to the market's activity for the past week.

This week, we continue our exercise with ValuEngine and ourViscovery SOMineSoftware.

NOTE: For a summary of our terms, theory, and practice, seeHERE.

The basic method for using Beta calculations and visual finance to gaugemarket sentiment/direction is this: a SOM of the component stocks of the S&P500 isconstructed. This SOM represents the basic topology of the market. We also create

six stock portfolios based on the Long and Short sides of the three ValuEngine

benchmark portfolio strategy screens. Remember that the VE Standard Strategy=Valuation; VE Forecast Strategy= Growth, and VE Star Strategy= Quality.* We thenplot our initial basket against the backdrop of the S&P500 component stocks andexamine the clusters of the resultant SOM.

*NOTE: Subscribers can run their own screens for the long sides of thebenchmark portfolio strategiesHERE

Prior to overlaying on the SOM, each of our ValuEngine picks is labeled with

their benchmark strategy, the sector they belong to, and whether they are Long orShort positions. The position of a label is approximately the position of the node on the

SOM that the stock occupies. The S&P500 component stocks are not labeled and theempty spaces represent the nodes on the SOM that they occupy.

Two weeks ago, I predicted that the selling had abated and there would be amild rebound. Well, maybe I was wrong in using the word 'mild'. The S&P500 increased

by 5 % or so for the week ending July 9. Let's see how we do this week.
http://www.technifundamentals.com/2010/07/market-outlook-cum-alphabeta-indicator_10.htmlhttp://www.technifundamentals.com/2010/07/market-outlook-cum-alphabeta-indicator_10.htmlhttp://www.viscovery.net/somine/http://www.viscovery.net/somine/http://www.technifundamentals.com/2010/07/explanation-page.htmlhttp://www.valuengine.com/ve/VEBenchmarkPortfolioshttp://www.viscovery.net/somine/http://www.viscovery.net/somine/http://www.technifundamentals.com/2010/07/explanation-page.htmlhttp://www.valuengine.com/ve/VEBenchmarkPortfolioshttp://www.technifundamentals.com/2010/07/market-outlook-cum-alphabeta-indicator_10.html


9/16

Here is our initial SOM:

B=Basic Industries, C=Capital Goods, D=Consumer Durables, ND=ConsumerNonDurables, S=Consumer Services, E=Energy,F=Finance, H=HealthCare, T=Technology, TP=Transportation, U=Public Utilities. V=Valuation, G=Growth, Q=Quality.

S1 holds the S&P500 stocks, S2 most of the Short (S) stocks and S3 most of the

Long (L) stocks. This is the same order as last week. Last week the ratio of L stocks/ Sstocks that are in the S1 cluster which holds the S&P 500 stocks was 28/21=1.33. Thisweek it is 42/29= 1.44. This is an indication of increased Bullishness. S3, the cluster

which has Bullish characteristics holds only 6.14 % of our stock Universe for this SOMwhile S2 the cluster with the Bearish characteristics holds 17.33 % . This point somewhattempers the Bullishness.
http://2.bp.blogspot.com/_SY9RUeK9djs/TDh5cZJym1I/AAAAAAAADAA/xcYnT63bvJk/s1600/clusters100710.jpg


10/16

Here are the individual Cluster stats:

The length of the bars denoting our Model variables above measures the

deviation of the cluster Mean from the Mean of the entire data set. Thus, the longerthe bars, the more those stocks in the cluster with those bars will differ from theperformance of the Index as represented by S1 bars. The longest bars in S3 with the L

stocks are Beta (first Green bar) Momentum [12-m return%] fourth bar Mauve colorand Volatility (Red bar). In a Bullish market, high momentum, high Beta and highvolatility means a sharp run-up. Also take a look at the Purple bar next to the Red

Volatility bar, which measures EPS surprise % in the stock's history. Note its length in S3as well as S2. EPS surprise will be an important factor in a stock's movement for thecoming week. Thus the sharp run-up is based on fundamentals, particularly EPSsurprise.
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11/16

Here is the SOM with the top BETA figures highlighted:

B=Basic Industries, C=Capital Goods, D=Consumer Durables, ND=ConsumerNonDurables, S=Consumer Services, E=Energy,F=Finance, H=HealthCare, T=Technology, TP=Transportation, U=Public Utilities. V=Valuation, G=Growth, Q=Quality.
http://3.bp.blogspot.com/_SY9RUeK9djs/TDh5cF4ANoI/AAAAAAAAC_4/BcrHv8Rr2Fw/s1600/betawindow.jpg


12/16

Here are our SOM BETA stats:

The average Beta of S2 stocks was 1.60 last week and is now 1.50. The averageBeta of S3 stocks was 1.98 and is now 2.62. There is more 'sensitivity' to the Index on

the upside than on the down side.

