Thursday, May 20, 2010

Approaching Flash Crash Bottom

I spoke to a couple of friends during the Flash Crash, indicating that the market would have to fall at least to those levels before we could see the correction dissipate, or at least calm down. We are now within a couple of percentage points of this reversal mark. While still bearish about the European prospects, and worried about the credit drought building there, I am now of the opinion that it is time to wade into higher quality stocks that have at least 65% of their revenues residing in North America, and are in less volatile sectors. National Presto, Laboratory Corporation of America, and Quest Diagnostics are some companies that appear qualify for purchasing at this time. I don't know where this market is headed, but companies with these characteristics should still profit during these times of economic uncertainty.

Full disclosure: I am long both NPK and LH at this time.

Monday, May 10, 2010

A $1T waste of money???

The $1 trillion dollar measure to support the Euro, and Euro-zone countries did not address the fundamental and structural issues surrounding the countries that it intended to save, and, to me, this is the one reason I think it will not resolve anything. The political maneuvering of Angela Merkel (German Chancellor) did not save her from losing control of Germany’s upper house, nor will it have saved the slide of the Euro and the remaining Club Med countries’ debt problems. The ECB will have to devalue its currency intentionally to really show that it is taking action. Throwing money at this problem is only showing to the world that the southern European nations have influenced the north, and now the whole Euro-zone is willing to destroy their fiscal responsibility.

The Euro must establish and enforce new austerity measures on EVERY country within the Euro-zone, including the usually responsible countries of Germany, France and the Benelux region. It is time the Euro-zone take responsibility, and promote productivity, deleveraging and individual responsibility.

Thursday, May 6, 2010

Germany's vote: The key to the next two weeks.

The unprecendented (we have never seen such a drop and immediate turnaround) action in the markets have led to many theories. Trader error, computerized trades, plunge protection team, etc. are all theories brought forward to explain what is a fat-tail event. At one point trading institutions were compounding the situation, and the Nasdaq and NYSE ended with their highest and second-highest volume totals respectively. The similarities to 2008 has been uncanny:

1. Iceland could be considered the Bear Stearns of sovereign economies. It fell first, and provided us with a sign of things to come.

2. The Club Med countries (Spain, Portugal, Italy, Greece, etc.) are all behaving similarly to the remaining financial companies in 2008. Their markets are all clearly falling, and they are bringing the Euro down with them.

3. Germany, one of the largest investing countries in Club Med, has hesitated in addressing the bailout. Like the US Senate, who hesitated on the economic bailout, members of Germany's controlling coalition are hesitant on accepting the bailout.

4. The feeling on the marketplace now appears in complete meltdown mode, and is now in a death spiral, with lack of confidence in counterparties and in the economies around the world.

With everything in turmoil, the biggest saving grace will be Germany's vote on the Greek bailout. If Germany votes unanimously to bail out Greece, it will provide some footing to the markets, and confidence that Germany will continue to support the Euro. If, however, German opposition and members of the key coalition decide to vote against the measure, either making the vote extremely close or even allowing the bailout to fail, the markets could go into freefall. With Germany investing in a substantial amount of the Club Med debt, I expect the vote to pass quite comfortably. But, I expect the markets to remain very skeptical of Spain, bringing them to the limelight in the next few weeks.

As I have stated before, I question the Euro's ability to survive the market action of the last 2 years (refer to my posts in October 2008 and January 2009). I personally feel that in order to survive, either all Euro countries need to accept devaluing the currency, or expelling the countries that cannot meet strict monetary disciplinary practices.

I am currently holding put options on NYSE:EWP (Spain) and NYSE:FXI (China), and intend on going short NYSE:EWG (Germany).

Friday, April 2, 2010

The Jobs Report - Good Friday Edition

For the third month in the last five, the U.S. job market has started to show signs of a pulse. Nonfarm payroll increased by 162,000, while the unemployment rate held steady at 9.7%. Overall, the Civilian Labour Participation Rate (the proportion of individuals employed versus the total population of individuals of employable age) is at 64.9%. Temporary workers, both for the Census and the private sector, continued to dominate the growth side of the ledger, as did healthcare (more on that later).

Whereas the unemployment rate is reported as 9.71%, the true U.S. unemployment rate is far higher than this, when we consider the fact that the Civilian Labour Participation Rate has declined from 67.3% in March 2000 (when the secular bear market began) and 66.4% in January 2007 (when the housing market collapse was confirmed), it is apparent that many individuals have simply left the job market. If we were to simply look at the unemployment rate using the past participation rates, unemployment rates are closer to 12.93% and 11.35%.

What does this all mean? Simply put, we are not nearly close to peak employment, and thus many inflationary pressures internal to the U.S. should remain low (such as housing and consumer capital goods). We should also hope that the U.S. Federal Reserve takes this into account when considering interest rate hikes in the future (after all, you don't want to alienate further parts of the population permanently out of the market).

The interesting labour trend of the last 3 years has been the increase in temporary and healthcare workers. Increases in temporary workers makes sense in the worst recession since the 1930's - companies are unwilling to risk their futures on a "shaky" economic outlook. However, the trend of increasing health care workers may be a sign of where the next economic bubble may occur. In the past, we have seen the first economic gains during recessionary times in areas where the bubbles form, like in the finance and construction sectors in the early 2000's and the technology sector in the early 1990's. I know it's early on, but the opportunities to make supernormal returns may present themselves in this field for the next 3-4 years, as investors identify the trend, and returns continue to grow. Compound this with the new healthcare bill, and we may have a winner (temporarily, of course!).

Monday, January 4, 2010

Five Stocks for 2010

Just for fun, here are my 5 stocks/ETF's for 2010:

1. National Presto Industries (NYSE: NPK): Who doesn't like some Presto cookware with some ammunition?

December 31, 2009 Price: $109.23 USD

2. Manulife Financial (TSX: MFC): Cheap, cheap, cheap. Beaten down because of shoring up capital. We'll see the upswing as people realize it is undervalued.

December 31, 2009 Price: $19.33 CAD

3. Progressive Insurance (NYSE: PGR): Huge cash flows, lots of premiums (unrealized claims) that generate large investment gains for the company. Just like Geico, this stock is ripe for growth.

December 31, 2009 Price: $17.99 USD.

4. Fastenal Corporation (Nasdaq: FAST): Simply put, this company sells small tools at construction sites and in industrial zones. If the stimulus package States-side is for "shovel ready" programs, than Fastenal should reap the benefits.

December 31, 2009 Price: $41.70 USD.

5. Barclay's India ETF: My opinion is that India will show accelerating growth and future prospects due to infrastructure, and attention to the largest democracy's growth prospects. After all, most Americans will be looking for safer alternatives to the US market and exposure to the USD.

December 31, 2009 Price: $64.11 USD.

Guessing the S&P 500 December 31, 2010 value: 1,231.49.

These picks are for fun, and should not be construed as investment advice. Contact your professional advisor for any investment advice.