36 Opportunities for the Beginning of the Bull
[Extracted from Bill Cara's Week-in-Review]
In observing extreme political and socially disruptive events that will stand out in history, many cynics have been born this month. We have seen the enemy and recognize it is us.
It has become exceeding difficult, if not impossible, to keep separate our biases as taxpayers and consumers and just plain people who struggle for a better life from that of our role as manager of our investments. But we must, because, in effect, these are personal conflicts of interest; something I say has been destroying society.
This week, despite the loss of ten percent of equity in the average portfolio in the span of five days, I wish to reiterate my belief that equity markets are in a cycle bottoming phase and that a new Bull cycle has commenced. Most of you, however, can only see that the trend has not yet turned from negative to positive. Moreover, you think the trend is worsening.
All I can do, then, is to ask you to keep an open mind; to approach your role as personal portfolio manager with an independent and objective mindset.
Part of the difficulty we all face is that mass communications today are being effectively branded; even legislation. Scriptwriters in Washington and New York have sold us a “$700 billion rescue package”. In their struggle to pass legislation that will benefit certain parties let’s say more than others, the headlines and stories stuck to the notional concept of $700 billion for rescuing us from economic circumstances. Yet, in our minds we know that the true figure – one that includes financial guarantees, related spending, funding of agencies like FDIC, and the like, is going to be at least more than double that $700 billion.
Within the disinformation and misinformation we are bombarded with, however, there are things going on that, as traders, we cannot ignore.
Fundamental arguments that are being made today are completely opposite to those made by the same people just two or three weeks ago. Take the peak oil theory, for instance. Analysts who pushed that particular story are now saying the world has too much oil for the present state of the economy.
We know that fear sells – even more so than greed. What is happening then is that the people’s emotions are being played by those who are control of the capital markets.
Having worked both sell-side and buy-side at a high level, I understand what the market is. By way of explaining it simply, I often say that the market is a game that plays people rather than the other way around. In a similar vein, I say that stocks are sold and not bought.
Now I spend my time helping educate and inform the people about capital markets in order to facilitate their taking control. My basic message is that the owners of capital need to take control of their wealth and to stay away from debt, which is the only path to financial independence.
Equity markets complete their Bull and Bear cycles with increased volatility, which is the case today. Bull cycles end when the actors run out of cash needed to push prices higher. Bear cycles end because cash holdings build up to very high levels amid the growing opportunities to buy value.
Presently the latter situation envelops the market. There are at least $4 trillion in cash now on the sidelines plus a couple trillion more in newly printed fiat money from the treasuries of governments around the world. There is sufficient cash to feed the Bull.
All we are waiting for is a decision by those in control of this market for the buying to begin. Yes, the market today is being controlled not by the people but by central bankers and finance ministers by way of recent decisions to put the people of today into more debt to be repaid, they hope, by future generations. This strategy is called reflation.
Reflation will work today, but will result in problems with more inflation and financial failures tomorrow. By tomorrow I mean in probably two, three or four years.
For trading discussion, inflation means the destruction of paper wealth faster than the creation of real wealth in the form of newly produced hard assets like real property improvement and the mining of gold and other metals and minerals. To be countered and defeated, higher interest rates are required.
As we all know that in many countries the present rate of real property foreclosures is skyrocketing, which threatens to put the domestic and regional economy into severe recession and possible depression, governments around the world need the time to legislate relief packages for families who are losing their homes. As the use of real property as a home is quite different than the investment in real property for financial returns, government is saddled with the difficulty, if not the impossibility, of finding a solution that eliminates (for a period of time) the equity in real property but at the same time permits families to stay in their homes. That legislation, at least in the US, will take at a year or more in the making.
Important to traders of US capital markets is the fact that legislators will return in January to start addressing this crucial issue. There may also be interim relief to stave the crisis from deepening.
The credit ring among bankers will be saved with (i) immediate guarantees of inter-bank loans, and (ii) a flood of mergers and acquisitions among banks that will mask, for a time, the issues many of them face with bad assets. In time, these assets will be properly marked to market, but in an unstable environment the hastily constructed mark-to-market regulations ought to be withdrawn. Similarly, the short-sale rule applied to financial services companies and then extended to many other industries and individual companies needs also to be rescinded asap.
The capital markets require short selling as a process that keeps markets honest as a facilitator of value discovery. Regulators, instead, must re-focus on the criminals who have abused the legitimate practice of short selling. Without the right to short in capital markets, hedge funds, which the markets need for liquidity reasons, will be put out of business. That would lead to increasing manipulation, which the owners of capital can ill afford.
