private wealth advisoryphoenixcapitalmarketing.com/pwa40.pdf · a critical juncture the markets are...
TRANSCRIPT
Private Wealth Advisory A Phoenix Capital Research Publication March 31, 2010
ACriticalJunctureThemarketsarenowatacriticaljuncture.AsIwritethis,theFed’sQuantitativeEasingProgramisabouttoend(boththepurchaseofUSTreasurydebtandofUSmortgagebackedsecurities).Atthesametime,we’vegottheendof1Q10alongwiththetypicalperformancegaming.Inaddition,marketparticipationisextremelylowthisweekduetoitbeingaholidayweek(PassoverandEaster).Onthatnote,themarketswillbeclosedmostofFriday,whichincidentallyiswhentheBLSwillpublishitsMarchemploymentfigures.Inanutshell,wearewitnessingamassiveconfluenceoffactorshittingstocksallatthesametime.Withthisinmind,there’slittlesenseintakingalargepositiononewayortheother.GoinglongisagamblebecausetheFed’smarketpropsarebeingremoved.Indeed,we’realreadyseeingsomewarningssignsintheUSdebtmarkets:
Asyoucansee,long‐termUSBondshaveenteredashort‐termfree‐fall,plungingfrom119to115.ThelastfourUSTreasuryauctionshavebeenabysmalwithnexttonointerestcomingfromForeignGovernments.ItisclearthattheBondmarket
(absentofFedinvolvement)wantshigheryieldsfromUSDebt.Thisistroublingastherecentdrophasbroughtthe30‐YearTreasuryNotetolong‐termsupport:
Inplainterms,thischartindicatesthattheBondmarketis“onthefence”aboutUSdebt.Abreakbelowthislinesignalswe’relikelygoingtotest112ifnot105.ThisinturnmeanshigherinterestrateswhichwouldcrushtheperceivedUSrecovery(imaginedebtpaymentsgoinguprightnow)andcouldpotentiallykickoffachainreactionintheunregulatedderivativesmarketwhere85%ofnotionalvalue($600+TRILLION)inderivativesisbasedoninterestrates.
BenBernankemaynotdomuchforMainStreet,buthe’snotacompletemoroneither.Heknowsfullywellthataspikeininterestratesis“game,set,andmatch”forhispolicies.He’stryingtocountertheremovalofQuantitativeEasingbypromisingtokeepshort‐terminterestratesat0%for“anextendedperiod.”TheissuehereisthatBernankecanonlycontrolinterestratesontheshort‐endofthespectrum.Heattempted(foroneyear)tocontrolthemonthelong‐endofthedebtspectrumwithQuantitativeEasing(buyingUSTreasuries).Butthatprogramisnowending.Sowe’reabouttofindoutwhattheBondMarketthinksofUSdebtwithoutanycrutches.Ifthelastfourdebtauctionsareanyindication,we’regoingtoseeUSDebtfall,interestratesrise,etc,verysoon.Thiswouldbrieflybestockpositive(someofthemoneyfleeingbondswouldsloshintostocks)butsoonstockswouldcollapsecourtesyoftheirmassivedebtloads.
Thus,Bernankeiscornered.Ifinterestratesspikethentheeconomywilldive(duringanelectionyearnoless).Butwithpublicoutragegrowinggreaterbytheday,thelikelihoodofhimannouncinganotherQuantitativeEasingprogram(atleastoneaspublicandgrandiose)isrelativelyslim.Isuspectthatwhatwe’llgetisatamer,“backroom”QEatsomepointinthelatesummer.Butagain,thatismerelyasuspicion.Whilethebondmarkethasbegunflashingseriouswarnings(thoughithasyettoreallybreaksupport),stockscontinuetochugalongasthougheverythingwasjustfine.
You’llnotethatthesteepnessofthelatestascentisactuallymuchsharperthanwhatoccurredfromAugust’09‐December’10.Thiscanbetakenafewways:
1) Thebearshavecapitulatedandarenowbuying2) Havingseeneverysinglecorrectionreversesharply,sellersarelargelyoutof
themarket3) Theshortsareonceagaingettingshreddedandbeingforcedtocover
It’sdifficulttosaypreciselywhichoftheabovebestexplainswhat’shappenedinthelastfewweeks.Iwouldpositit’sacombinationofalloftheabove.Anecdotally,I’venoticedthatquiteafewbearishblogshavebeenthrowinginthetowel,sothere’slikelysometruthto#1.Regarding#2,aclose‐upofthelasttwomonthsperformancerevealsthatatthispointNOONEistryingtosellthemarket.Consequently,we’regettingagradual
melt‐upinwhichtheS&P500tagson5‐7pointeveryday(40‐50pointsperdayontheDow).
