SET Monthly Issue December 2010

| December 21, 2010

December 2010


Successfully navigating the stock market’s ups and downs is never easy.  But there’s one thing that virtually guarantees higher stock prices over the long haul.

In short, it’s corporate earnings growth.

The good news is… As we move into a new year, a perfect storm is brewing for corporate earnings.

Here’s why…

Corporate balance sheets are strong, interest rates and inflation are low, and economic growth is accelerating.

Let’s take a closer look at corporate balance sheets.

According to the Federal Reserve, at the end of September, US corporations had amassed $1.93 trillion in cash.  That’s 7.4% of companies’ total assets.  The highest level since 1959!

Their cash hoarding has been a drag on economic growth so far.  If they were spending this money, it would clearly help fuel economic growth.  But they haven’t spent it… yet.  As they continue to amass cash, it’s like dry tinder just waiting for a spark.

I think we’ll get the spark to ignite corporate spending soon.  Simply put, the low rates of return on cash will force companies to take action.

Companies have a number of options to deploy their cash.  They can buy back shares or increase dividends.  (Both of which are great for shareholders.)  But the best thing they can do is acquire other companies or reinvest in their operations.

I think we’ll see companies spending money to grow their businesses as economic growth accelerates early on next year.  The opportunities are too great.  And more importantly, they risk losing market share to competitors if the don’t.

What’s more, I think companies will see opportunities for growth because the leading economic indicators are strong.  The Weekly Leading Index published by the Economic Cycle Research Institute shows economic growth is accelerating.

In other words, the economy will be stronger in six months than it is today.

And to add fuel to the fire, the Fed’s easy money policy will keep interest rates low. That means they can easily add debt at low rates to fuel growth.  And the easy money isn’t going away anytime soon.

Remember, the Fed isn’t going to increase interest rates until the unemployment rate comes down and inflation accelerates.  But that’s not expected to happen until 2012 at the earliest.

Right now there’s a perfect storm for strong earnings growth.  And I’ve got two great ETFs for you to ride the economic recovery.  So buckle your seatbelts, 2011 is going to be a great ride!


One of the key components of economic growth is industrial production.  Manu-facturing, mining, and utilities only make up a small portion of GDP.  But they’re ultra sensitive to shifts in consumer spending and interest rates.

Remember, corporate balance sheets are strong, interest rates and inflation are low, and economic growth is accelerating.  In other words, conditions are ripe for industrial companies to make a killing.

Macro/Economic Trend:  Accelerating Industrial Production

Right now industrial companies are in the sweet spot for huge growth.  And this growth should drive earnings and stock prices higher in the weeks and months ahead.

Just last week the industrial production figures for November were released.  And they surprised everyone by increasing more than expected.  Industrial production increased 0.4% month over month and by a massive 5.4% year over year.

But that’s not all…

By digging down into the sub-sectors, we can see what’s really driving the increase output.  And some of these gains are unbelievable…

The hottest sub-sectors are machinery, up 19.5% year over year, computers, up 11.9%, fabricated metals, up 11.5%, and primary metals, up 10.2%.  And this is only a small sampling.

In short, we’re seeing industrial output accelerating in many of the most economically sensitive areas.  Industries that are leading indicators of broad based future economic strength.

One ETF I like to profit from surging industrial output is the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ).

To get a better idea of the forces at work in the industrial sector, let’s take a look atGeneral Electric (GE).  It’s by far IYJ’s largest holding, accounting for more than 10% of the ETF.

GE is a massive conglomerate with its hand in a number of businesses.  But at its core, it’s an industrial powerhouse.  They make products for aerospace, power generation, water processing, security technology, medical imaging, and many other industries.

Recently GE’s CEO, Jeff Immelt, gave an outright bullish outlook for the company.  He told investors profits would be up “strongly” in 2011.

But like many US companies, GE is sitting on a mountain of cash.  They’re expected to end the year with $20 billion in the bank!  Before long, they could have $30 billion to deploy on takeovers, share buybacks, and increased dividends.

Shareholder friendly activities like these are a major catalyst for higher stock prices. And thanks to high cash balances across the board, industrial companies are uniquely positioned to deliver shareholder value in the weeks and months ahead.

Fundamentals:  A closer look at IYJ

IYJ holds 245 US based industrial stocks.  It’s composed of everything from large conglomerates to companies in the aerospace & defense, transportation, and construction equipment industries.

The expense ratio is 0.47%.  And the dividend yield is 1.6%.

The top five holdings and percentage weight for IYJ are –

Company Name Ticker % Weight
General Electric GE 10.87%
United Technologies UTX 3.92%
3M MMM 3.25%
Caterpillar CAT 3.03%
United Parcel Service UPS 3.00%

Technicals:  The charts lead the way

IYJ is in a strong uptrend.  It’s up nearly 30% from the July low.  And it’s showing no sign of slowing down.

In fact, during the last month, industrials are the strongest sector of the market with a 6.6% gain.  A clear sign of relative strength…

Take a look at the chart below.  You can see the blue uptrend that’s acting as a support level on any pullback.

