Global Market Comments
January 14, 2013
Fiat Lux
Featured Trades:
(THE LAST CRISIS TO GO), (SPX), (IWM), (INDU), (QQQ),
(TESTIMONIAL)
Global Market Comments
January 14, 2013
Fiat Lux
Featured Trades:
(THE LAST CRISIS TO GO), (SPX), (IWM), (INDU), (QQQ),
(TESTIMONIAL)
Generally, the world does not end. That is my sage observation after spending 45 years in the investment industry. Given the recent market action, it appears that money managers are finally coming around to my point of view.
Remember the great Debt Ceiling Crisis in July of 2011? Congress held out until the last second of the last minute of the last hour before coming to agreement on, what in past years, has been a simple housekeeping matter. Before the ink was even dry on the deal, the stock market started to amputate 25% off the value of your IRA in the following two months.
I always thought that this plunge was due to investors completely losing confidence in the full faith and credit of the United States government. Can you blame them when a Republican House was refusing to pay a largely (65%) Republican debt?
Then we got the ?Fiscal Cliff?. This time, your retirement fund suffered only a 10% hickey. That was the extent of the descent in stock indices in the aftermath of the presidential election. Then, guess what? We made it all back in six weeks and closed the year at the highs. Investors were learning that, generally, the world doesn?t end after all.
In a mere seven weeks we will face the last crisis for the foreseeable future, that of the Debt Ceiling Crisis, Part II. Only this time, it?s different. Stocks are not cratering. Instead, they are grinding sideways on diminishing volume, holding on to the dramatic gains they have wracked up since the end of November. What gives?
I believe that traders are not going to get scared by this impending disaster into dumping all their positions at the bottom, only to buy them back at the top. This time, they are holding tight. What this sets up is asset prices that grind sideways for a month on declining volatility, frustrating every attempt by the underinvested to boost equity weightings.
Then on the eve of a resolution of this donnybrook, stock prices will explode to the upside. To anyone who spent much of their youth pheasant or quail hunting, it is all familiar behavior. Stand still in one spot long enough, and you will eventually flush out a bird, or sometimes an entire covey, which makes an easy shot. That?s what I expect investors to do in February.
How am I positioned for such a market? I have the heaviest equity allocation in over a year. But every position has a short volatility element to it. If the market goes up, my year-to-date performance will hit 20% by February 15. If the market goes sideways, it will still reach 20% by February 15. If it goes down by less than 5%, I should still show a profit of 20% by February 15. To get the inside baseball on how I do this, you have to subscribe to my market beating Trade Alert Service.
It may well turn out that there is no crisis at all on March 31. President Obama could fall back on the 14th amendment, which requires the government to honor its debts in all circumstances. That leaves the House to argue with itself in the obscurity of CSPAN. If the market figures this out, it will go ballistic.
The rally that ensues will set up the high for the year for assets, and a new 14 year high in the stock market. Whether the S&P 500 (SPX) reaches 1,500, 1,550, or 1,600, is anybody?s guess. The top, no doubt, will be made by capitulation buying by those who, until now, idly watched the appreciation on TV, as they always do.
Then we are in for some tough sledding. Q1, 2013 will be dominated by better than expected data from superior business performance at the end of 2012. In Q2, 2013, the story will be about a torrent of worse than expected data that the bitter fruit of the fiscal cliff resolution come to harvest in the form of less spending by a newly impoverished government and consumers. That sets up nicely for a 15%-20% summer correction.
By the way, the California hunting grounds of my youth are long gone, turned into suburbs or factories. To hunt these days, you have to join an exclusive club which stocks limited grounds with as many as 20,000 birds a year. But you know what? They still behave just the same, and taste just as good.
?The Fed has created a situation where there is no effective alternative to common stocks,? Said Leon Cooperman of hedge fund Omega Advisers.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
I was in a huge hurry last week when I sent out a Trade Alert to buy insurance giant American International Group (AIG), operating from a Chicago hotel suite with a stock market that was flying. Now that I am home, and have single handedly brought Oakland?s crime wave to a juddering halt, I have an opportunity to go into depth on this troubled company.
I know it well, as it originally started out in Shanghai to insure the once sizeable Jewish and white Russian community there. When the communists took over China in 1949, it moved its entire business to Japan. Its skyscraper just across the moat from the Imperial Palace still maintains a conspicuous presence on the Tokyo skyline.
