stock sectors


The sector weightings, complete with their average, are depicted in the following charts. Of course the average means little to nothing, but it in the short term might throw up some trading ideas.

Technology. Is an early leader in an expansionary business cycle. As we are in the early stages of a contraction, technology might be one to underweight currently, unless it’s cheap, unloved and undiscovered currently.
Financials. I avoid. No transparency. Full of lies. A bit like flippe-floppe-flye.
Health Care. Another industry that I avoid like the plague. Medical Ethics are non-existent.
Consumer Staples. Defensive, and generally pretty solid. Need to find a solid dividend payer cheap.

Energy Long term, yes. Currently no. Energy has already run it’s race this cycle. Look again after QE2 comes to an end. The consensus seems to be that a QE3 is a given down the road.
Industrials Always worth having some, just finding the right ones currently.
Consumer Discretionary Again worth having some exposure generally. Now looks to be a propitious time to enter the sector.
Materials Based on the weighting, looks to be an interesting sector. I’ll have a further look. Of course, this happens to be a hot sector: POT, you name it, gold miners, silver miners, they are all in here. Makes for an interesting question: the sector, is underweight in the index, the stocks, many are extended. Which carries more weight? I’d definitely be interested in an ETF of gold/silver miners in the future, if prices should fall significantly for any reason, they are definitely on my to buy in the future list.

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Hedge funds’ net weighting in Consumer Discretionary remains the highest of all sectors at 17% followed by Information Technology. Hedge Funds increased their Materials exposure during 2Q 2010 and remained most underweight Consumer Staples and Financials.

The quarterly Goldman Hedge Fund Trend Monitor, aka the HF groupthink update, is released, chock full of HF holding trivia, such as that should Apple ever miss its priced to absolute perfection business model, a whopping 181 hedge funds are going to suffer, and 75 HFs, who have Apple as a top 10 holding, are going to get crushed.

Consumer spending, while certainly falling, will not fall to zero. Instead, it will be prioritised, and redirected into specific sectors within the market.

This of course is the basic tenet behind sector rotation, sectors positioned to be recipients, should on a relative basis, and quite possibly on an absolute basis outperform sectors that will be impacted to a greater extent than other sectors or, competitors [if within a sector]

We can see that “Energy” continues to be an outperformer. Traditional safe havens, medical, food & beverage are showing continued consumer support [spending]

Consumption is [has] fallen within areas that can be economised on.

New Claymore ETF Sheds Some Light On Solar Energy
Written by Heather Bell
Tuesday, 15 April 2008 08:18
Claymore Securities again broke new ground this morning with the launch of the Claymore/MAC Global Solar Energy Index ETF. The fund is the first exchange-traded fund to focus exclusively on companies operating in the solar energy space. It is listed on the NYSE Arca exchange under the amusingly memorable ticker “TAN.”

“The availability of this product acknowledges the maturing of the solar energy industry and investor interest in funding solar power development,” said Claymore’s president, Christian Magoon.

Solar energy, long ignored, is now a hot topic as energy costs continue to rise and concerns about the negative effects of fossil fuel use grow. A recent HardAssetsInvestor.com article by Eli Neusner quoted a study that had found that venture capital investment in the solar energy industry grew from $150 million in 2005 to more than $1 billion in 2007. The same article also noted that new legislation could redistribute substantial subsidies to the wind and solar energy industries that had previously been awarded to the oil industry.

Magoon pointed out that all three of the major candidates in the presidential race – John McCain, Barack Obama and Hillary Rodham Clinton – are concerned about global warming and are supporters of alternative energy. The next administration is likely to be very friendly toward the solar energy industry.

Magoon also cited an interesting statistic in “Profiting From Clean Energy,” a new book by Melvin & Co. Research Director Richard Asplund, that the energy from the sun that reaches the earth in one day could meet the energy needs of the world population for 27 years. Solar energy currently provides less than 1% of global electricity.

“You could see massive 50% or 60% annual growth rates for many years before solar energy would even be at a quarter of the world’s electricity,” Magoon said.

