Special Alert – Bye, Bye Permabear Camp – It’s Been Great!
About 18 months ago, after correctly calling for one more stock market rally on the heels of a Fed easing, I put on a permabear suit just two days after the DJIA made an all-time high. I remained (Thank God) a growling bear up until now. I’ve grown fat “feasting” on bull meat (Thanks in part to CNBC-TV and their constant parade of blind bulls). While my fellow bears can still feast for a while longer, I’ve learned after 25 years it’s always better to be a year too early then a day too late.
Now before my fellow bear followers scream “traitor” and question how can my cup go from half empty to half full, please note I’m not applying for membership in the “Don’t Worry, Be Happy” crowd. I tend to be early for everything (appointments, airplanes, buying NY Jets Superbowl tickets, etc.). I just believe that based on how well we’ve done overall these last 18 months, and all the possible scenarios I envision going forward at this point, the time has come to implement a program that appears to be prudent and offers potential gains from the long side. Even if my worst case scenario unfolds, the net effect should still be that being a permabear greatly lessened the hit one would’ve had otherwise.
At the minimum, we’re overdue for a sharp bear market rally. Never have my technical indicators suggested so in almost 25 years. Several market indexes are dramatically below key moving averages. Several have never seen this far of a spread between price and moving average while others only once or twice. Knowing in technical analysis you must look only at the charts, I do believe anyone experienced in this type of analogy would suspect as I do that a significant correction of an almost straight-down decline is overdue.
This belief is not the sole reason for my “change” (I’ve come not to like that word in the last year or so). When I started in the business 25 years ago, the investment community and investors usually used a 3 to 5 year outlook. Thanks to a desire to truly have a chicken in every pot, long-term investing became as short as 3-5 minutes. Yes, buy and hold was finally blown up (and thankfully as yours truly as called it one of the myths created by traditional financial planning). But unless one believes the world as we know it is gone and guns, dry foods and a cabin in the mountains is all we’ve to look forward to, I do think it’s come time to be selective on the long side again. One must realize that making 10% a day, week or even month, was never a good goal and is not likely for the foreseeable future. 10% a year gain versus 25%-75% losses a year should be more than acceptable going forward.
So here’s my plan knowing it’s not only subject to change, but remembering those of us who try and make a living looking into a crystal ball, only end up learning how to eat lots of broken glass.
One market I turned bullish on back on December 18, 2008 is oil. I’ve waited to take any significant positions in equity oil stocks because at that point I felt there were still lots of downside left in the overall market. That decline indeed came and combined with the fact that since then oil appears more and more each week to have put in a long-term bottom, I think one of the ways to get back in the stock market is through oil stocks. Even if the overall market doesn’t improve or worse, goes lower, I think oil stocks can outperform.
I also think we can at least return back to a stock pickers market. The $64,000 question is how one should allocate funds going forward. A lot of that will have to do with age, financial and emotional condition, and a series of other factors that makes one size fits all impossible. Therefore, discuss with your adviser before making any decisions.
The most conservative way would be either a scale-down or up program. This is where you make and/or add to positions based on the price of what you’re looking to buy goes down to or up to certain levels. This is not dollar cost-averaging because you only act if certain levels are reached. The older and more conservative investor is most likely to use a scale down approach. If we go straight up from here, you’ll have some exposure. If we do go lower, you should be buying at lower levels. Remember, I’m suggesting this because we’ve the luxury of not being heavily exposed to the large losses suffered in most markets. The younger more speculative investor (remember, the word speculative is really another word for gambling) can be more aggressive and be able to financially and mentally afford the risks of the market losing another 25% or so.
A couple of more suggestions; I do believe most equity players should at least be even weight, if not over-weight, in foreign markets. The tendency for individual investors is to buy mostly U.S. stocks. The chances of a “V” bottom are small. Whatever low we make before a bear market rally is likely to be retested at least once. An “L” bottom is the most likely scenario (which usually means only a selective stock picker can have any real chance for gains).
