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Sterling Weekly for November 24th, 2008

The overall market as measured by the Dow Jones Industrial Average lost approximately 450.89 points, or approximately 5.3% last week to finish at 8,046.42 last week. The overall market appears to continue to be suffering from a loss of confidence in just about everything. The rally that followed the announcement of Timothy Geithner as Treasury Secretary can somewhat be viewed as a sign of confidence in the handling of the financial crisis, which I believe can somewhat summed up as a loss of confidence. This brings us to an interesting question: if the current financial crisis involves a widespread loss of confidence in almost every asset class, what will it take to restore that confidence? Think about this for a second, the financial crisis started with rising defaults and declining home prices, then spread to the financial sector when the assets they held were forced to be written down in value, and now we are seeing funds and other investment groups taking losses because no one really wants to own debt assets that can be drastically written down because someone else is forced to sell a tiny amount of the securities when trading volume has dramatically shrunk. Why would anyone buy a new issue CMBS or pool of credit card debt when a triple A rated security could be written down by 40-50% just because someone else was forced to sell? It's just not worth the risk to your firm and your career. Now the financial crisis has morphed into a guessing game of which financial institution will be forced to write down its portfolio of these assets due to a freezing up of the market. This creates a lack of confidence in the health of these financial institutions, see Citigroup 'C' as an example.

The root cause of a lot of these problems is FASB 157, which requires firms to market the value of these securities to market for valuation purposes on their balance sheet and record the changing value as a gain or loss on their income statement. Theoretically companies can use an alternate valuation method to value these assets on their balance sheet. However there is a problem with this "alternate valuation," Sarbanes Oxley holds the public accountants who audit these firms personally liable for any harm or losses caused as a result of these "alternate valuation" methods. Think about that for a second, any accountant or accounting firm that would say for example allow Citigroup 'C' to place an alternate valuation (other than a market to market valuation) of CMBS or other assets on its books would then become both professionally and personally liable for any losses under Sarbanes Oxley. There is not an accounting firm in the world that is going to take that risk. I know what I am talking about on this; I consult for several small cap companies regarding their SEC compliance and I've spoken with the senior partners at the audit firms on these projects and there is not one of them that is willing to risk their careers, homes, and families for any company on the planet.

There is a lot of blame to go around for the cause of the current financial crisis, but at the end of the day most of blame lies with structural and systemic issues, and what is needed to correct these issues is not money being thrown at the problem, but reform. Remember, Bull Markets are caused by either technological breakthroughs or deregulation; excess liquidity creates asset bubbles.

Even after the recent rallies in the market, it still remains in an oversold condition. I am looking for the market to trend sideways to lower until something is done more than just throwing money at the problem.

Sterling Calendars for the Week of November 24th, 2008
Economic Calendar
Date Est. Time Release For

Briefing.com

Consensus Prior
11/24 10:00am Existing Home Sales Oct 5.07M 5.05M 5.14
11/25 8:30am Chain Deflator-Prel. Q3 4.2% 4.2% 4.2%
11/25 8:30am GDP - Prel. Q3 (0.3%) (0.5%) (0.3%)
11/25 10:00am Consumer Confidence Nov. 40.0 39.5 38.0
11/26 8:30am Durable Orders Oct (2.2%) (2.5%) 0.8%
11/26 8:30am Initial Claims 11/22   573K 542K
11/26 8:30am Personal Income Oct. 0.2% 0.1% 0.2%
11/26 8:30am Personal Spending Oct. (0.6%) (0.7%) (0.3%)
11/26 9:45am Chicago PMI Nov. 39.5 38.5 37.8
11/26 10:00am Mich. Sentiment - Rev. Nov. 58.5 58.0 57.9
11/26 10:00am New Home Sales Oct. 450K 450K 464K

  Misc. Calendar
Date: Comments:
11/25 American Eagle Outfitters 'AEO' announces earnings before the open. Est. $0.30
11/25

Borders Group 'BGP' announces earnings after the close. Est. ($0.50)

11/25 Tivo Inc. 'TIVO' announces earnings after the close. Est. ($0.06)
11/26 Deere & Co. 'DE' announces earnings before the open. Est. $0.99
  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 $1.57/share. This is an 85% success rate.

Highlights from Recent editions of the Prime Stock Newsletter
Recommendation Date Entry Point Recent Close or Exit Price Profit* Note
Transocean 'RIG' Short Sale Oct 27 $65.09 $59.44 $5.65 Covered on the 28th
Humana 'HUM' Short Sale Oct 28 $32.23 $25.01 $7.22 Covered on the 28th.

DryShip 'DRYS' Short Sale

Nov 10

$15.59 $8.50 $7.09 Covered on the 13th
* 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 @ 8,443.39Last Signal: Called Lower (again) with the close of 8,378.95 on October 24th. Current Expectations: We might see a short term rally however the Dow should continue to move lower and test 7,762.34 on a closing basis.


The S&P 500

Current Opinion: Closed @ 851.79 Last Signal: Called Lower (again) with the close of 876.77 on October 24th. Current Expectations: We might see a short term rally however the S&P 500 should continue to move lower and test 817.35 on a closing basis.


The NASDAQ 100 (NDX)

Current Opinion: Closed @ 1,154.34 Last Signal: Called Lower (again) with the close of 1,202.27 on October 22nd. Current Expectations: The NDX should continue to move lower and test 957.05 on a closing basis.


CBOE Ten Year Treasury Index (TNX)

Current Opinion: Closed @ 3.340% 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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