*****Economists: What Do They Know?
*****More on TRIGR
*****Maybe it’s the freezing temperatures here in our nation’s capital. Or maybe it’s the fact that I’m just tired of watching stock prices fall. But I’m starting to feel like we have a rally for stock prices coming.
And I’ll tell you why.
I think investors are going to start feeling confident that President-elect Obama will open the deficit spending floodgates to put money in people’s pockets. Highway projects, alternative energy initiatives, another stimulus package, even an extension of unemployment benefits – no plan that should be left unexplored.
Because so far, Paulson and Bernanke have completely failed to restore order to the markets with their top-down approach.
Regardless of our personal feelings about issues like an auto-industry bailout, unemployment is perhaps the pivotal issue for the markets. And if some form of aid for auto companies can lessen the fear of mass layoffs, stocks will be the better for it.
Now, at the moment, my rally theory is just that – a theory. I can’t guarantee it and I don’t advise buying in anticipation. But I do recommend having a few stocks queued up, just in case. I’m sure our recent discussions should have given you some good ideas.
*****The Dow Industrials is close to another test of its low close at 8,175. You may recall the last time the Dow tested 8,175, it broke below it and even dropped below 8,000 before staging an intra-day reversal and closing higher.
I won’t be surprised to see the Dow close below 8,175 before any rally. And if we see the Dow hit the intra-day lows from October 10, I’ll be looking for buyers to step in.
*****Shipping companies are always a good barometer for the economy. When times are good, businesses and consumers can afford to ship packages over night via FedEx or UPS.
In bad times, shipping volumes decline. So the fact that UPS has decided not to release its forecast for Christmas shipping volumes tells investors just as much about retail holiday sales as analysts’ sales estimates.
In short, it doesn’t look good for retail.
This is a good time to review my "Mom Cancels Christmas" trade from the November 7 Daily Profit. I put out the theory that holiday shopper will be focused on two things this year: children and bargains.
Both should favor Wal-Mart (NYSE:WMT) over other retailers.
So I recommended selling January 47.50 Wal-Mart put options symbol WMTMW, for $275 each, and using the proceeds to buy March 19 S&P Retail SPDR (NYSE:XRT) put options, symbol XRYOS, for $255 each.
Considering transaction costs, the cost basis is essentially zero. The XRT puts are currently selling for about $360. We could sell the XRT puts and buy the Wal-Mart options back for $290. That would close the trade with a $70 per contract profit. But I think this trade will do better.
Things would have to get very bad for Wal-Mart to approach $47.50. And bad for Wal-Mart would be even worse for the retailer in the XRT.
*****The Philadelphia Federal Reserve Survey of Professional Forecasters says that the U.S. economy went into recession in April, 2008. It will last 14 months and the unemployment rate will hit 7% next quarter.
Another survey from the National Association of Business Economists gives a better view of the range of expectations. These respondents say the recession started anywhere between the 4th quarter of 2007 and the 3rd quarter of 2008.
Most in the NABE survey believe the recession will last beyond the 1st quarter of 2009 and that the jobless rate will hit 7.5% next fall. They also said the housing market will bottom in mid-2009.
I don’t report survey results like these because I think they are right. Rather, I report them to show that even the professionals devoted to economic forecasting have a hard time actually doing it.
*****Yesterday I introduced you to my stock selection machine, TRIGR. TRIGR is a computer program that ranks thousands of stocks every day based on 155 criteria.
The criteria are a blend of technical indicators and fundamental valuations. The ultimate goal is to find fundamentally sound companies with solid revenue and earnings growth that are being bought by institutional investors.
It’s no secret that institutional investors are the ones that move the markets. Mutual funds, pension and hedge funds – these entities account for approximately 70% of the daily volume on the New York Stock Exchange. If you can follow the institutional money flows, you can make money on stocks.
We’ve seen that in the past with stocks like Graham Corp (AMEX:GHM) and Emergent Biosolutions (NYSE:EBS). And we’re seeing it now with Questcor Pharmaceuticals (Nasdaq:QCOR).