I want to make it perfectly clear; the stock market can still go substantially lower before any real bottom. The chances of it going straight up from here are like the Vancouver Canucks winning the Stanley Cup – slim or none.
U.S Stocks – If this was a normal recession, I would be jumping back in with both feet. However, all the bearish indicators I’ve spoken of late remain. The only thing different is risk/reward appears at least balanced now (DJIA 5,000 or 8,000 appear to have similar chances). Because I missed all the downside since the all-time high, if we go down to 5,000 from here, the net effect would mean I still prevented far bigger losses if I had been bullish up until now. After 25 years in and around the markets, I’ve learned if you can live with the worst case scenario both financially and mentally (mental anguish from losses is usually much harder to deal with then financial losses), then nothing unexpected should occur. I no longer believe it’s worthy to sell rallies and one should now look to buy declines (but only on a scale-down basis).
Oil - Per my December 18th alert, I returned to the bullish camp at $36.50 a barrel. Since then, oil has been tracing out a very good bottom despite an onslaught of truly bearish news. Again, after 25 years (and enough losses to last a lifetime) I’ve learned that when a market fails to go in the direction the fundamental news strongly suggests it should, it’s clearly signaling the market has just about priced in the news and sellers or buyers have exhausted themselves. Such appears the case for oil. While one shouldn’t expect a straight up move, the risks appears to be $10 lower and $50 higher in the next 12 months.
Precious Metals – I remain very bullish on precious metals. I don’t believe general equities are entering a new secular bull market and therefore won’t take away reasons to own gold. In fact, they appear to have strong potential to co-exist for awhile based on my belief that deflation is going to be replaced by inflation before most perceive at this time. In the early stages of inflation, general equities will be enhanced but eventually higher inflation should put an end to whatever run the stock market has. Precious metals meanwhile, should continue higher.
Base Metals – While it’s too early to get back in on them except in a few selective equity plays, I continue to believe that metals like copper not falling even close to past major lows, continues to suggest the great supplies of metals once around the world is no longer a key bearish factor. The fact that so many mines shut down so fast and most of the best projects have already been well-developed, suggests when the world does recover from this spiraling deflation, base metals can come roaring back. Stay tuned.
U.S Dollar – Despite all sorts of talk about a strong U.S. dollar and great gains over the last year or so, the U.S. Dollar Index remains trapped in a narrow trading range. Again, when the market isn’t fir-filling the expectations of the majority, it does many times suggest that belief is already baked into the price. I also believe its way overblown in how well the dollar has supposedly down. The Index went from 120 to 70 and has only managed to retrace not even half of that loss. If the dollar was truly still a safe haven, it would be much, much higher and gold wouldn’t be even close to $1,000 an ounce.
U.S. Bonds - I think the no-brainer play is shorting the 10 and 30 year Treasuries. Interest rates can only go much higher over the coming years no matter what the economy does. There’s no instant gratification in this trade unless you’re trading the futures themselves, but at the same time, it’s the least risky of all the suggested plays of mine. Sorry Uncle Sam.
Please Note – Remember, it’s not my belief that this alert marks the ultimate bottom. Accumulating as noted above is strongly suggested. Please speak to a financial adviser before making any decisions. These ETFs and individual stocks are now being added to Model Portfolio
Foreign Markets ETFs
SPDR S & P Emerging Asia Pacific GMF $37.75
SPDR S & P China GXC $37.81
IShare Hong Kong EWH $9.03
IShare Japan EWJ $7.12
IShare Canada EWC $14.03
U.S. Energy ETFs
IShare DJ O &G Exp IEO $30.25
SPDR S & P Oil & Gas Exp & Dev XOP $23.81
ProShare Ultra DJ Crude UCO $8.18
U.S. Energy Equities
Exxon/Mobil XOM $64.03
BP $35.32
Petroleo Brasileiro PBR $26.72
Ensco Int’l ESV $23.64
Special Situation
Power Share Water Resources ETF PHO $10.41
Canadian
IShare CDN S & P TSX Financial XFN $12.02 U.S. price $9.37
Canadian Oil Sands COSWF-PK $15.63 U.S. $12.19
Sprott Resource Corp SCP $2.49 U.S. $1.94
Int’l Royalty Corp IRC $2.17 U.S. $1.69
Prices as of 3/9/09
DJIA 6,626
S&P 500 683
Nikkei 7,173
Hang Sang 11,921
Shanghai 2,193
TSX 7,591
U.S. 10YR. T-Bond 2.82%
U.S. 30YR. T-Bond 3.48%
Gold $938
Silver $13.33
Copper $1.65
XAU Index 119.56
HUI 285
U.S. Dollar Index 88.55
Canadian Dollar 77.65
Oil $45.60
Wow, Peter, that’s quite a buy recco. No explanation on each of your reccos? or do we go on good faith?
