Housing “Stabilizing,” Rate Cut Substitutes, “Pathological Hatred,” a No-Brainer Trade, and More!

by Addison Wiggin & Ian Mathias

  • Cause for celebration? The home price number that’s "less awful"
  • Fed and Treasury plot Wednesday moves… Amoss on what to expect in lieu of rate cuts
  • Insights from Byron King’s power lunch… "Pathological hatred" of fossil fuels
  • The "no-brainer trade" of the next 25 years? A controversial suggestion
  • Icelanders "take aim" at their despised banking class… Icelandic men, anyway

 Only in America, only in 2009, can an annual 18.6% decline in home prices signal "stabilization" in the housing market.

Just out this morning is the latest Case-Shiller index of housing prices in major U.S. metro areas. The annual 18.6% plunge in February is a teensy improvement from a record 19.0% drop the month before. It’s the first time since the index started falling in early 2007 that it did not set a record year-over-year decline.

The numbers are in line with economists’ expectations. All 20 metro areas measured by the index fell during the last year. In the cases of Phoenix, Las Vegas and San Francisco, those drops were more than 30%.

Overall, home prices, on average, are now back to where they were in 2003.

 Also in the "less awful" category this morning – consumer confidence numbers from the Conference Board.

The sentiment index now stands at 39.2. We haven’t seen a number like that since November… and we all remember how sunny and optimistic those days were. Still, that’s undeniably better than the 26.9 registered in March. Credit for the increase goes to falling mortgage rates, a decent pop in the stock market since the March 9 lows, and hopes that the job market will loosen up soon.

The Conference Board figures jibe with the other big index of consumer confidence from Reuters and the University of Michigan. As we showed you last week, that number stands at its highest level since the financial sector imploded last September.

 Here’s a number that does continue to set records: the amount the U.S. Treasury will need to borrow each quarter.

The figure has reached record highs for three straight quarters. For April-June, we’re told the number will be $381 billion. Tomorrow, Treasury follows up this report with details of how much debt it plans to sell next week, and at what maturities, as part of its regular quarterly auction.

  As if that’s not enough to curl your hair, tomorrow is also the day the Federal Reserve Open Market Committee makes its next move. Since interest rates are already close to zero, and no amount of wishful thinking can bring rates down to the Fed’s desired minus 5%, we’re left to ponder what rabbits remain in the hat.

Our resident short strategy expert Dan Amoss is mindful of the Fed’s move last time, six weeks ago, to buy up $1.15 trillion in mortgage-backed securities and Treasuries.

"As long as those that hold or invest in U.S. dollars maintain their confidence," says Dan, "there is no real limit on the size of purchases the Fed can make with new dollars created with the push of a keystroke. Mortgage rates and Treasury borrowing rates have not gone down as much as you’d expect considering the size of the Fed’s purchases thus far. It might have to up the ante either now or at a later meeting."

Dan still has a recommendation in his portfolio that stands to move nicely if you act before the Fed announces its moves tomorrow. His most recent recommendation, out just yesterday, is already up 7% this morning. For access, and insight into his strategy, check this out.

 Swine flu worries yesterday left U.S. stock markets listless. The major indexes swung between mild fever and mild chills. The Dow ended the day down a little over half a percent, the S&P about 1%. This morning, flu worries remain, and the chills are winning out, with both indexes down about 1%.

 Apart from the flu, another reason the market’s swooning today is the inevitable leaking of the banks’ "stress test" results in advance of the official release next Monday.

The word is Citi and Bank of America need to raise more capital. Puts a different spin on those quarterly profits they just announced, no? Both banks are whining about these findings and plan to issue pre-emptive statements today, with their side of the story. We’ll see how traders react.

 Speaking of banks back in the black (supposedly), Deutsche Bank just announced $1.6 billion in quarterly earnings, swinging back from a loss in the previous quarter. Presumably those numbers take into account the $11.8 billion it collected from U.S. taxpayers via a bailed-out AIG.

No "danke schoen" for you or me in DB’s announcement, however.

 Our energy and scarcity bug Byron King emerged recently from a power lunch more convinced than ever that alternative energy plays stand to make huge profits under the new political environment in Washington.

The session featured a retired aerospace executive, a current steel executive, a venture capitalist and a former senior official at Treasury.

The consensus: Climate change will drive political change, which will drive economic change. "For at least 10 years, if you have not been promoting the dangers of climate change, then you have not been receiving government grants," says the aerospace guy. "So the research community is following the money."

The steel executive characterized the outlook as a "pathological hatred" of carbon-based energy. "The people making policy now have a crusader’s mentality. ‘The past is trash,’ is how many of the new policymakers view our world. So the new policymakers want to promote radical change in energy policy. They’re going to jam it down the throat of the economy."

For his business, that means inflation-adjusted energy prices tripling or quadrupling over the next 10 years.

