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More predictions for ’09

Sean Hyman at Seeking Alpha echoes the “seek out ye tech and infrastructure plays” chorus:

The transportation and technology stocks tend to lead the way higher out of recessions and bear markets. So I would suggest looking into the Transportation ETF (IYT) or UPS for an individual stock. In technology, I’d suggest looking to the Technology ETF (ROM). Keep in mind that this is an aggressive technology ETF and it will be very volatile.

Obama, it appears, will also make the infrastructure stocks hot once again as the government spends money on roads, bridges, etc. So I’d suggest the Infrastructure ETF (MFD) or CAT as an individual stock play. Keep in mind that individual stock plays carry far more risk than an ETF.

Exchange-traded funds are all the rage lately for getting exposure to sectors without individual-stock risk. A quick look at the EFTs mentioned above:

  • IYT: iShares Dow Jones Transportation Average ETF. Attempts to match performance of the DJ Transportation Average, which often leads the markets up and down (not always, but it’s fairly intuitive: companies that deliver products are the first to feel downturns.)
  • MFD: Macquarie/First Trust Global Infrastructure Utilities Dividend & Income Fund (MFD). More on the fund here. Frankly the description of this fund is so vague — and performance just as ugly as everybody else’s this year — that I’m a bit dubious right out of the gate.
  • ROM: ProShares Ultra Technology. “Ultra Technology ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones U.S. Technology Index.” So, yeah, super volatility.

One worrisome trait of ETFs: they are heavily traded by hedge funds and big-time financial players — money flow into and out of ETFs doesn’t always make sense in the same way it does with traditional mutual funds. That is, money can be pouring into ETFs even when their asset values are falling because sophisticated traders are using them to hedge themselves eight ways to Sunday.

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Tom Mangan posted at 8:46 am December 23rd, 2008 |

WSJ blogger’s predictions for ’09

Evan Newmark sticks his neck out at Mean Street with 9 predictions of what’ll come to pass next year. At least one is relevant for Caterpillar watchers:

Prediction No. 7: Oil will trade at around $30 a barrel for most of 2009

OPEC isn’t happy with $30 oil. But it will be even more unhappy if Obama goes ahead with all his nutty antifossil-fuel schemes. So OPEC will keep oil prices low until America is lulled into again thinking that $1.50 gas will last forever. That should take about a year. Oil will close 2009 back at $50 a barrel.

Well, I guess this one would be good for all of us if came to pass:

Prediction No. 9: The S&P 500 will close 2009 at 1200, up 30%

In this weekend’s Barron’s magazine (also published by Dow Jones), 11 of 12 “savvy” Wall Street strategists targeted the S&P to close 2009 somewhere between 975 and 1100. The consensus is nearly always wrong. By late summer, third quarter earnings will turn up, investor greed will replace resignation and a late year rally will take the S&P to 1200.

I’d rather not consider how bloody it has to get to trigger a 30 percent rally.

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Tom Mangan posted at 8:49 am December 22nd, 2008 |

About that Goldman downgrade

The excellent Seeking Alpha blog questions the Goldman Sachs downgrade of Cat last Friday. The writer concedes the point that Caterpillar is going to get hit by slower capital expenditure spending in the coming year or so, but it also throws a lot of cold water on GS’s calls on the commodity market, which was clearly driven to absurd heights by speculators — too much money chasing too few options and futures contracts — rather than significant increases in demand for the underlying commodities.

How much faith should we put behind these estimates? It’s a simple question, and borne out of no disrespect for Goldman. There are plenty of smart folks over there, and to say that it’s been the toast of the industry for the past decade is quickly becoming a cliché. Goldman deserves credit for being early on the calls for rising oil in 2007, and for accepting recession conditions in the U.S. this spring.

That being said, it sure was swept up in the tight supply, global-growth fed theory of higher commodity prices this summer, and overshot way big and way late. Now it has set its 2009 estimates for aluminum and copper below the current spot prices ($1525 for aluminum on the LME in the front month, and $3232 for copper) which many (including myself), contend have oversold due to the same forces that drove prices up so high in the first place.

Exec. summary: Demand and China and India — and a strong global brand — will most likely save Cat’s bacon. Read the comments for more juicy dis of Goldman Sachs. Loved this one:

Isn’t it crazy when after a stock has had a long ride on the downside and has about bottomed out, that the rating agencies and brokers, (like Goldman, etc.) then wake up and all of a sudden decide that the stock should be down graded. Is this stupidity or a phony ploy to drive the stock lower since they have shorted it. It is probably both and this is what has allowed cynics to believe that the market is rigged, especially against the public.

The market’s rigged against the public? Say it ain’t so, Joe!

Also at Seeking Alpha: Blogger Dr. Duru summarizes downgrades across the construction sector. Interestingly:

I have to agree that continued declines in oil prices (and commodities in general) will undermine the buying theses for infrastructure stocks. But with the gears of reflation spinning frantically across the globe, I remain more interested in looking for buying opportunities in this sector than selling (shorting) ones. If the charts of these infrastructure plays eventually break down, I will consider such action a reinforcement of the economic danger implied in the current acceleration of job losses in the U.S.

As the Doc always notes: Be careful out there.

This piece in the Wall Street Journal (subscribers only, alas), buys the GS party line, but notes one interesting detail:

Caterpillar counts about 50% to 60% of its profits from the mining and energy industries, according to the Goldman Sachs analysts, and they said the commodity downturn is likely to hurt the company until 2010.

True enough, but low commodity prices are generally good for the economy over the long haul, and more tractors get bought in up economies than down ones.

And a note for options cowboys: a Cat straddle.

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Tom Mangan posted at 5:57 am December 15th, 2008 |