Dennis Gartman: Go Long Infrastructure, Short Everything Else 25 comments
-
Font Size:
-
Print
- TweetThis
Dennis Gartman suggested this week a strategy to go long the infrastructure sector (specifically the steel industry) while shorting the overall stock market. See the video here. I like most of Dennis Gartman's ideas and this one is no exception. The logic is that with Obama's promise to spend up to a trillion dollars on roads, bridges, schools and general infrastructure building, together with a likely agreeable congress, it's as much of a sure thing as we will see next year.
More reasons to be bullish on the steel industry:
- According to the U.S. Green Building Council, raw material for newly formed steel is composed of up to 90% recycled scrap metal. Demand has plummeted for scrap metal in the last six months and a large supply is readily available.
- Scrap metal trades like a commodity and with such a large supply available, input costs for newly formed steel are incredibly cheap right now.
- Energy costs to run steel mills and to form it into usable shapes will be relatively low for some time.
- Transportation costs to bring raw materials to the steel mills and to ship it out to fabrication shops and construction sites will also be relatively low for some time.
A smart way to get in on this strategy would be to invest in SLX (steel industry ETF) while committing the same dollar amount to a position in SH (S&P 500 short ETF). Theoretically, if SLX goes up 20% based on Barack Obama's infrastructure plans, but the S&P 500 drops 10% over the same time period based on continued bad news for the overall economy, you could realize a 33% gain.
Three potential scenarios with a $10,000 investment ($5,000 in each):
1. SLX advances 20% while the S&P 500 drops 10%.
- SLX (around $27 today) goes to $32.40. $5,000 becomes $6,000.
- SH (around $75 today) goes to $82.50. $5,000 goes to $5,500. (Remember - it's an inverse ETF)
- $10,000 investment becomes $11,500.
2. SLX surges 50% while the S&P 500 advances only 10%.
- SLX (around $27 today) goes to $40.50. $5,000 becomes $7,500.
- SH (around $75 today) drops to $67.5. $5,000 goes to $4,500.
- $10,000 investment becomes $12,000.
3. The unthinkable happens and SLX drops 20% while the S&P 500 also drops 20%.
- SLX (around $27 today) goes to $21.6. $5,000 becomes $4,000.
- SH (around $75 today) goes to $90. $5,000 goes to $6,000.
- $10,000 investment is hedged perfectly and stays flat at $10,000.
If you're up for a more risk/reward strategy, go long Nucor (NUE) instead of SLX. Nucor is considered by many, Dennis Gartman included, as best-in-breed in the steel industry and likely to outperform it's competitors. Lastly, Nucor's dividend goes ex-div on December 29. You could pick up an extra $.35 per share if you put on a position by then.
Disclosure: Author holds a long position in SLX
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 25 comments:
Ditto for other infrasturucture commodities.
Thus, I believe the infrastructure bandwagon (like all bandwagons) has been over-rated.
The Obama government has also strongly made the argument that Healthcare will be reformed. Boomers don't have a choice about getting old and requiring more health care.
Boomers will now shun the markets and down size real-estate. Better insurance and health care is what old people buy and less everything else. We'll see what the policy looks like at the end of Q1 of 2009 before investing. Should it be in big pharma, the biotechs, or health insurers?
On Dec 28 09:13 AM prudentinvestor wrote:
> I doubt that the steel demand for all the new bridges and tunnels
> will make up for the decline in demand due to fewer new petrochemical
> facilities, power plants, mining projects, industrual buildings,
> office buildings, malls, casinos, cruise ships, cars, trucks, etc.
> There is a capacity overhang in all these areas that has to work
> itself off, and many projects around the world that consume steel
> are being put on hold.
>
> Ditto for other infrasturucture commodities.
>
> Thus, I believe the infrastructure bandwagon (like all bandwagons)
> has been over-rated.
What goes?
Gartman is half right: go to the headline and excise the words "go long infrastructure" and "else", and you've got the only winning strategy for 2009.
On Dec 28 09:13 AM prudentinvestor wrote:
> I doubt that the steel demand for all the new bridges and tunnels
> will make up for the decline in demand due to fewer new petrochemical
> facilities, power plants, mining projects, industrual buildings,
> office buildings, malls, casinos, cruise ships, cars, trucks, etc.
> There is a capacity overhang in all these areas that has to work
> itself off, and many projects around the world that consume steel
> are being put on hold.
>
> Ditto for other infrasturucture commodities.
>
> Thus, I believe the infrastructure bandwagon (like all bandwagons)
> has been over-rated.
