It’s a little funny watching market commentators and stock analysts on CNBC and the likes. It’s like making lemonade out of lemons as these silver lining experts look for reasons that the market will continue this breathtaking run. We’re already starting to see reality come back into play.
The market indexes are weakening and looks to be rolling over on it’s side. The dollar is starting the long and irreversible slide I’ve talked about for months. The bond market (those guys are the smartest money on wall street) have already begun to notice problems with the dollar as the reckless bailouts have moved the nation toward hyperinflation. We’re also seeing the rates on Treasuries increasing daily. There is not a single event that will stop a stock market advance in it’s tracks like a spike in interest rates.
“Money goes where it’s treated the best”
As the rates on Treasuries move higher it forces all other rates to increase along with them. They’re all competing for the same pool of capital and the Fed has already placed a floor under them by reducing the Fed Funds Rate to .25% (why not just make it 0%).
China has stated clearly it has no interest in supporting our deficit spending by buying into the long end of the Treasury Auction. This week being a huge offering makes this perfectly clear. The short end, 1 year, 2 year and tomorrow’s 5 year (and possibly the 10 year) have been well received, but that’s not where the problem lies. When the Treasury starts auctioning the longer dated bonds (20’s/30’s/40’s) they will have few buyers. The Fed will step in, print more dollars to buy them (in a misguided attempt to artificially keep mortgage rates at the 4.5-5% range).
The chain reaction will be a sharp spike in interest rates (crushing the price of the long bond), the falling dollar will add to inflationary pressures and the market rally will be history. I’m initially looking for a 125 point drop in the S&P from the 913 level. There is resistance at 875 but once it’s through that I expect to see 788. This does not even take into account the serious issues taking place in commercial mortgage defaults ($3.5 trillion market cap), the Alt-A mortgage resets (expected to be 2x’s the size of sub-prime), credit card defaults, 9% unemployment and a new wave of foreclosures from prime borrowers who lost their jobs. Not a pretty site.
In keeping with our theme, “money goes where it’s treated best,” a major shift is taking place from equity markets to commodities and natural resources. The falling dollar will support commodity prices as hard assets are always the absolute best place to be in inflationary times. All the BS about deflation is just that.
Please notice that just the other day Moody’s downgraded the UK’s sovereign credit rating and the pound has risen against the dollar every day since then. The exodus from the dollar will be swift and painful. My UUP puts are up 40% and this is the 2nd rollover.
DBA is in full swing even showing amazing price strength on selloff days. Don’t take the short money on this one. This is a long term uptrend. I increased my own position going out to October on the last pullback.
UNG is giving you a 2nd chance and it’s setting up to be a huge move. After the 1st recommendation we got a nice 20% bounce and watched as it retraced, close to it’s 52 week low of 12.69 (it closed today at 13.72). May sound strange but the pullback was great news having set up the pattern I was looking for to confirm the trade. The breakout point for UNG will be @17.50 (the point at which it reversed).
If you don’t own UNG… Buy It!
If you already own it… HOLD It!
If you want to add to your position… buy the farther out contracts.
The new Cap & Trade legislation and emissions standards will cost the coal companies billions. The only viable alternative to using coal (I still think ACI has more room to run) is natural gas (it’s fairly clean, it’s cost effective and it’s plentiful). The only downside is the huge inventory of nat gas and the pipelines that are in place that keep pumping it out whether we use it or not. More than half the nat gas producers have gone offline and will take months to resume production. When the “forward looking mechanism” (stock market) realizes the increased demand from the lowest cost producers I believe we (and UNG) will be off to the races.
I believe UNG & DBA will be the best trades of 2009.
New Recommendation
In spite of the fact that I am confidant the market will tank soon, I would like to make one “long call.”
Lorillard, Inc. (NYSE: LO) The 3rd largest cigarette manufacturer in the US. Now wait a minute. I can hear you and I have not lost my freakin’ mind! Hear me out.
LO is a solid takeover target which could mean a possible 500% or better gain depending on the takeout price. Here’s why I like it:
1) It’s Newport brand owns the menthol category with 35% of the market.
2) Gross margins are 45%, the highest in the domestic tobacco market. Lorillard banked 76 cents per pack last year compared to roughly 50 cents for Altria & Reynolds.
3) Newport brand posted a 3% increase in volume sales while the industry contracted 3% on average.
4) Stock trades at 11.5 forward earnings (bargain pricing). Lorillard has $1.5 billion in cash/no debt and just authorized a $250 million buyback. Management knows it’s a bargain price.
5) The tobacco industry is consolidating. LO’s one product focus (Newport brand in 94% of LO’s revenue), clean balance sheet and strong revenue growth pins a target on it’s back.
6) Potential buyers include Phillip Morris (MO), Imperial Tobacco and Japan Tobacco with Reynolds topping the list. Could wind up with a bidding war (wouldn’t that be a shame).
Further government restrictions would seem unlikely since it makes vast amounts of revenue from “butt taxes” to consider it with a fragile economy and litigation is priced in.
It’s cheap, cash-rich, debt-free and steady growth. Just a note, with a 5.4% dividend if you buy the shares outright you will receive the next dividend payment of $.92 per share on June 12 (you can sell it the next day). If you buy a 100 share lot you can collect the dividend, sell a covered call for a few dollars higher and pick up some premium while your waiting.
If the market collapses (as I expect) this conservative dividend payor should still perform well in a flight to safety. If it gets a takeover bid the options will knock it out of the park.
Heads you win, tails you win.
Ray
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