Search results matching tags 'Bernanke' and 'Growth Report'

Gurus Ring the Bell

IanWyatt — 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

IanWyatt — 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