Short Sell US Treasuries

The market is in recovery mode, there is no denying that. Recent economic data such as jobless claims and pending home sales all point to a recovery in the economy. Since March, the Dow Jones has jumped from 6,600 to its current value of 8,700. As equities regain their attraction, investors are bound to avoid fixed income investments and put money back into the stock market. Consider investing in an ETF that shorts U.S Treasuries. With Treasury yields so low, there is no reason for people to invest in treasury bills, notes, or bonds and now since the market is showing signs of recovery, people will take money out of the debt market and invest it back into equities. The ETF is TBT and it’s an Ultrashort ETF for added volatility as treasury yields usually do not fluctuate too much. The threat of inflation and the falling dollar will also lead to lower bond prices.

Market Response to Geithner'sToxic-Assets Plan

On Monday, March 23, the market closed up a remarkable 497 points in response to the government's unveiling of a new plan that would create a public-private partnership to buy up toxic-assets from troubled banks. Purchasing these assets would allow the banks to take these toxic-assets off their balance sheets and as a result, increase financial stability. The market responded positively to the plan, moving up throughout the day.

The plan allows private investors put as little as 10% of their money to purchase these assets, whereas the Treasury would contribute the remaining 90%. The market's broad-based rally is a reflection of the investor-friendliness of the plan. The risk for the private investor is minimal because he can walk away from the investment if the value of the assets falls further.

Furthermore, there was additional supporting data that make the rally legitimate and not just a bear rally. According to Reuters, existing home sales unexpectedly rose 5.1 percent in February, which is the largest increase since July of 2003. What makes the rally so strong is that it was broad-based. The Financials led the way but at the end of the day, all 30 of the stocks in the Dow and 98 out of 100 in the Nasdaq were up.

Since then, we have seen the market move higher consistently with supporting positive economic data. While I remain cautious about investing all at once, this could be the beginning of a turnaround.

Image source: http://img.timeinc.net/time/daily/2009/0902/tim_geithner_0210.jpg

Rally Extends

The Dow Jones is back above the 7,000 level and the rally that began last week is extending into this week. The S & P index rose more than 10 percent last week and today marks the sixth straight day of upside. While it may be tempting to jump back into the market all at once, I suggest investing in small increments. We will most likely see a correction to the 6,500 level before we move up again. The fundamentals of the economy have not changed, which is why this rally seems overextended. Build a list of companies you like and invest in each cautiously.

To hedge against the risk of the market reversing itself, purchase gold. Gold around $900 is cheap considering its demand in this market as a safe-haven. All of the measure being taken by the government in addition to the very low interest rates will eventually start to have an effect on the market and create a slightly inflationary environment in which both gold and oil should benefit. ETF's such as GLD and OIL are the best ways to track and invest in the performance of these commodities.

How Much Lower?

For the first time in 11 years, the Dow Jones has fallen below a benchmark level of 7000. There is no bottoming action and despite all the efforts of the government, the outlook is not much clearer. At these prices, it's hard to take your losses and sell because a bounce is inevitable. On the other hand, it's also tough to watch your investments deteriorate slowly. Take today's levels into historical perspective. The Dow was at the same levels as it is now in 1995. Subtract inflation over that time period and you have ridiculously cheap stocks. Warren Buffet today said that our best days are ahead. Have a mindset for the long-term and stay out of companies that are vulnerable to the credit situation. Invest in sure things and don't make any speculations whatsoever. Three years from now, you will look into hindsight and be glad that you did the opposite of what everyone else is doing: buying into panic.

Stimulus Package

Almost every day, there is a headline that briefs Barack Obama's push for the passage of the economic stimulus package. He is confident that the bill will pass in Senate. The vote could take place as early as today around 5-7 PM. While I like Obama's sense of urgency, he conveys pessimism. He warns of a "catastrophe" if the lawmakers do not pass the bill. The situation that we are in and the need for a stimulus to the economy is so great that we might overlook the actual plan itself. The only way to truly "stimulate" the economy is to spend and when consumers are not spending, the government must step in. Let's break down the proposed allocation of the money in the bill.

Energy:

•$32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.
•$16 billion to repair public housing and make key energy efficiency retrofits.
•$6 billion to weatherize modest-income homes.

Science and Technology:

•$10 billion for science facilities, research, and instrumentation.
•$6 billion to expand broadband internet access so businesses in rural and other underserved areas can link up to the global economy.

Infrastructure:

•$30 billion for highway construction;
•$31 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings;
•$19 billion for clean water, flood control, and environmental restoration investments;
•$10 billion for transit and rail to reduce traffic congestion and gas consumption.

Education:

•$41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).
•$79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.
•$15.6 billion to increase the Pell grant by $500.
•$6 billion for higher education modernization.

