Growth Report : Fed

Tech Spending and Stop Losses

Ian Wyatt — Thu, 18 Dec 2008 23:12:00 GMT

Your Daily Profit

December 18, 2008

*****Tech Spending

*****Stop Losses

***** Stock Summit 2008: Profits After the Fall

Dear Investor,

Up 359 on Tuesday, down 99 on Wednesday. I can live with that. But I still have to wonder how long the relative optimism for stocks will last. General Electric (NYSE:GE) was downgraded and received a rare “sell” rating by Sterne Agee & Leach, and, as we saw with Honda yesterday, companies are starting lower 4^th quarter earnings estimates.

We’ve been expecting earnings estimates to come down for some time. But it remains to be seen how much is already priced in. For the financials, it could be argued that the worst is priced.

Consider Morgan Stanley (NYSE:MS). That company posted a $2.37 billion dollar loss during its 4^th quarter, which ended November 30. That worked out to a loss of $2.34 a share. A poll from Reuter’s showed analysts were expecting a loss of just $0.34 a share. A month ago, analysts were expecting a $0.30 profit.

The analysts missed by a mile. They were totally unprepared for such a weak quarter from Morgan Stanley. Sounds like a recipe for disaster, right? Well, after a somewhat rough start to the day, Morgan Stanley shares finished with a 2% gain.

The same thing happened over at Goldman Sachs (NYSE:GS). Goldman lost $2.1 billion, which was roughly in inline with expectations even though there were some wacky calls for losses as high as $6 a share. The stock jumped 14% Tuesday and added another 3.6% yesterday.

*****The Fed’s rate cut helped Goldman and Morgan Stanley out, for sure. But there’s also the mark to market accounting that each company has to use. That means the companies must price all assets every quarter. In the case of mortgage related assets, where the prices are effectively nil, they are forced to take steep write-downs.

Morgan Stanley took around $2.2 billion in write-downs as it re-priced damaged assets. At present, these are paper losses. But it goes to demonstrate the difficulty of earnings estimates. So what looks like a staggering surprise loss may not be quite as bad as it first appears.

Of course, there’s also the flipside, which would be that the assets could be subject to more write-downs in the future. But for now, the companies are getting the benefit of the doubt.

*****We’ve seen the bottom fall out of homes sales, commodity prices, retail sales and lending. Technology spending has remained fairly strong. You may recall I discussed IBM (NYSE:IBM)’s 3Q earnings in Daily Profit as a strong point of the earnings season when it reaffirmed its 2008 full year earnings back in October.

That was then. Now analysts are expecting tech spending to be the next domino to fall. A Citigroup analyst says the first quarter could be the worst ever for software companies. A Gartner analyst is saying “There’s going to be a period of reckoning that’s not going to be pretty…”

IBM and Sun Microsystems (Nasdaq:JAVA) are two companies that could suffer.

IBM sold off sharply in the Fall, dropping from 52-week highs around $130 to as low as $70 a share. A casual look at one- or two-year chart might make it look as though a downturn is priced in. But a look at a longer term chart gives a different perspective.

In late 1999, at the height of the technology bubble, IBM traded as high as $140 a share. Between 2003 and 2007, IBM was range-bound between $75 and $100. In 2007, the stock took off again and rallied to the $130 area in spring and summer of 2008.

Now, IBM is back in that $75-$100 zone. For us to start talking about IBM hitting 10-year lows, like we have with so many other stocks, we’d have to see prices drop to the $50-$60 range.

Sun Microsystems looks even more vulnerable than IBM. Sun was already in a downtrend when IBM was hitting highs in mid-2008. The stock currently trades just above $4 a share.

*****One stock that may be an attractive alternative to the high-end server and software companies like IBM and Sun is VMware (NYSE:VMW). VMware makes “virtualization” software that allows companies to get more bang for their buck from their networks.

The stock has been whacked pretty good this year (what hasn’t?) but may actually benefit from cuts in corporate IT budgets.

*****Finally, I want to address some of the stocks we’ve talked about here in Daily Profit. We’ve managed to get in some positions that are doing well. Both Graham Corp (NYSE:GHM) and Emergent Biosciences (NYSE:EBS) are up nicely since they were first discussed here. It’s time to protect those gains.

Shortly after I recommended a stop-loss on Questcor Pharmaceuticals (Nasdaq:QCOR), the stock started selling off. That stop loss should have taken you out of the position at $8.80, preserving your gains and keeping from suffering as the stock continued to fall.

Now is the time to put in stops on Emergent and Graham. Graham’s got support at $10, so a stop at $9.75 should keep you in on a routine sell-off but take you out if the stock is going to head back to its lows.

