Weekly Recap & Outlook – 09.18.09

Tower Private Advisors


  • Couple of investment ideas for your careful, discriminating consideration and edification
  • Economy meandering along
  • Added cut-to-the-chase summary to the economics section

Recent Posts

One more thing for up here, we’ve got two seminars scheduled for next Wednesday (9/23).  The speaker will be Federated’s Market Strategist Linda Duessel.  We’re fond of Federated since they include a couple of funds appropriate for sloppy/choppy/bearish markets. They know how to address those markets.  She was a hit with attendees last November, and she will undoubtedly be this time round.  E-mail Holly Redding at holly.redding[don't include this]@towerbank.net for more details.

Capital Markets Recap


What passes for gold in the table above is really the S & P exchange traded fund for gold.  The ETF represents approximately 1/10 of the price of an ounce of bullion, but it’s close enough for our work to multiply by 10 to get the figure above.  This week reinforced the difficulty gold is going to have holding $1,000–much less rising considerably above that level.

In our eclectic approach to managing investment portfolios we look at some pretty obscure stuff, including a class of indicators known as Demark indicators, and we like most that group’s indicators that highlight exhaustion among buyers and sellers, and several of those indicators are saying that the decline in the dollar is nearly over, and while the eventual rally may only be a bull rally in a secular bear market, it will set gold, and other commodities, on their heels.  It’s hard to find any commentators who are bullish on the dollar, and as one of Gary Helm’s bits of conventional wisdom (click here for that amusing posting) says:

617852-29-2    Buy when you can’t find a bull

Speaking of eclectic, one strategy we’ve employed successfully this year has been writing covered calls.  Also called “overwriting” or a “buy-write strategy,” it involves selling another party the option and right to buy a given stock at a given price by some point in the future.  This has to be done selectively as one wants to enjoy nice compensation for the risk of getting taken out of a stock in the midst of its rise.  Here, though, is an example* of one that makes sense today.

  • Allegheny Technologies(NYSE:ATI) is a manufacturer of specialty materials like superalloys, titanium, and titanium-based alloys, some of which are employed in the field of medical equipment.  This is not your typical producer of flat-rolled steel. 
  • Its P/E is 14x trailing earnings, although the P/E based on future earnings looks terrible (33.8x).  See Gary Helms conventional wisdom #521598-14-3 (Cyclic stocks should be bought when their multiples are high and sold when their multiples are low.)
  • In the last 12 months the stock has traded in a range of $15 to $45, and it presently sits at $34.86.
  • January 2010 call options with a strike price (the “given price” above) of $37 are selling for $3.60/share, or 10.33% of the stock’s price, akin to a yield.  Annualizing that and the upside to the strike price produces a total annualized return of 49.40%.  The option premium also cushions the stock against a 10.33% decline.

If you pursue this strategy–something you found on the internet–something for which you pay nothing (which, by the way, approximates its value)–well, you probably deserve to lose money.  It’s an example, which happens to be one we’d feel comfortable implementing for clients.  Oh, and annualizing returns is not something we recommend; it’s just that with options of varying types (strikes, expiries, etc.) it’s a way of making apples-to-apples comparisons.

Top Stories

Markets started out the week with news that the Obama administration would be levying tariffs against the Chinese on tires that it exports to the U.S.  On the immediate heels of the news the markets were weak as this remains a lingering concern and one that we addressed back in 2006 in our mid-year outlook.  That outlook was titled “What We See,” and its context was the following.

Someone with more credentials and experience than us said something like the following: it’s not the story on page one of the newspaper that really costs an investor; rather it’s the story on page sixteen that one should be concerned with. Similarly, we should be more concerned with what the average investor is not concerned with rather than with what he or she is concerned with, since the latter is, by definition, priced into the markets. Accordingly, we present to you a few things that we are keeping an eye on.

One of the areas that concerned us at the time was that of possible protectionism, and we penned typed the following.

Historically, policy efforts to correct trade imbalances—whether in the name of protecting industries, workers, or national security—have produced disastrous consequences; witness The Great Depression or 1987’s Black Monday. The cries for action on this front are getting louder, and the results could prove to have massive and unpleasant consequences.

Here’s the problem.  While the White House, naturally, defended its decision, China appears ready to look into “whether U.S. chicken and auto products are being dumped at below-market prices or receive unfair government subsidies.”  A tip-for-tat (avoiding the riskier form in favor of the 1556 version) retaliation could have escalating potential at a time when we need the Chinese to be supportive of us.  U.S. Steel, having seen the willingness of the administration to impose tariffs, is seeking to have import duties imposed on Chinese steel pipe.  As we said in 2006 this is a situation to watch.