Health Care:

•$20 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.
•$4.1 billion to provide for preventative care and to evaluate the most effective healthcare treatments.

Unemployment Benefits:

•$43 billion for increased unemployment benefits and job training.
•$39 billion to support those who lose their jobs by helping them to pay the cost of keeping their employer provided healthcare under COBRA and providing short-term options to be covered by Medicaid.
•$20 billion to increase the food stamp benefit by over 13% in order to help defray rising food costs.

Many critics argue that the bill does not allocate enough funds for spending towards infrastructure, the real stimulus of the economy. However, the plan is designed to benefit the most number of people and if executed correctly with transparency, it should be effective in stabilizing the economy for the simple reason that it encompasses a vast number of sectors that need assistance. The stock market is reacting positively in anticipation of the passing of the bill. The Dow is currently up about 230 points for the day with a couple of hours left to go until the close. The passing of the bill in Senate is already priced into the market and this may be a case of "Buy on rumor, sell on news." In case the bill does not pass, we might see a huge correction on Monday. The passing of a stimulus bill is inevitable. The only question is whether it will be today. Going into the weekend, I suggest being cautious and hold more conservative stocks since the news is already priced in.

Compensation Limits

President Obama has proposed a $500,000 compensation cap for executives from companies that will receive federal funds. His proposal is sure to receive great criticism, questioning whether his plan interferes with principles of capitalism. But in the current economic condition, his plan makes perfect sense. He does not want to limit the pay of executives of companies that have not asked for aid, nor will he limit those that are considered 'healthy' even if they are receiving federal funds. A salary cap would ensure that government funds are not abused. This is the type of "change" that we need. Claims of Obama's proposal being socialistic are far-fetched because after all, it is the taxpayer's money that corporations were using for lavish spending and it is only fair that the executives make compromises as well.

Sterlite Industries for a Trade

Sterlite Industries India is a large mining and smelting company based in India. It engages mostly in the mining, smelting, and production of copper in India and Australia. I have liked the company ever since the IPO in the United States, which was not long ago. It has a strong cash flow and balance sheet and has been dragged down along with the rest of the commodities. The price of the commodity, in this case copper, accounts for 90% of the stock's price movement. The stock currently trades at a mere $4.89 per share with a price to earnings ratio of 4.05.

Shares of Sterlite are trading 8% higher on the Indian stock market under the symbol STER.NS. Since the Indian market precedes the US stock market, the price action there is usually a strong indicator of the price movement here. Therefore, SLT should trade higher on the AMEX by at least 5% tomorrow and if it opens anywhere below, it is a sure sign of a buy for a trade. Just to illustrate the strong correlation between the two equities, here is a chart that compares price movement of STER.NS with SLT:

Apple Blows Out Earnings

Apple after-hours reported earnings that blew out Wall Street estimates. The company reported revenue of $10.2 billion compared to estimates of $9.74 billion and actual earnings of $1.78 per share in comparison to expectations of $1.39 per share. Apple's performance is truly spectacular and even more impressive in a sluggish economy. I will personally hold my shares because I still think there is more upside potential. As I mentioned in a post last week, the company remains extremely strong fundamentally and Steve Jobs' leave is insignificant to its bottom line.

On a side note, Bank of America closed up 30%!

Cheers

If you followed my recommendation yesterday of buying into either IBM or Bank of America, consider taking your profits as the stock is up nearly 8% early. Bank of America is up 8%. I still like IBM as for a longer perspective, but Bank of America is way too risky to hold. On the other hand, if you have the appetite for risk, Bank of America could bring big returns.

Finally Some Relief

Crude oil has finally recovered a bit and is trading at $41 a barrel. Futures point to all three major indices being moderately higher. Apple and many other technology stocks are up after hours following IBM's upbeat report. I expect Apple to have a modest run up into earnings tomorrow. I have a long position in AAPL and will hold into earnings, although Apple has a reputation for conservative guidance, which might have a negative effect on the stock. I would buy more if the stock drops after the earnings release. Here's an interesting correlation that might indicate future price movement of AAPL:

Notice that the Put/Call Options Volume Ratio(shown in blue) moves inversely to the price of the stock (shown in red). After the sharp spike in the Put/Call Volume Ration, the stock consequently fell. Shortly after, the ratio dropped significantly but the price of the stock has not yet followed. Could this suggest that a move up is in the works? Possibly.