No short ETF’ hedges in case you are wrong ?
what are your thoughts on writing covered calls for some of these picks such as the oil stocks or the tsx financials since it may not yet be the bottom and there are some good premiums being paid on options?
Hi Peter – any thoughts on TCK.B? You had mentioned (on BNN I believe) that this would be on your buy list at some point. Is now the time?
Great Peter. I am half in agreement with you, here is why:
-ELLIOT WAVE: I believe the last sub-wave of (5) of PRIMARY WAVE “A” is underway. The target zone for this wave is anywhere between 5K-5.7K. We can one sharp rally 800-900 poin rally next week, but that will be met with the final washout selling, taking prices to the target zone. After the washout, as we all know, WAVE “B” should start, taking DJIA higher into a multi-month rally… ( a big tradable rally)…
- GUYS LIKE JIM CRAMER (FOLKS LIKE HIM- PERMA BULLS) ON CNBC (OTHER NETWORKS) HAS TURNED BEARISH..THATS A GREAT CONFIRMATION THAT THIS IS THE LAST LEG OF WASHOUT FOR NOW…..
- In the meantime, gold is also in third wave up, that started from Nov low, its subwave 5 of primary wave 3 has just started, after a rally on monday, a very sharp pullback can occur over the mid-week, creating a good buying opportunity.
The Canucks have more than a slim chance of winning the Stanley Cup. At the present time they are probably within the top 5 clubs in the hunt. And, if you have a hot goalie (Luongo) who knows? Hi Ho Canucks!
One of the things you mentioned above is to speak to our financial advisor before making any decision. For the most part I have lost a lot of faith in them. Yes, I know some (a few) are worth their salt but for the most part they have been part of the “Don’t Worry Be Happy Crowd.” And knowing them they’d want me in Mutual Funds and not ETF’s. I am seriously considering a self directed RRSP — What do you think?
By the way Terrell Owens is available for your New York Giants — just kidding.
Peter, gutsy call. I agree that this is not “the” bottom call but a bottoming call. The focus on energy is a smart way to start taking long positions because it doesn’t rely on any particular company fundamentals, nor exposes anyone to implosion risk.
Patience and prudence is going to be the key to building a nice portfolio over the next 3-5 years.
Regards,
George
p.s. I’m blogging about this.
Peter … it has to be done at some time …. little worried that the late afternoon rally was fabricated by the PPT who were concerned a close down of 100 after being up 120 in the first 1/2 hour would cause a big sell off early next week as the final capitulation kicked in.
We’ll have to look to see what happens next week … personally … I can’t see a bottom until the final capitlation or a real solution to the crisis is presented … spending more is no real solution and is exacerbating an already bad situation ,,, your post is wonderful in warning about being early and warning about the dangers of the market ….
I have and remain an ultra bear and am waiting for the paradigm shift required by John Q, who still does not grasp the dire situation their leadership has put them in now and in the future with the reckless spending and bailouts of the fat cats and the system they destroyed.
I do hope your right since … along with my ultra bearish perspective … I have become an ultra gold bug which has an inevitable destination so I’ll be fine and hope as few as possible are really hurt by the paradigm shift to a life more like the 50’s … perhaps without the suits etc for dinner with the family.