You’ll also note IYJ recently broke through resistance of the April high (the red line). It’s now hitting new 52-week and multi-year highs on almost a daily basis.


Right now IYJ is looking overbought.  We could see IYJ pullback to the dual level of support where the blue and red line overlap, around $62.  This would be an ideal entry point.  But there’s no guarantee we’ll get the pullback.

In the big picture, it’s not a deal breaker if you get in at $66 or $62.  I think IJY is destined to hit new all-time highs in 2011.

Trade Alert

Buy:  iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) up to $66.00
Recent Price:  $65.05
Price Target:  $85.00
Stop Loss:  $59.00

Remember:  IYJ is in a strong uptrend with solid fundamentals.  But it’s overbought. This could lead to a short term pullback.  You could wait to buy IYJ on a pullback to around $62.  Just be aware if IYJ continues to run, you could miss out on this trade.


Benjamin Franklin is quoted as saying, “Early to bed and early to rise makes a man healthy, wealthy, and wise.”

Nowhere is this idiom truer than in the life of a farmer.

Now after toiling through decades of high costs of production, high interest rates, and low commodity prices, farmers are reaping the rewards.

High grain prices at harvest compounded with low input costs during production has sent farm income surging.  The USDA projects farm income will hit $77 billion this year. The ripple effect of high farm income is being felt throughout the entire agricultural economy.

Macro/Economic Trend:  Surging Farm Income

Farm income is surging and farmers are using this income to expanding their operations and buy new farm equipment.

What’s more, in December, the farm equipment sales index expanded from November’s 68.7 to a record high 77.8.  The index is on a scale of 0 to 100, with readings over 50 signaling growth.  And it just hit an all-time high!

Clearly, this is great news for all of the businesses manufacturing farm equipment.

Sound incredible?

I don’t think we’ve seen anything yet.  I think we’re still in the early stages of a multiyear bull market for grain commodities.  Here’s why…

This bull market will be fueled by 1.3 billion mouths to feed.  Mouths increasingly demanding more protein like beef, chicken, and pork.  And as a result, demand for grain to feed their cows, chickens, and pigs is going through the roof.

In a word… China.

US exports of soybeans to China recently hit an all-time high.  And corn purchases may grow from 1.5 million metric tons this year to 7.4 million tons in 2011, according to Thomas Dorr, president of the US Grains Council.

And that’s not all…

The $858 billion tax cut bill just signed into law includes incentives for ethanol.  Right now refiners receive a 45 cent tax credit for every gallon of ethanol blended into gasoline.

I’ve heard $6.50 per bushel of corn could be the new price floor if demand from China meets or exceeds expectations.  That’s 2 to 3 times the average price of corn for the last few decades!

The bottom line is farm income is booming.  Demand for grains from China and alternative fuel makers is accelerating.  The way I see it… grain prices have nowhere to go but up.  And that’s great news for Ag business stocks.

One ETF perfectly positioned to reap the rewards of high farm income is the Market Vectors Agribusiness ETF (MOO).

Fundamentals:  A closer look at MOO

MOO holds 47 US and international stocks.  The companies must make at least 50% of their revenues from agriculture to be included in the index.

The expense ratio is 0.59%.

The top five holdings and percentage weight for MOO are –

Company Name Ticker % Weight
Deere & Co. DE 8.52%
Monsanto MON 8.23%
Mosaic MOS 7.68%
Wilmar International WIL.SP 7.02%
Potash of Saskatchewan POT 6.99%

Technicals:  The charts lead the way

MOO has been surging higher over the last few months.  It recently traded up to a key technical resistance level and reached high of $52.90 on November 9th.

Since then, it has carved out a bullish “cup-with-handle” continuation pattern.  This bullish setup was completed with a new higher low set just a few days ago.


I’m expecting bullish momentum to push MOO higher in short order, so jump on this one quickly.

Trade Alert

Buy:  Market Vector Agribusiness ETF (MOO) up to $53.00
Recent Price:  $51.42
Price Target:  $66.00
Stop Loss:  $45.00

Remember:  MOO just completed a bullish “cup-with-handle” continuation pattern. With the solid technical and fundamental backdrop, MOO could move higher in a hurry. So jump on this one quickly before it gets past our buy up to price.


Consumer Discretionary (+3.7%)

Consumer discretionary stocks are riding a wave of bullish momentum.

This economically sensitive sector has recorded five consecutive months of impressive gains.  And based on the latest retail sales numbers, consumer stocks won’t be slowing down anytime soon.  Just last week US same store sales accelerated 4.2% as holiday shopping went into overdrive.

Our position in iShares Dow Jones U.S. Consumer Services Sector Index Fund(IYC) continues to hit new highs.  We’re now up more than 15% on the trade.

Continue holding IYC for further upside.