A stop-loss at $22 will do the same for Emergent.

Chesapeake Energy (NYSE:CHK) is far more volatile and I also consider it more of a long-term holding. For that reason, I’m content to let it go, for now.

*****Monday’s landmark video investment conference, Stock Summit 2008: Profits After the Fall, was a huge hit. The turnout was phenomenal…thousands tuned in to watch TradeMaster Chief Trading Strategist Benson George give his blueprint for profits in 2009…and his top “breakout” stocks are already showing gains…

Well, it’s not too late for you to share the wealth

I’ve seen this happen more times than I can count. Benson uncovers an absolute gem of a stock with his TradeMaster system, and the profits start rolling in the very next day.

It’s like clockwork. But the thing is, those profits don’t stop after a day. That’s the key to the TradeMaster system. One-day gains turn into two-day gains…and then three-day gains…and pretty soon you’ve got a big winner on your hands.

Now, I want to show you how you start profiting with Benson and the TradeMaster system.

It’s quick. It’s easy. And it won’t cost you a single dime…

Here’s what you do – go to www.TradeMaster.tv to check out the replay of Stock Summit 2008: Profits After the Fall. You’ll discover the secrets to Benson’s amazing trading strategy that’s consistently putting up double-digit gains while the markets collapse around us.

Then accept my invitation to try Benson’s TradeMaster service and get you immediate access to the Special Report TradeMaster’s Top 5 Breakout Stocks. Take some time and watch the video then try the service with no commitment or obligation on your part to continue.

That’s it. That’s all you need to be well-armed to start making some money as soon as the opening bell rings on the New York Stock Exchange tomorrow morning.

Best regards,

Ian Wyatt

Founder and Publisher

TradeMaster Daily Stock Alerts

PS – After you view the video from the comfort of your home or office and sign up to try TradeMaster, don’t forget to grab your two Bonus Special Reports – The Beginners Guide to Shorting Stocks and Technical Analysis: Top 4 Indicators for Profits. Along with TradeMaster’s Top 5 Breakout Stocks, you’ll be armed for profits tomorrow!

Gurus Ring the Bell

Ian Wyatt — Tue, 07 Oct 2008 20:13:00 GMT

Gurus Ring the Bell

Ahh, the newsletter crowd is getting bullish. My inbox is full of stock-picking gurus saying now’s the time to be bold and buy stocks. Fear is rampant, they say. Distant relatives are calling in the wee hours asking for advice. The VIX is at an all time high. 59% of respondents to a CNN poll feel a depression is either very likely or somewhat likely.

And you know what? I agree. About being bullish, not about depression.

My trading guru, Benson George, the man behind TradeMaster Daily Stock Alerts saw a silver lining to Monday’s gut-wrenching decline. Namely, the 800 point sell-off came on relatively light volume.

I know, it’s a little difficult to call an 800 point drop orderly, but if there ever was an orderly decline, that was it.

Then there was the substantial recovery off the lows. Clearly, buyers are seeing value at current prices. Now, how long it will take for the buyers to gain the upper hand remains to be seen.

I do know that if Bernanke is trying to prep the market for a rate cut at the upcoming FOMC meeting on October 29^th, he should save his breath. We’re ready. Do it. Do it now.

Victor Sperandeo, of Trader Vic fame, maintained in one of his books that the key to making an interest rate move effective was surprise. Fed moves work best when they are a surprise. And any action that comes during a FOMC meeting is not a surprise.

Bernanke should pull another fast one and cut rates 20 minutes before the market opens tomorrow. That’ll help certain companies’ balance sheets immediately. Bill Gross over at PIMCO wants a full point rate cut. Sounds good to me. At this point, it’s about investor confidence. A big rate cut would definitely help.

A Bottom or THE Bottom?

Of course, I have to hedge my rally call. I do think we’re set for some kind of a rally. But I’m not, repeat not, ringing the bell at the bottom. I’m on record saying that employment has to show improvement before there’s sustainable upside for stocks. And the U.S economy is on pace to lose a million jobs in 2008.

No economy can lose that many jobs and still manage to grow significantly. And don’t forget, consumers don’t have the extra refi cash they used to fuel the last bull market.

In other words, there’s upside for stocks in terms of valuation. But growth? I’m not sold on that one just yet. Still, every one knows the story of how Warren Buffett made his fortune buying beaten down stocks in the 70s.

Earnings Season

I wonder if all the newly bullish realize that earnings season kicked off today with Alcoa (NYSE:AA)? With so much going on, it would be easy to miss. But there’s no way earnings are good. And there may be a few nasty surprise waiting in 10Qs. Because what the heck, when news is already bad, you might as well get it all out there, right?