Markets levitated on Tuesday when Fed Chairman Ben Bernanke declared, “the recession is very likely overat this point.”  That sound byte leaves out an important introductory clause, one that gets omitted when folks trash Gentle Ben for being a Pollyanna.  There he said, “from a technical perspective, the recession is very likely over.”  What he means is that the NBER will declare the recession ended (probably in June) based on the panoply of things they watch.  He went on to say that “it’s still going to feel like a very weak economy for some time.“  Put us firmly in that line of thinking.

Former Fed Chairman, Paul Volcker, echoed those comments in a speech in California on Thursday.  He also gave a cue about his view on ‘flation, something with which he’s well acquainted.  First, he said, “it will be a long slog–a matter of years–with the risk of some relapses along the way.”  As has been pointed out in this bit of the ether, the economy remains well below capacity, and that excess capacity is going to keep a lid on inflation for a while.  He said, “we have a long way to go to get back to the point of fully utilizing our economic resources and restoring . . . full employment.“  It’s that last part that fits with our inflation–or lack thereof–thinking.

With everyone’s eyes wide open after the residential real estate debacle, the crisis goggles were quickly turned to the next crisis(Generals fighting the last war comes to mind) to pop up, commercial real estate.  Not about to get caught with its metaphorical pants down, the Fed is on the case, and you shouldn’t worry a bit.  A Bloomberg September 16 story reported that the Fed is “examining mid-size banks’ exposure to drops in commerical real estate.”  If and when the shoe does drop–widely anticipated events tend not to be as devastating as expected–the fissures could be interesting.  In terms of the biggies, as of March 31, Wells Fargo (not a mid-sized bank to be sure) is tops at $88 million (10% of total loans); Bank of America is next at $59 million (5.8% of total loans); the next is a bit of a surprise:  Metlife with $32.5 million, a cool 50% of its total loans, which is, admittedly, not its core business.  Closer to home, KeyCorp is at 14.2% (partly to blame for its group-trailing stock performance; Comerica is at 22.5%.  Zions Bancorp (Salt Lake City) is at 22.5%; M & T Bank (Buffalo) is at 24.7%.  If any bodies come floating to the surface it could make for some interesting action in these and other names.

  • Here’s an investment idea to consider* (click here for a definition of consider).  There’s no concentrated way to benefit from the likely plight of some banks with high exposure, such as the aforementioned and the number of predicted bank failures (just google “bank failures”), but there is sort of a back-door way to position a portfolio. 
  • There is an inverse finance sector exchange-traded fund, the ProShares Short Financial ETF (ticker SEF). 
  • About 30% of the fund is comprised of solid, few-worries companies, like Goldman Sachs and JPMorgan Chase.
  • Here’s the strategy:  buy* SEF and hedge the good-company exposure by investing 30% of the SEF amount into these two solid industry representatives.  Here’s a specific example.  Buy* $10,000 worth of SEF and offset that with a $3,000 investment in Goldman Sachs.  This will come close to approximating a net short position in the weakest of the finance sector.

If you pursue this strategy–something you found on the internet–something for which you pay nothing (which, by the way, approximates its value)–well, you probably deserve to lose money.

Finally, the good folks at the Williams Inference Center–visiting us next week, by the way; stay tuned–put us on to the idea of the consequences of society working through the stages of grief, in response to CEO shenanigans, bailouts and the like.  One of those stages is anger, and we’ve got our antennae up for signs of this on the rise.  Here’s a tangential connection to anger–or at least something that doesn’t go well with anger.


Top Company News

Adobesaid it would acquire Monitor Omniture, a company that tracks online ad campaigns and other internet activity.  It sound like sales of Adobe’s key creative software applications is trailing expectations and prior launches, and this add-on will help it diversify.  The stock got beat up on the news but Barron’s took the other side and said it likes the deal.  Palmsaid that its sales would top analyst estimates as, according to Bloomberg, “customers warm to [Palm's] Pre smartphone.  The stock has been getting beaten by Apple (AAPL) and Research in Motion (RIMM) since July, and the iPhone seems to show no weakening.  Still, this is a game of perception and sentiment, and it wouldn’t take much good news to push the stock up.  I’ve never shorted a stock in my life–although it sounds like fun–but a common strategy among those who can is called a paired trade.  In such a strategy, one short sells one stock and uses the proceeds to invest in one expected to perform better, and it’s not hard to imagine a paired trade strategy involving Palm.  An improvement in Palm’s fortunes could send bears scurrying to cover their Palm shorts, liquidating their AAPL and RIMM longs. 

Speaking of technology, a Bloomberg story  mentioned that asset manager Blackrockis looking to invest in technology to “cut billions in Wall Street Fees.”  It’s stories like that that have helped the technology group to be the first to regain its pre-Lehman Brothers heights.  That hasn’t gone unnoticed by investors, who are piling into technology.

JPMorgan Chase, not surprisingly, said it wouldn’t be quickly restoring its dividend, proving once again that dividends come down a lot faster than they go up.  Sounds like the same thing that happens with checking account interest rates.  And in the category of don’t-they-ever-learn, AIG‘s new CEO, Robert Benmosche (say that a couple of times, “ben mowschhhh”–beats the tar out of STETTTTNER) found that AIG’s board didn’t much cotton to the idea of him using the corporate aeroplane for personal business.

