Jon Markman paints a gloomy picture
“I hate to be the one to break the news, but here it is: Despite everything you’ve heard about how massive infusions of hot new money printed by the Federal Reserve and other central banks have thawed the chill in interbank lending, veteran credit analyst Brian Reynolds says credit markets have just experienced their worst two weeks of all time and show no signs of improvement. None.
Unless they improve soon, you’ll have to brace yourself for new lows in stocks as equity investors begin to anticipate the same severe recession that bondholders envision.”
“Credit analyst Reynolds figures that bears are going to wait for a nice, strong run-up in stocks this year, just as they did last autumn before pouncing again to short corporate and sovereign credit in the derivatives market, which in turn has the knock-on effect of punishing stock values. At the peak, as much as a third of corporate profits were related to debt or financing, and half of that will never come back — desperately disappointing bulls. To survive, investors will need to learn to leap nimbly out of the way once the onslaught begins.”
Jubak’s 10/17 article highlights his favorite commodity stocks and his reason to bullish (long term) on certain commodity stocks. He’s bullish on:
TC (book value of $6.49/share), $17 price target for Dec 2009
CHK, target price of $39 a share by December 2009.
YARIY target price of $38 a share by December 2009.
PBR target price of $41 a share by December 2009
He’s currently looking to sell FCX and RIG.
He also says DVN, FSUMF, and UPL are holds.
Disclosures: I am long CHK and FSUMF
Things aren’t looking good according to Jim Jubak
He now recommends a portfolio of the following:
20% natural resource stocks
20% in ‘ high-dividend stocks in sectors with good growth prospects beginning in the second half of 2009’
20% in ‘growth at a very reasonable price’ stocks
He also recommended buying OKS with ‘an October 2009 target price of $52 a share. Buyers will also get that 9.6% yield while they wait.’
size:85%;">Jon Markman’s 9/26 article is worth a read: size:85%;">Trust Them? We Don’t Have a Choice
To summarize Jon Markman’s conclusion:
‘Is there any hope that it [the bailout plan] will work out? Sure. David Kotok at Cumberland Advisors provides this calculation: Assume the entire $700 billion will be deployed in acquiring damaged or toxic financial paper and any recovered money will be redeployed doing the same. Further assume that the ultimate recovery will be zero. The U.S. economy is $14 trillion in size; $700 billion is 5% of one year’s output. The entire amount can be financed with Treasury bonds at an interest rate below 5%. Assuming the $700 billion never gets repaid and is refinanced indefinitely, the cost is $35 billion in interest for each of the next 30 years. He concludes that $35 billion a year is not much to pay if it can avert another Great Depression.
I asked Kotok why we need to buy into the assertion that the alternative is a depression, and he argued that the real issue isn’t the actual amount of new credit made available but that the lack of lending today has dramatically reduced the global credit “multiplier” — or the amount that borrowed money is reused and re-lent. “We need a huge credit extension to offset the shrinking multiplier, which is now at 12 and is normally 14 — a massive difference,” he says.
Kotok says that in the world of credit unseen to most politicians and equity investors, credit spreads are widening, corporate bond issuance is growing more costly, and bank failures are expanding. A contagion is spreading, in other words, and Wall Street is dying. And dying with it, unfortunately, are the financing vehicles for houses, small businesses, autos, college education, cities and bridges.
In this context come the two actors who may not be perfect, but they’re all we’ve got. “Our leadership says, ‘Trust me.’ Should we do this? The answer is no,” says Kotok. “Should we authorize the $700 billion? The answer is yes.” Reluctantly, I agree. The show must go on.’