That’s probably why Bank of America (NYSE:BAC) chose to announce a secondary offering to raise cash at the same time it announced a 68% drop in earnings. You might think investors would be glad that BofA even had earnings.

I can only guess that, somehow, the $10 billion stock offering put a damper on the enthusiasm. And the fact that offering was only two-thirds subscribed probably didn’t help. Neither did the 50% cut in dividend. (Of course, it’s only polite to rein in your own spending when you’re begging for cash, but that doesn’t mean investors have to like it.)

BofA got whacked for better than 24%. And by my rough calculations, that accounts for 20% of the Dow’s drop today.

Here are some stocks I’m targeting for a valuation-based bounce:

General Electric (NYSE:GE) jumps to mind. That stock has hit an 11-year low. It’s important to note that GE has to access the credit markets to fund operations, which could be problematic. But on the other hand, GE’s already done a secondary, and Buffett added some liquidity as well. Earnings are October 10.

Intel (Nasdaq:INTC) quickly recovered from these levels back in 2002. Before that, you’d have to go back to 1996 to find the last time it was under $17. Earnings are October 15.

And Verizon (NYSE:VZ) has hit support at $30 that dates back to 1995. They report on October 27.

I’m sure there are some more speculative stocks that might fare better in a liquidity driven bounce. But for short-term trading opportunities, I favor the blue chips. And for the record, I’d rather buy AIG than anything emerging market related. And I’m not buying AIG.

Best regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

PS – I’m launching a new daily e-letter Monday, October 13, 2008. It’s called 24/7 Investor’s Daily Profit. The website is in place. Feel free to check out the new website, www.247investor.com, and sign up for Daily Profit.

Paulson Asset Management, LLC

Ian Wyatt — Wed, 24 Sep 2008 19:43:00 GMT

Paulson Asset Management, LLC

So now the Treasury has a massive $700 billion bailout plan on the table. The idea is to create a government agency to deal with bad mortgage related debt, sort of like how the Resolution Trust Corp. (RTC) dealt with $394 billion in assets of failed banks during the S&L Crisis in the 80s.

You probably recall how regulators would swoop in on troubled banks, close them down and turn their assets over to the RTC, who would then dispose of them, sometimes for pennies on the dollar.

It was like free money for some savvy investors as they were able to buy assets on the cheap from the RTC. Still, many shareholders in failed banks like Silverado and Lincoln never recovered their money.

That’s got me curious as to how Paulson Asset Management, LLC (PAM) will deal with the mortgage-related assets it takes on. Clearly, some of those assets, like the credit default swap derivatives, are essentially worthless and will remain so.

However, there’s certainly a fair amount of mortgage-backed securities that have been written down to near-zero out of necessity, because no one will buy them now, but will probably regain some value in the future.

After all, why else would PIMCO’s Bill Gross say that he’s expecting to be called by PAM (Paulson Asset Management), to help manage the mortgage-backed assets it buys?

Economic Socialism: Puttin It Mildly

My point here is that we’re seeing much more than economic socialism, or the economic communism that Jim Rogers alluded to recently. This is more akin to Valdimir Putin’s hostile takeover of Yukos Oil.

Politics aside, there’s a profit-motive here. Think about it. The Fed and Treasury lent AIG $85 billion. AIG can either pay up (with 11% interest) or the Fed and Treasury get an 80% stake in the company. And from what I understand, AIG has a matter of days to come up with the loot.

At $5 a share, AIG is worth around $13 billion right now. At the start of the year, it was worth around $130 billion. As of June 30, 2008, AIG had $67 billion in tangible assets, down from $95 billion a year earlier.

Obviously, those tangible assets are worth less than $67 billion now. Nobody will buy them.

But what will they be worth a year from now, after most of the bad debt out there has been exposed and investors can make informed decisions about what’s got value and what doesn’t?

That’s OUR $85 Billion

I suspect that PAM’s stake in AIG could be worth a decent sum in a few years. Same goes with whatever assets PAM’s $700 billion buyout fund targets.

It seems to me, since PAM is using taxpayer money to fund its investments, the American people should be considered shareholders. We should share in the spoils.

Now before you think this suggestion is like investing social security in the stock market, there’s a very important distinction here. For instance, PAM can change the rules anytime it wants to. Stock price going down? No problem. Just make it illegal to short.

The more I think about it this idea, the more I like it. And for the record, I have no problem with Bill Gross as the Chief Investment Officer.

What Will Congress Do?

Now I want to be clear about something. I might sound a little flippant with my suggestions here. But this financial mess is very serious. It’s a massive fraud, and the government’s bailout plan doesn’t mention even the slightest slap on the wrist for the offenders or deal with homeowners problems.