This Week

Cut to the chase:  Chairman Bernanke might be right that the recession is over, but the signs of recovery are tentative.

Inflation data, as presented by the Producer Price Index and Consumer Price Index, was pretty benign.  Keep in mind that the bigger risk to the economy in the inflation versus deflation arena is deflation.  In fact, inflation might just be the easy way out of our debt problem as both consumers and government get to pay back debt with deflated dollars.  Any lessening of deflation fears will be welcome.  Prices at the producer level rose in August, above consensus estimates and July data, while consumer prices were largely in line with expectation.  At the headline level, year-over-year price changes are running at rates of -4.3% and -1.5%, respectively, both of which represent better rates than in July.  Unfortunately, these measures of ‘flation have shown a habit of bottoming out well after recessions have ended, as the chart below evidences.  For now, you can put your runaway-inflation-the-government’s-printing-money hat away.











Inventories have yet to rebound, although the rate of decline might be improving.  Business Inventories contracted by (-)1.0% in July, which was a better pace than in June.  Originally, the June figure was -1.1%, so the July improvement was modest; subsequently, however, the June figure was revised to -1.4%, making the improvement seem more significant.  The revision suggests, though, that July’s figure will be rivised lower, too.  No inventory rebuilding yet.

Economists recorded a rare trifecta in their housing market forecasts, calling each almost perfectly.  First, the NAHB Housing Market Index (i.e. builder sentiment) improved by one notch, to 19 from 18.  Second, Housing Starts came in at 598,000 (economists expected 598,000).  Third, Building Permits came in at 579,000 (economists expected 584,000–close enough.)  Mortgage Applications, however, fell by (-)8.6%.

Industrial Production and Capacity Utilization both improved slightly.  The biggest jump in industrial production came in output from utilities, while mining and manufacturing output were each about one fourth of that.  Initial Jobless Claims fell by 5,000, which was 12,000 less than estimated.  That caused the commonly-used four-week moving average to turn back down, resuming the welcome downtrend.  Finally, the Philly Fed index rose (to 14.1) far above expectations (8.0), and well above the August level (4.2).

Next Week

MondayLeading Economic Indicator is released.  An expected reading of 0.7% would push the LEI into modestly positive territory, from its current +0.2% level.  The report includes three indicators:  the aforementioned leading indicator, a coincident indicator, and a laggingindicator.  The coincident indicator has a good track record of bottoming out at the marked end of each recession since 1949, leading by one month in two cases, lagging by 2 in another.  On the other hand, the cynic has to wonder if, in spite of all the recession-calling NBER’s rhetoric, recession’s end is heralded simply when the coincident indicator turns up.  If so, it looks like June will mark the end.

Tuesday - the first bit of housing data is presented in the form of the House Price Index, the index of housing prices said to capture more of the country than any other home price index.  It’s expected to have risen by 0.5% in July.

Wednesday – we get the Federal Open Market Committee‘s so-called “Rate Decision,” so-called since there is no decision to be made regarding rates.  They can’t be raised for fear of smushing the economy, and negative interest rates are somewhat unlikely.  As in the days when rates could be raised or lowered, the more important part of the press release will be the various ambiguities about the state of the economy.  MBA Mortgage Applications mark the second housing data point of the week.

ThursdayInitial Jobless Claims are announced, and economists expect them to have tallied 546,000, in line with this week’s figure.  Our own excuse for a forecasting model will do them 1,000 better and forecasts 547,000.  As in the childhood way of picking out who gets to sit in the front seat by picking a number between 1-100, we’ll edge out the economists with anything north of 546M, while we get shut out on anything lower.  We get the week’s third housing data point with the release of Existing Home Sales.

Friday – with 89 separate industry categories, the report on Durable Goods Ordersprovides a look into the most carefully-considered purchases in the economy.  What with big purchases of locomotives and defense equipment, the report’s sound bytes are usually presented in several formats, including the headline figure (expected to be 0.1%; 5.1% in July), orders net of transportation (0.8% expected; 0.8% in July), orders net of defense, and the last two combined.  Like most other indicators these show an economy just being transferred from the operating table to the guerney, but still not in recovery.  In contrast, New Home Sales are being wheeled from the operating room to recovery, the patient having received several doses of medications.  New home sales are rebounding nicely, although still far, far below highs, and with most sales occurring at very low price points.  Lastly, we get consumer confidence in the form of the month-end view of University of Michigan Consumer Confidence.  Economists expect it to be unchanged from mid-month.

Consider yourself informed.


One Response to “Weekly Recap & Outlook – 09.18.09”

  1. Mike 'The Hammer' Cahill says:

    Can I get an AK-47 if I open a new trust account?

    The Hammer

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