Chart Courtesy of StockCharts.com
The Philadelphia Utility Index quietly broke out of a trading range on December 1. To besure much of it had to do with the current cold weather that is persisting accross theUnited States, as well as the rally in the bond market. Yet, some of the index's fairlydecent performance of late might have to do with the potential for some of its componentsto be bought out in the latest installment of the private equity boom.
The Journal reported that Energy Capital Partners has "taken in" some $2.25billion from at least 150 investors, including "pension funds, university endowmentsand wealthy individuals."
The fund is led by Doug Kimmelman, and a group of former Goldman Sachs utility sectorbankers and investors, wit the goal of investing in "power generation, renewableenergy and the electricity-transmission grid."
According to the Journal: "Energy Capital Partners has already closed on its firstinvestment, a $1.34 billion purchase of hydropower and coal-fired power plants inConnecticut and Massachusetts from Northeast Utilities. Mr. Kimmelman said the firm put inabout $400 million in cash and took on debt to pay the remainder."
Checkered Past
The market has a short memory, as is proven by the bursting of the bubble of the powergeneration sector in the early part of the 21st Century, as the Enron saga unfolded.
One of the darlings of that era was Calpine (OTC: CPNLQ), a stock that once traded as highst 57 per share, and has finally rallied back above $1 over the last few weeks, althoughit still trades in the bowels of the pink sheets, a major decline not just in value, butin prestige. See chart below.
Chart Courtesy of StockCharts.com
The fate of power generation in the post Enron phase was shared by many high flyers of theera, as in the case of Calpine, a stock that came to embody the essense of those headydays, and the aftermath.
Another major mover, that has fared better, wasMirant (NYSE: MIR), a spinoff of The Southern Company (NYSE: SO), although this stock'srise came after the company went bankrupt in 2003.
Chart Courtesy of StockCharts.com
Mirant, unlike Calpine, was able to wipe the slate clean, and came back public in January2006. Still, Mirant is not out of the woods, as it has recorded volatile earnings sincegoing public, and it lost over $3 per share in the last two quarters before going public.
Still, Mirant has over $3 billion in equity, including over $11 billion in assets, whichmight make it an attractive target for private equity investors.
For The Trend Follower
Chart Courtesy of StockCharts.com
For the rest of us, it's important to understand that utilities tend to rally along withthe bond market. And the bonds have been doing well lately. Our trading model, based onthe i-shares 20 year Plus Bond Trust (AMEX: TLT) has been long for a good part of theyear, and is currently long.
With bonds rallying, it's no surprise that our trend following utility sector tradingsystem, featuring the Utility HOLDRS Trust (AMEX: UTH) is also acting well.
For individual investors, this exchange traded fund, offers a great opportunity toparticipate in the overall trend of the sector, while providing some diversification, inorder to prevent or reduce exposure to situations such as that faced by Mirant and Calpinein the early 2000s.
Diversification, though, is no cure for something that could ail the entire sector, whichis higher fuel costs.
Power generators depend on natural gas, oil, coal, water, and nuclear power for theirfuel. If their costs rise enough, profits can get crimped.
Another potential problem for utilities is the fact that despite their ability to generatecash flow, they still depend on debt for a significant portion of their operatingexpenses. Any surprise increase in interest rates can also hurt the bottom line.
Conclusion
Private equity continues to extend its reach, with the utility sector the latest target.
The sector is clearly attractive from a long term perspective to investors that don't haveto deliver sequential quarterly gains, and are interested in cash flow.
Still, at a time when fuel charges are high, and geopolitics remain a major danger,pouring money into the thinly stretched power generation sector is an interestingdevelopment.
There are no signs that the private equity boom is about to go bust. Yet, at some point,somebody is going to be left holding the bag.
It will be interesting to see if the move by private equity into the land mine filledutilities will be that proverbial straw that breaks the camel's back.
Oil And Commodity Summary:
More Cold And Snow
Crude oil prices pulled back, trading below $63, overnight as some of the cold weatherretreated.
But forecasters are predicting a new round of major snowfall and increasingly coldtemperatures for the Great Lakes, with a major cold air burst heading into the Northeastby the end of the week.
Thus, although prices may slip on profit taking, this week's energy supply data, releasedfor oil on Wednesday, and on Thursday for natural gas, will be very important.
OPEC is also putting on some pressure, with AFX quoting Saudi Arabian oil minister AlNaimi as saying that there are 100 million barrels of oil on the market that need to betaken off in order to prop prices up.
Crude oil has reversed its down trend, now trading comfortably above $60, with thesituation in the Middle East showing signs of rising strain, and cold weather looming overthe next few days.
This remains primarily a weather market, although OPEC talk will also move things. Andthat means volatility and wide price swings based on the weather.