Of course, there will be new regulations. There always are. But they never seem to do what they’re intended to do.

As the panic from last week’s market rout eases a little, and Bernanke and Paulson testify before Congress, Congress seems to be taking a harder line on the bailout plan, which is good.

Because, again, I want to know how PAM intends to dispose of billions in impaired assets.

And what’s more, Bernanke apparently wants to buy impaired assets from banks at a premium to current value, and hasn’t really talked about what he’ll do with them. That’s a problem.

If you remember the S&L Crisis, you’ll recall that there was a lot of criticism as to how the RTC disposed of its assets. Much of it was real estate, and in less than desirable markets, as well. Still, many felt that the RTC sold at prices that were way too low to compensate investors for their risk. (The New York Times reported about a resort with an $8 million book value selling for 695K.)

If Bernanke and PAM buy impaired assets at a premium with no realistic plan of how to monetize them, then they’re simply seeking to recapitalize failing banks at taxpayers expense. If so, this PAM shareholder has to vote no.

So what Should We Do?

I’d tell you to call your Congressmen, but they’re busy. Plus, judging by the tone of yesterday’s Q&A following Bernanke and Paulson’s testimony, I’d say they’ve got the message. Taxpayers are not wild about bailing out banks.

Why not expand the powers of the FHA and let Americans with mortgage problems refinance to a lower rate? At least that would address the “real” problem, which is default and foreclosure.

As far as investing goes, my advice hasn’t changed from last week:

“There’s one asset class I like a lot right now. It’s something of a defensive play, mainly due to the high dividend yield. But there’s also a case to be made for some capital appreciation.

It’s MLPs. Master Limited Partnerships. These companies own and operate pipelines for oil and natural gas, mostly in the Southwestern U.S. These companies have pretty stable revenue streams because they sell capacity in advance. MLPs are required to pay 95%+ of their income in dividends to maintain their tax exempt status. And they rely on credit to expand their operations, and hence, revenue.

Many MLPs are currently trading at 52-week lows. I believe this is because their ability to expand has been impaired by the banking liquidity problems. But these companies have stable revenue and they pay dividends of 6-11%. That alone makes them a good place to park your cash until the markets get better.

Plus, as the lending situation improves over the next few months, you could see as much as 30% gains for the stocks as investors anticipate revenue expansion.”

Here’s the link I posted last week to get my favorite MLPs. Most of these stocks have jumped 10+% since lows last Thursday.

Best Regards

Ian Wyatt

Editor

Big Idea Investor

A Yacht, Greenspan and Uranium Stocks

Ian Wyatt — Wed, 10 Sep 2008 01:51:00 GMT

On Monday, in a CNBC Europe interview, Jim Rogers wondered if the US was “…more communist than China.” He was referring to the Fed’s bailout of Freddie Mac and Fannie Mae, and to a lesser extent, the bailout of Bear Stearns back in March. “Socialism for the rich” he called it.

“This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents," Rogers said. "I’m not quite sure why I or anybody else should be paying for this.”

That’s great stuff. And when you consider that the Treasury is on the hook for something like $50 billion (assuming the entire portfolio of mortgages doesn’t go non-performing), it does seem a bit like the taxpayer is, to quote the license plate of my home city, experiencing taxation without representation.

As a counterpoint, Warren Buffett applauded the move as the best deal available. But even Buffett admits that this outcome was made somewhat inevitable when Freddie Mac and Fannie Mae were chartered as quasi-government entities.

There’s a lot of “coulda, shoulda” going on these days.

But to get to the best of them, we need to throw a couple more names into the discussion: Bill Miller and Alan Greenspan.

The Line Up

Bill Miller is the once-legendary manager of a few Legg Mason mutual funds. Miller beat the S&P 500 16 years running. It should be noted that the same year his streak was stopped, 2006, was the year he bought the 9^th biggest yacht in the U.S, the Utopia.

Many wondered at the time if this purchase was the ultimate “sell” signal. Well if that wasn’t, Miller’s early-summer admission that he doubled down on Freddie Mac should have been.

As of July 31, he owned 80 million shares of Freddie Mac. Ouch. So certain was Miller that he was sitting on a value goldmine, he added 30 million shares this summer, even as Freddie’s stock was getting pummeled.

You have to look at Miller as some kind of tragic hero. King Lear perhaps, who thought he was “…more sinned against than sinning.”

Miller apparently took Bernanke and Paulson’s pledge to keep Freddie Mac “in its current form” as gospel. And so it was either greed or ego that made him think averaging down on Freddie Mac was a good idea.

