Now that we’ve had a chance to decompress a bit following last week’s Thanksgiving holiday in the U.S., and with a couple of market breaks – Christmas and New Year’s Day – coming up in the next month, it’s time to take a look at where the market’s heading and how we’re going to position the Rhino Stock Report portfolio in 2010.

One look at the chart below should bring back some memories…

Enter the return of the “Failure Zone.” In the Friday Market Recap before Thanksgiving, I talked about the Failure Zone and why it was such a crucial area for the way stocks would move in the short term. We touched on two scenarios: a break above those two red lines, and a break below. What I didn’t mention was what the implications were if the market decided to bounce in between them for an extended period.

But that’s exactly what’s happening right now.

Often, sideways consolidation points to a continuation of trend, which means that we’d expected the rally to restart after charging its batteries for a bit. But over a shorter period, that sideways movement has been volatile — volatile enough to expect the previous recap’s rules to still apply.

So, did anything change since last week? Yes indeed. The market may be granting itself a reprieve from a move down to support — at least from now. If consolidation continues long enough to cool the overextended momentum of the market, it’s quite foreseeable for the rally to move on unscathed.

Until we’re tipped off either way, I’m inclined to stick with the status quo as far as our Rhino Stock Report positions are concerned. That means we’ll be adding another new position this month.

Now Onto Some Market Fundamentals…

Dubai has been in the news lately because the country asked for a break on some of its $60 billion debt. To be clear, we’re not talking about sovereign debt, but rather loans made to Dubai World, an independent financial arm of the emirate.

But that doesn’t mean the effects of the debt standstill won’t be painful for investors. The group controls some of Dubai’s most famous real estate, including the Palm Islands, and the under-construction Nakheel Tower, the world’s tallest building.

While much of Dubai World’s debt is owned by banks in the West, U.S. financials don’t bear the brunt of the financial burden for a change. Instead, U.K. and European-based banks are holding the bag until the United Arab Emirates decides to step in with yet another bailout.

Independent agencies are currently rating Dubai World’s risk of default at under 40%. That at least a good sign for now…

Don’t Miss This Exclusive Webinar

Right now, I’m hard at work on a webinar called “Timing Your Entries and Exits With Tecnicals.” As the name implies, it focuses on pairing technical analysis with fundamentals to get the most out of your entry and exit prices. I’m expecting the webinar to be completed around the end of the month — it’ll be a free exclusive for Rhino Stock Report subscribers (you).

You’ll get an email when it’s available.

I’ve just gotten word that the Rhino Stock Report was added to financial ratings website Investimonials, but unfortunately no one has given it a rating yet. Please take a second to let other investors know what you think, good or bad. Click here to post your review now…

Make no mistake: the tumble stocks took in late 2008 has changed the way we invest. The uncertain market has changed our risk appetite. Right now, most eyes have turned to the “widow and orphan stocks” – the stocks deemed safe enough for even the most unsophisticated and conservative investors.

Among them are regulated utilities.

Investors have long favored utilities for a few very good reasons… predictable, recession-resistant revenues; steady streams of dividends; and government-sanctioned monopolies. They’re a safe haven for stressed investors in the midst of a recession. But while much of the retail stock buying focuses its attention on the predictable utility stocks, one deeply related and highly profitable niche is being left to the wayside.

I’m talking about wholesale power generation…

Many people don’t realize the fact that power companies — like PG&E, ConEd, and my local friends at Baltimore Gas & Electric — don’t own all of this country’s power generation facilities. A different class of utility stocks, known as wholesale power generators, engages in turning commodities like coal, oil, and natural gas into a very different commodity – energy.

While most investors don’t think of energy as an investable commodity, it is. Utilities (and a number of other players) trade power just like retail investors trade stocks and options. And behind it all are the wholesale generation companies that power the grid.

NRG Energy (NYSE:NRG) is one such company. This generation firm operates 48 power generating facilities internationally using coal, oil, natural gas, nuclear, and alternative fuels. In the aggregate, the company is controls facilities that generate a total of more than 24,000 MW – enough to power between 4 and 8 million U.S. households according to Wolfram Alpha. And unlike most of its peers NRG is actually in the process of constructing additional generation capacity right now.

In the highly leveraged power generation industry, NRG is a best-in-breed stock with phenomenal operating metrics and a strong balance sheet, all at a relatively cheap price.

NRG’s Operational Prowess

In spite of difficult economic conditions and a decrease in power demand, the company closed a record year in 2008 with net income of $1.2 billion. That huge income number was thanks in part to prescient hedging amid rising commodity costs, something that the company has proved itself very capable of since it emerged from bankruptcy proceedings in 2003 in the wake of an Enron-induced collapse of the unregulated utility space.

Since then, with a management team headed by energy industry veteran David Crane, the company is preparing to enter a new decade with a markedly different financial footprint.

And NRG is stepping up to the demands of that new decade by embracing alternative energy sources like solar thermal, and wind power – and keeping them monetized. In June, NRG penned its latest deal with Pacific Gas & Electric to provide 92 MW of clean solar thermal energy from its Lancaster, California generation center.

With the Golden State’s serious peak energy needs in the summer months, the deal is more than green-energy PR for PG&E – it’s a cost effective means of helping to quench California’s power shortage.

But California isn’t the only strategically smart locale in NRG’s portfolio. NRG owns 1,400 MW of in-city generation capacity in New York City, as well as generation assets centered on metro areas in Texas, the greater Northeast, Europe, and Australia.

From a financial perspective, NRG is an attractive buyout candidate – and the company knows it. The company turned away a $7.5 billion takeover offer from Exelon (NYSE:EXC) in October of 2008, as well as a $7.9 billion pre-crash offer back in 2006 from Mirant (NYSE:MIR).

