Tuesday, November 25, 2008

The Perfect Upside Storm

For the last three years, I have been calling for the collapse of our highly leveraged economic system. With this in mind, I chose to position my client’s portfolios for this Armageddon. I utilized high degrees of cash, assets non-correlated to the stock market that pay predictable cash-flows, and also vehicles with income and principle guarantees.

My strategy was a contradiction to the normally accepted practice of positioning money across all asset classes, and of course, positioning long. I defied accepted practices of Modern Portfolio Theory and focused on the following question: Will the path of least resistance be up, or down, given the economic maelstrom I saw coming? I deduced down. Next: What sectors would show the greatest misfortune by the unraveling of leveraged mortgages, the cornerstone for all our problems. I deduced homebuilders first, and the financials second. Therefore, I focused the brunt of my stock market positions by shorting (betting against) the homebuilders and financials. It was the second best call that I’ve ever made in my thirty-six year career. The best call will be left for another time. That opportunity will present itself shortly. But I digress.

Currently the question to ask is: What is next for the stock market and ultimately the economy? I continue to believe that there is more trouble ahead for both. However, keep in mind, the stock market rarely goes straight up or straight down. Therein lies the opportunity. I’ve been asked many times by people who have made money during this difficult time period (my clients), and by those who have lost as much as 50% and more: Can I make more, and can I make it all back? I believe strongly the answer is yes. Both are possible.

So, what is the strategy? It is not to repeat the policies of the past by hoping things will turn around. Hope is a sucker’s play of which I happily like to bet against. Let’s first determine the players in this drama. The players are: Money managers, traders, President-elect Obama, and the employed, or soon to be unemployed.

Money managers have lost vast sums of money for their clients this year (this manager excluded.) They need to salvage some kind of positive performance for the remainder of the year in order to help make year-end account statements a little more palatable. Therefore, they will look for any sector or sectors that show the best upside potential. Then, like good Wall Street lemmings that they are, they will all follow into the trade. We saw it the other day with Hewlett-Packard ($34.64 as of 11-21-08) up 12% in one day. However, I don’t believe the technology sector offers much upside. Too much uncertainty about IT spending, and the lack of consumer spending on electronic gadgets.

What about financials, the most beaten down sector? I don’t think so. Too much uncertainty of what is on their books. In addition, there is too much potential for real government interference. (Eg. Citigroup $3.77 as of 11-21-08.) Definitely not retailers due to the death of the consumers. Healthcare? A potential.


Here’s where the next player comes in: The traders. The daily guys and gals who sit in front of the screens playing moving averages, candlesticks, stochastic, and many other byzantine terms. But make no mistake, they have a dramatic impact on the daily stock market movements.

What I asked myself is: What is the second most beaten down sector that not only could run dramatically to the 50-day moving average, and produce a double, a triple, or even a quadruple and still be technically broken? In other words, still be a downtrend, yet still offer some great upside. Answer: Commodities.

Bring in the next player: President-elect Obama, who continues to say, much like China has said, that the way out of our current malaise is the rebuilding of infrastructure. Obama has been tapped as the next FDR by the media. Textbooks show that FDR instituted the greatest public works program in history. Unfortunately, it didn’t work. We never escaped the throes of the 1930’s until planes arrived at Pearl Harbor.

The next player: Employees, soon to be unemployed. As the unemployment rate rises, companies will be allowed to fail, and people will look for new jobs. Where will those new jobs be created? Ask yourself: What does it take to build a bridge, a road, an overpass? It takes steel, cement, aluminum, and much more. Jobs, workers, paychecks, salvation. Wrong! However, the perception, I believe, will give impetus to a major move in those stocks that fit this bill.

In the past, I have shared with you my strategy for the downside. Now, I’ll share my strategy for the upside. Companies with good dividends that have fallen very far and very fast. Companies that fit for the money managers, and companies that fit for the traders. Companies that fit for the promises of President-elect Obama, and companies that fit for the unemployed. Companies that fit for the re-building of America.

There is a perfect storm building for basic materials to the upside. Remember, it’s only a trade. But I think it could be a very good one.

Till next time,

Bill

Long – UYM, ACM, TEX, and looking for more.

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A disclaimer: none of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Monday, November 17, 2008

The Truth Hurts

Over the weekend, I listened to commentary by the members of the G20. I also listened to President-elect Obama, and many of the economists who claim to have the solutions to all of our economic problems. The sad part about this whole thing is that none of them, and I mean none of them, saw this thing coming, and yet, now they all claim they know how to get us out of it. Well, quite frankly, they’re missing the forest for the trees. When you create an environment where four cars, three homes, multiple electronic devices, extravagant vacations, and dining out almost every night of the week is the norm, you have to ask yourself the question: What has made all this possible? Answer: low interest rates, and ease of credit has made the lifestyle of excess standard fare.

What everyone is missing is that in order to support these extravagant lifestyles, businesses have been created, and the world has gotten into the mix. For example, China builds ten factories, and puts thousands of employees to work, strictly to make products that are imported to stores in the United States, and eventually, to you, the consumer. Those businesses created jobs. Those jobs created income, the income created credit, the credit created the new lifestyle, and cycle goes on, and on, and on. The problem occurs when the consumer stops buying. Therefore, those businesses are no longer needed.

They all have it wrong: The G20, Obama, Bush, Paulson, Bernanke, and the pundits on television. They all figure they want to get it going again. However, they can’t. Why? It’s over, and times have changed. The solution? Very simple: Don’t live beyond your means. That’s the reality of the economy that we are living in today. Wake up and face it!

Till next time,

Bill

P.S. - Will the stock market trade straight down? Of course not. There will be fits and starts along the way, which will create trading opportunities. Last Thursday was a classic example. The market had a lower low than the day before, but closed higher than the day before on very heavy volume. That’s called a classic reversal pattern, and that’s why we currently own long positions.

Monday, November 3, 2008

CLEAR!!!!

Halloween just behind, the election just ahead, and in the middle, the stock market, which is showing signs of life. I’m not sure of the three, which is, or was, the most frightening. Do you remember on Ben Casey, ER, or even Grey’s Anatomy, when medics would bring in an obviously dead heart attack victim, but the aggressive young doctor would proclaim “I can save him, give me the paddles, and stand back.” Then the doctor would place the paddles on the body, and hit it with incredibly high volts of electricity. The body would contort in the air, and fall back…dead. Again and again, the doctor would perform this theater. “Stand back, electric shock, contortion, dead.” Eventually, everyone would walk away proclaiming they had done their best, but the body was still dead.

Right now, the economy is that body, and doctors Bernanke and Paulson have been hitting the body with charge after charge of electricity (money.) Yet the body (economy), is still dead. No matter who wins the election, no amount of electricity (tax increases, sharing the wealth, isolationism, defense cut-backs, buying mortgages, or even elevating Joe the Plumber), will save an economy that continues its meltdown.

However, while young Dr. Kildare is working on the body, the optimism that it will generate will allow us to take advantage of many opportunities. But in the long run, the patient is dead, and the flatline cannot be changed.

Till next time,

Bill

P.S. – Long - DDM, DIG, FCX, FNFG, GE, GLD, NYB, RXL, UYM. Shorts - none.

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A disclaimer: none of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.