Byron came away more convinced than ever that his tiny alt-energy plays in Energy & Scarcity Investor have their best days ahead. To learn more, check out this report.

 Gold fell out of bed today, dropping 2%, back below the $900 mark. Oops, make that below $890. The dollar index is also down, though not as much, hovering around 85.6.

 "What is the no-brainer trade," asks our friend Dennis Gartman this morning from his post in Virginia, "what is the asset that is so cheap compared to any other asset that you could look at it 25 years from now and say, ‘Gee, how did I miss that?’

"And the only asset I find is stocks. That’s the only asset that is underrepresented and anathema to most investors, and that’s how bottoms are made."

And it’s not just stocks that he sees coming off a bottom, but the economy too. No Greater Depression for him. "What took a rather severe recession in 1929 and 1930 and turned it into the Depression of the 1930s was that after the stock market crashed we did something totally idiotic… we raised taxes to balance the budget and the Treasury secretary asked the Federal Reserve bank at the time to drain reserves from the system … How stupid was that? That’s beyond belief that you could be that dumb."

"Ben Bernanke understands that that was, in fact, idiocy, and when he saw the banking system implode last year, he made certain there was going to be… a huge surfeit of liquidity to make certain that the implosion of the banking system would not devolve into a depression, and I applaud him for that."

Umn, we would take issue with a good deal of that assessment. But Gartman is not someone whose opinion we dismiss casually. That’s why he’s joining us in Vancouver this July for the Agora Financial Investment Symposium. This is our 10th anniversary get-together, and it should be the best ever. This week is the final week for discounted early-bird registration, so go here for the details.

 With everything else going on in the world yesterday, we didn’t take note of Kentucky Fried Chicken’s foray into selling grilled chicken – even giving it away yesterday to create buzz. But for our resource man Alan Knuckman, "It all comes back to commodities," so he sees this experiment through different eyes than most of us.

"Chicken is a commodity," he says, " but the futures contract failed years ago because of the low price volatility."

"Soybeans and corn, on the other hand, are fed to chickens, and if this newfound chicken demand catches on, watch out! KFC is the world’s largest chicken restaurant chain, with 11,000 restaurants in 80 countries."

"The only thing that may offset my theory is that since 2007, KFC has switched its fry oil to a Monsanto-made special low linolenic soybean oil. So more grilled chicken would mean less demand for that soybean oil used in the fryers."

Sounds arcane, but Alan has used that sort of thinking to generate a 100% gain this year for readers of Resource Trader Alert. Other positions, still open, are up 40% and 79%, with plenty of room to run. Here’s where you can get access to the portfolio.

 Icelanders, whose economy went from powerhouse to basket case in a matter of weeks last year, have a new way of taking out their frustrations – or relieving them, as it were…

The urinals at the Sodoma bar in Reykjavik are now outfitted with photos of former bankers who’ve fled the country. All three of Iceland’s major banks collapsed late last year and the IMF had to bail out the government.

We like this. Seems like a far more constructive response to the crisis than the one exhibited by Icelandic voters over the weekend. They voted in candidates from two parties pushing for Iceland to join the European Union. Yeah, that’ll learn ’em.

 "One thing I noted," writes a reader, chiming in on our climate change debate, "was the lack of mention of the human element. Each human exhales a kilo of CO2 per day (at rest), so 7 billion people exhale at least 7 billion kilos of CO2 per day. That’s a good 10% of CO2 production – assuming those 7 billion are asleep at the wheel all day.

"But nobody – so far as I found in all the global warming ‘debates’ (or demagoguery) – mentions the impacts of adding a billion breathers per decade, nor the CO2 producers already on the ground. Not PC, I suppose, to suggest people not produce so many offspring, especially those they cannot feed anyway."

 "If you properly inject CO2 in a greenhouse you can expect a 40% or greater yield in your produce production," writes another reader, thinking along the same lines. "So if you like to eat, do not consider CO2 as a pollutant. CO2 is to plants what oxygen is to animals."

 On a related note a third reader writes, "Trying to predict the evolution of the climate of planet Earth by means of the ‘average’ temperature of the atmosphere is very much the same thing as trying to predict the evolution of the world economy by means of the average wealth of the citizens of the planet."

 "Glad to see you citing the ‘statisticians’ from Storm Exchange who are able to discredit the Inconvenient Truth about global warming," writes a fourth.

"A look at its site tells me that it is probably drawing global conclusions from the cyclical trend of the surface water temperatures of the North Pacific, but does the group even wonder about the waters below or, like the polar bears, do they wonder where all the ice went? If I drip melted ice into my coffee, it seems to cool off too – maybe there’s more to their inference than Mr. Gore would want me to believe."

 "The solar cycle is a at a minimum right now and should be rising for the next few years," writes an earnest fifth gentleman trying to reassure us that we’re not headed into another Little Ice Age, replete with its own plague of the Black Death.