I’m guessing Miller was the only one who took Bernanke at his word. Now he’s found out how much sharper than a serpent's tooth it is to have a thankless Fed!

(I’ll certainly never forget my senior analyst Benson George’s warning to stay away from any mortgage-related stocks, but that’s a different article.)

Heads on a Platter

Bill Miller may be the sacrificial lamb, albeit of the same species as the homeowners who bought more house than they could afford. But what of the “crooks and incompetents” that Rogers spoke of?

It’s not as if Freddie Mac CEO Richard Synor and Fannie Mae CEO Daniel Mudd (could that name be more ironic) had no idea what was going on.

Freddie Mac’s chief risk officer David Andrukonis told Synor in 2004 that the bad loans it was buying “would likely pose an enormous financial and reputational risk to the company and the country.”

Syron got the warning in writing that “shoddy” underwriting standards were exposing the company to losses, according to Andrukonis. Demands to raise its capital cushion went mostly unmet. Even when they came directly from Paulson and Bernanke.

Well Syron’s out of a job now. But of course, he was paid $38 million in the last five years -- $38 million to make $80 billion in shareholder equity disappear.

Freddie Mac’s bond holders will get paid. That’s what Rogers means by “socialism for the rich.” Syron’s mess will get cleaned up. Eventually. It remains to be seen what happens to homeowners in over their heads and Bill Miller. I expect they won’t be the beneficiaries of any socialism.

Playing for the History Books

I remember thinking back in 2005, after Greenspan had announced his retirement, that he was playing for the history books. Using low interest rates to prop up a weak economy so he could go out in style. (Sort of like how gas prices have dropped as we head into the election.)

And even now, Greenspan seems to be trying to re-write the books.

"Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan recently said.

He went on to say that governments and central banks probably could not have altered the course of the once high-flying housing market.

Oh man. This is just too easy. I don’t even need a narrative. These comments speak for themselves:

· ''history has not dealt kindly with the aftermath of protracted periods of low-risk premiums (interest rates).'' 2005 Greenspan

· ''American consumers might benefit if lenders provided greater mortgage product alternatives (read: no interest loans and adjustable rates) to the traditional fixed-rate mortgage.'' Greenspan 2004

· "There do appear to be, at a minimum, signs of froth in some local markets," Alan Greenspan said. June 10 2005

· "…the apparent froth in housing markets may have spilled over into the mortgage markets." June 10, 2005

On July 19, 2005 chief economist for Standards & Poor's, David Wyss offered up some solutions to Greenspan. He said that the Fed could control mortgage rates by increasing interest rates, and could also place restrictions on banks to get them to stop providing mortgages with no money down.

Wyss said these types of loans place risks on the economy by providing owners with houses "that they can't afford." "What do you do when [the owner] mails the key back to the bank?"

Well, we’re finding that out right now. And it’s not good.

On August 29, 2005 Paul Krugman wrote in a New York Times editorial what Greenspan apparently couldn’t see “…we're going to have an economic slowdown, and possibly a recession.”

Wyss could see it. Krugman could see it. Benson could see it. Why not Greenspan or Miller?

Uranium Stocks

Now, on a completely different note, I hosted a forum chat here at Investor’s Insight last Friday. It went really well and I’d like to thank all the readers who came out to ask questions and leave comments.

You really helped that chat with informed questions and insightful comments. Thanks.

The transcript of the discussion is still available under Discussion Forums.

One person inquired about a couple uranium stocks. Here’s my response:

Uranium prices peaked in Spring of 2007 and have been pretty much downhill ever since. There appears to be plenty of supply and little increase in demand.

With a rising dollar, commodities in general have been headed lower. Until there is some stability in the dollar, price pressure will remain on commodities in general.

Uranium is a bit of a special case, as its price started falling well before most other commodities. That’s probably not a good sign. Though it may be worth noting that sentiment on uranium couldn’t get much worse at the moment.

There doesn’t seem to be much talk about new nuclear plants coming on line here in the U.S., and that makes me think that uranium prices may stay low for a while.

However, if you don’t mind waiting for a while, uranium stocks may be OK. But you must buy big companies, with plenty of cash, and, preferably, other sources of income, like gold mining.

For the record, I can’t believe Bancroft Resources (BCFT:OTC:BB) isn’t “bankrupt resources.” Granted, it’s only in the exploration stage, but with virtually no cash, I don’t see how this company stays afloat.

At least Uranium Resources (Nasdaq:URRE) has revenue and a decent cash position. But institutions are dumping and no insiders are buying, despite the stock price sitting at nearly all-time lows. In fact, the stock’s down 17% today on no news. That’s usually not a good sign.