Source for the graph: http://www.schaeffersresearch.com/streetools/indicators/equity_volpcratio.aspx

IBM Sees Strong Growth Ahead

In my previous post, I recommended buying shares of International Business Machines. IBM handily beat estimates after the market close. The company reported earnings of $3.28 per share, easily topping consensus of $3.03 per share. IBM's guidance for the fiscal year 2009 also topped estimates by a handful. Considering that IBM and Intel have both reported strong fourth quarters, Apple should follow particularly because of their large integration with Intel's products. Apple reports tomorrow and I would suggest picking up some shares before earnings are released. There remains the concern that Apple's guidance will not be as promising because of their history to forecast extremely conservatively but given the recent hammering of the stock, I think it's worth the risk.

An Additional Note

If you have the appetite for a high risk/high reward play, consider a stake in Bank of America as it is down almost 25% on the day.

Oversold

At 2:09, the Down Jones is down almost 200 points and the Nasdaq lower by 4%. The correction is overly extended and the market is now oversold. I expect a bit of a rally towards the close or early tomorrow. The market has been constantly drifting lower for the past week and a half. The new President should act quickly on his proposed stimulus plan but keep in mind that the rally must be led by the Financials. If you want to assume less risk, consider buying Large-cap technology stocks such as Apple and Intel or defense companies such as JNJ and PG. The S & P has bounced off around the 800 level and should do the same this time around. Nevertheless, the current trading action is painful to watch.

Futures Look Ugly

On the eve of Barack Obama's historic inauguration, Dow Jones futures point lower 102 points. As I did some research, I discovered that the stock market has been down on the day of an inauguration 12 out of 16 times.

Hopefully Obama can spur some positive sentiment in the market with his powerful speeches and promises about the economy. For the longer term, consider putting money in companies involved with construction and infrastructure. Alternative energy looks attractive as well but hold off on buying until oil shows signs of recovery.

Can't wait for the inauguration address tomorrow, I'll probably miss class to watch.

Source for the inauguration data: http://static.seekingalpha.com/uploads/2009/1/19/saupload_dowinaug2.jpg

A Fake Bottom?

Yesterday the market action suggested that a bottom might be in the making as it bounced sharply off the 8000 level. However, it lost strength towards the close, suggesting that it was simply a reaction to the oversold market which has been down for six straight sessions. The coming weeks could bring some optimism to the market as the Obama administration comes in. I'm convinced that he will better manage the $350 billion TARP fund than George Bush. He seems to have much more planning to his intentions of spending the money than Henry Paulson did. What we need is transparency, the American people need to know where every dollar of their tax money is being put towards. With that said, the stock market could come off the lows in the coming weeks, but I'm not convinced that it is a short-term bottom mostly because there was no sense of panic when the market was declining. Instead, it was slow decline with low volume. One of the analysts on CNBC this morning predicted the Dow at 12,000 by March. Very unlikely, but I sure hope so.

Buy Apple Right Now

As the credit crisis takes a toll on the stock market, companies that have no exposure to the credit markets become more attractive than ever. Apple, the consumer icon that has tremendous horizontal integration among its portfolio of great quality products, is in a position to grow earnings even in times when consumers are cutting back on discretionary spending. The brand recognition Apple has built up through its genius marketing is unmatched and any downward pressure on the stock as a result of the overall market should be looked at as a buying opportunity. The company has no debt and over $28 billion in cash. How’s that for a strong balance sheet?

From an investor’s perspective, the stock is a screaming buy after the drop in value following the announcement of Steve Jobs’ leave till June. Although Steve Jobs is essential to Apple’s success, his leave does not change the company’s fundamentals one bit. Investors should be concerned for his health but not to the extent that it skews their perception of the company’s fundamentals. Apple trading at around $80 immediately after the announcement is an extremely attractive entry point for traders and more so for long term investors. Apple’s product portfolio is strong and the company is growing at a much faster multiple in comparison to its competition. Its products remain in strong demand and are unrivaled in simplicity and design. The iPhone is still strides ahead of competition despite competing products in the market such as the Blackberry Storm. The iPhone’s dominance is tough to compete with and the company will continue to reap in benefits through its exclusive agreement with AT & T as well as from the App Store.

The new pricing structure of iTunes music downloads is strategically promising as loyal customers will continue to purchase popular music from Apple despite the minimal price increases. The software is the best of its kind and is so intensely integrated with all its products that Apple has in a sense created an obsession among its customers. Those who try an Apple product tend to be drawn into the cult known as the Mac faithful.

Considering that the fundamentals and the product offerings of Apple remain strong, the stock is grossly undervalued under $80 a share and all the negative news is priced in, at least until further announcements are made regarding Steve Jobs’ health. The pile of cash enables Apple to continue to pour money into product development, which leads me to speculate that the company might have another blockbuster product in the works, perhaps the much rumored iPhone Nano. While others sell in panic on Steve Jobs’ leave notice, the time is right to jump in for a few shares. The fact of the matter is that Tim Cook was already handling day to day operations and has the ability to manage the company and make sound decisions just as well as Jobs. The upside potential is big.