USO, X, NUE, SXCI and China Stimulus

Finally. A positive start for stocks finally finished that way. We’ve seen several rally attempts fizzle over the last couple of weeks. Once the S&P 500 hit 700, a lot of traders were looking for some upside. Let’s hope it sticks. 
Wednesday’s rally could have been stronger, though you can’t really be surprised that investors aren’t jumping head first back in the stock market. Volume appears to have been solid, but not outstanding. 
The most encouraging aspect to Wednesday’s rally was leadership. We got leadership from technology and oil. If investors are buying in anticipation of an economic recovery, then oil necessarily must trade higher. Because any uptick in economic activity means increased demand for oil.  
And with OPEC production cuts taking hold and recent reserve draw-downs, the oil market has to be tight. 

Obama the Stock Analyst

As much time as Fed Chief Bernanke spends before Congress, it’s amazing he gets any work done.   I have to say, I’m starting to like Bernanke. His forthright talk is certainly a refreshing change from Greenspan’s garbled speech. Yesterday, he expressed his feelings about all the bailouts.

Nationalization = Communism?

It is a strange sight to see the Dow Industrials trading at 6,700. That’s still a level from 1997. And it still indicates that people don’t want to own stocks. At this point, it seems to be as much about available capital for investment as a willingness to invest. 
Valuations are low, the Dow is trading with a p/e of around 20. But that’s still not as low as it’s been during past recessions.

A Caveman Could do It

Warren Buffett’s annual report for Berkshire Hathaway was released over the weekend. His letter to his shareholders is one of the most widely read investment documents there is. Buffett’s down home charm, inviting sense of humor and investment savvy are always a great read. 
Perhaps the biggest surprise was that the net asset value of Berkshire Hathaway dropped by $11.5 billion. Buffett was not immune to the market’s drop. Despite well-publicized investments in General Electric (NYSE:GE) and Goldman Sachs (NYSE:GS) that are down considerably, the lion’s share of balance sheet loss has come from derivatives, what Buffett has called “financial weapons of mass destruction.” 
 

GDP Surprise? C’mon!

Last month, Q4 2008 GDP was expected to show a 3.8% annualized drop. Economists were expecting the actual number to be -5.4%. But GDP came in worse than that this morning. The U.S. economy shrink at a 6.2% annualized rate between October and December, 2008. That’s the worst performance in 25 years. 
Stocks fell sharply on the opening, partly in response to the news. But should it be that big of a surprise?
After all, we’ve known that the fourth quarter was bad – that’s why the S&P 500 is trading at 1997 levels. Is there any reason to have been hopeful that maybe it wasn’t so bad? 
Don’t be surprised if buyers step in during today’s decline.

Anecdotal Evidence

Stocks finished lower yesterday after Obama’s speech. The lows were hit early in the day and stocks managed rally to positive territory before finishing slightly in the red. 
What to make of this? Not much, unfortunately. Ultimately, I think it was a reaction to Tuesday’s overzealous rally. Tuesday seemed to be about short-covering after the S&P 500 held above its November lows at 741. 
While Bernanke’s testimony before Congress on Monday was far more significant than any specifics Obama mentioned Wednesday night, neither event seems to be affecting stocks much. Except for HMO stocks. They’ve been killed this week as Obama is making a push for healthcare reform.

Bottarelli on LEAPS

In a minute, we’ll get to the interview with options trader Bryan Bottarelli. But first, I want to address Obama’s speech from last night. 
It seems pretty clear to me that Obama is proposing a re-structuring of the U.S. economy. Healthcare, education, and energy were specifically mentioned as areas where change is necessary. And I don’t think you can look at any of these areas and say that the current course is going to lead us where we want to be.
With healthcare, I have no problem with a doctor who is motivated by profits. I do have a problem paying exorbitant fees to HMOs to distribute care. With energy, I have no problem with OPEC countries getting as much per barrel of oil as they can. If we don’t like it, we can get moving on alternatives. 
Healthcare costs, gasoline and energy prices, even the housing bubble and the subsequent crash, act as silent taxes on Americans incomes. Much of our resources are wasted or not efficiently used. I’m all for changing that. But the ultimate questions are: Can it be done? And Can Obama do it? 
Thanks, and here’s Bryan Bottarelli…

LEAPS, Krugman and Microsoft

Seems like every day we dial the clock back another year or two. Friday, stocks closed at levels not seen since 2000. Yesterday, it was 1997. By the end of the week, we might be in yet another different decade. 
But I doubt it.
I think there’s little question that if you’re buying quality stocks at these levels, you will be rewarded. We’ve discussed quite a few stocks in past issues of Daily Profit that should be good buys for at least a trade. 
And if you’re interested in taking on a little extra risk for the chance at some outsized gains, you might consider LEAPS. LEAPS stands for Long-term Equity Anticipation Securities. They’re options that are good for up to three years out. With the markets trading at such low levels, LEAPS could pay off handsomely.

Rant of the Year, Part II

After last week’s declines, stocks look set to move higher. Is bouncing off lows a rally? Not really. You need a little optimism to call it a rally. A little enthusiasm. But even if stocks do move higher this week, investors won’t be particularly happy about it. 
Americans are mad – mad at the banks, mad at their financial advisor, mad at the mortgage industry, mad at people who bought too much house. We’re mad at Paulson and Bernanke, Congress and Obama, too. 
By now you’ve probably seen the rant from CNBC’s Rick Santelli I included in last Friday’s Daily Profit. It’s gotten a lot of attention the past few days, even getting airtime on Meet the Press this Sunday.   

Whitney Speaks Again

More depressing forecasts for the big banks from the best big bank analyst out there, Meredith Whitney. You may recall it was Whitney who forecast the dividend cut at Citigroup (NYSE:C) back in October 2007. That was three months before Citigroup actually cut its dividend. Whitney should also be credited as one of the few analysts to see the financial meltdown coming.