This is the first of what I hope to be a weekly posting discussing the week that was, the week that will be, and other commentary on market/investing strategies.
The Fed has created a more stable financial system. The financials as well as the market now have downside protection, something similar to dividend-yielding stocks. The dividend protects a stock from getting knocked down too far because as the stock price declines, the dividend yield increases, therefore attracting new buyers. Financial companies now have the Fed acting as a support to prevent further declines. The last few months everyone talked about the path of least resistance being down, but I feel we can now say the opposite - the path of least resistance is up. Fears have been calmed on
Some of the next few comments are courtesy of CNBC’s Fast Money. The Fed burst a lot of bubbles with their recent policy action: those shorting the dollar, those shorting the financials, and those long the commodities, especially gold. Gold is purely a speculators’ instrument and not really a commodity. Yes, there is global demand for gold, but the price action of gold is simply the opposite of the dollar’s price action. As the dollar goes lower (mainly because of a slowing economy and high inflation), gold goes up because it costs relatively less. Some feel the agriculture names have also burst, but I do not believe that is the case. The agriculture story is not just an “opposite the dollar trade,” but I do believe some of the commodity prices were a little inflated. Global demand for these commodities is present and it has been consistently rising the past few years. I don’t see an end in sight for rising commodity costs unless the Fed pulls the plug on ethanol as a viable alternative fuel source. For investopedia, I’m looking for a bounce in the ag stocks this week so I can begin scaling out and putting my money to work elsewhere – financials.
Of the commodities, I believe gold will sell-off the most because it is has been the most speculative and people just seemed to be dumping their money there the last few months because nothing else was working. My new price target for gold is $800-850. This is where gold was trading in late December before things really fell apart.
I believe crude will also suffer some more declines before prices stabilize. Investors also poured their money into crude oil as a speculative investment, and now some of those trades are unwinding. As the dollar continues to rebound, a barrel of oil becomes relatively more expensive to buy so the demand will not be as great. My new price target for crude is $90. The last few weeks we have seen inventory builds and last week’s prices of $110+ did not support the true value of oil. $90 was the price of crude in early February. I don’t see oil going below $80 because at this level, OPEC will step in and cut supply in order to support higher prices. I will be gradually scaling out of my energy stocks in investopedia this coming week. One point to note, though, is that the energy stocks have not had a huge run-up while crude oil has been spiking. Therefore, the downside in these names is limited because the stock prices are not as inflated as the commodity.
Disclaimer: I set these price targets assuming there will be no more catastrophic news from the financial companies, and that the Fed will only lower rates moderately, if at all, at their next meeting. We’ve seen some positive news already regarding the Fed’s new policy actions as investment banks have already been utilizing the discount window to acquire much needed cash.
Something to keep an eye on is Wal-Mart. WMT hit a 52-week high and recently broke out of a three year trading range. Discount retailers look attractive based on historic valuations.
Earnings reports:
Monday – Tiffany (TIF), Walgreen’s (WAG)
Tuesday – Yamana Gold (AUY)
Wednesday – Deutsche Bank (DB), Oracle (ORCL)
Thursday – Lennar (LEN)
Friday – KB Home (KBH)
Economic Calendar:
Monday – Existing Home Sales
Tuesday – Consumer Confidence
Wednesday – Durable Goods Orders, New Home Sales, Crude Inventories
Thursday – Q4 GDP (final), Initial Jobless Claims
Friday – PCE Inflation data
Something to watch as the first quarter ends is the agriculture stocks. Please reference Dave Light’s March 5th article, “Buy the Pullbacks,” when he talks about mutual funds wanting to own these stocks so they can show their investors they owned “the winners.” If I still own these names at the end of the week I might buy some put options to protect myself on the downside just in case funds start selling these names just like they did with tech stocks a few months ago.
The biggest market mover, in my opinion, will be Thursday’s Term Securities Lending Facility where banks can exchange their “bad” mortgage-back securities for “good” government Treasuries. Banks can then sell their newly acquired Treasuries on the secondary market for cash to fix their deteriorating balance sheets.
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