TAN tracks the MAC Global Solar Energy Index, an index of 25 stocks, many of which are pure plays. The index was developed by MAC Indexing LLC which is an affiliate of Melvin & Co, a research firm specializing in clean energy. The index has a strong growth tilt and is more than 75% international, according to Magoon, although eligible components must be listed on a developed exchange. The companies fall mainly into the areas of equipment producers, materials producers and service providers.

Magoon said there are only about 200 publicly traded companies that have interests in solar energy worldwide, so the selection pool is somewhat limited. Nonetheless, the index’s selection and weighting methodologies show a strong preference for pure-play companies, which MAC defines as companies deriving two-thirds or more of their revenues from solar energy. Companies deriving less than one-third of their revenues from solar energy are excluded from the index entirely. Currently, almost all of the components are classified as pure plays. Pure-play companies receive higher weightings within the index, but weightings are further adjusted to ensure the index complies with 1940 Act diversification regulations.

The current component list has a combined market capitalization of $95 billion, ranging in size from $250 million – which is actually the minimum threshold for inclusion – to $18 billion, Magoon said. Large-cap stocks represent 27% of the index, while mid caps have a 29% weighting and small caps have a 42% weighting.

Among the top 10 components are First Solar Inc., Renewable Energy Corp., Suntech Power Holdings Co., and SolarWorld AG. Europe dominates the index, with a 29% weighting for Germany, Norway at 7%, Spain at 4% and Switzerland at 3%. China is 29% of the index, and the U.S. has a weighting of 26%.

Importantly, almost all of the companies are also profitable, belying what Magoon says is a common misconception that the solar energy industry does not make money. In fact, 20 of the index’s components were profitable in 2007.

He added that the companies within the index tend to be fairly volatile and heavily traded. They also face unique risks relating to solar technology and government subsidies. However, their prospects are strong, with demand for materials currently outstripping supply – a further sign of the changing attitudes toward alternative energy.

TAN offers an interesting diversification play in the energy space: Besides spanning a variety of size segments and several countries, it also offers diversification away from the ever-dominant oil industry. Magoon noted that a recent study from Melvin found that there was not much correlation between crude oil prices and solar energy because currently solar energy is used mainly to generate electricity, while much of global oil production is ultimately used for transportation.

“The outputs are used for different things,” Magoon said.

Although Claymore is clearly a first-mover in the space, Van Eck currently has its own solar energy ETF in registration, so TAN may see some competition soon.

TAN charges an expense ratio of 65 basis points.

Top 10 Companies Weight
FIRST SOLAR INC 8.77%
RENEWABLE ENERGY CORP AS 7.45%
Q-CELLS AG 6.44%
SUNTECH POWER HOLDINGS ADR 6.19%
JA SOLAR HOLDINGS CO LTD 5.25%
SOLARWORLD AG 5.24%
SUNPOWER CORP-A 4.95%
LDK SOLAR CO LTD-ADR 4.74%
MEMC ELECTRONIC MATERIALS INC 4.68%
YINGLI GREEN ENERGY – ADR 4.32%

Boardwalk Pipeline Partners, LP owns and operates the business conducted by Boardwalk Pipelines, LP (Boardwalk Pipelines) and its subsidiaries, Texas Gas Transmission, LLC (Texas Gas) and Gulf South Pipeline Company, LP (Gulf South). The Company is engaged in the interstate transportation and storage of natural gas for a mix of customers, including local distribution companies (LDCs), municipalities, interstate and intrastate pipelines, direct industrial users, electric power generation plants, marketers and producers. For the year ended December 31, 2007, approximately 65% of the CompanyGÇÖs revenues were derived from capacity reservation charges under firm contracts. During 2007, the CompanyGÇÖs customer mix comprised LDCs (32%), pipeline interconnects (34%), storage (13%), industrial end users (7%), power plants (6%) and miscellaneous other (8%).

I shall be running the numbers on this one for probable inclusion within the portfolio.