We certainly agree you can’t time the market and better early than late … maybe I have had partyied way harder after a good round of golf and have better first hand experience of the bigger the party the bigger the hangover … the mid 90’s through 2007 was one heckuva irrationally exuberant party … the don’t worry crowd have been at so long they can’t even seem to find the door even when others lead them to it … apparent addicts now … me realist or pessimist … I see the correction to where we should have been ( had it not been for that irrational exuberance) having just started (long term charts if they continued would have seen the dow around 8000 … think we need a 50% decline to reflect the dire conditions).
anyways … I really hope you are right one way or the other but will stick to holding what I got before the averaging down (on what’s worthwhile) campaign begins in earnest.
the prophet
Dave … forgot to mention in my post … can you send me some of the hallucinogens you use for such optimism in the canucks … have a feeling the cubs may win the world series in 2009 so could use some
the prophet
Hi Peter
What about the HGU and HOU that you suggested before as plays on gold and oil
Are they still advisable plays
Where on your site can I find your model portfolio?
Many Thanks
Alan
It`s sooo tough to get a correction in a bear market right and then to go short at it`s zenith that I`d rather go with the overall bear camp at this time.
No one has mentioned Uranium, especially Obama not one word about creating nuclear plants for elec., how else will the electric cars be fueled. Or is everyone holding their breath on this area ?
Alan:
Stay the **** away from HOU for the following reasons:
1) Leverage Erosion.
2) Contango (yes, it has tightened up, but it still exists and is causing drops in HOU monthly)
3) Bull ETF’s were made for Bull markets. Oil will spike and trade sideways and down for a long time, further eroding leverage and your position.
4) They are made for intra day or very very short term holds. They do NOT track properly over the long term. Try XGD for a non-leveraged Gold Index play.
5) If you want to go long Oil, I would advise to do it via DXO.NY because it tracks one month alone and not the spot price month to month, which is a bit less volataile and not susceptable to contango.
Also, TCK.B is a bad bad bad idea right now. JF Tardiff (the BEST bull/bear fund manager at Sprott) is short it. We will get some bounces off the potential sale of projects and I am going to go short on those rallies. Teck is done.
Hi Peter,
As a Canadian purchasing bullion at this time I’m concerned about our dollar gaining and therefore negating the gains with gold and silver. I’d appreciate your’s and others opinion on this.
Pam, I’m in the same boat. You have probably thought of these things but here is what I have mulled over. Options: sell some bullion now or soon ( if you have held your bullion from a much lower price), say if there is a short rally towards 1200 US while the Canadian dollar is still soooo down, and wait for a depreciation in the US dollar to buy some back at cheaper $Cdn prices.
However if gold goes up as Canadian dollar goes up your gold value should hold it’s own, more or less, and the best plan would just be to hold, especially because long term the high probability is that gold will go firmly much higher. The paper currencies are going through a time of ” competitive devaluation” , through “quantitative easing” ( another expression for intentional inflation). All paper is going to go down in relation to gold ( unless the gold cartel has way more power than we even imagine).
Sinclair and others like to remind us that gold is the real store of value now, against which currencies are bashing themselves. There will be a time to get out of gold in the future, which we all need to be thinking about.
What I am doing is building a position of CEF.A to trade with and to hopefully take advantage of the currency situation if it arises. CEF can also be held in US dollars, which, if the US dollar goes down, will be immediately adjusted for in it’s NAV so is a very good currency hedge. GTU.UN is the same, but it is less liquid and doesn’t have the balanced exposure to silver. So much depends upon what your purchase price of bullion is/was. I am looking at 50% gain vis a vis the drop in the Canadian dollar and gold’s rise. It is so tempting for me to sell some bullion just now to cover some of the losses I, like so many, had in the stock crash. I am holding off for now. But each of us has to work this out.