Both of those unrequited merger opportunities are telling about NRG’s management – while C-level stock options would have appreciated nicely under either offer, Crane and his team clearly believe that the company is on the path to be worth considerably more on its own in the intermediate term. I’m inclined to agree.

These Are Some Powerful Financials

NRG’s profitability isn’t the only thing that makes this stock attractive right now. The company is also making a very enticing value case for investors who aren’t afraid of going long in this market.

With a price-to-earnings ratio of 5.96, NRG investors are paying 88% less for this company’s earnings than for those of its industry peers. That’s thanks in large part to a nearly 20% slide that shares have taken since an analyst downgrade to “Hold” in early October.

That 20% discount in price has lead to some interesting valuation metrics – like a price-to-book ratio of 0.8. A P/B that low is nearly unheard of for asset-centric industries like power generation, and with the costs of building power plants 40% higher in the last three years according to analysts at Morningstar, chances are good that the market value of NRG’s generation assets exceeds what’s on the books… especially in hard-to-penetrate markets like NYC.

On a per-share basis, NRG sports $31.46 in net assets, of which nearly $6 per share is quick, liquid assets. All told, the company has $4 billion of liquidity, and enough hedging in place to ensure that its cash needs are more than adequately covered through 2010.

Technically Timely

Shares of NRG look attractive from a technical standpoint as well…

The company hit a seemingly impenetrable resistance level just below $29.50 for the third time back in October just as the stock’s downgrade sent it sliding. But that freefall stopped just a few days ago when shares collided with support at the 200-day moving average.

That’s significant because it tells us that while investors overcompensated in selling down to the $23 mark, the stock is still obedient to the technicals… It also means that with most indicators showing the stock as oversold right now, and shares sitting right above support, now should turn out to be a great time to pick up a stake in NRG.

Dealing With the Market’s Malaise

Like most stocks, NRG is highly susceptible to the market’s recent mood swings. And with investor confidence waning at the prospect of another tumble into 2010, that means that going long on this otherwise amazing power generation play leaves some risk on the table. That’s something that we’ll deal with by monitoring this play very closely in the coming days and weeks.

With shares otherwise perfectly aligned fundamentally and technically, this Rhino play looks ready to dive into right now. We’re taking our position at NRG’s current price of $23.59 for the Rhino Stock Report’s model portfolio.

The uptrend the market’s been riding for the last two months finally took a breather this week, but does that mean we’ve seen the end of gains this year? Lots of people, especially technical guys are beginning to think so.

But not so fast… let’s take a look at the charts:

On Monday, the stock market took a big dive on investor fears about financial industry earnings and jobs numbers. That drop signaled a big change in the way the market’s been going for quite some time now; it was the largest single-day drop since late February.

Taking a look at the chart above, it’s clear how Monday curbed the uptrend. What’s also starting to unfold are the technical reasons to worry about more of a drop in May – right now, a descending triangle is starting to form, a bearish signal that the market’s due to break out to the downside.

But those who see the patterns alone pushing the markets down in the next week will probably be sorely mistaken. While a bearish chart would normally be a dark cloud, the fact is that fundamentals are carrying the markets right now. Chart patterns are going to be secondary for a while.

Now, that doesn’t mean that things are going to be great for the rest of 2009 – the are a lot of fundamental reasons to forecast another pullback in the markets, but I think that the biggest takeaway from this trading week is the fact that once again we’re seeing a market that’s yet to make up its mind. When it does, we’ll see a decisive move one way or another, but until then, there’s still a lot more information for investors to digest.

Regardless of what anyone says, suggesting that the market will rise next week or fall next month is pure speculation. Let’s just stick to picking Rhino Stocks and leave the guessing games to the gamblers.

Harmful Headlines

As usual, the headlines in the financial media have been anything but helpful in cutting through the clutter of market “news” that’s been going around. On Thursday, news outlets grimaced at an increase in new jobless claims for the week, pushing aside the fact that the four-week average of jobless claim initiations – a more trustworthy number actually dropped slightly. That’s good.

Earnings announcements continue to be a big deal this week – companies reporting tomorrow include 3M Corp (NYSE:MMM), Ford Motors (NYSE:F), and Schlumberger (NYSE: SLB).

3 Reasons to Watch the Market Next Week

From an earnings perspective, next week should be an interesting one. On April 28, EMCOR Group (NYSE: EME) reports their first quarter earnings. We’re up 22% right now on the stock. Also reporting next week is SPX Corporation (NYSE:SPW). The company reports their Q1 earnings on April 29. SPX Corp has been a wild ride of late – we’re currently up 2.5% on the stock.

With one of our watchlisted stocks also reporting earnings on April 28, this should make for an interesting week indeed.

Disclosure: EME and SPW are positions in the Rhino Stock Report’s model portfolio.

Apparently the treasury department has a knack for ironic naming.

There’s more than one way to deal with almost any problem – take the disposal of toxic chemicals, for example: If a chemical company needs to rid itself of toxic chemicals, they’re going to have to choose between treating those chemicals to reduce their toxicity, or something more creative… like bury them!

But burying toxic chemicals brings with it its own set of risks and drawbacks. For starters, chances are those buries 55 gallon drums of dioxin are going to seep back to the surface eventually, just as they did in the Love Canal Disaster of the 1970s in Niagra Falls. In that particular instance, 21,000 tons of toxic waste buried beneath a residential area had horrific effects on the residents who lived there.

Indeed, just throwing a tarp over a problem can certainly disguise it; at the very least it’ll keep it out of sight and out of mind for a while… but ultimately, that problem’s still there.

That’s what’s so funny about the Troubled Assets Relief Program (TARP). We’re throwing a TARP over trillions of dollars worth of toxic assets to “get rid” of it. Apparently the irony was lost on whoever’s responsible for naming the program.

(more…)