ValuEngine Weekly December 30, 2010

8/8/2019 ValuEngine Weekly December 30, 2010

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December 30, 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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VALUATION WATCH: Our models find that overvaluation is approaching

levels typically seen when a market correction is imminent. Overvalued

stocks now make up 62% of our universe and almost 30% of the universe is

calculated to be overvalued by 20% or more. 15 of 16 Sectors are now

calculated to be overvalued.

MARKET OVERVIEWIndex started week Wednesday

Close3 day change 3 day change % ytd

DJIA 11572.81 11585.4 12.59 0.11% 11.03%

NASDAQ 2657.09 2666.93 9.84 0.37% 17.46%

RUSSELL 2000 786.9 790.26 3.36 0.43% 24.83%

S&P 500 1254.66 1259.78 5.12 0.41% 12.88%

Summary of VE Stock Universe

Stocks Undervalued 37.75%

Stocks Overvalued 62.25%

Stocks Undervalued by 20% 17.47%

Stocks Overvalued by 20% 29.92%

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SECTOR OVERVIEW

Sector Change MTD YTD Valuation Last 12-MReturn

P/ERatio

Aerospace 0.16% 5.62% 24.91% 7.55% overvalued 30.97% 19.64

Auto-Tires-Trucks 0.19% 6.52% 57.31% 13.49% overvalued 48.07% 26.05

Basic Materials 1.02% 9.40% 36.98% 31.91% overvalued 69.20% 38.12

Business Services 0.25% 6.36% 14.77% 7.18% overvalued 20.93% 30.07

Computer and Technology 0.01% 5.73% 31.87% 7.83% overvalued 33.42% 43.79

Construction -0.04% 9.13% 14.04% 6.73% overvalued 11.09% 38.21

Consumer Discretionary 0.43% 3.68% 22.81% 5.48% overvalued 25.65% 31.17

Consumer Staples 0.20% 4.03% 11.68% 11.21% overvalued 17.41% 27.93

Finance 0.12% 6.26% 22.16% 8.75% overvalued 18.67% 25.06

Industrial Products 0.12% 7.27% 25.18% 16.13% overvalued 30.59% 26.24

Medical 0.06% 8.34% 20.00% 2.64% undervalued 20.00% 37.79

Multi-Sector Conglomerates 1.04% 5.43% 27.46% 15.20% overvalued 33.23% 29.73

Oils-Energy 0.77% 6.29% 20.12% 25.82% overvalued 36.01% 41.65

Retail-Wholesale 0.40% 3.37% 21.44% 10.66% overvalued 67.84% 22.32

Transportation 0.47% 3.83% 25.95% 12.26% overvalued 26.50% 42.71

Utilities 0.52% 2.79% 7.59% 7.42% overvalued 11.41% 25.55

Sector Talk-- Metals and MiningCommodity metals and minerals have been in the news again this week with

Gold, Copper, Rare Earths, and other basic materials reaching high price levels with

no end in sight. Below, we present various top-five lists for various miners and metalproducers from our Institutional software package (VEI). These results were filtered bymarket price and volume--no results below 3$/share or less than 100k shares/day

volume.

Top-Five Metals and Mining Stocks--Short-Term Forecast Returns

Ticker Name Mkt Price Valuation(%)Last 12-MRetn(%)

MSB MESABI TRUST 40.22 -13.52 232.67

CHOP CHINA GERUI ADV 5.85 2.2 3.91

TRE TANZANIAN ROYAL 7.32 N/A 113.41

AAUKY ANGLO AMER -PLC 26.03 39.83 21.64

URRE URANIUM RES INC 3.42 N/A 322.22

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What's Hot--Suttmeier Releases 2011 Themes

Chief Market Strategist Sees Continuing Economic Challenges Ahead

This week our Chief Market Strategist Richard Suttmeier finished off 2010 byreleasing his top themes and predictions for 2011. Here are the economic and market

trends Suttmeier will be watching in the New Year:

1. Home Prices will resume a decline that began in mid-2006. We had the home

buyer tax credits expire in mid-2010, and government sponsored mortgagemodifications provided limited help. In 2011 we face continued foreclosureissues including questionable documentation, and banks have a record high

Other Real Estate Owned (OREO). OREO is up to $53.2 billion at the end of the

third quarter, up 338.2% since the end of 2007. Depressed home sales are beingsold at a 30% to 35% discount, which reduces property appraisals at the county

level. Home builders will have to compete with these lower prices and we needa mortgage modification program for all Americans, not just those at risk oflosing their homes. QE2 is not working and US Treasury yields are higher causing

mortgage rates to rise. “The Great Credit Crunch” began with housing, andthat foundation needs repair before Main Street can recover with sustainable

job creation.

2. Community Banks still have $1.43 trillion in commercial real estate loans thatrequire resolution. The FDIC’s List of Problem Banks rose to 860 in the third

quarter of 2010, which is 11.1% of all insured institutions. My analysis shows 2,485or 32% of all banks overexposed to Commercial Real Estate loans, and 3,938 or 50.7% of all banks with real estate loan pipelines that are 80% to 100% funded.This stress needs to be addressed before jobs can be created on Main Street

USA as housing and construction drive local economies. “The Great CreditCrunch” will not end without a program to remove toxic real estate loans fromthe books of community banks around the country.




3. The Banking System is supposed to de-lever risk, but it has not. When I look at

the Notional Amount of Derivative Contracts I cringe at the fact that since the

end of 2007 this risk category has grown $71.6 trillion since the end of 2007,that’s an increase of 43.5% to $236.4 trillion at the end of the third quarter in an

environment where banks should be de-leveraging not adding to this risk wherefinancial time bombs are ticking.

4. Fannie Mae and Freddie Mac will continue to drain taxpayer money as theTreasury provides unlimited lines of credit through 2012. The cost currently is

about $150 billion, by far the largest of any government bailouts. We need tounwind the activities of these GSEs, and beef up Ginnie Mae as the go togovernment agency that backs new mortgage issuance.

5. Because of the housing market depression and stress in the banking system theUnemployment Rate will stay above 9% for all of 2011.

6. QE2, the $600 billion program where the Federal Reserve buys long dated USTreasury Securities has been a failure so far. The yield on the 10-Year was 2.334

when Fed Chief Bernanke touted QE2 in October only to see the yield nearly125 basis points higher in December. The primary intent of QE2 was to lower

longer-dated US Treasury yields. Yields held this week’s value level at 3.494again on Wednesday. There is risk to 3.75 to 4.25 in 2011, but with or without thisweakness the 10-Year yield will decline to 2.75 to 2.50 during 2011.

7. Comex Gold has gone parabolic and therefore you cannot predict how highgold prices can climb. I do know that corrections will be fierce and painful for

those that buy strength instead of weakness. The 2011 neutral zone is between$1350 and $1450.

8. Nymex Crude Oil is headed back above $100 per barrel according to mostexperts. I cannot rule that out for 2011, but the downside is more significant

given weekly closes below the $87 per barrel area. If gasoline stays above$3.00 per gallon demand on Main Street will slow down and will be a drag oneconomic growth and job creation.



9. Problems among the PIIGS nations denominated in euros will trump problems atthe state level in the USA. This will keep the euro versus the dollar in a trading

range. We will begin 2011 with a quarterly pivot around 1.3150.

10. US stocks show strong technical characteristics. The S&P 500 is above the 61.8%Fibonacci Retracement of the decline from October 2007 to the low of March

2009 at 1228.74. Dow Theory had a Buy Signal in early November and another confirmation in December. The Dow Industrial Average – I project downside to9,375 in the first half with a rebound to 11,500 in the second half. Strength

above 11,500 will return to 11,500, and the 2011 close will be at or below 11,500.