Let's take a look at some selected VE screening results that we find plotted inS3:

Ticker Company NameMkt

PriceValuation

(%)P/E

RatioBeta Sector

AIG AMERICAN INTERNATIONAL GROUP 37.38 -75 N/A 3.78 FINANCE

AIV APARTMENT INVESTMENT& MANAGEMENT 20.88 55.41 14.74 2.33 FINANCE

DDS DILLARD INC 21.86 -39.56 13.41 2.6CONSUMERSERVICES

UFS DOMTAR CORP 49.68 -48.77 8.51 3.05 ENERGY

DYN DYNEGY INC 3.69 -61.36 1.66 1.4CONSUMER

NON_DURABLES

EK EASTMAN KODAK CO 4.73 -60.55 3.47 1.56 FINANCE

FFG FBL FINANCIAL GROUP - CLASS A 21.2 -39.27 6.69 2.58 FINANCE

FCE.A FOREST CITY A 12.19 -47.29 6.82 2.89CONSUMER

SERVICESGCI GANNETT INC DEL 15.11 -34.42 6.84 2.67 FINANCE

KFN KKR FINANCIAL HOLDINGS LLC 7.96 -51.42 5.63 2.87BASIC

INDUSTRIES

SLG SL GREEN REALTY CP 57.07 -21.55 14.51 2.63 ENERGY

SGY STONE ENERGY CORP. 11.67 -51.39 3.83 2.51 FINANCE

UTR UNITRIN INC 26.25 -29.41 7.98 1.51BASIC

INDUSTRIES

RHAYY RHODIA SA 19.95 -38.51 6.82 2.91 FINANCE

Based on this exercise, the market outlook is decidedly more Bullish this week ascompared to last week. But only a few stocks will move significantly. The stocks will be

those with good fundamentals and the run-up will be speedy.
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13/16

Suttmeier Says

--Commentary and Analysis from Chief

Market Strategist Richard SuttmeierIf you have any comments or questions, send them to [email protected]

Treasury YieldsThe 10-Year is at 2.974. After holding my daily pivot at 3.111

the 10-Year yield is back between my annual pivot at 2.999 andmy annual risky level at 2.813. Todays neutral zone is between mydaily pivot at 3.110 and my semiannual pivot at 2.999. Semiannual

and quarterly value levels are 3.479 and 3.486 with annual,quarterly and semiannual risky levels at 2.813, 2.495 and 2.249.

The low yield for the move was 2.879 set on July 1st, and was a failed test of my 2.999and 2.813 annual risky levels.

Commodities and Forex

Comex Gold--Strength this week has stayed shy of my semiannual pivot at

$1218.7. This level needs to be cleared to target my semiannual risky level at $1260.8.The downside is to my quarterly risky level at $1140.9. Todays value level is $1196.9

with my semiannual pivot at $1218.7.The all time high of $1266.5 set on June 21st wasa test of Junes monthly resistance, as a significant top for gold.

Nymex Crude--Its amazing how strong my annual pivot has been at $77.05. The

chart trading range has been $67.15 to $87.15 with $77.05 right in the middle. Myquarterly value level is $56.63 with my annual pivot at $77.05, and monthly andsemiannual risky levels at $79.36 and $83.94.

