by C.S. Jefferson
The Honeymoon Is Over: Gauging The Market In A Brave New World
Congratulations, Barack Obama on your Presidential victory. Thank you for restoring our trust and belief that votes do matter. Democracy is alive and well.
Having said that, put the party hats away and the champagne on ice, because America is in for a sober awakening. It is clear that the incoming Obama administration must not wait until the traditional inaugural swearing into office to put a mandate forward. Our country’s economy cannot afford the luxury of a post-election honeymoon period and extended jubilance or celebratory cheer.
I would thoroughly expect within the next several trading sessions and, perhaps, as early as tomorrow’s public address, the President-elect will not only display to the markets his newly assembled economic team but, hopefully, a formal announcement of deferring all capital gains tax raises due to hazardous and systemic risk to macro-economic conditions.
A suspension of any campaign promises to raise capital gains is absolutely necessary in a time of great economic crisis. If you want to shear a sheep, you better feed it and allow it to grow first. Wall Street is starving for stability and news of real encouragement to create an underlying bid in the market. Any potential tax raising is detrimental to economic recovery.
While the future of main street and Wall Street are inexorably tied like a perpetual loop, punitive decision making such as taxes will only curtail private capital injections and increase the liability of government bailouts to maintain liquidity in the markets and underlying economies of the world.
We have had two successive major sell offs in the market since the election has finally concluded, fast tracking a retest on October lows. While the cynicism in me would think, strategically, it would make sense for a Democratic administration to sit on the sidelines and let the markets wash out completely before assuming power, I would hate to think that such political calculations would place party interest before country.
There is not a singular moment to waste, time is of the essence and the risk of allowing assets to deteriorate further closing out the year could risk irreparable damage and, unnecessarily, forestall any possible hope of recovery for the economy in 2009.
Good things have been put in place by Fed Reserve Chairman, Ben Bernanke and Treasury Secretary, Hank Paulson that have not yet fully met market expectations. But they need a chance and considerable time allotment to work effectively.
Today it was reported that the Fed has assumed over 2 Trillion dollars on it’s balance sheets and continues to be the lead purchaser of commercial paper that is absolutely necessary for corporations to fund payrolls and operations with short-term debt instruments. This is a record that will probably be broken again which makes the heavily politicized Treasury TARP plan look like a pittance of $750 billion by comparison.
There is no backing out now, it’s too late for all that nonsense because the only option is muddling forward. So if the spigot is open then let the money flow, after all, it’s only paper anyway, right? Deficits only matter if the confidence and stability of our own economy is gone and no one is willing to buy our Treasuries and debt. And the only way to effectively pare down a burgeoning deficit is to have a thriving economy with sustained job growth and rising asset valuations. Reinflation of the economy is the only answer, once things are better then you can reduce spending and talk about deficits.
All this enormous liquidity being pumped into the global financial system along with coordinated rate cuts predicates its success on if, and only if, there is a seamless transition between the outgoing and incoming administration. If the markets continue to interpret mixed messages, everything that has been going well to induce a recovery will simply be all for naught.
One thing that did disturb me in, what was quite a brilliant victory speech, was the mention that issues we face in our economy and nation may take more than one term in office. I’m sorry, but the American people no longer have the patience for inaction by policy makers to drag out the change we voted for.
While mainstream media will characterize the Democratic victory as historical in the context of superficial barriers being broken, the truth is that it was more of a referendum on the Republican incumbent party and wide scale frustration by the American public.
More than anything, this election proved and allowed American citizens to trust that their vote really does count. And I tend to believe that people will be more motivated and inspired to vote their conscience in future elections.
No matter who is in office, people are starting to believe they have the power to not only put candidates in office, but the power to remove them from office if they fail to deliver on promise. If there is no stability in the underlying economy within months of inauguration, not just the stock markets, people will not only be disappointed, but even angrier watching retirement savings, 401k’s, pension funds and the most precious asset for most Americans, the home, deteriorate further.
It is only a couple of years until the mid-term election, so the consequence and repercussions of not creating real economic stimulus will be substantial. All of this liquidity that is being pumped into the system will begin to flow on the back end of things and it may, ironically, benefit a Democratic administration and Congress by early 2009. This is if, and only if, they don’t do things that undo or actually stifle investment and economic growth.
TRADING THE OBAMA ELECTION
A substantially bad job report is expected tomorrow. If such impending news is countermanded by a welcome announcement from a new Obama administration on suspending any potential raises of the capital gains tax, there is a very probable rally due to occur that may actually be sustainable.
In addition to such, it is also equally important to display a competent advisory panel that inspires trust and confidence in the markets. Showcasing all your heavy hitters means nothing unless they can hit the ball out of the park, and you can only get that home run if you step up to the batter’s box and swing.
While I am hopeful of such an announcement to allay and calm fears of nervous investment houses, we still have skittish and manic-depressive behavior by fund managers trying to game the market. Volatility has turned strategy from long-term investment into day trading instincts that are reactive as opposed to proactive.
I would reiterate buys I’ve mentioned in previous articles for the long-term on commodities with high dividend yields such as BHP Billiton (BHP), Freeport McMoran (FCX) and Vale Dolce Rio (RIO). It may sound contraindicative to recommend a global growth play amid this worldwide recession but, as I’ve mentioned before, you are being paid to wait until they ignite a staggering economy.