From a trading standpoint, we have found a good core group of holdings and are adding newpicks. Several stocks delivered chart break outs on 11-29.
See our energy trading section for investment ideas, especially in the increasinglyinteresting natural gas and exploration area.
The metals markets are still in play and should be watched carefully. Much will come aftereconomic data, Fedspeak, and the Fed's Beige book release.
Visit our gold section for more on metal stocks. New stocks have been added to the listalong with recommendations on the Gold ETF.
Gold remained above the $600 area.
Natural gas is now trading above the $7-$8 range, and gasoline futures rose above $1.50.Heating oil may test the $2 area in the next few days.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index has bottomed, but is trailing the conventional energysector.
Chart Courtesy of StockCharts.com
Crude oil prices are above the $58-$60 area. A sustained rally above $62 is the nextlogical step if the up trend is to remain intact.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) closed above 200, its recent line in the sand.This is a bullish development.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) closed above 1200 and is challenging its all time highs.
Technical Summary:
Chart Courtesy of StockCharts.com
End Of The Line For Santa?
The seasonal tendency for stocks to rise in December remains a strong one, thus, thepotential for one more up leg before the year is out remains above average.
Some forecasters are saying that the Santa Claus rally is on its last legs. And while thatis a possibility, there are some things missing from the picture of a classic top.
One of them is the lack of big volume selling for several straight days, and the marketbreaking below key support levels.
Last Monday is a perfect example. The market sold off aggressively, but did not take outkey support levels, as the major indexes remained above their 20 and 50 day movingaverages.
The NYSE advance decline line remains in a rising trend. And the number of stocks making52 week highs continues to act well.
There is little enough hype out there, despite an excellent rally, with some even callingfor the end of the rally.
In other words, this rally is mature, having started in July. But, the signs of a majortop forming are not in place, at least not yet.
Caution, though, is always important. And after six months of aggressive rallying, themarket remains vulnerable, and one or two more days of heavy selling, if they appear, willlikely turn this rally into a rout.
Our long term forecast remains upbeat, unless the major indexes fall convincingly belowtheir 200 day moving averages.
What To Do Now
There is only one useful word in a market like this, discipline.
The time to be very methodical about monitoring portfolios, adhering to trading rules, andratcheting up sell stops is clearly still here.
If the rally is finished, then following a sound trading plan, such as outlined above,will likely minimize the long term damage to most accounts.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, isthe recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
SentimentSummary:
No Panic No Elation
Option traders kept their cool on Friday.
The CBOE Put/Call ratio checked in at 0.91, still below 1.27, the recent high. Aconsistent string of low readings can be a sign of excessive optimism and often signals atop in the markets. Readings below 0.5 are of concern, but not as serious as readingsbelow 0.40. Readings above 1.0 are bullish. The numbers cited here are meant to beevaluated on a closing basis.
The CBOE P/C ratio for indexes rose to 1.55 after hitting a cautious 0.90 on 11-29.Numbers above 2.0 as the market sells off, often lead to rallies. Readings below 0.9suggest too much bullish sentiment, just as readings above 2 are usually required to markmajor bottoms.
The VIX and VXN had readings of 11.66 and 16.60, holding steady. A fall near or below 20on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when thevolatility indexes begin to rise. Readings above 40 and 50, respectively, are often signsthat a bottom may be close to developing.
The Duarte Overbought-Oversold Gauge (DOOG) rose to a very hot level of 90 on 11-24. Thisis now a major overbought market on a momentum run.
NYSE insiders were buyers of stock for the week of 11-10-06. NYSE insider short sales arestill at very low levels. When NYSE specialists raise their short sales, and sell stocks,risk increases dramatically. There is a two week lag for these figures.
Market Vane's Bullish Consensus checked in at 73% on on 11-24-06. This is the tenth weekabove 70%, which is a sell signal.
MarketMoves
Merrill Lynch Tests Key Support
Merill Lynch (NYSE: MER) has given back 7.5 of its gains since bottoming out it June.
Chart Courtesy of StockCharts.com
To be sure, Merrill has had a huge move since June, gaining 45% in the interim. And thebottom in Merrill preceded the rally in the overall stock market.
Yet, the stock clearly ran out of gas in early November, prior to the market topping out.
Merrill is now testing the support of its 50 day moving average, near 86.
If the stock holds here, we would like to see the stock market also smooth out its recentvolatility.
Merrill Lynch has been an excellent bellwether for the market for an extended period oftime. If it fails here, it could be a signal that the rally in stocks might be headed formore trouble.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) is trying to stabilize. The 780-800 area is importantresistance.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) turned increasingly weak on 11-27.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) dipped below 480, a key pivot point.
Chart Courtesy of StockCharts.com
Small stocks took a serious hit on 11-27.
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