Fromatechnicalanalysisstandpoint,stocksareoverdueforsomekindofcorrection,nowtradingroughly5%abovetheir50‐daymovingaverage:
Thisrelationship(5%fromthe50‐DMA)shouldberememberedbecauseithasshownagreatdealofsignificancehistorically.I’vemarkedthetimeswhenthemarketgotbetween4.5‐5%awayfromthe50‐DMAinthechartabove.You’llnotethateverytimewe’veseenacorrectionoratleastaconsolidationperiodoccursoonafter.IshouldalsopointoutthatthisrelationshipALSOworkstothedownside:theJanuarycorrectionwasroughly4.7%Thiscertainlysetsthecaseforsomekindofstockcorrectionnow.Indeed,onthatnoteIwishtopointoutthattheRussell2000,whichleadtheotherindexestotheupsideduringthislatestrally,hasalreadybeguntocorrect:Russell200=blue,Nasdaq=greenS&P500=redDowIndustrial=black
Asyoucansee,theRussell2000hasvastlyoutperformedtheotherindexesduringthislatestrally.Withthisinmind,itisimportanttonotethattheRussell2000hasalreadybeguntoshowsignsof“rollingover”:
Asyoucansee,theuptrendherehasdramaticallylessenedandisnowintheprocessofrollingover.Thiscombinedwiththegeneraloverextensioninstocksmarketwide,suggeststhatwearegoingtohaveacorrectionoratleastaconsolidationperiodsoon.Onthatnote,IwantedtoletyouknowIamsomewhatchangingthefocusofthisletter.I’vebeenreceivingquitealotofemailsfromreadersinthelastfewweeks.Whatstruckmemostofallwasthedifferenceininvestmentquestions/respectiveinvestmentneeds.Somereadersclearlywantedshort‐termtradeswhileotherswereaskingmequestionsregardingtheir401(k)sandretirementaccounts.SogoingforwardIwillbetryingtocoverallourbases.I’lldothisbyofferinggeneralizedinvestmentstrategies(whentoreduce/increaseexposuretovarioussectors)aswellasspecificshort‐termspeculativeideasfortraders.ForGeneral“BuyandHold”Investors:Nowisthetimetobepruningyourlongholdings.We’vehadaspectacularruninstocksinthelastyearandthelikelihoodofthiscontinuingwithouttheFed’smarketpropsissmall.Mutualfundshavegone“allin”(cashlevelsareathistoriclows)leavingonlyindividualinvestorsasbuyers(largerinstitutions,forthemostpart,ofoutofthemarketcompletelyasevincedbythelowvolume).Indeed,moneymarketfundassetsaredownto$3trillion(roughlythesamelevelstheywereatduringthe2007top)asinvestorspileintostocks.
Inplainterms:everyoneisnowfullyinvestedinthemarket.Forthistohappenwhenthemomentumisbreakingdownandvolumedroppingdoesnotbodewellforstocksgoingforward.Soifyourportfolioisheavilyinvestedinstocks,nowisatimetobetakingsomeprofits.Ifyoucan,considermovingasizablechunkintocash.ThemarketisextremelytiredandthesystemicrisksunderlyingtheFinancialCrisisareinnowayresolved.Withinvestorcomplacency(asmeasuredbytheVIX)backtopre‐Crashlevels,theFedwithdrawingseveralofitsmoresignificantmarketprops,andlowparticipationcomingfromthelargerinstitutions,thismarketisripeforaseriouscorrection.I’mnotsayingthatwillimmediatelyhappen.ButatsomepointtherewillbeanewroundtotheFinancialCrisis.Whenthathappens,wewillhaveanotherCrash.Indeed,itisquitepossiblethatstocksaremakingaVERYsignificanttoprightnow,sobeingheavilyinvestedinstocksgoingforwarddoesn’tmakemuchsense.Takesomemoneyoffthetable.Ifyouneedaplacetoputit,IsuggestcashorGold/Silverbullion.IfyouDOhavetostayinvestedinstocks,nowisthetimetobeshiftingoutofjunkintoquality.Thisrallyhaslargelybeenleadbyjunkcompanies(financials,retailers,etc).Meanwhile,qualityhaslaggeddramatically:comparetheperformanceofCoke(KO)toBankofAmerica(BAC).KOisoneofthebest,mostprofitablebrandsintheworld.Thecompetitivemoataroundthisbusinessisextraordinaryanditremainsoneofthemosteasilyrecognizedfranchisesontheplanet.YoucandrinksixglassesofCokeadayandstillenjoyitthenextday.Thatqualityisalmostnowheretobefoundinanyotherfood/beverageontheplanet:evenchocolatewouldgetoldaftersixbarsaday.BAContheotherhandhasswallowedCountrywideFinancialANDMerrillLynch’sgarbageassets.Itiseffectivelyinsolventbasedonitsderivativeexposurealone(thecompanyhasderivativesequalto3,000%ofassets).BAC’sbalancesheetislikeanopensewerandwithoutseriousgovernmentinterventionthecompanywouldnotexistrightnow.Andyet,thiscompanyisupnearly200%sincetheMarchlows…whileKOisuponly45%.