Despite the commodity collapse and fall in petroleum prices, Obama’s win will be good for alternative energy. No question, the time for true energy independence has finally found the political will to back it up into policy. You have to have solar exposure in your portfolio.
Solar was a heavily traded sector and ridiculously overbought during the crude manipulation of several months past and, certainly, fund redemptions have absolutely contributed to selling pressure in this sector, knocking valuations down to more reasonable levels.
Despite some early anticipation of this trade and bounce off recent bottoms, select solar companies still remain below tradable expectations. It’s not too late but there is no reason to rush out and chase, only buy based on company specific selection because there are too many that seem less competitive going forward.
Energy Conversion Devices (ENER) is probably one of the best plays out there. This is no start up company that lacks a credible track record like some other fly by night solar companies. Headquartered in Michigan, this diverse company structure not only leads with some of the premier innovation in thin film solar, but it’s ovonic battery division is well positioned for integration with the very next generation of hybrid, fuel cell and emission free cars.
Suntech Power (STP) is probably one of the better solar companies in China along with LDK solar (LDK). First Solar (FSLR) is heavily traded but the beta in this stock makes it too risky for the average investor and, in my opinion, makes it extremely difficult to actually gauge a safe entry and exit point. I would prefer to recommend ENER and STP over this choice. Additionally, the solar ETF (TAN) is also one among many solar ETF’s to hit the market as a broad based play.
Natural gas is a domestic winner and the T. Boone Pickens plan is a viable conversation starter to get politicians committed to energy independence as a matter of urgent political will. Clean Energy (CLNE) is, interestingly enough, a bargain with Pelosi, the Speaker of the House having personal investments that make it likely she has a committed bias toward this company in particular.
Chesapeake Energy (CHK) is cheap enough to buy, either with development of liquified natural gas as a viable transportation energy source, or as part of a buyout and consolidation in this industry. And don’t forget wind turbine power makes even General Electric (GE) look compelling as a conglomerate, especially if you consider it pays a hefty dividend yield.
Payment processors are the only stocks of the financial sector I would invest in right now. The exchanges such as Chicago Mercantile Exchange (CME), New York Stock Exchange (NYX), Nasdaq (NDAQ), and, perhaps, Intercontinental Exchange (ICE). Also, the two credit card companies of Mastercard (MA) and Visa (V).
All of these aforementioned are, to me, worthwhile holds as long-term investments, despite the prospect of a sustained and enduring recession or not. For those that are more interested in short-term trades and look to fade the market, it may be more prudent to trade ETF’s on the indices instead. The S&P 500, DJIA and Nasdaq can be bought long or short with options on shares of the ETF’s if you want to create leverage with defined risk exposure, limited to the premium paid for the derivatives.
SPY, SSO, QLD, are examples to play the upside. SDS, QID, DXD are ways to play the downside. Keep in mind, and I hate to confuse anyone, if you play the options you can take either direction in the market on any long or short structured ETF position, depending if you are using puts or calls and, whether or not, you are buying long or writing short.
Personally, and I recommend options only for experienced investors with higher risk tolerance, utilizing a “strangle” of both out-of-the-money long calls and long puts on index ETF options is not a bad way to maximize the effect of volatility.
If you feel inclined to actually gamble, look at Las Vegas Sands (LVS). I bought some speculative positions when it was recently trading in the 4 dollar range. It bounced all the way back to 15 before coming down to today’s levels. If you look at the put options, of which I own against my shares, they are trading with the idea of LVS going into bankruptcy. It could happen, we shall see, but I think it’s an interesting speculative play.
And by speculative, I mean no more than 1-5% of your entire portfolio. This is a trade, not an investment. Please, do not over extend yourself on a risky position like this. I am very reluctant to recommend plays like this because people have to know this is playing with fire. If you have less than $100,000 in your personal portfolio, buying 100 shares under $1,000 won’t make or break you. Expect and fully anticipate it can go to zero, but snatching a quick 100-200% return, or even a 10xbagger down the road is not out of the realm of possibility.
But if the temptation of high returns undercuts risk discipline, then you’re asking for it if you exceed a position of more than $1,000, or more than 1-5% of a total portfolio allocation.
The success or failure of LVS seems to hinge on capital injections, but I tend to believe someone is watching this closely for an acquisition if they are unable to meet and fulfill credit requirements. Ironically, as a person that doesn’t like to gamble, I am making a bet on a casino. Since you must treat it as a bet, it can be no more than the total amount you can afford to lose.
DISCLOSURE: Author holds long positions on BHP, FCX, RIO, STP, ENER, NYX, NDAQ, MA, V and LVS.
October was the scariest Halloween ever in the markets! Let’s hope Obama can pool the right people and run this economy away from the edge of the cliffz!
excellent writing! Yeah, I know lots of republicans that personally voted for Obama just out of disgust of the current economic condition.
But Dems should not take that as a sign that they have all the time to waste and not do a damn thing. If they don’t act and stimulate jobs and the economy it will be a dramatic reversal in two years midterm eleciton
Obama doesn’t get my vote in 2012 if the economy still sucks.
Yep honeymoon is over. Obama needs to show us the money. I voted for him and a democratic ticket straight down. But my vote is not to be taken for granted next election.
If they don’t perform and things aren’t seriously better then my vote will swing the pendululm.
Someone finally listened and told Obama to calm teh markets. I’m happy that he put together a team of moderate economic leaders and not radicals to increase confidences.
Frankenstein is h ot