1. VIX Below 30: This is viewed as important in my Vix Asset Allocation Model and is viewed as a positive. If the VIX was in a Stable Vix Pattern and burst up to 30, as in August 2007, this would be a Trigger Event and a bearish indicator. Now, however, the VIX is returning from the Phase 2 Unstable VIX Pattern, a Catastrophic Event, and this is view favorably even though the VIX is still elevated at its current readings. This is an interesting note about the VIX from yesterday. CNBC.com
Another discussion of this event is contained in this article from Reuters. Reuters
This is a link to another CNBC article where the author maintained, historically speaking, that the S & P rose 3 to 6% over a 3 to 6 month period after the VIX fell below 30. CNBC.com
This article also has a chart of both the VIX and the S & P 500 over the past two years.
This chart shows the events that I have been talking about, the formation of the Phase 1 Unstable Vix Pattern coming out of the long standing Stable Vix Pattern going back to October 2003, and the subsequent formation of the Phase 2 Unstable Vix Pattern in late September 2008. The chart shows how the S & P 500 index reacted to those increases in volatility.
If I had to guess, it appears to me that the March break in the decline from October 2007 was a decisive break compared to bear market rallies which ultimately petered out in prior bear markets. I formed that period a couple of weeks ago just looking at the charts. dshort.com:
The S & P 500 is still down 41.9% from its October 2007 high, even after this spirited 37.4% rally off the March 2009 lows. There is just a lot of damage to repair. I would expect some choppy action, with the VIX eventually finding stability in the 20 to 30 over the course of the next several months before trying to broach what I call the main 20 demarcation line between bull and bear VIX patterns.
2. Duke (DUK): I averaged down in my position in Duke by buying just 30 shares at $13.56. Utility stocks will be a source of funds for institutions at the start of a bull rally. Many of the utility stocks that I own have fallen in price since the start of this bullish phase in early March. I just view all of that as providing an opportunity to average down on a utility position. At my last purchase price, the yield is around 6.8%. I am reinvesting the dividends.
I am not concerned about Duke's recent lackluster earnings reports. Earnings will improve as the economy turns around which is a process and will just take time.
There are three issues that concern me. Duke has a very large capital budget of around 4.75 billion this year and approximately another 20 billion from 2010 to 2013. Part of that expansion is to increase generating capacity by 6,000 megawatts by 2014. I am not too concerned about Duke's ability to finance those projected capital expenditures. Instead I recognize that part of those expenditures will be finance with new stock issuance, and the price of Duke shares are weak now, showing no signs of being able to rally off the current depressed prices. Duke is currently selling at a significant discount to its book value. DUK: Key Statistics for DUKE ENERGY CP HL CO - Yahoo! Finance
The second issue is the possibility of a dividend cut. The percentage of the dividend to net profits was close to 90% last year but may fall some this year. When dividends take up that much of net income, a cut is a real possibility, though it does not appear to be necessary yet. Some of the pressure may be taken off with an improvement in earnings later this year and into 2010 resulting for what I hope to be an economic recovery.
The last issue of concern is Obama's cap and trade plan. This is just a wild card, since I really do not know what will happen. I do know that Duke acquired a large presence in coal generation resulting from its recent purchase of Cinergy, a midwest electric utility, in 2006.
This issue could have a negative impact on Duke. Seeking Alpha
At a minimum, this issue creates uncertainty and probably places some downward pressure on stock prices for those utilities with significant coal generating plants.
Duke is one of my core electric utility holdings which is relatively stable part of my asset allocation.
3. Is new Apartment or Housing Construction Numbers More Important? The market took a dip in the morning after the Commerce Department reported that the construction of new homes fell 12.8% in April. This was due entirely to new apartment construction. Building permits for new single family homes actually rose 3.6%, while new construction increased 2.8%. http://www.census.gov/const/newresconst.pdf
It is always interesting to me to see how the government divides responsibilities among the various departments. This data comes from the Census Bureau of the Commerce Department. I view it as more encouraging that new home construction and permits are rising at a time when there is still are large overhang of inventory, particularly from foreclosures. I view that as more important than the fall in new apartment construction. An argument could even be made that the fall in apartment construction is a positive since it may represent the start of a shift back to single-family homes from apartments by American families.
4. Medtronic: I added some Medtronic at below $26 during RB's frolic and detour in early March. (Last sentence: Dynamic Asset Allocation Trumping Trading Rules/Oops Forgot about 55 million/Earnings Yields for Recent Stock Purchases) After reviewing the the earnings report for the 4th quarter of fiscal 2009, I will not add any more until after the next earnings report, though I intend to hold what I now own. Yahoo! FinanceMDT will cut more jobs. Revenues fell .8% overall, and declined 5% in the cardiac rhythm disease unit (pacemakers & defibrillators). Overall revenue would have increased 5% excluding currency fluctuations. I was also disappointed by the report and Metronic's outlook for fiscal 2010 of $3.10 to $3.20.Yahoo! Finance Still, the current price would just be 10 times that estimated forecast which is certainly no reason to sell what I now own. This one will be put in the wait and see category. Barron's ran a positive story on Medtronic in the last issue. Barrons.com
5. Emerson: Of the news today, I was more concerned about the news from Emerson than the housing starts number. EMR said that orders took a sequential decline in April, with economic trends in Europe taking "another step down" . EMR stated that its prior forecast for 2009 earnings was at risk.
I have a long term hold position in Emerson, currently taking a wait and see on when to add to my position. I have no intention of selling.
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