Market Comeback, Sector to Short, Berkshire Meeting, Investing in Swine Flu and More!

by Addison Wiggin & Ian Mathias

  • Stocks break-even for 2009… 2 charts detail the strange path to “profitability”
  • Chris Mayer on Buffett, Berkshire and the latest shareholder’s meeting
  • Dan Amoss with a sector begging to be shorted
  • Our in-house bankruptcy adviser on the fate of Chrysler
  • Plus, a rare Overtime Briefing… investing in the “swine flu”

 

  Arriba! Cinco de Mayo heralds big news for the S&P 500 this morning:

After a manic 36% bounce from its March lows, the S&P 500 has turned positive for the year. It’s now sitting on a whopping 0.4% gain, thank you very much.

But before you down the Cuervo Gold and shimmy onto the parquet for a hat dance… consider this:

  The resurgence in S&P 500 is being driven by only three sectors: Consumer discretionary, materials and tech. See for yourself.

It’s hard to believe in “bull market” when two-thirds of the players are in the red.

We’re taking a closer look at tech, but for the time being — as if you need another reason to turn off CNBC — health care, utilities and consumer staples, the classic refuges for mainstream money managers, aren’t such good choices during this sucker’s rally.

  “Buffett thinks his utilities and insurance businesses will do ‘quite well’ despite the recession,” says Chris Mayer, recapping Berkshire Hathaway’s annual shareholder meeting.

“Berkshire has its fingers in many different businesses, so Buffett has an eye into many parts of the economy. Buffett was mostly gloomy. Aside from utilities and insurance, he saw weakness in service and manufacturing and his other lines.

“Also interesting was a comment that he was looking more in the U.S. now than overseas. Last year, Buffett seemed to be devoting more energy abroad — I recall a trip to Germany, for instance. Now Buffett seems to find the U.S. situation more interesting.

“One other note: Buffett may not see much in manufacturing, but I’d say it is a wide spectrum. In Capital & Crisis, for instance, we own a few manufacturers in key areas of water, infrastructure and energy. They’ve turned in great results. But Buffett doesn’t see these, as they are too small for his radar screen. Too bad for him. Big advantage for us.”

In fact, Chris booked a 117% gain on just such a stock yesterday, in less than five months. Special Situations readers could have taken another 30% yesterday too, if they were following Chris’ advice. How did you do? If you’re not privy, become so here.

Stocks soared again yesterday, thanks mostly to another batch of “less awful” data. Traders started to rush in after construction spending and pending home sales data hit the tape at 10 o’clock. Both were way better than expected: Construction spending rose 0.3%, after a 1% drop in February, and pending home sales rose for the second straight month.

Of course, historically speaking, both measures are still in the dumps. But better to buy first and ask questions later… major indexes jumped 2.5-3%.

  Markets are more timid today. The Dow is down about 20 points as we write — we suspect profit taking. And…

“Right now, the credit markets are broadcasting the following warning,” says Dan Amoss. “The equity of overleveraged REITs is at risk of elimination or permanent impairment. Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount a ‘garden-variety’ recession in commercial real estate.

“REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

“REITs thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean times. Since REITs pay out all their earnings, they cannot grow without taking on more debt. During the boom, a REIT strategy encompassing growth, leverage, and acquisitions was a virtuous cycle that led to juicy dividends and soaring stocks; in this bust, it’s morphed into a vicious cycle of dividend cuts, dilutive equity offerings, debt offerings at double-digit interest rates and bankruptcies.

“The REITs that levered up and grew too fast at the peak will go to zero in bankruptcy. Others could fall into the low single digits by year-end as the market anticipates that creditors will take title to many properties in 2009 and 2010. These developments would push the value of the REIT Index dramatically lower.”

Following that logic, Dan just handed his Strategic Short Report readers a short-REIT play with “200% profit potential.” Thanks to yesterday’s rally, it looks a whole lot juicier today… details here.

  “I don’t know what in all honesty,” White House Press Secretary Robert Gibbs “government can do about it," highlighting another industry ripe for short selling: flailing newspapers.

Of course, Gibbs assured us President Obama “believes there has to be a strong free press,” but it seems that any hope of a GM-sized bailout check from Uncle Sam was informally squashed yesterday. Alas, papers like The New York Times and McClatchy have borrowed just enough money to go out of business, but not enough to pose the all-so-critical “systemic risk” to the U.S. economy.

Only magnificent failure is rewarded in I.O.U.S.A.

  Ten of the 19 banks undergoing government stress tests are going to have to raise capital… that’s the word from The Wall Street Journal this morning. Wells Fargo has now joined Citi and Bank of America on the unnofficial list of banks rumored to have been naughty.

No one will really know for sure until Thursday, when the government has promised to release results. But seriously, who’s cereberally challenged enough to believe this charade anyway?

  The mighty greenback is looking knock-kneed and feeble as stocks soar. The dollar index dropped a full point, to 83.8, during yesterday’s rally. That’s a one-month low and nearly 6 points off its credit crisis high.

The dollar swing has given the euro a 2 cent shot in the arm, too. It’s up to $1.34 as we write. The pound followed suit, rising from $1.48 to $1.51 in less than 24 hours. Only the yen held pretty steady… around 98.

  Gold likes it when the dollar sucks air. The spot price climbed $15 yesterday and another $10 this morning, bringing the current price up around $915 and ounce. Work it.

  Oil has also been enjoying the stock rally, too. The light sweet stuff edged up higher again yesterday, this time to a 2009 high of $54.47 a barrel.

Quietly, gas has been inching back up to levels of concern. The national average price for a gallon of the cheap stuff is now solidly above two bucks… $2.07, to be exact.