Consumer Staples (+2.3%)

Consumer staples continue to lag behind the more cyclical consumer discretionary stocks.  The good news is… the sector is trending higher along with the overall market.  The bad news is… the sector is nearing its all time high set back in December of 2007.  This technical hurdle could prove to be a strong resistance level going forward.

Energy (+4.7%)

Energy stocks continued their strong performance again this month.

Chinese demand continues to pressure oil prices up toward $90 per barrel.  Their oil consumption is increasing at a mind-blowing rate… 11% year over year so far in 2010.  And just recently, consumption rates increased even faster, jumping 15% year over year in November.  Clearly, China’s demand for oil is accelerating.

Our PowerShares S&P SmallCap Energy Portfolio (XLES) continues to outperform the large cap energy stocks by a wide margin.  We hit a peak gain of 18% earlier this month.  But I think we’re heading even higher.  Sit tight for bigger gains ahead.

Financials (+4.1%)

Financial stocks have posted gains for two months in a row.  Is the tide of negative investor sentiment finally beginning to turn?

I think so, and so does investment banking giant Goldman Sachs.  They named large cap US banks as their “top trade for 2011” in their 2011 market forecast.

That’s great news for our SPDR KBW Bank ETF (KBE).  Since the Goldman recommendation hit the wires, KBE has been jumping higher by leaps and bounds.  We hit a peak gain of more than 11% last week.  But there’s still plenty of upside, hold tight for further gains ahead.

Our iShares Dow Jones U.S. Real Estate Index Fund (IYR) is basically flat for the last month.  But it’s still in a solid long term uptrend.  Continue holding for the next leg higher.

Healthcare (+2.4%)

Healthcare stocks bounced back from a down month to post solid gains this month.
I think there’s a good chance the Republican led Congress will attempt to gut the healthcare bill early next year.  But there’s still too much uncertainty in this sector to justify straying beyond biotech and pharmaceutical companies.

With that being said, our biotech and pharmaceutical ETFs are on fire right now!

Our iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) hit our $64.50 price target last week.  Go ahead and lock in your 17.5% gains on IHE if you haven’t already.  Congratulations on another successful trade!

Our First Trust Biotechnology Index Fund (FBT) is surging higher once again.  The catalyst for the big move on Friday is Intermune (ITMN).  The shares shot up 150% on news their drug for treating a rare lung disease was approved for use in Europe.

This is the second time we’ve profited from a surge in FBT thanks to ITMN.  In March of this year, the very same drug was up for FDA approval in the US… and shares of ITMN tripled.  Ultimately the FDA didn’t approve the drug.  As a result, ITMN and FBT fell, but we we’re out well before then with a 25% gain.  Now we get the opportunity to ride ITMN higher once again…

We’re rapidly closing in on our price target.  So keep an eye on FBT and be ready to sell if it reaches $40.

Industrials (+6.6%)

Industrial stocks are leading the markets higher.  We’ve locked in solid gains of 18% on the Airline ETF (FAA) and 14.5% on the Transportation ETF (IYT) on the way up.

I’m looking to keep the good times rolling with two new industrial ETFs this month.  The iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) covers the entire sector.  The large conglomerates like GE dominate the top holdings.  And the Market Vectors Agribusiness ETF (MOO) lets us drill down into the red hot agriculture business stocks.

Technology (+3.0%)

Tech stocks have strung together four straight months of gains.

Software and semiconductor stocks are the strongest industries within the tech sector.  And these are the two industries our ETFs are focused on.

Our iShares S&P North American Technology-Software Index Fund (IGV) is the clear cut leader in the tech sector.  IGV is up 13% and going strong.  Cloud computing and strong earnings from bellwethers Oracle (ORCL) and Adobe Systems(ADBE) continue to buoy bullish investor sentiment.  Continue holding IGV for the next leg higher.

Our SPDR S&P SEMICONDUCTOR ETF (XSD) is extending its uptrend off the August low.  XSD hit a peak gain of 24% this month.  Continue holding for further gains ahead.

Materials (+5.9%)

Materials stocks are up again…

It’s now five straight months of solid gains for the sector.  The strength is broad based with metals, chemicals, mining, coal, and paper companies all participating in the rally.  But platinum and other precious metals are outperforming the other sectors by a long shot.

Our First Trust ISE Global Platinum Index Fund (PLTM) hit a peak gain of 18%.  But it’s still got plenty of upside.  Platinum’s dual role as both a precious and industrial metal should continue driving prices higher.

Utilities (-0.6%)

Utilities have been slow to do much of anything lately.

Our Utilities Select Sector SPDR Fund (XLU) has been stuck in a trading range between $30 and $32 since July… The good news is we just collected another dividend.  The bad news is I’m cutting XLU loose.  We’re collecting a nice dividend but there is just not any momentum behind utilities right now.  Go ahead and sell XLU now for a small gain.

Portfolio Changes

  • This month we’re buying IYJ & MOO
  • Sell iShares Dow Jones Pharmaceuticals Fund (IYT) for a 17.5% gain
  • Sell Utilities Select Sector SPDR (XLU)


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