This weekend there are high level conferences by international heads of state, finance ministers and central bankers to try to work out temporary solutions to the global credit crisis. America has taken its bitter medicine first. Humongous Bank & Broker is waiting for the others to follow before they will re-start inter-bank lending at the levels required by credit markets.
The timing of such agreements will be linked to the kick-start of the new Bull market. My point in switching from Bear to Bull is to alert you to these important events among governments and bankers. You do not want to miss the beginning of the Bull run. You have been saving cash for that purpose. Now is the time to be thinking of using it.
This past week I gave you some equity ideas – 36 stocks of high quality companies – some more conservative than others. I avoided debt market ideas because I believe that interest rates will have to lift significantly to help pay down the cost of the reflation strategy that has been adopted, which will cause bond prices to fall. As fiat money is being printed much faster (because of the reflation policy) than economic wealth will be created – at least for a couple years, I believe that precious metals, as storehouses of value, will lift in price a lot.
Interestingly, as the $USD gains strength and interest rates rise relatively faster in the US than in other countries where rates are higher, I believe that precious metal prices will also rise. Gold, for example, may be denominated in $USD, but it is still a hedge against fiat money depreciation which will happen in each country until the use of the newly printed money begins to create strong economic value. At that point, traders ought to sell their gold and invest the proceeds again in equities. For now, however, I recommend 20% investment in gold and goldminers; the latter which will lift in price as their top line revenues increase. Also, with a higher gold price the economic cut-off grades for valuing reserves get smaller, which leads to the calculation of higher ore reserves, which factors into higher share prices as well.
As nobody knows when the equity market complex technically will revert from Bear to Bull – I say it has done so notionally this past two weeks – I have accordingly reserved 40% investment in short puts in the shares of select high-quality Cara 100 companies (see my list of 36). My objective is, in effect, to put in stink bids expecting that only a few are met with stock that is put to me by traders who are under duress of margin calls or other aspects of emotional or forced selling. That is a double win because (i) the stocks for some are acquired at a very low price and (ii) the remaining short puts expire worthless, which is my income while waiting for this market to become an apparent Bull.
Herewith is my list of the 36 candidates republished from October 1:
I have a list of three dozen stocks to consider buying here. Each of these companies has respectable management, financial strength, operating margins, long-term returns on shareholder capital, industry leadership positions, and good products and services. There are problems with some of them, but consider that these same problems were evident during recent times when share prices were much higher.
In order of the GICS sectors, here are the 36 companies and ticker symbols (alpha order) that I like:
Sector 10: Energy
• (ECA) EnCana
• (IMO) Imperial Oil
• (SU) Suncor Energy
• (XOM) Exxon MobilSector 15: Basic Materials
• Mostly precious metals at this point [25% invested after the $USD reaches a short-term cycle peak in a couple days as the Euro/Pound sinks due to the credit market crisis that monetary authorities there must stabilize].
• (ABX) Barrick Gold
• (DOW) Dow Chemical
• (GG) Goldcorp Inc
• (SLW) Silver WheatonSector 20: Industrials and Transports
• (ABB) ABB Limited
• (BA) Boeing
• (GE) General ElectricSector 25: Consumer Discretionary Spending
• None at this point until the credit markets recover
• After an initial rally from an over-sold condition, most of these stocks will likely miss the first leg of the Bull and start to lift, say, about March 2009Sector 30: Consumer Staples
• (DEO) Diageo
• (KO) Coca-cola
• (MCD) McDonalds
• (PG) Procter & Gamble
• (WAG) Walgreens
• (WMT) Wal-MartSector 35: Consumer Healthcare
• (DNA) Genentech
• (JNJ) Johnson & JohnsonSector 40: Financial
• Only a few at this point until the credit markets recover
• After an initial rally from an over-sold condition, most of these stocks will likely miss the first leg of the Bull and start to lift, say, about March 2009
• (HBC) HSBC Holdings [very strong in the emerging economies]
• (IBKR) Interactive Brokers [brokers and traders and not dealers]
• (OXPS) OptionsXpress Holdings [brokers and not dealers]
• (RY) Royal Bank of Canada [very strong in the emerging economies]Sector 45: Technology
• (CSCO) Cisco Systems
• (DELL) Dell Inc
• (GOOG) Google
• (IBM) IBM
• (INTC) Intel Corp
• (ORCL) Oracle
• (QCOM) Qualcomm Inc
• (RIMM) Research In MotionSector 50: Telecom
• (MICC) Millicom International
• (NOK) Nokia Corp
• (TEF) Telefonica SASector 55: Utilities
• (CCJ) Cameco [not a utility, technically speaking, but supplies uranium]
• (EXC) Exelon Corp [uranium utility]This list is lengthy but not complete. I can think of many other high quality companies that are trading at attractive prices. I just need to remind you that cycle bottoms happen in periods of fear (and when we have cash and credit available) just like cycle tops happen in periods of greed (and when we run out of cash and credit).