I always advocate waiting for signs of buying before taking a position in a stock. That’s what my stock-picking machine TRIGR is engineered to do, and that’s the way I like it. I don’t want my money sitting around for months or years waiting for a stock to move.

There are plenty of trends moving stocks higher right now that you can profit from. Opportunity cost, while not an outright loss on your capital, is still a cost.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

Inflation, The Fisher King and a Solar Stock

Ian Wyatt — Tue, 19 Aug 2008 21:12:00 GMT

Inflation, The Fisher King and a Solar Stock

And to think, investors cheered the Fed’s decision to hold interest rates unchanged.

Today, the Producer Price Index, a popular low-ball measure of wholesale inflation, came in twice as hot as expected at 1.2%. That 8.9% rise is the biggest jump since 1981. I don’t think anyone cares to hear the annualized number.

In case anyone is curious, the inflation rate for July of 1981 was 10.76%. A year later, Paul Volcker’s rate hikes had slashed inflation to 6.44%. Speaking of Volcker, his name is certainly being tossed around a lot lately. And not just for his endorsement of Presidential candidate Barrack Obama.

Apparently I’m not the only one invoking his name as a model for Bernanke. Larry Kudlow’s “Where's Bernanke's Inner Volcker?” takes a similar position as my “Princess and the Dragon” article here on August 5 – interest rates are too low and should be hiked.

The Fisher King?

At least there’s one member of the FOMC who seems to understand that inflation needs to be dealt with pronto. Dallas Federal Reserve Bank President Richard Fisher has dissented at every FOMC meeting this year. He has advocated smaller cuts to help the financial meltdown and he’s been on the side of higher rates lately.

Maybe I’ll start calling him the Fisher King. In the Arthurian legend, the Fisher King keeps the Holy Grail. But he has a lingering injury and cannot move of his own will. And so long as he is injured, there is a blight on the land. So he sits and fishes.

I’d say there’s enough connection there to make it an intriguing metaphor. The Fed’s Fisher can’t move rates on his own. And until rates are higher, inflation is likely to remain a blight on the U.S. economy.

In the week following the FOMC’s last meeting on August 5, the Dow put on an amazing 544 points. Amazing, because homebuilders and financials were leading the charge. It should be no surprise that the Dow has since given all that back. And then some.

A Keen Eye for the Obvious

The obvious reason is that it’s dawning on investors that the banking liquidity problems are far from over. Just the other day, bankruptcy specialist Wilbur Ross told CNBC that a thousand banks could fail. Of course, Wilbur would be in hog heaven with that much feed in his trough.

I see it a little differently when it’s the former chief economist for the IMF saying that …”we’re going to see a whopper…”. Now an economics professor at Harvard, Kenneth Rogoff side with the Fisher King in saying that the Fed shouldn’t have cut rates as much as it did to help the financial sector.

Still, the one item that stuck with me the most is the Freddie Mac bond sale from Monday, August 18. Apparently it was undersubscribed. Ya don’t say?

And stocks sold off as a result. Shocking. I’ve always had a keen eye for the obvious.

A Solar Stock

Well, just a few minutes ago, my senior analyst Benson George called me over to his office. Benson’s the mastermind behind my stock-trading machine, TRIGR. If you ever need someone to turn support and resistance points or moving average breakouts into mathematical formulas, he’s your man.

Apparently, Candian Solar (Nasdaq:CSIQ) jumped over 3,000 points in TRIGR’s ranking system to take the number 3 spot. The 3,000 points were awarded due to new analyst coverage and some recent increases in earnings estimates that leave Canadian Solar with a forward P/E of 7.3.

I can’t tell you whether thin-film or polysilicon technology will be the big winner in the solar energy sector. But I can tell you what happened the last time Canadian Solar rose to the top of TRIGR’s rankings.

It was April 10, 2008. the stock closed at $23.75 that day. Over the next month, it made it as high as $34.10 on May 12. The next day, Canadian Solar announced blowout earnings. The stock closed at $40.78 on May 13 and $44 on May 14.

The stock eventually peaked at $51 in mid-June. Now, it’s almost back to where it started in April. Support looks good at $25. Just thought you’d like to know.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

PS – The last time Canadian Solar (Nasdaq:CSIQ) made it to the top of TRIGR’s rankings, it went on to post a 102% gain. Find out how high it goes this time with TradeMaster Daily Stock Alerts .

WCI, the Fed and Spring of 2010

Ian Wyatt — Wed, 13 Aug 2008 17:49:00 GMT

WCI, the Fed and Spring of 2010

Just because your title is “billionaire investor” doesn’t mean you don’t make a mistake from time to time.

