The GTBP equity traders are back at it again.  Jon Nordhem won last years competition that began in August 2008, right before the market free fall.  Hats off to you Jon!  I hope you enjoy the new additions to your wine cellar.  The last forecast that we produced in June, for the second half of 2009, recommended caution in long equity positions.  I personally took my gains from the March lows and cashed out with a 40% return for 2009 in June.  That was on top of a 24% return recorded for 2008 where I parked in cash mid-year and took Jon Nordhem and Keith Nash's recommendations and shorted the market in September with SKF and EEV.  Even my in-laws took my advice back in March and upon a nice return, retired this year.  I may have scored some points with them but they still don't like me.  I'm still the damn Yankee who moved their daughter north to beautiful Northeast Pennsylvania.   So what do we do from here?

I am not sure myself, so I spent a lot of time over the last couple of weeks interviewing our traders and other stakeholders on the front lines of our economy.  Last week I took a trip to the National Retail Federation (NRF) big annual show.  I spoke with executives of some of the largest retailers, as well as some retailers who are considered winning demand-driven retailers.  In addition to the retailers, I also visited with leaders of several technology companies.  Finally, I interviewed an economics professor who just returned from a two day symposium at the Federal Reserve in New York.  But let's begin with the GTBP traders' feedback and then we'll wrap it up with my comments and recommendations.

Roger Berkowitz:

I am largely fully invested in both my accounts although with great trepidation. The stocks I own are (in order of position from largest to smallest):

Uluru (doubled my large position in the last 3 months)

Exel

Infn

BIP

BYDDF

Imax

Yong

Syy

Form

AOne

NEWN

MOO

WTW

DBA

BSEG

You'll see a number of Chinese names, a recurring revenue infrastructure play (BIP), two inflation hedges (MOO and DBA), two electric car plays (BYDDF and AOne), two drug biotechs (EXEL and ULURU), along with Imax and IBn, the Indian bank I have held for 3 years. In any case, I am confused. I think things here are poor and yet the market is climbing and I have decided not to fight it, although I do everyday look to see if there are any reasons to sell my shares. Especially the US names I am wary of. I just don't see the kind of rosy scenario ahead that these and other stocks are pricing in. I have to imagine that the upside here is somewhat limited and the downside large. If I can exit after a run up I will and wait for a correction. 

My biggest worries: a crack in the EU with sovereign bankruptcies around the world; Japan having to raise interest rates to attract buyers of its debt; a hit to employment in the US when states and localities cut jobs as taxes disappear; more terrorism. 

My hobby horse: how I hate the way Geithner and co. have rolled over and let wall st. go on as if nothing happened! The Brill cover story in the NYTIMES mag. this weekend was right on. From 24:1 to 275:1 in 50 years!!!! Do CEO's and top management really think they are 11 times more valuable than CEOs 50 years back? And 275x more valuable than their average employee? GEEZ! Can you believe that UNDER TARP BOA execs made an average of 6.5million in bonuses last year!? And this is what they are complaining about? 

Opening trade: my only trade at the moment is Buy 40,000 shares of ULU at limit of .23

otherwise I am on a wait and see trajectory. 

Mark Flanagan:

Most everyone who I talk with says that this recession is different than the past.  It's not.  There was a banking bubble and it collapsed.  I am putting my money on history.  We are on the rebound.  The correction has already occurred, and it corrected to the upside.  The markets were unnaturally low and we corrected.  Do you think that people's 401K level affects spending?  No.  They look at their 401K and say I have to work another five years.  They might freak out for a year and try to spend less but we are already past that.  I don't believe that the Fed will raise rates till the end of the year. 

1. Most people think that the consumer is dead. They aren't. They will spend more than expected.

2. Don't buy bonds. They will get crushed. (some international is ok)

3. Go global in emerging markets. (choose eastern European countries over china and Russia. Brazil is ok) Do not invest in China or Russia.

4. Healthcare is fine. The current healthcare plan doesn't change anything. There is value in this sector.

5. Value stocks will do well. (financial, healthcare)

6. Dividend stocks will do well. (they underperformed in 09)

7. Financials will continue to do well. Forget the noise from congress about punishing them.

8. Large cap will do well domestically. (Small internationally)

9. Hedge inflation. Interest rate ajustable debt, stocks and some commodities.(Gold ok up to 1300 then sell) No bonds except for munis which will be a hedge to rising income tax rates.

10. High tech is still great!

First purchase is Citibank. 50k MKT at open (1/2 of the 100K portfolio)

Sent from my iPhone.

