Obama's Infrastructure Rally: Take a Swig of Kool Aid

Thesis rules. Every infrastructure stock we outlined last week in [Dec 3: Back of Envelope Look At Infrastructure] is up 12-18%.

Thesis is everything - with Obama spending like mad, dry bulk shippers will once again be in need, coal production will ramp, steel will be in shortage, oil might make a race for $200 again... or so the stocks act like today.

Reality? None of the above, but this is not a market of reality. Perception is reality.

The government has saved us. Again.

While mocking it, we are willing participants in the Kool Aid. If the move lasts, all the lowest quality most beaten-down stuff will make up the next leg of the rally - Obama solar stocks, small cap/mid cap Chinese stocks, and the "early cycle" plays of course (finance, housing, construction, retail). Never mind the news, it will all be better in 4-6 months.

As I swig on Kool Aid an envision an America full of teeming shoppers emboldened by 4.5% mortgage rates for all, I am taking some of my Ultra Real Estate (URE) and Ultra Financial (UYG) off here as they are now both in the 6-6.5% range of the portfolio (12% total). While these two always seem to trade in concert, I'm actually leaning more to the financial over real estate because the government won't be bailing out commercial real estate, and it is a more direct victim of the flailing economy.

So while I'm trading them in tandem only because the market is a monolith and we "student body" buy or sell everything, these two should separate at some point as the business bankrupcies reign down in first half 2009, while the United States of Banks meanwhile has the not-so-invisible hand permanently injected. It will be interesting to see when the fortunes of these 2 sectors separate.

China is no longer just poised for a breakout [China Just About Poised to Break Out] - it has. Pity the fool shorting China (source: Mr. T)

The seeds for the rally were there [Dec 3: Seeds for a Rally] and we laid out our near term upside targets [Nov 26: Let's Look at our Potential Upside] Party on.

Disclosure: Long Ultra Financial, Real Estate in fund and personal account

Comments

[Edit or perish:]

"full of teeming [sic] shoppers "
"Teem" is a verb, not an adjective.


"bankrupcies reign [sic] down "
rain, rein, reign: English is just a mystery, isn't it?

"has the not-so-invisible hand permanently injected"
This is beyond comprehension.

2008 Dec 08 09:27 PM

[Robert Nabloid:]

Out of curiosity - If the American consumer accounts for roughly 70% of GDP, and I'm assuming the government (which is already huge and debt ridden) is the other 30%, how big would Obama's plans have to be to pick up the slack from the consumer? (I guess we'd have to know how much of a drop there was in consumer spending to figure that out).

Man, the government can't afford to spend what it does now... But I doubt it can increase spending enough to ward off the entire economic downturn without risking bankruptcy... What a waste of money. The consumers took on too much debt and now they're smartening up and realizing it wasn't good. Then what happens? The government runs out and does the same thing that got the consumers into so much trouble.

"The government has saved us." Saved us from what exactly? For how long? Who saves the government?

2008 Dec 08 09:36 PM

[herbert hoover:]

It's comments like these that forced me to liquidate my portfolio today and go to 100% cash. I figured that i'd just buy everything back next month at a 20 percent discount

2008 Dec 08 09:47 PM

[BxCapricorn:]

An article based on nothing, and I've compounded the waste of time by offering a comment about its "nothingness". Notice the quotation marks, Edit or Perish? Your efforts have not been in vain (or is it vein.....dang you, EOP!!!)

2008 Dec 08 11:08 PM

[Steven Hansen:]

"Out of curiosity - If the American consumer accounts for roughly 70% of GDP, and I'm assuming the government (which is already huge and debt ridden) is the other 30%, how big would Obama's plans have to be to pick up the slack from the consumer? " - robert nabloid

My guess is 5% of gdp or $700 billion. this much is already on the table. but what i don't get is what do you do after that. nothing seems aimed at the 70% to repair. it is almost like they are buying time hoping for a solution later. we are crippling future with this debt.

2008 Dec 08 11:11 PM

[Alan von Al...:]

Whoa, wait a minute. Forget so-called consumer spending, more than half of which is govt disbursement (Fed, state, local = 40% of GDP). In 1943 at the peak of WWII, with maximum sacrifice, rationing and price controls, US govt spending topped out at 52% of GDP. I doubt there's going to be any way to recover from Obama's first 100 days of "stimulus."

2008 Dec 09 02:44 AM

[Mowog:]

Eventually the US turns on the printing presses, steadily eroding the value of the US dollar. Rare is the politician willing to lose votes by restraining its spending.

2008 Dec 09 08:52 AM

[Jose D Roncal:]

Obama's Plan Sends Markets Up, But For How Long?

The big news of Monday was the DOW hitting the 9,000 mark. The big question now is, “Have we hit bottom”? Our answer is, “Maybe, but don’t rush into anything on a single day’s news just because you’re worried that you might miss out.”