11. ValuEngine.com indicates that equity fundamentals are not cheap. Fifteen ofsixteen sectors will begin 2011 overvalued according to ValuEngine. The normal

range for the percent undervalued or overvalued stocks is 35% to 65%. We willbegin 2011 close to the low end of the range for undervalued stocks andtowards the high end for overvalued stocks. Because of the battle between the

technicals and fundamentals, stocks will be reversal-oriented in 2011 and belittle changed year over year.

Click the icon below to hear VE Chief Market Strategist Richard Suttmeier on TheStreet.com's "The Real Story" Podcast

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Suttmeier Says

--Commentary and Analysis from Chief Market Strategist

Richard Suttmeier

If you have any comments or questions, send them to [email protected]

Treasury Yields

10-Year-- (3.466) – The Weekly value level is 3.494 has held onweakness with a risky level at 3.264.

Commodities and ForexComex Gold-- Value level is $1387.4 with this week’s pivot at $1401.2 and monthly

risky level at $1443.5.

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Nymex Crude-- Pivot is $91.38 with this week’s risky level at $93.28.

The Euro--Value level is 1.3060 with my quarterly pivot at 1.3318, which goes away atthe end of the year.

Major IndicesUS stocks are overvalued fundamentally and overbought technically on both

daily and weekly charts. The major equity averages remain below this week’s risky

levels as the year draws to a close at: 11,629 Dow, 1269.4 SPX, 2682 NASDAQ, 5215Dow Transports and 808.57 Russell 2000. Fifteen of sixteen sectors are overvaluedaccording to ValuEngine with only 37.7% of all stocks undervalued. At 35% the stock

market tends to find a top. Only 17.5% of all stocks are undervalued by 20% or more.

The Dow--Daily: Remains extremely overbought on both daily and weekly charts. The five-

day modified moving average is 11,523 with daily and weekly risky levels at 11,618and 11,629.

HousingOn Tuesday we learned that home prices are on the decline again according

to Case-Shiller, and that the Conference Board’s Consumer Confidence fell to 52.5 inDecember. The National Association of Home Builders Housing Market Index remainsdepressed at 16 when a reading of 50 is neutral. The Consumer Confidence reading

at 52.5 is depressed considering that 90 to 120 is the neutral zone.

• The 20-City Composite from the Case-Shiller Home Price Index fell 1.3%sequentially in October and 0.8% year over year with Atlanta, Charlotte, Miami,Portland, Seattle and Tampa hitting new lows since home prices began to fall in

mid-2006.• Home sales are down 25% year over year and the supply of unsold homes isup 50%, and housing starts are near thirty year lows.

• From the mid-2006 peak to current home prices are down 29.6%.• The 20-City Composite is still 50% above its starting point at the end of 1999.



Upcoming Suttmeier Appearance

ValuEngine Chief Market Strategist Richard Suttmeier On the Road in

January

ValuEngine Chief Market Strategist Richard Suttmeier is a financial analyst for media such as Fox News,CNBC,YahooFinance,the Wall Street Journal, New York Times, CNNfn, and Bloomberg, Suttmeier has long beenone of ValuEngine's "power users," supporting his owntechnically-focused analysis with VE's fundamentally-based quant methods.

With all of the recent marketuncertainties, making the correct stock

decisions can be daunting. ValuEngine Chief

Market Strategist Richard Suttmeier will beappearing at the AAII Orlando Chapter

meeting on January 19, 2011. We invite all VEclients in Florida to attend. At the meeting,Suttmeier will discuss the following topics:

• How ValuEngine.com can help investors adaptto volatile and risky market conditions

• How to implement a hedge fund-type strategy for your own stock investment portfolio

• How ValuEngine’s research helped me call both the top and the bottom of the market over thepast five years

This meeting will take place at the University Club of Winter Park, 841 N. Park Ave. Winter Park, FL 32789. It starts at 6:30pm. Again, all VE clients are invited. We

place a special call out to those seeking individual investment advice, assistance,and portfolio management.

Happy New Year to All !

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ValuEngine Weekly December 30, 2010

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