Glen Eichman:

Continued rebuilding of confidence and recurring plays from 2009 i.e., financial asset's values are revised upwards as the analysts figure out just how much they are worth, dividend payers continuing to be attractive, some bond plays working as the corporate climate improves, the international arena remains attractive  I am way long now and for the next few months

I will closely monitor the inflation scene as it relates to interest rates and make adjustments accordingly.  I believe that a lot of things will have to happen before the inflation cycle begins and most of it is good.  Unemployment has to get down quite a bit and the powers that be will pull out the stops to get the economy going before the elections.  It is all constructive

"Sell in May and go away" might be operational adage that applies this year, but the fall will bring some excellent opportunities and a strong finish to the year.  This remains a stock pickers market.

 Opening Trade: 

1300    ALSK 7.61

1000    BAC 16.26

300      EVEP 30.41

500      GE 16.44

400      LGCY 21.42

300      LLY 35.82

300      NRGY 36.63

100      UPL 52.56

1300    WIN 10.65

Jon Nordhem:

I'm a bear when I have to be.  I was optimistic with this market up to a year and a half ago.  I believe currencies are the best place to park money right now.  Also tech might be a good place as well.  The pigeons are going to come home to roost finally and the dollar is going to get murdered.  A lot of banks are sitting with toxic 40:1 leveraged CDO and SMBs and no one wants to take them off their hands because no one believes the rating agencies.  We have high unemployment and this is the worst recession since the Great Depression.   We are going to see 15% unemployment.  Then the rebound horizon will look a lot different from now.  No one has any money and the folks with money are scared.  I believe this market is going to take another dip.  I don't think it will be as deep as the last one because people are going to be waiting to jump back in.   The US bond market has not been met with much resistance up to now but by mid-year that might change.  I hope it doesn't.  With this health care bill being worked on, I see the democrats getting voted out and then tax breaks will be put in place to stimulate the economy. 

If you walk up and down Clark and Armitage {Lincoln Park, Chicago}, from Armitage to Sheffield I counted 11 empty stores.  I don't want to buy into this market.  Food service, with the exception of fast food, is down 17-19%.  Consumers are going out less and spending less.  Until people get a job and start spending money they are not going to spend.  Retailers are doing a little better because they did not carry inventory into this holiday season.  They cut people and they low balled the expectations for this quarter.  Intel beat expectations this quarter but that is not going to happen next quarter.  They already laid everyone off, and are working the existing employees to death and they are happy to have a job.  Do you really think they are going to hire these folks back?  The unemployed are not buying anything.  I think it is going to get a lot worse. 

What can the Fed do past this point?  Nothing.  They already have interest rates a zero.  Currently, I am all in cash.  With currency trades, I would not buy and hold I would scalp them.  I would ride momentum.   Oil will reach $100 again soon.  I think BAC looks decent and so does JPM.  I would be real careful with dividend payers.  Once they cannot sustain the dividends and cut, then the stock gets killed.   A lot of folks lose money chasing dividends.  If you are going to invest in a dividend paying stock you might consider buying a close put while selling one that is further out.  That way you can make some money on the puts, while collecting the dividend on the stock. 

The BRIC is crumbling a bit.  China cannot keep up with their growth. 

Opening position:  Cash.  But keeping an eye on Currency ETFs like URE and URR

Keith Nash: 

A Bloodied but Unbowed Bear

I first read 'Atlas Shrugged' in the 70's and never dreamed that Ayn Rand's dystopic novel would so accurately portray events as they've actually unfolded. The inauguration of a new President popularly perceived as the polar opposite of his predecessor has nevertheless seen an uninterrupted continuation of the same economic, military, and foreign policy and the further trepidations of bankers, corporations, and lobbyists on the common weal. What's the upshot of all this as it affects trading? It means that fundamental and technical analysis fall by the wayside as political considerations are now paramount. Those enterprises deemed 'too big to fail' have been bailed out at unprecedented cost, in some cases repeatedly (Citibank, AIG). Enterprises less fortunate (CIT Group) are thrown to the wolves. Twenty years ago anyone predicting that the US automotive industry would be nationalized by the Federal Government would have been ridiculed.

It seems to me that the relentless rally since March's low is not due to a genuine economic recovery but instead is the result of pumping by the Treasury and Federal Reserve and perhaps even a carry trade in the US dollar. And I fear what may happen when or if they are unable to continue inflating the bubble.

