Growth Report : US dollar

After the Bailout

Ian Wyatt — Tue, 30 Sep 2008 21:15:00 GMT

After the Bailout

I can’t help but wonder if Monday’s bailout vote would have been different if the Dow Industrials were down 770+ points before they started the roll call.

Members of Congress that voted against the Paulson Asset Management plan seemed to be responding to political concerns. Apparently Capitol Hill phone lines were clogged with angry voters. And voting with President Bush isn’t the best career move these days.

Most in Congress agree that doing nothing will certainly lead to higher unemployment and foreclosure rates (and more angry voters). They wanted the bill to pass, but didn’t want to be on record as having voted for it.

I suppose that’s understandable. Whether you want to blame the Democrats and Nancy Pelosi for undermining the vote, the fact remains that the American public wasn’t sold on the bill. First of all, the word “bailout” is poor marketing. It gives the impression that Paulson and Bernanke simply want to help their banker buddies. And frankly, the terms of the bill didn’t do a lot to dispel that perception.

Bernanke argued against setting salary caps on CEOs who sold impaired mortgage-related assets to the government. And the plan to buy these impaired assets at above-market prices smells of cronyism.

Marking to Market: Fair Value Accounting

Over the last couple of days, the issue of “marking-to-market” is getting a lot of attention. Financial institutions are required to mark their assets to the market. They have to value their assets according to the price they’d fetch on the open market. Since nobody in their right mind would buy anything that even remotely looks like a mortgage backed security, those assets have to be carried on the books as a huge loss.

Makes sense. I can’t claim my house is still worth what it was 3 years ago. And I sure can’t adjust my brokerage statement to reflect what I think a stock should be worth. To let banks value their assets at anything other than what they can sell them for is utterly ridiculous.

Don’t get me wrong. I see the point. If banks can value their assets at a higher level, they suddenly have enough capitalization to raise their creditworthiness. Then they have the ability to sit on these mortgage-backed assets until the market (hopefully) improves.

The only problem with this is it’s not reality. It’s wishful thinking. And any move to suspend mark-to-market accounting is a sin of the exact nature that got us into this mess. Namely, that there’s no downside risk.

Nothing but Downside

So Congress goes back to vote on some new version of the bailout plan Thursday. And given Monday’s record-setting decline for the Dow, I suspect Congress and their constituents are a bit more amenable to passing the bailout bill. I just hope Congress avoids the real bailout issues, like suspending mark-to-market accounting, and instead focuses on truly helpful measures like increasing FDIC insurance limits and expanding unemployment benefits.

Traders certainly seemed to be hopeful. On Tuesday The Dow took back more than half of its Monday losses. But it’s still going to be interesting to see what happens in the wake of a passed bailout bill.

It seems a pretty good bet that stocks will rally further, at least in the short term. But it’s hard for me to get fundamentally bullish about massive government intervention. The dollar is enjoying a little return to faith rally. But ultimately, $700 billion coupled with the massive amounts of cash being made available by the Fed seem more than a little inflationary.

And while we might stave off disaster, there are still fundamental problems with the US economy that won’t be fixed by helping banks with their mortgage related credit problems.

Where’s the Money Going

Monday was a very interesting day, trading wise. While the total point losses were huge, some sectors did very well. Biotech and alternative energy rallied strongly. Both sectors are about as far from mortgages as you can get. But they do depend on investment, which is a little incongruent.

In any event, Pacific Ethanol (Nasdaq:PEIX) shares shot up from $1.30 to $2.08 in the final 30 minutes of trading. Of course, it gave most of it back on Tuesday.

Beacon Power (Nasdaq:BCON) and Quantum Fuel Systems (Nasdaq:QTWW) made a similar late day jumps only to fall back. Only Ocean Power Technologies (Nasdaq:OPTT) managed to hold its gains.

In the biotechs, Altus Pharmaceutical (Nasdaq:ALTU) and Helicos Biosciences (Nasdaq:HLCS) gave back their Monday afternoon gains.

Gold prices have been extremely volatile. But not much has changed with the miners, which means they aren’t doing well. Oil prices seem to be highly correlated to the bailout plan. Traders appear to believe the bailout will mean stronger economic activity and hence more demand for oil.

Now I hate to keep saying the same thing over and over, but I’m still a big fan of the MLPs. I first mentioned these stocks in my column on September 17. One of the stocks in the free report I offered, Eagle Rock Energy (Nasdaq:EROC) opened at $10.41 that day. 2 days later it closed at $13.75.

Today, Eagle Rock closed at $10.53. Now, I’m not going to predict another 32% run in two days. But I won’t be surprised to see it move higher when the bailout bill passes.

Also, my special report is still available here.

Best regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

Big Oil and Big Brother Google

Ian Wyatt — Wed, 03 Sep 2008 09:44:00 GMT

Big Oil and Big Brother Google

I hope everyone enjoyed their long weekend. I know I did. But I’ll also freely admit – I always look forward to getting back in to the office after a holiday.

The financial markets are the most dynamic of beasts. They give you something new and different to chew on every day. It’s a constantly shifting landscape. On a daily basis, you have to be ready to shift gears quick in response to trader’s fickle sentiment.

