Wednesday, January 31, 2007

Ride the Fed to "GLD"ilocks

The Federal Reserve helped out the cyclicals & commodities on Wednesday, with their endorsement of the economy, saying: "Overall, the economy seems likely to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time."

Some last-minute numbers contributing to the Fed's decision included a surprising 3.5% GDP from Q3's 2.0%. While the number cured the permabear recessionary fears, it also told us the Fed should be on pause until the April meeting - at the earliest. Not to be outdone, the Chicago PMI came in at 48.8. Low inflation + Growth = A Goldilocks Economy, and the Market rallied in response.

Traders were timid to move into Gold on Tuesday, ahead of the Fed, despite a huge 5%+ rally in Crude Oil. After the manufacturing number, weaker dollar and Fed statement on Wednesday, Gold contracts moved up nicely to close at $657.9.

The 10 year note is near 5%. GDP is stronger than anticipated. Cyclicals are strong, and we can still see rate cuts in the second half of the year. Still 8 points under its 52-week high, I believe there is room for Gold to stretch its legs - and the best way to play this is the streetTRACKS Gold Shares (NYSE:GLD) ETF, which tracks the commodity price itself.

Look at the intra-day chart below for (GLD). All traders needed was the strong GDP number @ 8:30 A.M. to trigger the rally at the opening bell:

Furthermore, look how (GLD) has tested and maintained the support level of $60. To add to that, I've included a 20 period MA with Bollinger Bands. Look how the bands constrict up until the most recent rally, then diverge & open up. Keep an eye on the upper limit band as it should continue to trend upwards with the rally. [click for full view below].

Finally, if you pull up the Dollar Index 1-year chart, pay close attention to the moving average. It's been in a free fall slide, and I don't see anything that makes me think it will get its act together anytime soon. In my opinion, gold downside is minimal and upside potential is another 8% or more.

Sentiment: Buy
Disclosure: I have no position in (NYSE:GLD). Again, just a reminder that this article is for informational purposes only, and is not a recommendation to buy or sell any security.

Tuesday, January 30, 2007

Small-Cap Gem

Wondering how to play the market as all of the Baby Boomer generation retires? I’ve heard numerous pundits mention everything from casinos to retirement homes, hospitals and pharmaceuticals as bullish investments in the midst of the ever growing population aged 65 and older.

My play is a little known, lightly traded stock that I've been following for a few weeks now. It’s called Healthcare Services Group, Inc. (NasdaqGS:HCSG), and this chart looks absolutely beautiful. I'm showing the 5 year chart to illustrate the true run this company is having:

Yahoo! Finance’s description of the company: “Healthcare Services Group, Inc. provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States and Canada.”

Bullish case:

  • I believe HCSG warrants its 34 P/E – there is so much growth in this industry, as we’re just starting to see the wave of Boomer retirement.

  • Acquired Summit Services Group, Inc. in September, 2006.

  • They’re due for another 3:2 split, just like they’ve done numerous times in the past.

  • Increased dividend to 2% on 1/23/07.

  • Upside surprise looking at the trailing 4 quarters.

  • Absolutely NO debt

I would not be surprised to see some firms initiating coverage and/or upgrading the stock. I intend to start a position on the next dip and see strong potential in both healthcare and service stocks.

This commentary is for informational purposes only and is not a recommendation to buy or sell any security.

Saturday, January 27, 2007

A Traders Dream

Next week is a dream week for the active trader: Not only does Google, Inc. (NasdaqGS:GOOG) report earnings [Wall Street expects $2.90/sh], but we'll also find out a lot about the state of the economy.
  • Altria (NYSE:MO) reports on 1/31 (Est. $1.23) and is widely expected to announce the details of their Kraft spin-off. I've heard rumors from anywhere b/w 0.62 and 0.72 shares of KFT for every share of MO. We'll have to wait and see.
1/31 is a HUGE day for economic data, and will certainly influence investors:
  • GDP (Est. 3.0%)
  • Chicago PMI (Est. 52.0)
  • Crude Inventories (For week ended 1/26)
... All those numbers precede the F.O.M.C's policy statement at 2:15pm. Steve Leisman of CNBC pointed out that CBOT Fed Fund futures show a non-existent chance of rate cuts or hikes -- and also revealed that the 10-year note (yield 4.879%) has been climbing, and could be silently doing the Fed's job. Expect 5.25% for some time yet.

Chart is (C) of

We'll also see unemployment rate early Friday morning, expected to hold at 4.5%.

Disclosure: I have no position in GOOG, MO or KFT. This commentary is for informational purposes only and is not a recommendation to buy or sell any security.

Friday, January 26, 2007

On Every Street Corner: Starbucks (SBUX)

New Starbucks (NasdaqGS:SBUX) stores are popping up on every street corner. It seems that if you look the other way -- you'll miss a new grand opening. While Starbucks appeals to a wide variety of consumers, they certainly have capitalized on the college student mindset -- all-nighters, early-risers or mid-day crammers looking for a jolt.

I'll run through a few brief pros/cons.

  • Price-point: Donny Deutsch pointed out on The Big Idea that CEO Howard Schultz has the power to charge whatever he wants for the coffee -- because you're really paying for the atmosphere. Starbucks continues to increase their top line revenues via price hikes ($0.05 in October, 2006) and new, innovative decor.
  • Brand loyalty: The parking lots are full, the lines are long, and I even ran a search on the company to find complete blogs and discussion forums dedicated to the coffee giant.
  • International growth: Starbucks raised its goal to 40,000 new stores (+10,000) in October of last year.
  • I believe Starbucks sees itself as almost a secular-type stock -- that regardless of an economic downturn, people will keep buying Starbucks like they buy cereal, beverages and other household items. If the present bull-market subsides, I think SBUX is still a strong hold, especially with analyst price targets holding above $40.

  • *P/E of 47 trailing, 31 forward with a 1.68 PEG ratio: Investors were scared off last summer when the stock bottomed out at its 52-week low of $28.72. It could certainly happen if and when SBUX reports sub-par earnings and stagnant growth.
  • Market Share: Starbucks has been the subtle target of recent Dunkin' Donuts (TM) advertisements -- aiming to show difficulties in ordering and waiting for Starbucks coffee, complete with a clever jingle.
  • Had a nice run off of its lows, but has broken below its 50 day moving average versus its 1 year chart.

*All fundamentals & technicals are as of market close on 1/26/07.

What to watch in the Options Market:
  • Feb. $37.50 calls ($0.20) are a cheap alternative for the bullish bulls.
  • April $30 put ($0.40) volume is high and worth watching.

Sentiment: Hold
Disclosure: I have no position in (NasdaqGS:SBUX). This commentary is for informational purposes only and is not a recommendation to buy or sell any security.