If Obama does he get his infrastructure bill, after he rewards campaign contributors and political hacks and Congress does the same, there won't be much left. Then, of course, we have the permit process, eminent domain, lawyer fees, labor chiefs, local graft , etc., we get another level of skim and the taxpayer may get ten cents on the dollar of actual work. What projects do get done will take a decade to complete them.
An investor may get luck and make a buck if there is a buck left for them.
I'm curious why everyone that hears Obama's pledge for infrastructure jumps on the SLX, or more commonly URE (Proshares real estate). Not only did he propose an infrastructure buildout, which means bridges and buildings, but an increased funding of broadband internet.
Sometimes I feel like the 'Lone Ranger' here, but it would seem to me that copper would be the best infrastructure/broadba... play. Not only has copper been creamed... Now trading at 1.25 from 4+... But PCU and Freeport McMorran are two excellent companies. And both pa reasonable dividends (I'd keep an eye on the divs for both as my feeling is that divs are generally coming down the next two years ).
My point is that I don't care what you build... earth movers, cars, electronics, power stations, bridges, homes, laptops, Mr. Coffees, refrigerators... etc... etc.... They all use copper. Not all of them use cement or steel.
jegan
On Dec 28 06:22 PM jegan ;-) wrote:
> Relating to 'Confusion's' question above. Although I like too like
> Gartman's comments, his advice does seem to bounce around a lot.
> One week it's 'go long of gold', next week 'I wouldn't touch gold
> with a ten foot pole'. My advice is listen to what he has to say,
> but unless you are a member of his newsletter, don;t follow his advice.
>
>
> I'm curious why everyone that hears Obama's pledge for infrastructure
> jumps on the SLX, or more commonly URE (Proshares real estate). Not
> only did he propose an infrastructure buildout, which means bridges
> and buildings, but an increased funding of broadband internet. <br/>
>
> Sometimes I feel like the 'Lone Ranger' here, but it would seem to
> me that copper would be the best infrastructure/broadba... play.
> Not only has copper been creamed... Now trading at 1.25 from 4+...
> But PCU and Freeport McMorran are two excellent companies. And both
> pa reasonable dividends (I'd keep an eye on the divs for both as
> my feeling is that divs are generally coming down the next two years
> ).
>
> My point is that I don't care what you build... earth movers, cars,
> electronics, power stations, bridges, homes, laptops, Mr. Coffees,
> refrigerators... etc... etc.... They all use copper. Not all of them
> use cement or steel.
>
> jegan
only problem with KBR is it had a large Tontine Associates presence (the hedge fund that was down over 70% for the year and had to liquidate two of its funds). so, until we can get some clarification if they've sold all their position or what they're doing with it, then it would be a safer entry. can't argue against the company though, they've got a ton of cash per share.
AND PEOPLE FORGET THAT WITH DEMOCRATS IN OFFICE THIS MAY BOG DOWN ON THEIR PERFOMANCE...LOOK AT WAL MART'S 600MLN SETTLEMENT...US STEEL IS HAS WILL BE THE STEEL CO. OF THE U S of A
"If Obama does he get his infrastructure bill, after he rewards campaign contributors and political hacks and Congress does the same, there won't be much left. Then, of course, we have the permit process, eminent domain, lawyer fees, labor chiefs, local graft , etc., we get another level of skim and the taxpayer may get ten cents on the dollar of actual work. What projects do get done will take a decade to complete them.
An investor may get luck and make a buck if there is a buck left for them. "
Very well put and I believe exactly right. You have surely had dealings with the Devilrats before!
The next biggest chunk goes to construction, and the Chinese was on a building spree prior to Olympics. Chances of that repeating? Not for several years as the Chinese are more interested now in spurring domestic consumption.
If you believe that a moderate US infrastructure stimulus will send steel stocks to the sky, prepare to be disappointed. But then again, steel is a highly local market and Nucor may turn out to be a pretty decent investment after all.
In short, Gartman's opinion, while nice to listen to, cannot be, & should not be, relied upon for anything learning HIS view of the market at an instant in time. JMO.
On Dec 28 12:46 PM Bodysurf wrote:
> Yup. Great post, game over. Even a profligate government run by
> liberal Democrats can't borrow and spend fast enough to make up for
> the annihilation of private sector investment.
>
> Gartman is half right: go to the headline and excise the words "go
> long infrastructure" and "else", and you've got the only winning
> strategy for 2009.
On Dec 29 09:52 AM gebby wrote:
> last week he said gold broke down badly now buy gold. yea i can
> comment like that also. gartman is all over the map in his reasonings
> , he pretends to always be correct in his outlook. but his outlook
> is always what just happened.