Sunday, March 11, 2012

Further investment ideas.

I have been thinking a lot about the markets in recent weeks, and talking a lot about them, to anyone who would listen, and more than a few people who wished they didn't have to.

Two caveats.  First, nothing in this blog post is investment advice!  You must do your own homework!  Second, I own stock and/or option positions in every company mentioned in this post except JP Morgan, which I'm considering buying.

Here is what I've been thinking about.  I have a few GREAT investment ideas which I'll outline.  Cheat sheet-- BUY STOCKS.  Especially buy cyclical stocks and big banks.  I am especially bullish on Citigroup, GM, Ford and GE.  Not because I think they will triple quickly or anything (though both Citi and GM should double or come close in the next two years if most things go right) but because I'm super confident that each of these are seriously undervalued.  But more on that later.

The conditions I laid out as crucial parts of my investment thesis in my last post, hold.  Europe is successfully muddling through, and will VERY likely avoid the worst outcomes which involve contagion.  The manner in which they are doing it is very stupid, and harmful to Europe long term, but that's another post.  Suffice to say Merkel and company won't let Greece/Portugal take down the world economy a la Lehman, and new flyingpinkunicorn fave Mario Draghi, the new head of the ECB will not let banks take down the global financial system, a la Bernanke.

Second, the US economy is improving, though recent data causes me to think the expansion has slowed a bit and may remain slow until about June when it should pick up again.  Although we do not yet have the Obama Boom I wrongly predicted a few years ago, all signs are indeed more positive, and auto sales are particularly strong, a sign of consumers having long term confidence (as well as beat up old cars).

As for specific investment ideas, the two that I mentioned prominently were TBT, an ETF which shorts interest rates, and IFN, a Closed End Fund which owns shares in Indian stocks.

On January 3, when I recommended TBT, it was at 18.60.  It closed Friday at 19.27.  That's a 3 % return in two months and change.  Not pathetic, but not great considering the market has beaten that by a mile.  I NO LONGER RECOMMEND TBT.  I have concluded that the fact that instrument (designed to vary by twice the inverse of a basket of long term bonds) does not do this accurately over periods longer than a single day renders it useless for a long term investment.  In addition, I appear to have been premature on my call that interest rates will rise.  They may not rise much until after the Fed's Operation Twist concludes in June, and maybe even a tad later.  I have instead bought put options on TLT which expire in January.  This ETF will, at least, accurately track long term interest rates (with a direct 1-1 relationship) over time.  So a put on TLT does indeed serve as a bet on longer interest rates.  I am not as excited about this call as I was in January.

IFN, an ETF which owns Indian stocks, turned out to be a brilliant short term call.  IFN was $19.68 when I recommended it on January 3rd, and closed this past Friday at $23.23.  That's a tidy 18% return in two and a half months!!!  A Monster return, obviously.  I did not advocate IFN because I thought the Indian market would soar overnight, but instead as a long term play.  My strong belief that India is the next China is intact.  It won't be as clean and neat an economic rise, but a rise it will be, and a stockpicker who can pick the right companies in India can make a glorious amount of money if my predictions come to pass.  The folks running IFN seem to know what they are doing, so there is no reason I can think of not to buy IFN if you are thinking long term.

As for my American stock plays:

GM/Ford-- their stock is ridiculously low compared to their profits last year.  Car sales are WAY up this year in the US, and both companies are going to make a metric boatload of money in the US this year.  Europe will be a big drag, and China may be a potential pitfall for GM (it currently makes a lot of money in China) but roaring success in the US should drown out international woes.  Both stocks have already run up nicely this year, but have a long LONG way to go.  In addition, the market is only trading at 13 times last year's earnings.  With interest rates this low, that is an absurd multiple.  That multiple should increase to a historically normal 15 or so sometime in the next 2 years.  That implies a big further rally in this already remarkable bull market, which turned 3 years old and 100% big just last week.

Citigroup (and JP Morgan, and probably Bank of America) are wildly undervalued.  The market still doesn't begin to trust these mega financials and their mega balance sheets.  With good reason.  But the market has gotten carried away.  They've already run up big this year (my Citi shares and all of my Citi options are in a lovely shade of green) but have MUCH more room to run.  Sometime this week, the Fed is HIGHLY likely to say that all financials have passed its (stressful) stress tests.  Citi has presumably already asked for permission to increase its dividends/institute a stock buyback.  I predict this permission will be granted.  Don't know when, sometime in 2012.  If/when that happens, I expect an immediate pop in the stock of at least a buck, and a whole lot more bucks in the stock price after that.

GE: As soon as the Federal Reserve approves it, GE Capital should resume paying a dividend to the parent, GE, as opposed to hanging onto all of its cash.  GE should then be able to increase its dividend and share buyback, as the CEO has repeatedly publicly stated he wants to.  That should cause some of the share price increase I seek.  Excellent quarters this year in most parts of the company should cause still more of it.  Finally, I think the market overall is undervalued.  Add all of that together, throw in a 3.57% yield, and I think GE is a clear buy (and hold!) for the long run, and a fine buy for the short run as well.