I see four major areas of concern:

Unemployment -- Currently at more than 10%, the highest since the early 80's. Rate of increase has slowed, but this may be merely a reflection of many long-term unemployed workers falling off the rolls as their extended benefits expire. In any case, the unemployed don't buy homes or contribute much to consumer spending. And they don't pay much tax, either.

Treasury Issuance -- Is there any limit to U.S. government borrowing? We may find out this year, as over a trillion dollars of debt will be on offer from the Treasury. Will rates rise as a result, stifling the government's ability to service its debt? Again, we'll likely find out this year. Prospects look grim, as the biggest buyers of our debt, particularly China, seem less willing to acquire more. And don't forget that with falling tax revenues, even the slightest increase in yields has a drastic effect on debt service.

Mortgage Defaults -- We are in the eye of the storm presaged by the sub-prime crisis. The next wave of defaults will appear when the Alt-A, Option-ARM, and other exotic loans of the housing bubble begin to reset, and this will happen soon. We may very well have yet to see a bottom in real estate.

Derivatives -- All of the exotic instruments of recent financial engineering - Credit Default Swaps and so forth - are still traded behind the scenes, without margin requirements or a central clearing exchange. So the same land mines that destroyed Lehman still exist and we ignore this at our peril.

My predictions:

> We will see a lower print on the S&P 500 - lower than that of March '09.

> Mortgage default rates will worsen, particularly if unemployment remains intractable.

> There will be another credit crisis of some kind, probably initiated by a sovereign default in the EU or Middle East.

> Prices for residential and commercial real estate will continue to fall.

> The dollar will continue to decline, unless or until there is a market crisis that precipitates a 'flight to safety'.

Or not. My crystal ball has been transparent for over a year. Timing is difficult to call, and being early is the same as being wrong. Caveat emptor!

My Take:

What about the extra $800 Billion in stimulus?  No one mentioned it.  Is it long forgotten?  Shouldn't we just begin to see some of the results of the stimulus?

Everyone expects the dollar to fall against just about every foreign currency.  It sounds logical but wouldn't it be in the best interest of those foreign economies who have a large vested interest in selling goods to the largest buyers in the world, the USA, to keep the dollar propped up where it is?  Could this happen?

I believe the general consensus will agree that if the market makes a significant break through 1100-1140 on the S&P 500 and keeps driving on then oil, tech, and banking will lead the way.  So will most of the big boys like GE, DOW, LLY, and healthcare bio-tech area will do well too.  From the floor of the NRF conference, I got a view of how big business knows they need to be innovative with technology to become more demand driven to survive.  If you look to the tech companies that have high revenue growth in this environment, I would say they would be a good place to begin one's stock picking research.  For instance, I just did a quick filtered search and wow, check out the growth on Cognizant CTSH.  If you consider investing in it, check out the other story featured in this issue, Fleecing America, the Business Model.  To protect myself from a falling dollar, I would look to CanRoy's (Canadian Royals).  Mainly oil based CanRoys that pay a healthy dividend.  Check out BTE, ERF, PGH, PWE, PVX.

Stock prices are all based on supply and demand of you and me and everyone else reading this blog.  In talking with everyone I know, I hear a lot of optimism right now.  I believe that the first quarter will have mixed but slightly positive earning and economic news.    Sales will turn into job creation and we might be on our merry way.

Now if we don't make a nice break beyond the 1100-1140 mark where we are today and the bad news begins to build, it could get a bit choppy for a while, gyrating between 860-1100.  Traders will probably enjoy that market.  But depending your invest needs, what long term means to you, and what risk tolerance allows you to sleep at night, I believe the GTBP Equity Traders have given us some good ideas.

What are the odds of another systematic breakdown?  I have no idea and I bet you would have a hard time finding anyone that can shed an educated bet on it.  Necessity is the mother of innovation. 

S&P 500 Forecast for 2010?  IF we break through the 1040 resistance line, by mid-year we will be up 15% to around 1,300.  Otherwise somewhere between 860-1100.

What I am personally investing in?  I'm currently in all cash but monitoring many of the stocks mentioned in this article for investment if the S&P 500 makes the 1140 break.  Roger's ULU looks interesting as a small stock pick due to the high volume on the stock since the end of December.  5 to 10 x the average volume.   The product has value.  Is there a buyer?  Perhaps.  The upside looks promising and the downside, well limited.  It's not something I would place a significant percent of one's portfolio, but it might be a big winner for a small investment.

What do you think?

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