Principles of the Stock Market » Economic Slowdown Trade

Economic Slowdown Trade  

Posted Apr 04 2008, 09:12 AM
by Richard Schwartz

Capital Trust (CT).  Very interesting REIT I stumbled upon.  Below is the story:   I track a good number of economists and their observations.  The bearish ones like independent Gary Shilling and Morgan Stanley’s Stephen Roach.  And the bullish ones, like, last I heard, Ed Hyman, chairman of well-respected International Strategy and Investment Group and the #1 rated economist (by Institutional Investor) on Wall Street for some 28 years.  I haven’t heard anything out of Mr. Hyman since last August 29th when he predicted the Fed would start lowering interest rates, inflation would recede, we would avoid recession, we would have a “better economy next year” and that 2008 would also resemble the “soft landing” engineered in 1995.  And thus the stock market should go up, starting back when he spoke.  Of course, this was just when/as the subprime mortgage mess was emerging and heretofore caused the asset-backed securitized mania to implode and spread and freeze up the whole global credit system. I did notice Mr. Hyman filed that he bought shares of Capital Trust (CT), a mortgage REIT, back on January 3rd, 2008.  Checking for any comments out of him yesterday, I see Mr. Hyman filed once again, and bought some more CT stock.  As did chairman of CT, Sam Zell, who’s known as one of the best judges of real estate values around.  Remember Mr. Zell sold his Equity Office Properties REIT company right out at the top of the REIT market in February 2007.  Perfect timing.  So when Mr. Zell talks/moves I “listen.” Schwartz View:  Anyway, I know many of you are frantically (or not so frantically) searching for income situations to ride out this bear market since the stock market hasn’t produced much growth and thus profits for many months now.  Let me thus suggest if both Sam Zell and Ed Hyman are both buying  CT, maybe exercising some options or whatever, we might piggyback on them and take a modest position.  For income purposes, CT is yielding over 11% and because the stock price is down some -30% this year and some -50% off its high of February 2007.  While still in a downtrend, the big dividend gives us a nice buffer, its better to buy something/anything at half price (“a stock well bought is half sold”), the Fed is bailing out interest sensitive investors with lower and lower interest rates and we do have Sam Zell doing the managing.  So if anyone can maneuver through real estate’s rocky shoals, I’d bet on Mr. Zell.  So I suggest taking a small position and putting it in a three stock slowdown package along with Wal-Mart & Leap Wireless/MetroPCS Communications below.  Disclaimer!  I hold none of the three stocks recommended below but I like to buy my recommendations AFTER I recommend them to you.  STOCK VIEW:  SUGGESTED THREE STOCK ECONOMIC SLOWDOWN PACKAGE                                                                 Price       Mkt Cap                 Buy RationaleWMT      Wal-Mart                               54.93       217,218m                Place to save when stressedCT           Capital Trust                          27.95       617m                       High income/ top mgr.LEAP      Leap Wireless                         52.58       3612m                     Providing value to users PCS         MetroPCS Communications   19.15       6666m                     Cell phones now a necessity Schwartz View:  I explained my rationale for Capital Trust up above.  Expanding a bit, it’s been paying $0.80 a quarter which equals $3.20 a year and on the current stock price of $27.95 that’s a yield of 11.45%.  Plus it generally pays a year-end special cash dividend which ups the yield even more.  So CT is your income provider.  Wal-Mart has recently broken out and above the low 50’s which has held it back for some three years so by the charts it can make up some ground now after being pent up.  Wal-Mart seems to be positioned perfectly for an economic slowdown/recession in that it’s whole mantra/business model is to provide the cheapest prices for anything Americans buy.  Including food.  So it’s part of our consumer staples play.  Finally Leap Wireless (symbol LEAP) and MetroPCS (symbol PCS) adds some excitement and growth to the portfolio.  I read an article by Amy Thompson of Bloomberg yesterday pointing out and selling me on the positives and timeliness of the two cell phone providers.  The bullish bullet points are: 
  • Both provide cheap, no-contract mobile phone service.
  • Customers who can’t get credit approval at AT&T or Verizon, are turning to LEAP and PCS.
  • Leap and PCS are pay-as-you-go, low cost providers.
  • Leap and PCS can cost as much as 70% less than AT&T and Verizon.
  • Analysts are projecting big increases in customers for both Leap and PCS.
  • One analyst, Michael Nelson of Stanford Group says:  “The longer the economic downturn, the more the benefit is” from switching to Leap and PCS.
  • Both stocks have fallen over 30% but neither has made any major new lows since last November giving us some sense that a base is in.  Both have started up with this latest rally.
  • The rationale is that as more house foreclosures occur and jobs are lost, more cell phone users, almost a necessity or staple in today’s world, will move to where the monthly nut is smaller.
  • New users are occurring in depressed areas of the country, like in Detroit, San Diego and Florida.
 Schwartz View:  While this trend toward shifting to low cost cell phone providers may prove temporary, it’s underway right now, the stocks are rallying and thus it’s now time to strike.  We don’t need to hold Leap and/or PCS for too darn long after all. Bottom line, I’d suggest a full position in Capital Trust and Wal-Mart and a ½ position in both Leap and MetroPCS forming a third full position.  This balance gives us income, staples and growth.

 



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