Growth Report : unemployment

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.

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

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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