You know where the world stands today. I cannot act for you, but I can tell you what I am doing for clients because this is a period of fear (and the accumulation of trillions of dollars of investable cash), and I have no problem taking action.
To repeat what I have been saying through this Bear market ending process; it pays to close your ears and to direct your full attention to prices. Trends and cycles are reversing here. This time in the market is what successful traders wait for. Carpe diem; seize the opportunity.
No matter what I say, this is a free blog among many others and many of you will choose to follow a different path. I have spoken now at length on this subject, and I must tell you I refuse to continue to debate it. That would not be good use of my time.
I leave it to you all to discuss your ideas and beliefs in the Discourse. In fact, I welcome it.
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This article has 35 comments:
- TopForeignStocks
- 55 Comments
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Oct 05 02:00 PM- basehitz
- 30 Comments
Oct 05 03:31 PMThank you for your thoughtful post. I invested through the last bear market. Today, I can find prices of solid companies at the last bear trough, in spite of improved aspects. For example, last week bought JBL near $9. They just reported earnings, positive cc, and stock was bid up to $12 premarket. In spite of earnings being out, it was still trashed. Finding value is easy. Staying patient is tough.
- Investa Mania
- 6 Comments
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Oct 05 03:54 PMEven when people start unloading their cash that has been accumulating, the capital markets will not be the same. Credit will not be as available, which will change the playing field in the market.
We must let everyone know that capital-intensive driven sectors will probably be hurt in the next few years. Hence, we must find companies who are able to accumulate cash to finance their projects and operations.
The era of easy credit is done.
- curbs-in
- 385 Comments
Oct 05 04:53 PMInteresting choices. I hope you are right, for all of our sakes.
I've got to ask you a couple of questions, based on your background with firms like KPMG and PricewaterhouseCoopers...
How on Earth, did professional accountants, allow our financial system to rot at the core? The financial instruments being used are so complex, it may take thousands of forensic accountants decades to figure out what went wrong...
It seems like nobody in business, be it MBA's, accountants, etc. ever blow the whistle on these schemes until we are thrown off the cliff... Enron, MCI, the list goes on...
Anyhow Bill, I see some interesting choices on your list, but I'm not sure the landscape, as we move ahead, will support some of your choices... Energy looks good...
- M. J. Docl
- 2 Comments
Oct 05 05:13 PM- Ray Lopez
- 90 Comments
Oct 05 05:34 PM- Jonathan Swift
- 14 Comments
Oct 05 06:10 PMDoes anyone follow the profit/loss history of these blog commentaries?
I'd like to see the performance record of the above recommendations in about a year.
- rsen01
- 3 Comments
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Oct 05 06:27 PM- curbs-in
- 385 Comments
Oct 05 06:55 PMIt is what I call the "Madison Avenue" aspect to our economy... Demand and value creation in the markets run amok. As I read yesterday, the "Pet Rock" concept... It's worth it because you are made to believe it's worth it.
For the past 20 years our economy has run from bubble to bubble created by marketing and advertising firms (I blame them just as much as Wall Street), but now the world is hitting a brick wall.
I don't think any amount of Hype in the media, bloggers, or even the latest CNBC's savior (GE) What Would Buffett Do? push consumers and investors into this farce anymore.
When the market gets down to value (one suggested DOW 5,000 ... I think 6,000 or 7,000 is more realistic), only then will investors be drawn back into the market as it won't be built on hype and marketing/media games.
Currently, I feel the risk is to the downside and big time...
- Jolly_Rancher
- 61 Comments
Oct 05 06:57 PMI think GE is probably not the most imaginative pick. Why pick a stock for it's industrial nature whose earnings in the past have come mostly from the finance arm? Also it is composed of heavily healthcare and entertainment. Doesn't make sense. Maybe TEL makes more sense as an industrial conglomerate.
- curbs-in
- 385 Comments
Oct 05 07:01 PMIt is really sad... It seems like so many good companies actually diversified themselves into this mess! I think a lot of them were fooled, just like the public.
