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Sterling Weekly for October 27th, 2008

The overall market as measured by the Dow Jones Industrial Average failed to follow through with the move higher that our technical indicators signaled would occur. Granted no set of indicators is flawless, and we are in time when news and conditions changes daily and sometimes multiple times during the same day. However, Friday's close of the Dow Jones Industrial Average at 8,378.95 was below the closing low of 8,451.19 set two week's earlier on the 10th. This was a bearish trading signal in that the Dow Jones Industrial Average closed below near term support. While there is some support at 8,235.81 and 7,762.34 I am expecting the Dow Jones Industrial Average to move lower and test the low set in 2002 & 2003. As the chart below shows, I am expecting to see support at 7,524.06 and then 7,286.27 If those levels fail to hold then we'll see some support in the low 6,000 range, and then no meaningful support until the 5,700 level.

Oct. 24th, 2008 Chart of the Dow Jones Industrial Average


In the July 21st edition of the Sterling Weekly I listed five (5) factors I thought were weighing on the market. They were Financial System Weakness, High Oil Prices, Dollar Weakness, Taxes, and Political Uncertainty. I discussed financial system weakness in the August 13th edition, and the price of oil in the September 9th edition, and Dollar Weakness in the September 15th edition, of the Sterling Weekly. Since then we have seen the price of Oil fall by over 50%, and the US Dollar strengthen against the other major currencies of the world. Last week in the October 21st edition of the Sterling Weekly, I briefly discussed the Tax Issues facing the country and the two (2) alternative proposals, the Flat Tax, and the Fair Tax. This week, I want to take a look at the political uncertainty facing this country and how a win by either Presidential candidate will either be positive of negative for each sector.

As I have written several times in the past, we have a very wide gap in the ideologies of our two (2) Presidential candidates, and politics is the single biggest influence on the market. While most polls have Mr. Obama leading Mr. McCain, and being the most likely winner of the President Election, there is still some level of uncertainty due to the unique nature of this election. As a result of this uncertainty is placing a great deal of downward pressure on the market, it's either that or the market is trying to tell us that the expected winner is going to be bad for the US economy. I track a variety of market indices on a daily basis, the major market indices and several sector indices. In the table below I have attempted to organize the various sector indices provide my opinion of how each of the Presidential candidates will effect the separate indices based upon the following major policy differences: Taxes, Regulation, Tort Reform, and Labor Issues (believe it or not this will have a big impact in the next 2 years). I think everyone at this point in time should be pretty well aware of their differences on these topics, so I have attempted to just summarize how I see the difference.

Sector / Index
McCain
Obama
Comments

Banking 'BIX', 'BKX'

Negative More Negative Both candidates have made rather negative comments that don't indicate a good future for this sector. Unfortunately Obama's support of the Community Reinvestment Act (CRA) leads me to believe it will fair worse under his presidency than McCain's.

Biotech 'BKX'

Positive Negative I see a very sharp contrast between how the policies of Obama will effect this industry vs. those of McCain. Obama's support of the trial lawyers is very big negative for this industry.
Consumer 'CMR' Neutral Negative Tax issues are the difference.

Chemicals 'CEX'

Positive Negative I see the issues in the Presidential election that effect this industry being the price of petroleum as a raw material, taxes, and tort liability.
Commodities 'CRX' Negative Positive I see Mr. Obama allowing looser monetary policy which will allow a greater level of inflation in this industry.

Cyclicals 'CYC'

Neutral Neutral No opinion on this industry.

High Tech 'MSH'

Positive Negative I see the tax policy and the catering to organized labor being the difference here.

Pharmaceuticals 'DRG'

Neutral Negative I do not see McCain as being positive for this industry, but I see the tax issues, trade, and tort issues being the big negative by Mr. Obama.

Healthcare 'HCX'

Positive Negative Tax issues and tort liability make the difference here. Socializing medicine is going to be bad.