 "It is true," writes a sixth, shifting gears, "with Bush as president, the government spent much too much money. It is also true that with Obama as president, the government spending has been much, much worse."

"I never thought I’d see this so soon," writes an seventh, ‘But Obama’s spending makes Bush look like Scrooge."

The 5: "Brevity," wrote our friend Bill Shakespeare, "is the soul of wit." Our reader mail has been very witty today.

Thanks for reading,

Addison Wiggin
The 5 Min. Forecast

P.S.: We have this great new service called INCOME ON DEMAND. We all love it. We think it’s wonderful… a great way for you to force the stocks currently in your portfolio to "pay dividends." Trouble is, we’re having a tough time getting readers to get excited, too.

So… I’m going to try something a little different today. You recall the debate Wayne Burritt and Dan Amoss were having over Hot Topic, the teeny-bopper apparel shop? The ticker symbol is HOTT. Here’s an actual IM conversation I had this morning with Joe Schriefer, our publisher here at Agora Financial, regarding the actual strategy Wayne used to play HOTT:

[10:45] joes29im: The detailed trade: Wayne reco’d buying HOTT for $12.56 on 4/20

[10:46] joes29im: and after you purchased shares, he reco’d selling the May $12.50 calls

[10:46] joes29im: basically giving another buyer the right the buy HOTT shares off of you for $12.50 a share by the third Friday in May, the 15th

[10:46] joes29im: so, in itself, most people may think that’s weird… why would you buy a stock for $12.56 and sell the right for someone to buy that same stock off of you for $12.50? A full 6 cents less? well, here’s why…

[10:47] joes29im: the volatility was so high that the income you received from selling the call was $1.05

[10:48] joes29im: So it’s a quick way to skim $1.05 in income on a $12.50 stock – that you think will trade relatively flat – in 4 weeks

[10:48] Addison1wiggina: k.

[10:48] joes29im: an 8.4%, 30 day income play

[10:48] Addison1wiggina: nice

[10:49] Addison1wiggina: what’s the stock at now?

[10:49] joes29im: 12.67

[10:49] Addison1wiggina: so… aren’t those puts?

[10:49] Addison1wiggina: or where was the stock on the 20th?

[10:49] joes29im: 12.56

[10:49] joes29im: he sold "in the money" calls

[10:49] Addison1wiggina: k

[10:50] joes29im: So Wayne figured that for the next 30 days, HOTT would trade flat…

[10:50] joes29im: but the market was pricing the options high…

[10:50] joes29im: so Wayne took advantage of option buyers in the market to turn a flat stock into a quick 8%+ income play

[10:51] joes29im: if HOTT is above $12.50 come the 15th of May, the WORST Income on Demand subscribers could do is 8.4% in 30 days

[10:52] joes29im: Using option selling, he kinda "forced" a non dividend paying company to pay him a 8.4% dividend in 30 days

[10:53] Addison1wiggina: what happens if the stock drops below $12.50?

[10:53] joes29im: so, he reco’d buying it for $12.56… and then reco’d selling the calls for $1.05 worth of "income"

[10:54] joes29im: so the cost basis is $11.51

[10:54] joes29im: subscribers are protected down to that….

[10:54] joes29im: if HOTT is at $12.49 or below, we have a bunch of choices…

[10:55] joes29im: 1. The option expires, subscribers who acted on his reco now hold the stock

[10:55] Addison1wiggina: keep the stock

[10:55] joes29im: yep, they can keep it..

[10:55] joes29im: 2. they can sell it in the open market, and as long as it’s above $11.51, they make a profit

[10:55] Addison1wiggina: nice

[10:55] joes29im: 3. they can hold it and sell another round of calls if the volatility is there

[10:55] Addison1wiggina: right

[10:56] Addison1wiggina: another $1.05 potentially

[10:56] joes29im: yep

[10:56] Addison1wiggina: further reducing the all-in cost

[10:56] joes29im: yes sir

[10:56] Addison1wiggina: love it

[10:56] joes29im: although I think the IRS only views the first call write as a reduction of cost basis

[10:56] joes29im: all other call writes are treated as income, me thinks…

The conversation went on for a bit further. Joe described another series of trades on a mining company from December 2008-March 2009. The trades help catapult a 33% move in stock price into 107% of income and gains… even calculating it the way the IRS wants you to.

So… this Income on Demand strategy allows you to get "dividends" on stocks you already own. It works best in a volatile market. In a raging bull market you won’t want to do this. You’d be better off holding onto your stocks for serious capital gains. But until that market comes around again, you might as well just earn income… on demand. And Wayne can help you with every trade.

If you’d like a little more explanation on how to force your portfolio into paying you guaranteed income, feel free to call our man at the VIP help desk, John Wilkinson, our director of trading services, at 1-866-761-3662… he’ll be happy to walk you through it.

Hope this helps.


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