The Euro--The euro is stronger than I expected and todays pivot is 1.2900. My

weekly value level is 1.2422 with a daily pivot at 1.2900, and the 200-day simple

moving average at 1.3691. Monthly and quarterly value levels are 1.2035 and 1.1424.
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14/16

Major Indices

The Dow--Daily: The Dow traded above my annual pivot Tuesday through Thursday

without a daily close above. Weakness on Thursday held the 50-day simple movingaverage at 10,244. My weekly value level is 9,635 with my annual pivot at 10,379, andsemiannual, daily and monthly risky levels at 10,558, 10705 and 10,891. My annual risky

level at 11,235 was tested at the April 26th high at 11,258, which marked the end ofthe bear market rally that began in March 2009. We are in the second leg of themulti-year bear market that began in October 2007 targeting 8,500 before 11,500.

The S&P 500--

Tuesdays high was just below my semiannual risky level at 1100.7 after the July1st low held my annual value level at 1014.2. This volatility enabled ValuTraderSubscribers to employ my Buy and Trade Strategy by shorting SPY at $120.49 on May3rd and covering the short at $101.84 on July 2nd for a gain of 15.5%.

The NASDAQ--A bearish cross-over where the 50-day simple moving average crossed below

the 200-day was confirmed and tested at 2251 and 2254 on Wednesday as mysemiannual and annual pivots provide magnets at 2223, 2242 and 2250. All of theselevels could not be taken out even with Intel reporting its best quarter in a decade.

Todays risky level is 2311.

Financial Reform

The bill's proponents claim that it ends too big to fail but in my opinion doesnot. The big banks are bigger and if a problem arises where is the funding to break up

a big bank in trouble?

Its now up to the banking regulators to implement this law, but how can they

be trusted when they did not see The Great Credit Crunch coming? Rememberthat the US Treasury, Federal Reserve and FDIC ignored their own guidelines set inDecember 2006 with regard to concentrations by community banks to Construction

& Development Loans and Non-farm Non-residential real estate loans, with thecombo called Commercial Real Estate loans. Community banks are failing todaybecause of this lack of regulation.


15/16

Resolving this dilemma is a problem and it is being hidden by fancy accounting

foot work. The FDIC has new powers among a still to be determined Systemic RiskCouncil. If they think that a too big to fail institution such as AIG can be unwoundusing the FDIC broad authority to use receivership powers start now! AIG owes US tax

payers $47.5 billion. How about unwinding Fannie Mae and Freddie Mac which owetaxpayers $144.9 and counting through the end of 2012 at least.

If the FDIC provided a macro view back in 2003 and 2004 they would haveidentified the heavy concentration of C&D and CRE loans before community banksbecame overly concentrated to these real estate loans. If they did we would not

have more than half or them at risk today.

Regulators will provide much needed oversight of the derivatives markets. If theFDIC was concerned about that Notional Amount of Derivative Contracts why wouldthey allow them to continue to increase throughout The Great Credit Crunch? Theytotal $218 trillion today, up 32.3% since the end of 2007.

The FinReg Bill strengthens the capital requirements of the US banking system

with bank holding companies subject to the same standards as insured banks for Tier

1 capital. Too much leverage and thin capital cushions were a factor during thefinancial crisis, but unfortunately for community banks this stress has intensified whileWall Street was bailed-out.

Jobs will not be created on Main Street until the problems among Main Streetcommunity banks are cleaned up. Perhaps the FDIC will put pressures on the too big

to fail to pay higher deposit insurance fees to bring the Deposit Insurance Fund backto regulatory ratios by mid-2013. This will require banks with assets above $50 billion toraise capital, which could slow lending and result in higher rates for consumer and

small business loans.

As I have been saying; you cant prevent another crisis until The Great Credit

Crunch ends and in my opinion, the FinReg bill just makes it more difficult to end TheGreatCredit Crunch."


16/16

--The ValuTrader Model Portfolio Newsletter

The ValuTrader Model Portfolio Newsletter is based on ValuEngine Chief Market

Strategist Richard Suttmeier's proprietary market analytics. Suttmeier combines histechnical analysis expertise with ValuEngine's proprietary valuation, forecast, andratings data for more than 4000 equities trading on US markets to come up with a 20stock portfolio tailored to current market conditions. With ValuTrader, subscribers

access Suttmeier's "Buy and Trade" strategy with a portfolio designed to function wellin both up and down markets.

For more on the Suttmeier ValuTrader Newsletter Portfolio, Click the Logo Below
http://www.valuengine.com/nl/mainnl?nl=V

valuengine weekly newsletter july 16, 2010

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