Insurance 'IUX'

Positive Negative Tax issues and tort liability make the difference here.

Retailers 'RLX'

Positive Neutral / Negative I see a very stark difference between the two (2) candidates. Tax issues and the support of big labor being the difference.

Airlines 'XAL'

Positive Negative I see the big difference with this sector being the labor and the energy policies.

Broker/Dealer 'XBD'

Negative Negative Neither candidate is saying anything positive with respects to this industry.

Natural Gas 'XNG'

Positive Negative More domestic drilling vs. the same and a windfall profits tax.

Oil & Gas 'XOI'

Positive Negative More domestic drilling vs. the same policies we have now and a windfall profits tax.

Transports 'TRAN'

Positive Negative I see the big difference with this sector being the labor and the energy policies.

Consumer

Positive Negative This is a free trade vs. trade restrictions issue.

Tax Payer

Positive Negative McCain wants to keep the Bush Tax cuts in place. Obama wants to let them expire and then give 95% of Americans a tax cut. If it sounds too good to be true it probably is.

Investor

Positive / Neutral Negative Tax and Tort issues are the difference here.

I have agonized over the publication of this edition of the Sterling Weekly more than any other I can remember. I did not set out to endorse one political candidate over another, and I know that the opinions laid out in the table above will upset some readers of the Sterling Weekly. However due to the starkt differences in these candidates I see one potentially causing a very sharp contraction in the economy, and one attempting to clean up the cause of the problems, which I see as too much government regulation of our economy. I am not endorsing one candidate over another; but I do believe that ultimately our problems result from our voting population not understanding what they are voting for.

It will take some time, but once this election is over and the dust settles, the market will begin to sort the winners from the losers in the various sectors. Investors and traders will also fall into one (1) of these two (2) groups. I know which one (1) I want to be in.


Sterling Calendars for the Week of October 27th, 2008
Economic Calendar
Date Est. Time Release For

Briefing.com

Consensus Prior
10/27 10:00am New Home Sales Sep. 445K 450K 460K
10/28 10:00am Consumer Confidence Oct. 52.0 52.0 59.8
10/29 8:30am Durable Orders Sep. (1.0%) (1.0%) (4.5%)
10/29 10:35am Crude Inventories 10/25      
10/29 2:15pm FOMC Policy Statement        
10/30 8:30am Chain Deflator-Adv. Q3 4.2% 4.0% 1.1%
10/30 8:30am GDP-Adv. Q3 0.3% (0.5%) 2.8%
10/30 8:30am Initial Claims 10/25 470K 473K 478K
10/31 8:30am Employment Cost. Ind. Q3 0.7% 0.7% 0.7%
10/31 8:30am Personal Income Sep. 0.2% 0.1% 0.5%
10/31 8:30am Personal Spending Sep. (0.1%) (0.2%) 0.0%
10/31 9:45am Chicago PMI Oct. 50.0 48.0 56.7
10/31 10:00am Mich. Sent. - Rev. Oct. 55.0 57.5 57.5