However,whenitcomestimeforanotherCrash,itisCoke,notBankofAmericawhichwillholditsground:
So,ifyouHAVEtoremaininvestedinstocksforwhateverreason,nowisthetimetobemovingintohighqualitycompanies.Thismeansfindingcompanieswithlowdebt,lotsofcash,strongresults(KOactuallyGREWrevenuesin2008),andsignificantcompetitiveadvantages.Also,andthisiscritical,lookforcompanieswithstrongbalancesheets:companiesthatwillstillEXISTifthere’sanotherCrisis.Depressionorno,peoplewillstilldrinksoda,alcohol,smokecigarettes,andneedmedicine.I’vecompiledalistofcompaniesyoushouldconsiderifyouneedtoremaininvolvedinstocksgoingforward:Company Symbol Sector Price/Cash
FlowDividendYield
Coke KO SoftDrinks 15 3.2%Budweiser BUD Alcohol 14 N/AJ&J JNJ Medicine 10 3.02%
Wal‐Mart WMT GeneralRetail 8 2.16%ExxonMobil XOM Oil 11 2.51%Thebeautyofthisisthatbecausemanyofthesecompaniesdidn’texplodehigherduringthe2009rally,youcanstillbuythematcheaplevels.I’mpersonallyamazedyoucangetCoke(KO)todayat13timesEnterpriseValue/EBITDA(or15timescashflow).Exxonat11timescashflowwithoilat$80?Extraordinary.Remember,theseinvestmentsareifyouHAVEtostayinstocksforsomereason.Ifthereisanothercollapsethesecompanieswillfalllikeeverythingelse.However,theywillfalllessthantherestofthemarket(seethechartcomparingCokeandtheS&P500below).
Iamcreatinganewportfoliototrackallofthesepositionsgoingforward.It’scalledthe“IfYouHavetoBeInStocks”portfolio.I’mreplacingthe“KickingtheCan”portfoliobecausequitefranklyIhaveyettofindasinglecompanythatqualifiesforit.Iinitiallythoughtthattherewouldbequiteafewcompanieswithstrongfundamentalsandcronycapitalistrelationshipstothegovernment.Instead,whatI’vefoundarealotofcompanieswithGovernmentconnectionsandtotallyawfulfundamentals.Indeed,ifitweren’tFORtheconnections,mostofthemwouldbeoutofbusiness.Sothe“IfYouHavetoBeInStocks”portfoliowillbeourlongexposuregoingforward.Idonotexpectthesepositionstomakealotofmoneynow.ButtheywillshelterthoseofyouwhoneedtoremaininvestedinthemarketfromlosingtoomuchmoneyshouldanotherCrashhit.
However,Iwillsaythatshouldthemarketcollapseandtheseallfall10‐15%acrosstheboard(whilethemarketfalls30%+)IwouldbeaVERYeagerbuyerforallofthesecompanies.Letmeexplain.Volatilitycaneitherhurtyouorbeyourfriend.Mostpeoplewouldsellapositionifitfell20‐30%.Thisiswiseifyou’reinvestedbasedonmomentum.However,ifyou’reinvestingbasedonvalue,thendoingthisiscompletelyantitheticaltoattaininghighreturns.ConsiderCoke.Let’ssaytomorrowCokecollapsedfrom$55to$25pershare.Mostinvestorswouldpanicandsell.I,ontheotherhand,wouldbebuyinggreedily.Why?BecauseCoke’sbusinesshasafundamentalvalue.EvenduringaFinancialCrisisandDepression,peoplewillcontinuetodrinksoda.SotheopportunitytobuyCokeat$25ashare(whichwouldbe7‐8timescashflow)wouldbetrulyanextraordinaryopportunity.Indeed,fromanincomeperspectivealone,theopportunityherewouldbefantastic.Considerthatin2009,Cokepaidout$1.76individends.Withsharesat$55,thismeansadividendyieldof3.2%(roughlythreetimeswhatyou’dgetbyleavingyourmoneyinasavingsaccount).However,ifCokesharesfellto$25,that$1.76suddenlybecomesa7%yield($1.75/$25.00).That’saheckofareturnfromanincomeperspective.EvenifgloballytheworldenteredasharpDepressionandCoke’sincomefellby30%,pullingitspayoutsdownto$1.23,you’restilllookingata5%yield.Indeed,companieslikeCokeoffertheREALvalueinowningastocktoday.TheirfundamentalsalmostALWAYSoutperformsentiment.WhatImeanbythisisthatshouldtherebeanotherCollapse,Coke’ssharepricewillalmostcertainlyfallMOREthanitscashpayoutsorincome.During2008,Cokesharesfell30%orso.However,CokeactuallyINCREASEDitsdividendthatyear.AnyonewhoboughtCokeinOctober2008,nowcollectsa4%yieldontheirshares(fourtimeswhatheorshewouldgetfromabankaccount).ThisiswhycompanieslikeCokeremainsostrongduringtimesofCrisis.WiththeFDICbrokeandmostUSbanksinsolvent,investorsdesperatelyneedaplacetoparkcashthatissafeandwillstillEXISTinafewyears.CompanieslikeCokeareareasonablealternativetoasavingsaccountinthesensethatyou’repaidahigheryieldforyourdeposit(now3%,but5%orhigherifCokesharesplunge).Ofcourse,becauseCokeisastock,youcanlose10‐15%ormoreifsharesdropandyousell.ThisiswhyIsuggestbuyingthiscompanyandtherestofthe“HavetoOwnStocks”companiesonlyIFyouHAVEtobeinstocksrightnow.Thisisapositionthatismeanttobeheldforthelong‐term(years).Youshouldalmostthinkofitasakind
ofbankaccount:aplacewhereyouputmoneytocollectinterest,NOTatradewhereyou’relookingforcapitalgains.Again,thisistheIfYouHavetoOwnStocksPortfolioandit’sdesignedforthoseofyouwhoMUSTstaylonginthemarketgoingforward.It’salong‐termfocusedportfolioandshouldnotbeusedfortrades.I’llbeaddingtothisportfoliogoingforwardasIfindothercompanies.Buttheabovefiveareagoodstartfornow.FortheTradersForthoseofyouwhoarelookingforshort‐termtradesorinvestmentswithholdingperiodsofseveralweeksI’vegotquiteafewtradeslinedup.However,IwanttostressthatnowisNOTthetimetobeplayingthemarketheavilyonewayortheother.Therearesimplytoomanyfactorsatplay.Inplainterms,thefundamentalsaredeterioratingbutthemomentumisup.Indeed,thisentiremarketislikeahouseofcards:eachnewlevel(orhigh)isevenmoreunstable.Thisistheproblemwith“Tops,”themaniathatoccursaroundthemcanlastfartoolong.Indeed,fromanysensibleperspective,stocksshouldhavebrokendowninearnestseveralweeksago.Butwe’veyettohaveanythingresemblingasignificantretrenchmentinoveramonth.SorightnowIsuggestbeingmainlyonthesidelines.Itissimplytooearlytomakeaguessastowhatwillhappenonewayortheother.CommonsensedictatesthatthemarketshouldbegintorolloversharplyoncetheFed’spropsareremoved…butthenagain,ifcommonsensematteredthemarketrallywouldhaveendedbackinJuly’09.Solet’ssimplystayputfornow.IWILLsaythatIseeanabundanceofpotentialshortsthatlookripeforadrop.Butweneedtoseestockscomeundoneinaseriouswayformostofthesetoreallybecome“triggered”sells.Soplease,DONOTshortthenexttwocompaniesjustyet(I’vegotathirdthatyouCANshortwhichI’llbetalkingaboutlater).Instead,putthemonyourwatchlistandwaitforstockstoREALLYbegintobreakdownbeforeshortingthem.I’llbeaddingthemtoanewportfolio:the“StocksComeUnhingedPortfolio.”Thesearepositionswe’llusetoprofitwhenstocksstarttheirnextCorrection/LegDown.However,rightnow,it’sNOTtimetotradethem,PotentialShort#1:DSW(DSW)IactuallyLIKEthiscompany’sbusiness(namebrandshoesatdiscountprices),butitschartisoneoftheugliestI’veseeninalongtime.
