Saturday, May 29, 2010

Relax! It's Not as Bad as You Think!

Stocks closed out their worst month in more than a year by sliding again on more unsettling news about Europe, including a downgrade of Spain. The old adage "sell in May and go away" seems to be absolutely right on the money again.

But not everyone is buying all the gloom & doom. James Altucher, president of Formula Capital, was on Tech Ticker on Friday stating that the U.S. recovery is better than a V and look for new highs in 2012:

The debt crisis in Europe likely spells slower growth across the Atlantic. China is taking steps to put the brakes on its runaway economy and the U.S. housing market still looks weak. There's seemingly plenty of reasons to be a stock market bear, especially after the run we've had over the last year.

Nonsense, says James Altucher, president of Formula Capital. The economy and market will continue to surprise, he tells Aaron in this clip. In fact, he's calling for a 'checkmark'-shaped recovery, stronger than the ‘V’ we hear so much about. "The debate is over, it’s already been a V, now the question is, does it continue? I think it does," he says.

Why is he so confident?

  • -- The job market is improving. “We've seen temp workers go up for seven months in a row," the fastest pace since 2004. Average pay and hours worked are up and the U.S. added 290,000 jobs last month, the biggest jump in four years. Plus, he notes, “jobs in self-employed positions and start-up businesses have jumped by 1.9 million in the past four months."
  • -- Car sales are up by 25% in April compared to a year ago. “How did Toyota have 27% year over year car sales increase?"
  • -- Pending home sale are up 21% year over year.

Altucher is confident all this will translate into record profits and an all-time high on the S&P 500 by the end of next year. "I know people are going to laugh," but the proof is in the pudding, he says.

How do you make money on this?

"Play the triple play companies. The ones that beat earnings, beat on revenues and guided up," he says. At the top of his list are Intel, Starwood Hotels, Humana, Intel, EMC and IBM.

Watch the interview below:


Mr. Althucher might be a little too optimistic, but he is right that the fundamentals have drastically improved in the last 12 months. On my blog, I provide a link to the Dallas Fed's US economic data. I would urge you to keep an eye on the charts when trying to gauge fundamentals.

But what about Europe's sovereign debt woes? Mr. Altucher says "relax", we've been through much worse than this:

Europe’s sovereign debt crisis has wrecked havoc on the markets in the last few months. We’ve had a spike in the VIX, aka the fear index, the flash crash and many global markets are now back in bear market territory. In the U.S. were on track for the worst May in half a century.

The wild market action has many investors wondering: How will we get out of this mess?

"Everybody needs to just relax a little bit," says James Altucher, president of Formula Capital. "This is not Argentina, this is not Zimbabwe."

The market has been through much worse than this in the past 30 years and Altucher believes the economy and stocks will remain resilient.

When has it been worse?

  • --In 1982-83 Brazil, Mexico, Venezuela and most of Latin America all defaulted or, came close to defaulting. "The whole world was going bankrupt and we were coming out of the Volcker led recession from the early '80s where he was fighting inflation," he notes. Guess what? After a bailout – U.S. markets were up 49% those two years.
  • -- 1987’s Black Monday. Think the 'flash crash' was frightening? On October 19th, 1987, the Dow fell 22%. In a single day! Hong Kong markets fell 45% on that day, alone.
  • --1997’s Asian financial crisis lead to Russia debt default in the following year and the collapse of hedge fund Long Term Capital Management. Talk about contagion.
  • -- September 11th, 2001. "It seemed like the world was ending, it was the scariest thing that happened to me, at least, in my lifetime, and it was horrible for the country," Altucher recalls. "And, we were in the middle of a recession."

Bailouts and quantitative easing followed most of these previous crises. But our current predicament comes after we've already had the biggest bailout in history and rates can't go lower. Altucher has a retort to that concern too, noting half the stimulus package hasn't been spent yet. In fact, he's more concerned that using the rest of the funds will create another bubble and lead to higher inflation.

That's a problem the Fed might look forward to.

Watch the interview below:

I also think that longer-term, the structural changes taking place in Europe will benefit the global economy. As for the next bubble, I agree that it's only a matter of time before the liquidity tsunami pushes risk assets much, much higher.

My bet is that the next bubble will be in alternative energy, especially Chinese solar stocks. In fact, I love all solar stocks at these levels and I see a secular bull market in this sector. The overall market might be range bound, but again, Mr. Altucher is right, some large caps are making solid earnings and their cash positions are indicative of solid fundamentals.

Finally, Bill Ackman of Pershing Square Capital Management, a well known bear, was also on Tech Ticker saying that he's bullish on America and Citigroup:
In April 2009, Bill Ackman of Pershing Square Capital Management said America had suffered "the equivalent of a heart attack, but now we are in recovery, hopefully. It takes time to heal."

Fast forward 13 months and, "yes," America has healed, Ackman says.

Furthermore, "I think the market's not particularly expensive," the famed activist hedge fund manager declares. "Look at large-cap, very high quality businesses today [and] they seem pretty cheap to me. "

Much to everyone's surprise - including Ackman's - those "very high quality businesses" include Citigroup. On Wednesday, the day after Treasury announced the sale of 1.5 billion shares of Citi stock, Ackman stunned Wall Street by revealing his firm has taken a big stake in the big bank.

With theatrical flair, Ackman made the announcement as a throwaway line at the end of his presentation at the 15th annual Ira Sohn investment research conference in New York: "And by the way, we bought about 150 million shares of Citigroup, but I don't have time to talk about it," he said, according to multiple reports.

And by the way, when Ackman and Bloomberg reporter Christine Richard joined us this morning to talk about Confidence Game, a new book about Ackman's public battle with MBIA (and regulators), I just had to ask him about the Citigroup position.

The Bull Case for Citigroup

"If you had asked me a year ago ‘could I conceive of owning Citi 12 months later?', I couldn't conceive of owning the company," he says. "It was hard for me to even look at it in light of a year ago."

Upon further review - and while admitting "there are still question marks" -- Ackman determined Citi was attractive based (in part) on the following:

  • -- Money Talks: Thanks in large part to the government's conversion of its preferred stake in Citi to common stock in 2009, Citigroup is "probably one of the best capitalized banks today, ironically," Ackman says.
  • -- Free Money Is Even Better: Because Ben Bernanke has kept the fed funds rate effectively at zero, banks like Citigroup "effectively they've got free money," Ackman says. Furthermore, "it's a great time to make loans - they can earn attractive spreads" because collateral values are down and lending standards are up.
  • -- Franchise Value: Despite hits to its reputation in recent years, Citigroup still has a "great deposit franchise" and a "very well capitalized balance sheet," the fund manager says. In addition, he notes off camera Citi has less exposure to home equity loans than most of its big competitors.

In sum, "it's really a great time to be in the banking business," Ackman says.

Watch the accompanying video below for more about Ackman's take on Citigroup, General Growth Properties and other investments -- and stay tuned for additional segments where Ackman and Richards discuss Confidence Game and the ongoing war against the shorts.



Mr. Ackman is not the only hedge fund manager bullish on Citigroup. If you peruse through the holdings of other top funds, you'll see many others are also long Citiroup. I will update that list of funds over the weekend, but there is enough info there to give you an indication that the top funds are still bullish and long risk assets.

So relax, the world is not coming to an end. It's going to be volatile, there will be more fear mongering and manipulation by the big hedge funds (they thrive on vol), but at the end of the day, the fundamentals are improving and stocks will grind higher. Some sectors will soar higher.

I too am bullish on America and the rest of the world. Put away your crash helmets and enjoy the long weekend.

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