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Decade…………………….DJIA Stocks………………GDP Nominal
1900………………………….4.1%……………………….5.3%
1910………………………….0.8%……………………….10.0%
1920………………………….8.8%……………………….3.0%
1930…………………………[-4.9%]…………………….[-1.2%]
1940…………………………2.9%………………………..11.2%
1950………………………..13.0%………………………..6.6%
1960………………………..1.7%…………………………6.9%
1970………………………..0.5%…………………………10.0%
1980………………………..12.6%………………………..7.9%
1990………………………..15.4%………………………..5.4%
2000………………………..1.8%………………………….5.1%

Secular Cycles;
1901-1920 Bear…………0.1%……………………………8.0%
1921-1928 Bull………….19.5%…………………………..1.4%
1929-1932 Bear……….[-33.1%]……………………..[-11.9%]
1933-1936 Bull…………31.6%…………………………..9.3%
1937-1941 Bear………[-9.2%]………………………….8.6%
1942-1965 Bull…………9.5%…………………………….7.5%
1966-1981 Bear……….[-0.6%]………………………….9.6%
1982-1999 Bull………..15.4%…………………………….6.2%

Secular Bear Average….4.2%…………………………….6.9%
Secular Bull Average…..14.6%……………………………6.3%

Thus from the data we can surmise that stock market performance is not closely correlated to the performance of the overall economy; at least not closely enough that you can reliably utilise the economy as an indicator.

Additionally, if you are going to be a “long term” bear, you need to have your timing down pretty accurately as history for a number of reasons, none of which have currently changed, favours over time, a bullish posture.

Below is a chart of the hot sectors going cold, and the cold sectors heating up. Certainly, the cold sector that I have a position in REIT’s, provided an attractive investment entry point, provided you have a method that will absorb short-term volatility.

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There will probably be dissention; however, the business cycle is alive and well. Much work was completed by Schumpeter, Kondratieff, Irving Fisher and numerous others. This article again was originally posted on the “Fly on Wall St” site, just thought I would rescue it from there.

The business cycle has an important bearing upon financial markets and the stock market in particular.

Cycle Stage……..Recession…..Early Recovery……Recovery……Early Recession

Consumer………..Reviving………….Rising……………..Declining………Falling
Industrial………..Bottoming……..…Rising……………Flat………………Falling
Interest………….Falling…………….Bottoming…………Rising…………Peaking
Yield Curve……..Normal………Steep………………Flattening………Inverted

Early expansion
Technology, Transportation

Middle expansion
Capital Goods, Basic Materials

Late expansion
Basic Materials, Energy, Consumer Staples

Early Contraction
Utilities, Financials

Late Contraction
Financials, Consumer cyclicals

How then has the S&P500 performed across the following timeframes? The performance statistics are from November 2007

Timeframe…………………52weeks……….….YTD……..3months……..…..1month
Technology……………….12.72%……….11.6%………..1.4%……………[-6.1%]
Financials……………..…[-14.6%]……. [-17.6%]………[-9.6%]………..[-15.2%]
Health Care………………7.5%…………….4.8%…………2.4%………….[-3.9%]
Industrials…………………13%…………….11.2%……….[-0.2%]…….…..[-7.1%]
Consumer Staples………….9.2%………..6.8%…………..2.3%………..[-0.4%]
Energy…………………….28.5%……………27%…………..10.6%………..[-1.8%]
Consumer Disc….….[-8.5%]……….[-11.3%]………..[-7%]…………..[-10.3%]
Utilities……………………17.4%…………..14%…………..5.4%…………..1.4%
Materials………………….23%……………..19.6%………..6.4%…………..[-4.3%]

With the odd exception, we can observe that the theoretical business cycle correlates reasonably well with reality.

Energy and Utilities have been the strongest which we would expect at this stage of the business cycle which is the late expansion phase.

Financials are currently the topic-de-jour and are in point of fact indicating that the market may well be entering the early contraction phase. Consumer cyclicals, or discretionary are also showing confirmatory movement.

Therefore we can add the sector analysis to the overall market analysis of the first post and reassess the picture once again.

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