Whatwehavehereisaclassicexampleofmomentumbreakingdown.DSWwentonatearfromJulythroughDecember.TheuptrendhassincesharplyloweredandDSWsharesarenowonthevergeofsettingupsomenewlowerlows.Again,thefundamentalsherearen’ttooawful:peoplewillstillbebuyingshoesoncetheDoubleDiprecessionhits.AndwhileDSW’soverallsaleshaven’tbeentoobadlyhurt,thecompany’sinternalsclearlytakeaSERIOUShitwhentheeconomyturnsdown. 2009 2008 2007 2006 2005 Net Sales Per Sq Foot $203 $196 $212 $218 $217 Number of Leased Depts 356 377 378 360 238 Comp. Store Sales Change 3.2% -5.9% -0.8% 2.5% 5.4% Total Income (in millions) $54 $26 $53 $65 $37 ThesepicturescombinedwithDSW’sweeklychart,givesusaclueastowhatwillhappenwhenstockscomeundoneandtheSecondDipofthedepressionhits:
ThefirstthingIwanttopointoutisthatDSW’ssharesactuallypeakedinAprilof2007,afullsixmonthsBEFOREtherestofthemarkethititsall‐timehighs.ThusweknowDSW’ssharesaresomethingofaleadingindicatorfortherestofthemarket.Withthatinmind,Iwanttopointoutthatonaweeklybasis,DSWappearstobepeakingnowjustasitdidin2007.Fromatechnicalstandpoint,DSWlooksprimedtoatleasttestits52‐weekexponentialmovingaverage($20)afull20%belowwheresharesaretradingtoday.IfthesecondRoundoftheCrisisisanythinglikethefirst,wemayevenbreakthislevelanddropto$15,$12.50orevenre‐testtheMarchlowsdependingonhowbadthingsget.Inplainterms,thereisaHUGEamountofdownsidepotentialhere.Butagain,it’stooearlytoshortthiscompanyjustyet.True,DSWhasrecentlybrokenbelowits50‐DAYmovingaverage,butIwanttoseeittakeoutrecentsupportat$24beforeshorting.
PotentialShort#2:WellsFargo(WFC)WhenWellsFargotookoverWachoviain2008,ittookononeoftheworstbalancesheetsintermsofresidentialoptionadjustableratemortgages(ARMs)ontheplanet.AndthiscomesonTOPofWFC’sowntoxicassetpool.Firstandforemost,workingthroughWFC’s10‐Kislikedoinghardlabor.The10‐Kisn’tevenpresentedasonesingledocument,butinsteadonedocumentwithadozenorso“exhibits.”Ifyouwanttofindthecompany’sfinancialresultsyou’vegottogoallthewaytoExhibit13.Again,Irepeat,clickingon“SelectedFinancialData”inthe10‐KfiletakesyoutoafootnotethatthennotifiesyouthatyouhavetogotoExhibit13toactuallyseeanynumbers.Thataloneshouldtellyouthatthecompanyhasarather,shallwesay,“unusual”takeontransparency.Inplainterms,yousimplycannotvalueWFC’sassets.Indeed,thecompanyitselfdoesn’tevenbother,statingrightupfront:
Approximately22%oftotalassets($277.4billion)atDecember31,2009,and19%oftotalassets($247.5billion)atDecember31,2008,consistedoffinancialinstrumentsrecordedatfairvalueonarecurringbasis.
That’squiteastatement.WFCisinessencesayingrightupfrontthat78%ofitsassetsareNOTpricedatfairvalue.Evenmoreinterestingisthefactthat98%($145outof$167billion)ofthesecuritiesthatAREmeasuredat“fairvalue”areLevel2orLevel3assets:assetsthatarevaluedbasedonmarketpricesANDmodel‐basedvaluationtechniques(make‐believe).
So,rightoffthebatwehaveacompanythatadmits78%ofitsassetsareNOTfairlyvalued.Andofthe22%thatare,98%ofthemarevaluedbasedatleastpartiallyon“marktomodel”accountingAKA“whateverwedecideit’svaluedat.”Icouldgoon,butthefollowingaloneshouldgiveyouanideaofthe“risk”associatedwithWells’business:Bank Derivative
ExposureAssets Derivativesas%ofAssets
WellsFargo $5.1TRILLION $1.1trillion 465%WFChas$3.4TRILLIONinnotionalvalueofinterest‐ratebasedderivativesalone.Ofcourse,we’retalkingaboutnotionalvalueofderivatives(not“atrisk”money).Thecompanyclaimsthefairvalueofthesederivativesis$90billion(theassumed“atrisk”money),butWFConlyhas$111billioninshareholderequity.Putanotherway,thecompany’s“fairvalue”derivativeexposurealoneisequalto81%oftotalshareholderequity.AndthatofcourseisassumingWFCisaccuratelymeasuringtheriskofitsderivativeexposure.Ishouldalsonotethatwe’renotevenbotheringtolookintoWFC’smortgagebackedsecurityexposure,commercialrealestateexposure,andcountlessothernon‐fairvalueassetsandliabilities.Sufficetosay,WFC’sbalancesheetisaliteralminefieldofpotentialrisks.Thechartdoesn’tlooktoohoteither:
Asyoucansee,WFChasbeenlargelyrangeboundsinceMay2009.IthadanexplosiverallyoffthemarketbottominMarch‐April2009.Butsincethen,notmuchhashappened.AndcomparedtoBankofAmerica(anotherbailoutdarling),WFC’sperformancehasbeenseriouslylagging.