Although compared to the average price this time last year — $3.61 — who’s complaining?

  A bankruptcy judge OKed Chrysler’s request to tap a $4.5 billion government loan yesterday, even though holders of their senior secured debt have yet to be repaid.

Investors and funds are filing motions left and right to stop the transfer of any assets to Chrysler… at least until the company ponies up $6.9 billion in assets to cover their debt obligations.

We doubt those “evil Wall Streeters” will get their way, but… oy… this thing is already a mess.

“The gurus in Washington say that the Chrysler bankruptcy is prepackaged,” writes Byron King. “And it’s going to be fast and easy. Yeah, right. Beware hubris. Like the previous administration thought that the Iraq war was going to be fast and easy.

“I used to practice bankruptcy law. Is there a courtroom anywhere in this land that’s big enough to hold all the players in a Chrysler bankruptcy? It’s the first ‘big’ automobile bankruptcy in the U.S. since Studebaker in 1933. There’s no recipe book for doing this.

“The judge in the case might just have to book Madison Square Garden to have enough space for all the participants. And everyone is entitled to their day in court. Considering the tens of billions of dollars in play, I expect we’ll see many days in court, up to and including the U.S. Supreme Court. That should take only a few years.”

But at least you’ll be able to drive one of these afterward:

The Fiat 500: Not Currently Available Near You

  “After researching, over the past 10 years, the different venues of alt energy,” writes a reader, “I have invested what I can in geothermal. There is no other source that runs 24/7, has zero ecology damage and zero carbon footprint, is available virtually under every rock and is economically less expensive than any other source. We don’t have to wait for the sun, wind or enough uranium to be mined. Oh! We don’t have to figure out how to bury the byproduct in somebody else’s backyard (NISEBY).

“It is such a no-brainer that considering any other way must mean that there are serious politics involved. Maybe the wrong people will make the money. The difference in costs could go to solving the problems raised in I.O.U.S.A. Do you suppose that Big Oil would find it a problem if the grid were run on geo? It can be done.”

The 5: We suppose they’d be annoyed, but as an investor, why choose one or the other? Byron’s Energy & Scarcity Investor has strong plays in both oil and geothermal… check it out, here.

  “So what if Byron King is right,” writes a reader, “that China now controls the ‘rare earth metals’ that are integral to the manufacture of guided ballistic missiles (and all the other knickknacks that we don’t really need — and some we probably do).

“I’d rather have the Chinese control them than the delusional, slobbering cowboys in our military. Maybe they’ll do something with these metals other than design weapons whose purpose is the wholesale slaughter of human beings. Besides, what are they going to do with them? Eat them? Of course not. They’ll sell them on the world market at market price and we can go on happily making new bombs, which, it seems, is the only thing we are really good at.”

The 5: Heh. You have a good point there.

  “Hey, 5,” writes the last, “thanks for the ‘tip o’ the mug’ to Red Emma’s. In this day of lunatics and liars, Red Emma’s gives us a break, helps keeps us grounded. Not enough of that around these days.”

The 5: Best coffee (and transgender anarchist poetry selection) in Baltimore.

Salud,

Addison Wiggin

The 5 Min. Forecast

P.S. We haven’t run an “overtime briefing” in some time, but thought this breaking opportunity regarding the H1N1 “Swine Flu” virus warranted a longer and more immediate look:

Financial Strategy Brewing With Potential Swine Flu Vaccine

From: Patrick Cox,

Breakthrough Technology Alert

May 5, 2009

Naples, FL — So far, the swine flu is a minor problem. Only one person in the U.S. has died from the infection. Still, it could get worse, and governments are looking for a vaccine. So just what are the financial opportunities?

I don’t think standard flu vaccines are going to make investors rich. The reason is that vaccines are an established industry. IP is well distributed, and yields have been driven down by competition.

But if you’re interested in playing swings should probably look into:

Novavax — NVAX

Dynavax — DVAX

Hemispherx Biopharma — HEB

BioCryst Pharma — BCRX

AVI BioPharma — AVII

deCODE genetics — DCGN

Crucell — CRXL

Vical — VICL

This does not mean there aren’t huge flu-related opportunities coming. Even if swine flu doesn’t turn into a major pandemic, influenza is a serious international problem.

The World Health Organization (WHO) estimates that influenza infects 5-15% of the world’s population in a typical year. Typically, this results in 250,000-500,000 deaths. Medical science has progressed significantly since 1918, when the "Spanish flu" killed upward of 50 million people, but flu is still a serious illness.

Ultimately, however, influenza will be cured entirely. Specifically, we’re looking at universal flu vaccines.

Pandemic influenzas emerge from a sudden change in the flu virus against which there is no immunity. Vaccines have two key limitations. First, they are developed against single known flu strains. Therefore, they may be ineffective against new strains. Second, vaccines are produced using a lengthy process requiring incubation in chicken eggs. New flu vaccines take months or years to stockpile.

 

I know of at least two companies that have been engaged in the search for a universal genetic flu cure. We own them both in Breakthrough Technology Alert. The potential advantage of genetic antiviral therapeutics — as opposed to traditional vaccines — is that they can be used to provoke an immune response that prevents replication of all influenza viruses, new or old.

Such a treatment could be stockpiled in advance of a global pandemic. It could also be used to prevent routine flus. Whoever produces the therapy will own the proverbial gold mine, since flus exist in other species and cross over periodically to humans. Unlike smallpox, flus cannot be eliminated.

*** For more Breakthrough Technology opportunities, please be sure your subscription is up-to-date. Agora Financial LLC.

 

rspertzel

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