- curbs-in
- 385 Comments
Oct 05 07:02 PM- Garry
- 18 Comments
Oct 05 07:08 PMThanks
- Jase
- 43 Comments
Oct 05 09:04 PM- Ames Tiedeman
- 702 Comments
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Oct 05 09:16 PM- Jolly_Rancher
- 61 Comments
Oct 05 09:32 PMAmes, I actually think you and Bill Cara are both correct partially!! I think this is a bottoming cycle but the bottom ain't gonna be pretty -- maybe six months of wicked downs and ups that will pretty much keep the ETF investors thoroughly whipped out. 1975 this is NOT. The best one can do is buy companies whose earnings are not entirely driven by the economy, like selective drugs/healthcare. Again, very company specific. Indiscriminate buying or shorting will result in whiplash. Perhaps dividend plays make sense here -- stable companies only with little economic downside.
- John Pseudonym
- 230 Comments
Oct 05 09:36 PMYou are way overly optimistic.
This will take much longer to correct itself and if the politicians keep trying to stop the decline and speed up the recovery we are all going to end up in soup lines.
- curbs-in
- 385 Comments
Oct 06 12:07 AMI think there are a lot of people who will be choking on their optimism in a few days... Or I'd like to know what's in that glass their drinking... :-)
Asia is tanking, even after the bailout and fingers are pointing now at Congress for screwing things up. A $700 billion bailout that didn't even get an up tick.
Soup lines... I don't know what it's like where you are, but I've already heard of suicides that are believed to be related to these financial problems in the United States and overseas.
Anyhow, I do think energy stocks are the best bet of the group since many are involved in alternatives and hybrid sources... But all of them long, as this may turn out to be a decade or more correction. (sorry those of you in the instant gratification generation -- how we got here in the first place).
- jrs87sch
- 11 Comments
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Oct 06 01:13 AMThe price may have dropped quite a bit from its high, but Apple still has a long way to go in gaining market share in computer sales, which is their most profitable product type. Also, they will continue to innovate. Apple is really a great all around company that you can buy for relatively cheap now.
- Matt Blackman
- 172 Comments
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Oct 06 02:02 AMYou and all the other analysts I've heard labeling this an excellent or 'once in a generational time' to buy may be right. But given the trend we are in there is a greater chance you and they are wrong. (Trends reverse when a force greater than what is pushing them down exerts an upward force). Such major trend reversals do not happen often especially considering that the bailout attempts are now having a diminishing effect (see tradesystemguru.com/co... ). Our debt situation ( tradesystemguru.com/co... ) doesn't help....
- Pipo
- 192 Comments
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Oct 06 06:05 AMRead his latest interview at: jimrogers-investments....
- Cheap Charley
- 1 Comment
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Oct 06 06:13 AM- Pretzel Logic
- 65 Comments
Oct 06 07:21 AM1) The markets are overly unstable, as the 300-700 daily point swings illustrate. We run the real risk of a crash.
2) The fundemental conditions are not anything most of us have seen in our lifetimes. Maybe everyone is RIGHT to be fearful. Contrarian indicators generally only work to confirm other indicators. They are virtually useless on their own, because the levels of bullish/bearishness are all relative. As an example: It may seem high when 50% of the people are bearish, relative to the 20% who were 2 months ago... but it will turn out that 98% will be bearish at the REAL bottom -- which makes the 50% seem low. There's just no way to know where you are in that cycle, except by hindsight.
3) There is a risk of systemic meltdown. This would obviously be exceedingly bearish.
4) The hedge funds are facing extremely high redemptions, and may be forced to continue selling.
5) The market anticipates the future. The future 6-9 months ahead looks worse, not better.
All in all, I have considered trying to bottom pick, but decided against it. Bottom picking implies a bottom -- and I'm not convinced we're there yet. Stocks are still not cheap by historical standards.
I would rather miss the exact bottom by a few percent than be way too early and lose dozens of percent.
- Mountain Fist
- 38 Comments
Oct 06 09:39 AMNot catching this falling knife, I am out and in cash. There will be other ways to make money, but it won't be by going long stocks denominated in US dollars. I'll look to buy in the next 5 years or so, but we've got a LOT more downside to go.
- davemcc3300
- 36 Comments
Oct 06 11:43 AM- oldman
- 54 Comments
Oct 06 11:55 AM- wallyjm
- 39 Comments
Oct 06 12:32 PM- Lin
- 44 Comments
Oct 06 01:52 PMYes , you are correct , but Russia , along with Brazil , are tanking , along with China + Europe . This will be a global Depression .It will be most severe in The US + Europe . You had better hope that there are soup lines. How will you get there with the price of Gas ? More mass layoffs are coming + martial law
- getshorty
- 1 Comment
Oct 06 04:01 PM- LobsterM
- 327 Comments
Oct 06 09:58 PMmore hurtful than the last one.
- Anti-Fool
- 9 Comments
Oct 06 11:29 PM- sickofthehype
- 184 Comments
Oct 06 11:30 PM- Shiv
- 66 Comments
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Oct 07 12:46 AM