Buy sun hats in the winter and snow boots in the summer. That?s the simple argument. The stock market equivalent to this is to buy insurance company shares in the wake of a giant hurricane, as we had with Hurricane Sandy in November. That?s because companies can jack up rates enormously after disasters such as these, just when the probability of another storm declines, to the benefit of the bottom line. Investment sage, Warren Buffet, figured this out 60 years ago, which is why he has carried major holdings in this sector ever since.
I picked (AIG) in particular because it has a whole raft of special circumstances. You may recall that the company went bust in 2009 after massively leveraged derivatives bets by its Greenwich, CT office went awry. Because it was feared that the extent of their bets would take down the entire global financial system, the Treasury stepped in with a whopping $183 billion bailout.
Much of this money went to European banks, and some $165 million was paid out as retention bonuses to the errant staff. It was the most despised rescue in the history of US financial markets.
I believe it was the single largest policy error of the Obama administration. Instead of honoring AIG?s obligations in full, I would have offered 50 cents on the dollar, which the creditors would have taken in a heartbeat at the time. But the new Obama administration had exactly a week to figure this out, with no time for research or analysis. When your ship is on fire and sinking, you don?t spend a lot of time figuring out what kind of fire hose to use.
In the end, the government made a $23 billion profit on the deal, dumping its last 15% share of the company in December. It was largely assisted by the bond market bubble, which panicked investors of every stripe to reach for yield, including that offered by the impossible to define garbage on AIG?s books. In the end, (AIG) turned out be to a gigantic, hyper leveraged call on the corporate bond market.
With the government out of its hair now, it is suddenly a whole new world for AIG. Investors had been avoiding the stock like the plague, as the ever present risk of a government unload was capping the share price. You only need 10 institutional investors to take 5% weightings each to soak up the entire government holding.
The company, which consists of its core U.S. life, global property and casualty, and U.S. mortgage insurance units, will now have to focus on turning around earnings at the property and casualty business, formerly known as Chartis. As a stand-alone entity, the investment case for (AIG) is really quite compelling. It is trading at a big discount to book, and is even a bigger bargain when compared to its insurance industry peers.
On top of this, the company is a big asset story. It still retains some securities that originally got it into trouble, which are marked at, or close to, zero. As these are sold out into a frothy bond market, huge profits will be realized. What we don?t know is how much money regulators will allow the company to take out of reserves to book in profits or pay in dividends.
As for the lawsuit just announced by former owner, Hank Greenberg, (which AIG has refused to participate in) claiming that the government paid an unfairly low price for the company, you can forget about it. This is more about salving an ego than pursuing a legitimate economic claim. If he had done a better job managing his risk, AIG would not have gone under in the first place. What is a fair price for an illiquid asset when the world is ending?
I Think I?ll Buy Some Insurance Companies
I though you would be interested in this note I received from my real estate broker in Squaw Valley, California, where I sold my ski cabin in 2005 for $3 million. This is the high beta end of the housing market in the Golden State.
"Here are some stats (from the multiple listing system and other sources) and developing trends:
2012 Summary of Sales info
? 24 cabins and homes sold from $385.5K to $2.9M
*3 over $2M - 6 from $1M to $2M and 9 under $1M
? 4 lots sold from $385K to $750K-
? 9 non- hotel condos sold from $154.9K to $580K
? 11 Resort at Squaw Creek condos from $84K to $745K
? 6 Squaw Valley Lodge condos from $220K to $815K
? 17 Village at Squaw Valley condos from $235K to $825K
Most of the short sales, bank sales and foreclosures are gone from the market and the real estate market is showing signs of recovery. As the market recovers, the biggest problem is for the buyers to grasp that prices are rising and trying to buy a property based on the comparable sales data is now difficult as the comparable sales data may not support the listing prices and ultimate selling prices of the properties selling. Most of you are now aware of the potential development plans for the valley at the base of the ski area. If you have not already checked it out here is a link www.SquawRenaissance.com.
Listing inventory is beginning to decrease and we expect to see this continue into 2013. This makes for tough decisions for buyers who have not already purchased a property as the longer they wait to buy, the more changes that are occurring in the availability of properties."
Are you able to give a lot of advanced notice of the next date you will be hosting a lunch in London? I reserved a place last time you were here but business intervened and I missed it. I would love to meet you in person. I admire your character, independent spirit and good heart. Oh, and your investing nous too!
Keep up the great work. And enjoy life to the full.
Best wishes
David
London, England
?Giving some countries the Internet is like giving a cannibal an AK-47 assault rifle. No good will come of it,? said John C. Dvorak, editor of PC Magazine.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
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