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By Ian Wyatt, Daily Profit |
CHK | Nov 24, 2008 |
Your Daily Profit
November 24, 2008
*****Finally, A Rally
*****Obama’s Economic Plans
*****Reader Mail
Dear Investor,
*****Hallelujah. After 7 down days in the last 9, and 1,800 or so points of decline, the Dow Industrials finally had a nice rally. Volume was the heaviest it’s been in a month.
But it wasn’t easy. The Dow seemed intent on dropping below 7,500. That would have set up the lowest close for the Dow since March of 2003. And it was even worse for the S&P 500 – it was facing levels not seen since 1997.
The buyers took control of the Dow right at 3 pm and ramped it 494 points. The only news of any consequence was that President-elect Obama was selecting Timothy Geithner to be his Treasury Secretary.
Not only that, but Obama’s put Harvard professor and former Treasury Secretary Lawrence Summers in position to be the next Fed Chairman when Bernanke’s term is up in 2010.
I wrote in last Tuesday’s Daily Profit that investors might start looking forward to Obama’s influence on the economy. And this may have been the first taste of it.
*****Geithner is currently the head of the New York Federal Reserve. He seems to have a fair amount of clout on Wall Street. He was involved in negotiating the Bear Stearns buyout and AIG bailout. He’s also worked with Summers in the past during the Asian currency crisis.
As for Summers, he’s been very vocal lately about the need for large amount of economic stimulus in the form of jobs programs for infrastructure. Obama’s appointment of Summers as director of the National Economic Summit.
But the biggest news from the Obama camp came this weekend. They’re considering postponing a repeal of the Bush tax cuts and, instead, just letting the cuts expire in 2011 as the original legislation intended.
This is important news for those that feared Obama would raise taxes right out of the gate.
It’s looking as though all of this might get addressed in a sweeping stimulus bill, expected to be ready for Inauguration Day. Figures being discussed are in the $500-$700 billion range.
*****Especially considering the tax issue, I’d expect to see stocks continue the rally that started Friday. But on the other hand, stocks haven’t been conforming to any bullish expectations lately. So, this will be an interesting test.
It’s been a pretty stunning couple of days for Chesapeake Energy (NYSE:CHK). From $21, to $14, then back to $17. Friday’s bounce was the biggest for the natural gas stocks. But what’s next?
Natural gas prices have been falling and inventories have been on the rise. But after the frigid weekend we had here in the District, I expect we’ll see some investors re-think their pricing expectations for natural gas and Chesapeake.
Now, let’s get to some questions and comments…
*****I love this comment from N. Moore: I’m far from an expert on this stuff but try this on for size. I think the banks balked at getting rid of these mortgages at deeply discounted rates because they know that along with the stinkers there are also a bunch of them that will hold real value when the economy comes back. I’m assuming that they couldn’t cherry pick the good ones out of the bunch that was for sale.
That’s a terrific theory. I don’t think there’s any question that Paulson has been acting on Wall Street’s behalf. His denial of aid for Lehman Brothers, despite Lehman’s warnings that a failure would cause severe problems, sure sound like a personal vendetta against Lehman’s CEO, Richard Fuld.
Let’s not forget that Paulson was Goldman-Sachs CEO for X years before moving into public service. So when Wall Street took a nosedive, it was his friends, colleagues, and enemies, that came calling for aid.
Who wouldn’t be tempted to throw old friends a lifeline. Or, use the opportunity to sink a bitter rival like Fuld? And Paulson’s demand for total power with no oversight gave him the freedom to ignore to ignore the taxpayer and rescue his Wall Street pals.
Why else would he take less than market rate for loans make no stipulations about how bailout funds would be used by banks?
So Mr. Moore has a great point. Why wouldn’t banks want to hold onto mortgage-backed securities that are trading for pennies on the dollar? Why not just get some cash to shore up the balance sheet and wait for the value of your securities to rise after this mess blows over?
After all, the problem for mortgage-backed securities isn’t really non-performance and default. It’s confidence. In time, it’s almost a certainty that these assets will rise in price.
Also, this is one of the reasons that Obama’s fast-action on his economic team seem to be getting a good reception. Lots of investors are not happy with the way Paulson has handled the bailout plans.
*****Here’s an anonymous question that I expect many have on their minds: What do I do about GE I have lost 50% in it in just a month.
If you’re down 50% on GE in a month, that suggests you were buying the stock somewhere in the $22 neighborhood. Now, GE has dropped for a number of reasons. First, investors have been panicking. No stock has been safe.
And GE has exposure to many segments of the economy. If consumer spending falls, people will buy fewer appliances. Less air travel means fewer new jet engines. A frozen credit market means GE Capital is making fewer loans.
But these conditions are mostly temporary. So quite simply, you hold GE, enjoy the 8.8% dividend, and wait for it to move higher. You could also look into selling some covered calls on GE to offset some of your losses.
*****J. Sharp has a biotech question: Have you any comment on ISIS --a biotech company that I heard might be a buy-out candidate?
First, I can’t add anything to the buyout talk for Isis Pharmaceuticals (Nasdaq:ISIS). There’s just no way to know. And I would suggest that anyone who says any company is a buyout candidate is guessing. It may be an educated guess with a sound argument. But that doesn’t mean any big company is ready to snap it up.
Second, I am not a doctor and I never played one on TV. I can’t comment on Isis’ technology, either. I take my cues from TRIGR, which gives solid fundamental companies that are moving up in price.
A quick look at the ISIS chart shows that the stock sold off sharply in October. Most stocks did. But the two biotechs I’ve mentioned here in Daily Profit, Emergent Bioscience (NYSE:EBS) and Questcor Pharmaceuticals (Nasdaq:QCOR) both posted gains in October. That’s the kind of strength I look for.
That doesn’t mean Isis isn’t a good company, but I have to think that the market has shown a preference for QCOR and EBS.
Now, with that said, the recent sell-off has taken Isis down to a support level between $10 and $11 a share. If the market continues higher, Isis should do well. In particular, if Isis can break above resistance at $12, it could be a quick ride to the $14-$16 zone.
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