ThebigpictureforWFC’schartisn’tanyrosier.
Asyoucansee,WFConaweeklybasis,fellintobearishterritory(beneaththe52‐weekexponentialmovingaverageorEMA)inOctoberof2007.Fromthenon,the52‐weekyEMAactedasstrongresistanceuntilApril2009,whenWFCbrokeabovethislineforthefirstsustainabletimeintwoyears.Sincethen,the52‐weekEMAhasbeensupport.WFChasbouncedaroundabit,buthasyettobreakbeneaththislevelinameaningfulway.Thatisourtriggerforwhentoshortthiscompany:whenitbreaksbeneathits52weekEMA(currently$27)onaweeklybasis.Untilthen,thiscompany(likeallfinancials)isahedgefunddarling,beingmovedthiswayandthatonsentimentandmomentum.Bothofthesepositionsaregoingintoour“StocksComeUnhinged”Portfolioaspotentialshortstowatch.However,IDOhaveonetradethatisreadyfortoday.Thisisperhapsthemoststretchedstockonthemarket.AsIwriteit’safull12%aboveits50‐DMA.Anditlookstoalreadybeentering“correctionmode.”ShortforTODAY:LimitedBrands(LTD)LikeDSW,Limitedengagesinconsumerretail.However,initscase,LimitedsellslingerieandcosmeticsviaitsVictoria’sSecretandBath&BodyWorksbrands.Thisrepresentsthemostextremeoftheconsumerdiscretionaryretailsegment:itemsthatareextremelyoverpricedandunnecessary(notstaples).Duringthegoodtimes,thiskindofbusinessisfantastic.DuringaDepression,notsomuch.
2009 2008 2007 Change2009
Change2008
SalesPerAvg.SquareFoot Victoria’sSecret $581 $620 $694 6% 11%Bath&BodyWorks $587 $594 $655 1% 9% SalesPerAvg.Store Victoria’sSecret $3,356 $3,480 $3,678 4% 5%Bath&BodyWorks $1,393 $1,410 $1,540 1% 8%Asyoucansee,LTD’sresultshavebeenplungingsince2007.Thisispreciselywhatyou’dexpectforthehigh‐endoftheconsumerdiscretionaryretailmarket.Afterall,whenmoneyistight,consumerstaples(foodandenergy)takepriorityoveroverpriceddiscretionaryitemslikeexpensivebodycreams&lingerie.However,youwouldn’tthinkthisfromLTD’sstockwhichhasrisen300%sincetheMarch2009lows:
Asyoucansee,LTD’sshareshavebeenonavirtualtear,onlyslowingtheirascentbrieflyfromOctober‐February.Theynowlooktobeina“blowoff”top.Indeed,whenyoulookatLTD’sweeklychartwithits52‐weekexponentialmovingaverageyougetaclearimageofjusthowover‐stretchedthisstockhasbecome:
Onaweeklychart,LTDhasgonevirtuallyparabolicinthelastthreemonths.Theonlyothertimewesawaspikeevenclosetothiswasinthesummerof2008rightbeforestocksfelloffacliff.Oncestocksbegintocollapse/rolloverinearnest,weshouldseeare‐testofthe52‐weekmovingaverageat$17(roughly30%fromtoday’slevels).However,inthenear‐term,LTDsharesareafull12%overtheir50‐daymovingaverage.Indeed,fromatechnicalstandpoint,LTDlooksripeforaquickcorrectionof10%ofso.
Asyoucansee,LTDsharesarefarabovetheir50‐DMAandnowshowingsignsofseriousfatigue.Iwishtonotethateverytimethestockhasgottenthisfarabovethe50‐DMA,adecentsizedcorrectionhasfollowed:
Inthevery‐shortterm(ona5minutechart),LTDhasalreadyrolledoverandisnowtestingitsmostrecentsupport(24.50).
Thenextsupportbelowthislevelis$23.50,then$21(afull15%belowtoday’slevel).TheoddsaregoodwecouldevenseeLTDwipeoutthelastmonth’sgainsfairlyquicklyifthecorrectionpicksupsteam.
