Growth Report : IndyMac

Panic in the Air

Ian Wyatt — Wed, 17 Sep 2008 13:43:00 GMT

Dear Investor,

Monday’s 500 point drop on the Dow was the closest thing we’ve seen to an outright panic in years. Stock prices have been extremely volatile, and that’s probably going to continue.

Now, before I go on, I’d like to take a quick minute to thank my loyal readers for sticking with me. In times like these, when so many of Wall Street’s leaders have proved to be so reckless, it’s not easy to trust anyone when it comes to your money and investments. I’m flattered by your support.

And I’ll be straight with you – I can’t tell you how much farther the markets will fall (though I have some ideas I’ll share in a moment). I can, however, continue to do the same type of analysis that’s lead to 12 out of 16 winners for my Growth Report newsletter this year.

I can also tell you that the problems we’re facing now will be resolved. We may get a stronger SEC, or more laws to protect investors. But we won’t learn our lesson. We’re dealing with the human element here. We’re only 10 years removed from the Internet bubble and Henry Blodgett’s $400 Amazon target…

Back in the day, investment banks put out analyst reports with pie in the sky stock price targets to lure investment banking clients. In the aftermath of the bubble, a few political bulldogs made quantum-leap career moves by pushing regulatory reform.

Investment banks were forced to separate their research divisions from their investment divisions. And in some cases, that meant separating research from any real income, too.

So now, good research on small cap companies is hard to come by. And Elliott Spitzer’s naked ambition got the best of him just up the street from my D.C. offices.

Same Old, Same Old

It’s almost a perfect replay. Just insert “condo” for “Amazon” and you can pretty much leave everything else in place. Except the stakes are far higher this time around.

Because, this time, it’s mortgages and not just stock.

It’s hard to blame investors for being worried – bad bets on mortgages have put our entire financial system on thin ice.

Well, I don’t mind saying I’m worried, too.

And I’m also mad as hell about it. As far as I’m concerned, Wall Street’s committed every one of the Seven Deadly Sins. And it’s you and I that will pay the price as the government bails them out.

However, fear and anger won’t help any of us be better investors. In fact, if you let fear or anger inform your investment decisions, you’re all but guaranteed to wind up poorer.

Let the Times Make the Man (or Woman)

I never recommend taunting the gods with questions like “How can it get any worse?” I did that once. It didn’t turn out well. Still, with Bear Stearns, Lehman, Countrywide, Fannie Mae, Freddie Mac, and IndyMac gone, Washington Mutual and Wachovia soon to follow, and AIG not looking good either, it’s hard not to wonder how it can get worse.

It’s fine to wonder. Just don’t say it out loud. That’s what really gets the gods peeved.

After Freddie Mac and Fannie Mae got nationalized, a lot of stock gurus heard the proverbial “bell at the bottom” and stated it was time to buy financials.

Not me. And not because I know anything more about the situation than they do. Only because I’ve learned that it can always get worse. (And by the way, I think the gods like that kind of talk.)

I’ve repeatedly stated that unemployment is now the key to finding a market bottom. Financial companies may be done writing off bad debt (though I doubt it). But we’re not getting a sustainable rally until the employment situation reverses. Or at least stabilizes.

Times like these don’t call for desperate measures. They call for rational actions. And I’ve got a pretty rational investment for you, which I’ll share in a minute. But first, I need to make a brief comment on the Fed’s decision to hold interest rates steady.

The Right and Wrong Answer

The FOMC responded to the Bear Stearns crash with a rate cut. That was the wrong answer. Cheaper money didn’t really help the banks. They just ramped oil prices higher and the dollar lower.

This time, the Fed got it right, but apparently for the wrong reasons. The FOMC voted to hold rates where they are, with the understanding that the Fed and Treasury will make special liquidity provisions where necessary.

Just when you think the Fed is getting a handle on things, it comes out and says it’s concerned about inflation. That statement got big “huh?” from PIMCO’s Bill Gross. Gross says we’re clearly in a deflationary environment. And it’s hard to argue.

If banks won’t or can’t lend, then there’s less money in circulation. That’s deflation.

Now, the investment angle I wanted to discuss plays directly on this situation…

Low Price, High Yield

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.

If you’d like to get my Top 5 MLPs, just click here. They’re free, you just need a valid email to access the report.

Best Regards

Ian Wyatt

Chief Investment Strategist

Growth Report

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.