There is a growing suspicion however that there may be a sudden very steep devaluation of the US dollar in the not too distant future which would about double the price of gold overnight. One wouldn’t want to be out of a maximum postition ( for your own portfolio) at that time. I don’t know the probability of this but some astute watchers have suggested it. On the other hand, the devaluation may take a step down path again, which woud be much easier to deal with..
There sure are many possibilities. Peter’s advice ” to trust in the Lord with all your heart” is ultimately the only source of peace as we do the best we can.
——————————————–
To Nat and Ruthless re: TCK.B. I was just reading yesterday about Teck again because of the rumors of Chinese sovereign wealth fund activity turning to Canada as it has in Australia recently, and much as IPIC did with Nova Chemicals which was on the brink of bankruptcy also, Peter Hodson of Sprott has been evaluating stocks for their takeover value and has done pretty well apparently in the last four or five months. This is similar to our Peter Grandich’s idea about Northern Dynasty, except in an inverse way, because the issue is a debt/equity swap of a large producing company, and not the ownership of a humongous potential one. I think this is a real present possibility for Teck. and might be worth at least a small position. Teck is not going to go to waste and is already down 90%. Downside risk is limited I think. I don’t think it will go the way of Oilexco unless the owners, pride takes it there. .But they seem to be acting responsibliy in the face of their big blunder with Fording.
The best to all of you.
Peter there are so many inconsistencies here. Why speak to an advisor when most have us have listened to you and dumped them because by and large they’re flawed. Watch the prices on some of your picks, for future performance reference COS>UN is $20.00 Cdn close.
Also, a let of your picks are in U.S. dollars and if the U.S. dollar is headed down most of the picks profits will be eroded with it. Why not reccommend Cdn ETF’s rather that American as there are a lot of those covering the picks you’re suggesting, eg. HXU, HOU, etc.
Please advise
Peter, thank you for the explanation on why you believe oil has bottomed whilst the US economy and the markets may retreat further.
Fred,
Re:TCK.B, Take-over investing strategy :
I find it hard to believe that Hodson is making a lot of money right now for his fund as it was down huge in 08′–about 50% I believe. I hope he is though, for the sake of the unit holders. It’s a very speculative strategy in this market and could result in punishment if you are wrong as most of the companies that might be taken over have balance sheet issues. I like Jean Francois Tardiff’s strategy a bit more- low long equity positions with dividends with a few shorts in there for downside protection.
SCP’s corp farm play on the reserve land is very interesting. Add to my watch list. Thanks for video clip.
My two cents. I would like to 2nd Peter’s view on the market and the scale-down program. I have been testing the scale-down program for two month. So far, it seems to work on current market conditions. The test was done on DOU (it is a ETN, a mirror of DXO, I think.) The scale-down approach appeals to me because I just can’t be tied to my computer 8 hours a day watching tickers and trying to catch the MOMENT.
BTW, I started my test on HOU. After a couple of weeks, I switched to DOU. It works better. But, currency flux took away some of the profits. Also, between buy low and sell high, and accumulate while I can. I am always holding some position. I would like to generate some income with the postion. Now, I am considering switching to XEG because of the quarterly dividens. I would continue using the oil price as buy/sell indicatior. I think the same method can be applied to any sector as long as your long term views on that sector are bullish.
Any suggestion or advise is welcomed.
[...] Chief Commentator, Peter Grandich, has offcially shed his permabear skin according to his latest blog post. This is a pretty important declaration because Grandich has an uncanny ability to call market [...]
Peter or anyone else in the know, could you please clarify this. I take Peter’s latest post to mean that he expects a rally at least in the short term. I think he has a typo in his 3rd paragraph where it reads “Knowing in technical analysis you must look only at the charts, I do believe anyone experienced in this type of analogy would suspect as I do that a signficiant correction of an almost straight down decline is overdue.”
I don’t think he means straight down as that would contradict his recent prediction, right?