  Misc. Calendar
Date: Comments:
10/27 FPL Group 'FPL' announces earnings before the market open. Est. $1.38
10/27 Hercules 'HPC' announces earnings after the close. Est. $0.39
10/27 Verizon 'VZ' announces earnings before the open. Est. $0.66
10/28 Apollo Group 'APOL' announces earnings after the close. Est. $0.67
10/28 Earthlink 'ELNK' announces earnings before the open. Est. $0.40
10/28 Fiserv 'FISV' announces earnings after the close. Est. $0.83
10/28 Kansas City Southern 'KSU' announces earnings before the open. Est. $0.60
10/28 Occidental Petroleum 'OXY' announces earnings before the open. Est. $2.71
10/28 US. Steel 'X' announces earnings. Time N/A. Est. $7.08
10/28 Valero Energy 'VLO' announces earnings. Time N/A. Est. $1.38
10/29 First Solar 'FSLR' announces earnings after the close. Est. $1.01
10/29 Hartford Financial Services 'HIG' announces earnings after the close. Est ($1.54)
10/29 :Legg Mason 'LM' announces earnings before the open. Est. $0.09
10/29 Newmont Mining Corp. 'NEM' announces earnings before the open. Est. $0.44
10/29 Office Depot 'ODP' announces earnings. Time N/A. Est. $0.08
10/29 Prudential Financial 'PRU' announces earnings after the close. Est. $1.05
10/29 Tesero Corp. 'TSO' announces earnings after the close. Est. $1.50
10/29 Visa 'V' announces earnings after the close. Est. $0.56
10/30 Aventine Renewable 'AVR' announces earnings after the close. Est. $0.13
10/30 ExxonMobil 'XOM' announces earnings. Time N/A. Est. $2.40
10/30 Flagstar Bank 'FBC' announces earnings after the close. Est. $0.13
10/31 NYSE Euronet 'NYX' announces earnings before the open. Est $0.73
  The full earnings calendar for this week can be found (here)

Prime Update:

Sterling Investment Services is an investment research and money management firm publishing the Prime Stock Newsletter. The Prime Stock Newsletter is a daily comprehensive newsletter that is useful for investors and traders alike. Whether you are looking for short term trading opportunities ranging from day trading to a couple of weeks or if you looking to acquire a long term portfolio at smart entry points. Subscriptions are $50/month. A Free 2 Week Trial is currently being offered.

Our most recent Performance Report is now available available (here). 16 of our last 20 recommendation resulted in profitable trades for an average profit of $3.61/share. This is an 80% success rate. Two (2) of our recommendations opened outside of our initial target and we would not have entered the trade, and we did not issue a recommendation on the 24th due to the futures being limit down. Only one (1) of last 20 trading recommendations would not have been profitable.

Highlights from Recent editions of the Prime Stock Newsletter
Recommendation Date Entry Point Recent Close or Exit Price Profit* Note
Valero 'VLO' Short Sale Sep 30 $30.75 $15.96 $14.79 Should continue to move lower However note that earnings are to be released on the 28th
Research in Motion 'RIMM' Short Sale Oct 21st $53.91 $44.96 $7.84 Covered on the 24th. Intra-day low of $40.21

Weyerhaeuser 'WY' Short Sale

Oct 15

$46.62 $32.37 $14.25 Covered on the 16th. Note the shares closed the 24th @ $30.59
* The per share PROFIT is a theoretical calculation based upon the opening price the day the recommendation is published and the intra day high (or low for short sales) on the exit day. The exit day is determined based upon the application of our "Rules for Trading", the implementation of "stops" within our stated policy, and may not reflect the complete or full movement of the underlying recommendation.

Dow Jones Industrial Average (INDU)

Current Opinion: Closed @ 8,378.95 Last Signal: Called Lower (again) with the close of 8,378.95 on October 24th. Current Expectations: I am expecting the Dow Jones Industrial Average to continue to move lower and test 8,235.81 and then 7,762.34 on a closing basis


The S&P 500

Current Opinion: Closed @ 876.77 Last Signal: Called Lower (again) with the close of 876.77 on October 24th. Current Expectations: I am expecting the S&P 500 to continue to move lower and test 851.19 and then 817.35 on a closing basis.


The NASDAQ 100 (NDX)

Current Opinion: Closed @ 1,202.27 Last Signal: Called Lower (again) with the close of 1,202.27 on October 22nd. Current Expectations: I am expecting the NASDAQ 100 to continue to move lower and test 1,188.41 and then 1,172.58 on a closing basis.


CBOE Ten Year Treasury Index (TNX)

Current Opinion: Closed @ 3.697% Current Expectations: With the current market turmoil it is anyone's guess where interest rates are going. However, my guess is that short term debt instruments will be more sought after than longer term ones.


Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.
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