Billionaire investor Carl Icahn apparently lost $113 million when his home-building company, WCI Communities declared bankruptcy last Monday. I guess he can afford it. But he should thank what lucky stars he has left that he wasn’t able to increase his 14.5% stake as was reported in mid-July.

I can’t help but take a special delight in Icahn’s mistake this time around. Not that I want to see anyone lose money. But Icahn’s something of a bully when it comes to his investments. I don’t think anyone’s shedding any tears for his loss with WCI.

Besides, it’s pretty well understood that to make money in the stock, someone else has to lose it. And I’m still pretty excited that I was able to turn Icahn’s loss into a gain for some of my readers.

As I may have casually mentioned last week, my stock analysis system, which I affectionately call TRIGR, first targeted WCI Communities as a Top Short way back in the beginning of May. That was the first of many appearances, and the stock was trading for $2.65 a share.

Most recently, on July 29^th, WCI appeared on Top Shorts list at $1.31. Just 4 trading days later, WCI dropped to $0.59 on the bankruptcy news. That’s a gain of +55% to +77%, depending on your entry point, as this troubled housing stock finally threw in the towel.

Not that I think the two events are directly related, but WCI announced bankruptcy the day before The Fed thrilled the markets by leaving interest rates unchanged.

What’s A Fed to Do?

Stocks did their best bull market initiation in the wake of that no-decision on interest rates. The possibility of a hike was clearly on investors’ minds. And they were obviously pleased when Bernanke & Co. decided to stand pat.

Even though a rate hike would have been good for the dollar and inflation, it never seemed to me that a hike was a real possibility. So why the relief rally?

I can’t help but think there’s a fair amount of investors out there who think stock prices have bottomed. The casual connection between the Fed and WCI is of the “how can things get worse?” variety.

After, all we’ve seen 6 banks fail in the sub-prime debacle. Inflation has picked up because oil prices are at (until just recently) ridiculous levels. Housing stocks are decimated and, even worse, our homes which are the average American’s biggest investment, have lost a significant amount of value. Things can’t get much worse, can they?

Careful What You Ask For…

I learned a long time ago not to tempt fate with questions like that. Things can always get worse. And I suspect those value investors who are already scooping up bombed out financial stocks and even dipping a toe back in the homebuilder stock pool are going to find that out.

Now, before I continue, I just want to make it clear that I’m not a perma-bear. I don’t think the U.S. economy is doomed. I’m just not one for irrational exuberance. And investors’ recent eagerness to overlook bad news strikes me as bit irrational.

It’s easy to look at valuations and conclude stocks are cheap. And as we all know, they don’t ring a bell when the market bottoms. Bottoms are usually made while the bad news is still flowing. Investors have to be able to sift through the bad news to find the hidden morsels that point to the next bull market.

However, there’s a bit of bad news that shouldn’t be overlooked. And that’s rising unemployment.

Unemployment Rising

Three months ago, the Philadelphia Fed forecast unemployment to hit 5.4% for the 3^rd quarter, which ends with September. Now, that forecast has been revised upward to 5.7%, with 4^th quarter unemployment to hit 5.9%.

What’s more, as the forecast for unemployment rises, GDP expectations are falling. GDP estimates are down to 1.2% from 1.7%.

I remember the recession of 2001 well. Unemployment started falling in the wake of the DotCom crash as corporate America cut IT budgets. It didn’t pick up for 2 full years. And even then, we were treated to a “jobless recovery” for another year.

Ultimately, that recession was measured at just 8 months. It was a “mild” recession. But stocks were down from spring of 2000 to October of 2003.

Even a cursory comparison should give the silver-lining crowd pause. Unemployment has been rising for 8 months. And stock prices peaked 10 months ago. So even if we follow the course of 2001’s mild recession, unemployment may not stop rising until December of 2009. And stocks may not find their final bottom until spring of 2010!

All you have to do is take a look at Japan’s housing market and economy during the 1990s to find the worst-case scenario. Again, I’m not a perma-bear. And the U.S. economy is far more dynamic than Japan of the 1990s. Only an external shock could keep our economy down for 10 years.

Hit and Run

So what’s an investor to do? In my not-so-humble opinion, uncertain times call for uncertain investing. That doesn’t mean you should invest in things you don’t understand or believe in. It simply means you can’t hold any new positions with strong conviction.

If you caught a little bounce in the housing or finance sector, great. Take you 15%-20% gains and move on. It’s probably not an ideal time for long term buy and hold investing.

The readers who follow my stock picking machine TRIGR, made some money in bio-tech a couple weeks ago. (disclosure: We’re still holding a couple choice bio-techs). We’ve already moved on to some home healthcare stocks that have been moving. Between July 23 and August 4, Almost Family (Nasdaq:AFAM) was a top recommendation 5 times. And 5 times, traders took gains of 21%-36%.