For instance, on August 19^th we noticed a pronounced shift in sentiment toward one solar stock, Canadian Solar (Nasdaq:CSIQ). That stock was up 17% in the days following. And you’d think the entire solar sector had received an upgrade.

By August 22^nd, a handful of double-digit gains could have been made, based off that one event with Canadian Solar. Canadian Solar is still holding 10% or so of its gains, while other solar stocks have given all their recent gains back.

Think Long-term, Act Short-Term

Of course, over weeks and months, the recent rally for solar stocks will be just a bump on the charts as longer term business and economic trends play out. I’ve been bearish on traditional “Big Oil” stocks for months. I just can’t see how – with virtually no new discoveries and rising costs – a company like Exxon-Mobil (NYSE:XOM) can see its stock price rise. Record-setting profits or no.

And Exxon recently broke below $80 a share for the first time in nearly 2 years. That was well before Hurricane Gustav was even a blip in the radar.

We’ve been having good results with small, dynamic exploration and services companies all year.

Today, oil prices may be responding to Gustav-relief. But there are much bigger issues for oil prices. Commodities are dropping across the board as the OECD has slashed growth estimates for Japan and Europe to 1.2% and 1.3% respectively. England’s 1.2% estimates appears to be a best-case number, as the OECD acknowledges that the UK economy is looking recessionary.

Surprisingly, the US is doing better than expected. Growth estimates here rose to 1.8% from 1.2%. With a strengthening dollar and rising exports, perhaps the rally that began on July 16 hasn’t been complete folly.

This Time, I’m Cheering for Microsoft

One particularly important-sounding headline that greeted me this morning was the latest in the Google vs. Microsoft heavyweight battle. In case you missed it, Google is launching an Internet browser, called Chrome, to compete Microsoft’s 8^th version of Internet Explorer.

Internet Explorer is the dominant browser with 75% market share. With no vested interest, I’ll usually pull for the underdog. It’s always nice to see the little guy win. Of course you can’t really call Google “little” anymore. This is a battle of titans with Google weighing in with a $146 billion market cap to Microsoft’s $248 billion cap.

We all saw Microsoft crush Netscape. And WordPerfect. And any other company it could. But I’m pulling for Microsoft and Explorer 8 to thoroughly pound Google’s Chrome into the cyber-canvas. And I’ll tell you why.

Google is a remarkable company. It pretty much created the paid search industry. And it’s now a major determinant for all Internet traffic. In other words, if you’re not picked up by Google’s search functions, you ain’t sellin’ squat.

Trust me, I’m in the publishing business and we do much of our work on the Internet. And I consider my relationship with Google downright Faustian. On the one hand, with its paid search results, Google has made Internet advertising simple and effective, albeit a little expensive.

But on the other hand, Google is very specific about the free results that it will display when you search for specific information. In fact, if you don’t construct your website with a Google-approved design, you’ll never show up in their search results, no matter how relevant your solution to a query might be.

Free the Internet!

Google’s strict and mysterious search criteria has spawned legions of companies that do nothing other than try to figure out what Google’s search algorithms are looking for. And of course, those algorithms change every few months.

In a nutshell, Google is attempting to take way to much control over Internet commerce. And it seems to me, if it gets a massive share of the Internet browser market, Internet commerce will become Google commerce.

So how’s Microsoft going to help? Mainly, by keeping what websites we visit at least semi-private. Here are a couple quotes I’ve come across today…

“[the new Explorer’s functions include]…privacy changes that could prevent it [Google] from collecting information related to the effectiveness of its ads, quick-linking to Microsoft mapping and other offerings and a more robust search bar that is also more Microsoft-centric.” -- D: All Things Digital

“Microsoft…released a new version of Internet Explorer last week for testing. The software lets users control whether it saves the sites they've visited.” Bloomberg

We all know that many company websites put “cookies” on your computer when you visit. The cookie can then track your steps and report its findings back to the company for marketing purposes.

Maybe I’m being too Orwellian here, but the thought of Google taking sole control of Internet advertising scares me a bit. If I have to align myself with evil Microsoft to maintain Internet commerce freedom, then so be it. I won’t be using Google’s Chrome browser any time soon.

Friday’s Investors Insight Discussion

As you know if you read last week’s entry, the moderators at the fine website Investor’s Insight (www.investorsinsight.com) asked if I’d be willing to host a live forum discussion event on their website. I agreed and it’s happening this Friday, September 5, from 11:30 am to 12:30 pm, ET.

It’s totally free. All you have to do is sign up with a valid email address at the website. Then you can listen in to the discussion and ask questions if you like. I expect we’ll be talking mostly about my stock-picking machine TRIGR and what investment opportunities it’s been turning up lately. But this is an open forum discussion so you’ll be free to bring up any topics for discussion.

Again, I’ll be hosting a live Internet discussion at www.investorsinsight.com on Friday, September 5 between 11:30 am and 12:30 pm, ET. I hope you can make it, it should be fun, informative and profitable!

Best regards,

Ian Wyatt

Publisher

Growth Report

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

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