Withthatinmind,Ithinkit’ssafetogoshorthereasaspeculativeposition.Butwe’reusingatight10%stoplossfromtoday’sclose($24.62).SoifLTDclosesabove$27.08,we’recoveringthisshort.Actiontotake:ShortLimitedBrands(LTD).Usea10%stoploss.FinalNotesIcontinuetobelieveanotherCrashiscomingforstocksbuthavedecidedtogiveupontryingtotimeit.IfthemarketswereoperatingbasedoncommonsenseorfundamentalstheCrashshouldhavealreadyhit.Havingjumpedinfrontoftoomanyrallies,I’mnolongergoingtobemakingformalpredictionsonwhentheCrashwillstart,instead,I’msimplyaddingpositionstoour“ComingCrisis”portfolio.Thesearepositionswe’llbeenteringoncethemarketbeginsitsfree‐fall.Ifyou’llrecallfrom2008,stocksdidn’tgostraightdown,insteadtheydropped,bounced,andthenbegantheseriouscollapse.Lookingbackatthattime,the50‐DMAservedasausefulmetricforgaugingthataseriousdeclinewasabouttobegin:
Asyoucanseestocksrolledoverandbrokebelowtheir50‐DMAinlate2007.Afterthat,the50‐DMAactedasstrongresistance.Indeed,therewasonlyonebounceabovethislevel,whichlastedroughlyamonthandahalf.Therealtroublebeganinthesummerof2008,andinvestorsweregivenadecentwarningwhentheS&P500collapsedandthenbouncedtotestthe50‐DMAandfailedtobreakit.
Similarwarningsappearedbeforethe1987Crash:
TheTechBubble:
Andthe2008Crash:
Thus,thistellsusthatthe50‐DMAisastrongmetricforgaugingwhenrealtroublewillhitstocksagain.Onthatnote,thetriggerI’llbelookingforintermsofwhenthenextCrashwillhitwillbeadecisivebreakbelowthe50DMAfollowedbyastrongbouncethatFAILStobreakaboveitagain.Rightnow,thereisnosignthatthisisabouttohappen:
Lookingattheabovechart,inJanuary2010wehadtheinitialsignsofanotherCollapsestarting:adecisivebreakbelowthe50‐DMA.Hadthemarketre‐testedthe50‐DMAandFAILEDtobreakaboveit,wewouldhavehadagoodindicationthatanotherCollapsewasstarting.However,insteadofthishappening,themarketbrokeabovethe50‐DMAwithconviction.Lookingatthis,IshouldhavecoveredallourshortsinlateFebruary.Iwillnotbemakingthismistakeeveragain.Onthatnote,we’reclosingoutbothourUltraShortChinaETF(FXP)andourUltraShortGoldETF(GLL).Bothoftheirunderlyingindexes(theFTSE/Xinhua25ChinaIndexandGold,respectively)continuetoeitherholduporareshowingsignsofstrength.Therearebetterplacestoputcapitaltowork,sowe’reoutofbothpositionsnow:Actiontotake:SelltheUltraShortChinaETF(FXP)Actiontotake:SelltheUltraShortGoldETF(GLL)
Gold:WhatGives?ManyofyouhavewritteninaskingmemytakeonGold.Afterall,Irecommendedbuyingsomephysicalbullionlastissue.Sowhydidn’tIaddittotheportfolio?ThesamegoesforSilver.ThesimpleanswertothisisthatIdonotknowofanyGoldETFthatistotallysatisfactory.SprottManagementrecentlyopenedaGoldTrust(PHYS)whichactivelyownsphysicalbullionandallowsinvestorstocashouttheirsharesintheformofactualphysicalbullion(minusexpenses).Theissuewiththistrustisthatyouhavetocashoutabar(30+ounces),notasingleounce.Alsoyoucanonlyredeemthemonceamonthandyourredemptionrequesthastobeaccepted(meaningthetrustcanchooseNOTtoacceptyourredemptionbasedonitssize).Soeventhisinvestment,whichishailedasbeinganactualmeansofowningphysicalGoldisnotwithoutmajorissues.Inplainterms,therereallyarenopaper‐basedGoldETFsthatIlike,butIHAVEformallyrecommendedbuyingGoldandSilver.GrantedIsuggestedowningthemmoreascatastropheinsurancethanasamomentumtrade,butforportfolioreasons,Ishouldbetrackingthissuggestion.So,I’veaddedGoldandSilverbulliontotheportfolioandwillbetrackingtheirpricesbasedonthecurrentspotpriceinthefuturesmarket.Onthatnote,Iwanttopointoutsomeveryseriousconcernsemergingaboutthepapergoldmarket:
ForyearsGoldbugshavebeenclaimingthatGoldwasmanipulated.However,upuntilthistime,mostoftheseclaimswerebasedmoreonanecdotalevidenceandconjecturethanfact.Thisallchangedafewweeksago.Isuggestwatchingthefollowingvideo:
ThenamedwhistleblowerwasthetargetofwhatappearedtobeahitandruninLondonsoonafterthiswentpublic.Heisrecoveringwithhiswife(bothofwhomwerestruckbyacarwhiledriving).Iftheabovevideo’sclaimsareentirelytrue,thenthisisaveryseriousmatterandshouldbeamajorredflagtoanyoneinvestinginpapergoldorsilver.Thefollowingisnotgoodnewseither:FormerGoldmanCommoditiesAnalystReportsGoldPaperMarketisaGiantPonziScheme.Sogoingforward,ifyouwantexposuretoGoldorSilver,ISTRONGLYsuggestbuyingactualphysicalbullionfromadealer.Also,withthesekindofshenanigansgoingonintheGold/Silvermarket,Iamofficiallynolongertradingeitheroftheseassets.Thiswholethinglookslikeahouseofcardsreadytocollapseatsomepoint.I’mnotgoingtobeplayingpokerwiththeremainingdeck.Sofromnowon,forourportfolio’spurposes,GoldandSilverarelongtermholdings.AndIamstressingthatanyinvestmentyoumakeineitherassetshouldbeinPHYSICALBULLION.Thisconcludesthisweek’sissue.Asabriefrecap,herearetheimportantpoints:
1) WeareclosingbothFXPandGLL.2) WehaveopenedanewPortfolio,titledIfYouHavetoBeInStocksPortfolio
whichiscomprisedofstockstobuyifyouHAVEtoremaininvestedinstocksgoingforward
3) We’veidentifiedtwofutureshorts(DSW,WFC)whichwewillbeshortingwhentheirrespectivetriggershit
4) We’reshortingLimitedBrands(LTD)today5) AnyandallfutureinvestmentsinGoldorSilvershouldbeinPHYSICAL
BULLION6) TheMarkethasyettotriggerthemostcommonwarningofanimpending
Crash(adecisivebreakbelowthe50‐DMAfollowedbyafailedattempttoreclaimthislevel).We’vegotanumberoftradesinourComingCrisisportfoliowhichwewillbebuyingassoonaswegetasignthatthenextRoundoftheCrisishasbegun
Thankyouforreading.IhopeyouenjoythenewdirectionofPrivateWealthAdvisory.Ithinkitdoesamuchbetterjobofhaving“something”foreveryone.Onafinalnote,thankyoutoallofyouforyourcontinuedwellwishesformywife.Sheremainsweakbutisdoingmuchbetter.Imyselfhavesomewhatrecoveredfromtheshock(ifayou’veeverhadacloselovedonesufferamedicalcrisis,youknowwhatImean),buthavetoadmitIwasbadlyshakenbyeverything.Myapologiesiflastissuewasmoreflusteredthanusual.BestRegards,GrahamSummers
If You HAVE To Own Stocks Portfolio Company Symbol Buy Date Buy/Short
Price Current Price Gain/
Loss Coke TWM 3/30/10 $55.00 Buy If Needed Budweiser BUD 3/30/10 $50.45 Buy If Needed Johnson & Johnson JNJ 3/30/10 $65.20 Buy If Needed Wal-Mart WMT 3/30/10 $55.60 Buy If Needed Exxon Mobil XOM 3/30/10 $66.98 Buy If Needed Stocks Come Unhinged Portfolio
Company Symbol Buy Date Buy/Short Price
Current Price Gain/ Loss
DSW (SHORT) DSW N/A N/A NOT YET Wells Fargo (SHORT)
WFC N/A N/A NOT YET
Limited Brands (SHORT)
LTD 3/30/10 $24.62 SHORT NOW
Bullion Portfolio Company Buy Date Buy Price Current Price Gain/
Loss Gold 11/2/09 $1,120.00 $1,113.00 0% Silver 11/2/09 $17.50 $17.49 0% Old Positions
Company Symbol Buy Date Buy/Short Price
Current Price Gain/ Loss
UltraShort Gold GLL 1/26/10 $10.29 $9.72 (SELL) -6% UltraShort China FXP 2/17/10 $9.04 $7.86 (SELL) -13% Coming Crisis Portfolio: Positions We Will Buy When the Next Crisis Hits Investment Symbol Reasons to buy when the Crisis hits UltraShort Emerging Markets ETF
EEV Sovereign debt default, end of liquidity rally, capital withdrawals on flight to safety
UltraShort Russell 2000 TWM The WORST index in the US, comprised of junk and unprofitable companies
UltraShort Real Estate SRS Second wave of mortgage rate resets, continued increase in defaults in housing,
UltraShort Materials SMN Economic Depression UltraShort Financial SKF Derivative exposure, systemic insolvency