The Monday Before the Storm???

As you know from my forum post, I spent a lot of time this weekend studying Chesapeake Energy (CHK) from top to bottom. I also read the Barron’s Roundtable Part 1. If you haven’t read it, I suggest getting a copy or seeing if it’s online somewhere for free. In the first couple pages of the discussion, the term demographics was used several times, which is a topic I’ve been bringing up for years. 

The general tilt of the panel, which included Jeff Gundlach, Mario Gabelli, Abby Joseph Cohen, William Priest among other heavy hitters, was that slow growth was in fact the new normal that I’ve been discussing in articles for awhile now. Gundlach and Priest sounded a similar alarm, and have both have been for some time now, that we should expect secular slow growth. They didn’t go so far as to say “slow growth forever” as I did in a recent MarketWatch article, but those two at least seem to be thinking in that direction.

This all adds up to continuing to take extreme caution with our portfolios. As the initial subscribers know, I suggested holding 25-50% in cash repeatedly beginning early last year. I also made some too early investments in energy which I am not repairing with you as we trade the continuing to fall oil prices with Iran coming online with 500,000 more barrels of oil per day. I believe for a moment, maybe two days, oil will fall below $20 per barrel before the next OPEC meeting which is currently scheduled for June but likely to be moved up to the end of March.


Tuesday Morning & Short-term

There is a lot of stress in the markets right now. I think it is likely we see another surge in volatility soon. Possibly at the open or by afternoon. As of right now, S&P 500 futures are pointing up a bit. We’ll see if that holds. 

If we markets follow their pattern of periodic early day strength, then I will be looking to make more trades that benefit from increasing volatility, falling oil prices, falling small and midcap oil and gas stocks, and falling metals and mining stocks. It is clear that while long-term value is starting to emerge, the short-term trends promise to continue to pound prices on certain assets down until there is a snap back rally.

Ultimately, we will see a ferocious rally in stocks as the market gets more and more oversold. That rally will be big and fast, but it won’t last. The reality of the world is that China, Japan and Europe, as well as, many emerging markets and the Middle East are all in bad shape, while the U.S. is barely better than neutral. As pointed out in the Barron’s article, we are likely to see further Yuan weakness as China is growing far slower than the world needs to maintain anything near target GDP growth.

Stock prices need to see contracting P/E ratios to reflect slower permanent growth and come more inline with plunging high yield (junk) debt. The demographics issue can’t be solved with monetary easing. If there is no fiscal response that creates work for the money printing that is coming – oh yes, we’re going to see more – then we will get stagflation. Hopefully the politicians realize that Louis Black has a pretty good point about building big things (my preference is water infrastructure).

One interesting chart I saw in MarketWatch was of how many stocks were still above their 200 day moving average. It’s down to about 25%. We generally see a snap back when the number gets somewhere below 25%. However, that’s not a magic number, we saw single digits during the financial crisis and only about 15% of stocks over their 200 day moving averages in recent years. So, while I think we get a snap back soon, I’m thinking February is a lot like October, we still need to see a real longer term bottom and that means reaching all the way down to firm support which is the former resistance for the S&P 500 around 1600 to consider it a major bottom.

For Investors

I am going to be aggressive in the swing trade portfolio. You can decide which trades are for you and your portfolio. So far we are running a good track record there with an internal rate of return so far this year is +386%, albeit on 3 great trades. I’m sure that won’t hold up, but who knows. If for some reason oil rallies without any news, a short covering rally, then I will get very short oil as I am that certain that oil plunges further. Industrial metals companies are going to go bankrupt, as are a few dozen more oil and gas stocks, so, we might as well make money on those since they are as near as sure things as I’ve seen in a long time. 

Buckle your seat belts. 




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