BP – here is Kurt Wulf’s analysis of BP. He is a well respected analyst of oil and gas stocks. Below is his short writeup:
Summary and Recommendation
Estimated Net Present Value (NPV) of $74 a share is more than 70% above stock price for moderate-debt, hold-rated BP plc (BP). Released today, fourth quarter results displayed lower unlevered cash flow (Ebitda) driven by crude oil and natural gas prices (see table Next Twelve Months Operating and Financial Estimates). Our valuation capitalizes the future year’s cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil, and to an industry multiple for downstream. Latest calculations result in NPV concentrated 23% on natural gas, 62% on oil and 16% on downstream (see table Functional Cash Flow and Present Value). Pointing to expected oil price recovery, futures prices for the next six years averaged $60 a barrel recently (see charts Six-Year Commodity Price Meter and Six-Year and One-Year Natural Gas and Oil Futures). Chief Executive Tony Hayward expects cash flow to be balanced in 2009 within an oil price range of $50 to $60 a barrel. Should oil price surprise on the downside, we see room to reduce capital spending while maintaining the dividend, which offers an annual yield of 7.9% on current stock price.
Kurt H. Wulff, CFA
Another write up from Kurt Wulff a well respected oil anaylist
Long-Term Oil Supply Declining
Summary and Recommendation
Stocks of oil and gas companies including buy-recommended European leaders Total S.A. (TOT) and StatoilHydro (STO) are likely to demonstrate positive price momentum before it is obvious the oil supply/demand balance has tightened. At a quote of $40 a barrel, or less, for oil to be delivered next month, almost no new investment in oil supply is justified economically. As a result, existing oil supply is declining. It is just a matter of time before price firms to reverse declining investment and to encourage new supply. The difficulty in estimating supply trends is illustrated by an updated comparison of the forecast issued in February of each of the past three years by the Energy Information Administration of the U.S. Department of Energy (EIA). The best official information now tells us that sustained oil production was indeed limited to an annual ceiling of 85 million barrels daily (mmbd) (see chart below). Repeated forecasts of higher levels could not be achieved and price went up accordingly until demand reacted. Today, the question is moot temporarily because demand is less than maximum supply. The futures market is not much better as a forecaster. Nonetheless, we believe it is reasonable that average prices for oil and gas over the next six years and for the next twelve months are higher than the widely reported near month quote
You may all wanted to click on the link below and voice your opposition to this one more unwarranted tax. I did. You may also want to add your displeasure to the fact that Congress voted themselves a 4% pay raise and indicate that given the high umemployment numbers which far exceed the 8% actually reported that they consider rescinding such pay raise until the taxpayers can better able to support it. I did that as well.
susan
http://www.rallycongress.com/no2traderta
Peter,
Where are you? This is an important blog and you’re not here.
superstar???
Orgrophet:
Re Canucks – don’t need hallucinogens when have best goalie in the league who is coming off an injury and is
playing at “B+” and team playing at an “A” level with both moving towards “A+” levels. Bring on the Playoffs.
Dave, I wouldn’t mortgage the house on them …. lol … not even if someone gives you big odds ….
the prophet
Peter,
Looking at your “Model Portfolio,” how does one interpert this information? Do you actually buy all of these companies/ETF’s or are you just recommending them as your picks?
Do you suggest putting a certain percentage of one’s cash resources into an equal share of each of the picks you add to the Model Portfolio based on ones own due diligence?
Sorry for Newbie type questions, but I have been following your blog/letter for the last 2 years and have certainly lost faith in the “Financial Advisor” community and looking to do more of my own investing.
[...] turning bullish on oil again back in late December, I greatly increased my fondness for it earlier this month by urging much greater exposure to it. Regardless of what it does the next day, week or month, I’m totally convinced I’m in at [...]
[...] more beneficial was on March 6, 2009, I literally startled friends and followers (and myself), by leaving the bear camp and calling for a big rally in stocks. Boy did we get a rally! I rode that rally all the way up to May 9th. At that point, I decided to take big profits even [...]
[...] yours truly “crossed over” to their side in early March (causing my perma-bear friends to “persona-non-grata” me), I now am more like “Switzerland” [...]