I won’t be at all surprised if we’ve left this sector behind in another week or two to pursue other opportunities. And we may be back to shorting troubled homebuilders like WCI Communities if that’s where TRIGR says the money is. We’ll take what the market gives us.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

Click here to find out more about how you can profit from the next financial or housing sector “deathbed” stock with TradeMaster Daily Stock Alerts.

The Hero's Dilemma: Kill the Dragon or Rescue the Princess?

Ian Wyatt — Tue, 05 Aug 2008 20:47:00 GMT

The Hero's Dilemma: Kill the Dragon or Rescue the Princess?

Our previous experiences with "stagflation," as the double economic whammy of slowing growth and rising inflation is known, occurred in the '70s and early '80s.

Market veterans still recount the Legend of Former Fed Chief Paul Volcker as if it were a cautionary tale for children -

"...and then, Volcker held interest rates aloft (to a now unthinkable 20%) and vanquished the foul worm (inflation rates of 13%)."

Volcker made his heroic choice. He fought the dragon first. Once that threat is no more, living happily ever after with the princess is no problem.

But if we understand the true nature of this Hero's Dilemma, we see that stagflation isn't really a double whammy. In the modern era (the only era that matters), stagflation is caused by one thing: high oil prices.

Sure, one could argue that the condition of stagflation is exacerbated by several factors, like a bombed out housing market, a weak U.S. dollar or a financial crisis. But ultimately, it's rising oil prices that both slows economic growth and causes prices to rise.

Volcker really had no choice at all.

Any attempt to invigorate the economy with lower interest rates would only push oil prices higher. In other words, if you rescue the princess first, then the dragon eats you both.

Memo to Bernanke: The Dragon's Breathing Down Your Neck

So another FOMC meeting has come and gone. And as expected, the Fed did nothing to surprise the financial markets. Most of the time, it's good monetary policy to give the market what it wants.

But we're quickly getting to the point where Fed Chief Ben Bernanke has to make a heroic choice. At least, that's how it seemed a week ago, before oil prices dropped 20%.

It would appear that Bernanke is keeping his sword in its sheath, hoping that falling oil prices will render the necessity of choosing between the princess and the dragon moot.

Stocks rallied strongly today in reaction to Bernanke's non-decision. The average investor can usually be counted on for hope. But ultimately, I don't think many investors are comfortable with a Fed relying on luck to take care of the problem.

The meteoric rise of oil prices could have been a bubble. And we could be seeing that bubble deflating right now. But there's one way Bernanke can be sure: raise interest rates, strengthen the dollar and actively force oil prices lower.

That might put the princess through the ringer for another few quarters, but princesses have a way of coming out of tough situations looking pretty good.

For my money, I'd rather see Bernanke deal the dragon a mortal blow.

Time to Live Happily Ever After?

I'd like to think that the oil "bubble" is popping. I'd like to think that the effects from that main driver of inflation will soon be reversed. But I just don't see the current economic problems having a fairy tale ending without a fight.

That's probably why interest rates rose on T-bills after the Fed's statement. Investors might like the news. But the bond market seems to think that higher rates are coming. And that's probably not good news for stocks.

So what's an investor to do? Well, my stock picking machine (which, by the way, is called TRIGR) is still turning up some great stocks to short. In fact, on July 29, one of its Top Shorts was WCI Communities. Yes, that WCI Communities, the one that filed for bankruptcy on August 4.

Actually, TRIGR's been pulling up WCI Communities regularly since May 8. Of course, it also targeted IndyMac on May 12, 2008, and we all know how that turned out.

We also closed two other short positions yesterday - Western Refining (NYSE:WNR) for 17% since July 31 and Accuride (NYSE:ACW) for 16% since July 30.

Today, TRIGR turned up Hansen Medical (Nasdaq:HNSN) as a Top Short. In light of the decent gains TRIGRs pulled up with its Top Long Biotech stocks, the sight of a medical devices company on the Top Short was worth another look.

I'm not sure how Hansen Medical ever commanded a $1 billion market cap on $16 million in revenues. And I suspect it'll have difficulty holding on to its current $300 million market cap without a massive jump in revenue. Judging by the ever-widening loss estimates from the covering analysts, such a jump in revenue isn't forthcoming.

You might want to give this stock a look as a potential short opportunity while Bernanke tries to figure out what to do about that pesky dragon.

Ian Wyatt

Chief Investment Strategist

Growth Report

TRIGR is an electronic stock-picking machine that selects long and short opportunities for the TradeMaster Daily Stock Alerts service. For more information on how you can have your profits powered by TRIGR, click here.