The pundits tell us, "The market is a discounting mechanism." But relying on market "fundamentals" falls far short of explaining what’s really happening. Colorful trend charts can’t gauge the true intentions of buyers and sellers, and plugging in discount rates, risk premiums or annualized growth rates into a formula is no measure of the true fair market value of a financial asset.

But there are a few facts that the market has apparently already discounted which might explain the rally of the past few days:

• Monday: Stocks Rally Worldwide, DOW hits 9,000, S&P 500 hits 1-Month High on Obama Plan
• The market withstood the 533,000 job loss report on Friday—worse than expected
• Obama presented a proposed stimulus package with the largest expenditures on U.S. infrastructure since the 1950's
• Over the weekend the Asian markets rallied, China announced expansions of stimulus package and India has approved it’s own $4 billion of stimulus infusion
• The future is uncertain for the NASCAR race car economy. Formula 1 is the first victim as Honda has pulled a $300 million plug
• A $15 billion bridge loan for the Big 3 U.S. Automakers will be voted on next week, which if signed would tide the industry over only until March 09
• Dow Chemical is slashing 11% of its workforce and shutting down 20 facilities
• Advertising expenditures are way down and today’s retail sales report was enough to harsh Main Street’s holiday buzz

The worldwide crisis isn’t going to get fixed over night. I expect further volatility in the days ahead. For instance, when corporate earnings are released in January, it could trigger more volatility. Things are likely to continue like this well into 2009 or 2010. You may agree as you consider the following:

• U.S. bailout packages have been bridges to nowhere
• First stimulus package of $160 billion led nowhere
• New structure of financial industry still not addressed
• Regulators and credit rating agencies don’t have their act together—the 23rd U.S. bank failed last week
• States like California and many others are going broke, if they haven’t already, and urgently need life-support
• Corporations are filing for chapter 11 or chapter 7 due to inept executives who claim they couldn’t foresee this coming
• Risk management is non-existent in most organizations today – “surprises” are becoming the new standard
• GM and Chrysler (even with the expected bailout) will be back for more sooner than later
• Commercial lending, even though better collateralized than residential lending, could bring the issue of their $900 billion credit cards debt to the handout table.
• Expect further losses and write-downs from JP Morgan, Bank of America, Citigroup as well as other major financial institutions


I could go on and on without even mentioning our under-funded heath care system and other government program. There are simply not enough funds to do everything.

A situation that began as a housing crisis has turned into the worst financial crisis since the Great Depression. More than $31 trillion has evaporated through equity and debt losses. And the write-downs on the books of the world largest lenders and investors is approaching $1 trillion. We’d never want to be accused of saying, “We told you so!” but the fact remains that all of this was predicted in our book "The Big Gamble: Are You Investing or Speculating?” by Jose Roncal and Jose Abbo as weI’ve always maintained, that in the end, it’s all speculation.

2008 Dec 09 07:28 PM

[Robert Nabloid:]

I also seen the problems coming for a long time, since a young age (I'm still very young). It didn't take a rocket scientist to see all the big homes and all the new cars and realize everyone was buying everything with debt and that it was a dangerous house of cards, especially as the boomers approach retirement. Why were so many of my relatives buying expensive homes when they only had 10 years until retirement? It was nuts.

On a trip to Mexico I was talking to the guy at the resort who worked there - he had been to my city and lived near me for a year or two apparently. I told him the only difference between my "rich" country and his was that we were able to get big loans... but that we don't actually own much of it. I mean, obviously there are other differences, but for the most part, the reason the rest of the world thinks we are rich is due to our lavish lifestyles - which are primarily funded by debt.

As some other commentators pointed out - nothing in Obama's plan is actually going to fix the situation. He is buying time with bailouts that don't fix anything. What we need is structural change in the way our system operates. I think it all goes back to the fractional reserve lending system and the Federal Reserve. Much of the "wealth" we built was not sustainable or real wealth.

On Dec 09 07:28 PM Jose D Roncal wrote:

>
> A situation that began as a housing crisis has turned into the worst
> financial crisis since the Great Depression. More than $31 trillion
> has evaporated through equity and debt losses. And the write-downs
> on the books of the world largest lenders and investors is approaching
> $1 trillion. We’d never want to be accused of saying, “We told you
> so!” but the fact remains that all of this was predicted in our book
> "The Big Gamble: Are You Investing or Speculating?” by Jose Roncal
> and Jose Abbo as weI’ve always maintained, that in the end, it’s
> all speculation.

2008 Dec 12 12:00 AM

[CLH:]

The history channel just had a program about Roosevelt. The similarity is great. First psychology has a lot to do with stock prices. Roosevelt the first US messiah spent money putting everyone to work with meaningless jobs and the market soared 1932-1936 until we saw that industry was not doing well ( in1939 there was 20% unemployment). Obamas (our second messiah) expensive stimulus will send up stock prices for a while (Im long) but after 2 or 3 years it will end as private industry cant make a profit.

Only time will cure the credit crisis (or war).

2008 Dec 14 10:14 PM