Someone Has to Lend in 2009: Ideas to Profit

Much has been made about the paralysis of lending by banks in both Great Britain and the United States. Balance sheet repair is certainly a significant part of the credit smackdown that is dominating financial news and creating in some a sense of desperation. The other half of this bitter pill is that..well..no one trusts anyone else. I have the feeling that long after people have forgotten what TARP represented the name Bernie Madoff will stand as a testament to investment fear, gullibility and anger. There are two schools of thought (at least) on the lending issue.

The first counsels caution on the part of Governments and goes like this: Banks know lending (please try and keep a straight face) and will begin making committments when its prudent and they feel secure in their financial status. Let's not get burned again. Liquidity will move through the general system (financial to business to individuals/families and back to business and the payback to financials) the way it always has. This is the Historical Guide Model. Slow and steady.

The second is the Political Reality Model and its priorities are much different than the first. They must keep the 'The Most Self Indulgent Generation' (baby boomers) and their sequences of MTV offspring from bombarding them with a combination of endless whining and then significant social unrest. In order to placate these groups the Government will do whatever it monetarily and fiscally takes, in large part because they never see themselves as having to pay it back. It's like a loan taken out on one's behalf by a very wealthy, far distant Uncle who just can't say no..almost too good to be true.

The short of it is the Historical Guide has no chance... zero. The Political Model will rule the next year (or two)... this group has an endless bag of tricks and the naysayers will be painted as distant academics and bureaucrats who are heartless and don't know the everyday pain of people. A Bush Administration would have strong headwinds in pullng this off..for an Obama Administration it is manna from political heaven. Here's what will likely happen and how to profit...

1. The Government can put tremendous back channel pressure on Banks to lend. To give the lending credibility and market cover they'll need to come up with real programs..look for infrastructure of every imaginable type to start ruling the discussion (it's already beginning)...

Transportation (roads, rail, bridges, river dredging, port renovation, etc.), Grid (electrical transmission, electrical monitoring, establishing the Renewable Energy Highway), Research (everything from new and better materials to vehicles and machines to make the new America work better)...

The investments: SGR, CAT, ABB (worldwide), FWLT, FLR, JEC, HXL (carbon fiber) - these are but a few but the list includes engineering heavyweights and engineers will rule the day. Closed End Funds CGW (water) and NLR (nuclear energy) provide relatively well balanced portfolios and save a lot of investor time.

2. Americans are capable of creating small businesses at incredible rates. These small businesses will serve, in many cases, as site support and subcontractors on larger projects. Banks refuse to lend? Congress will pass legislation establishing Small Business Bonds and they'll fund them through Fed purchase if necessary. Banks will loan. Loans mean profits in the coming environment.

The investments: look very early to the Closed End Bond Funds and Preferred funds - JPS, JSN, BHD. There will be a scramble for above 0% yields and T-bills will be abandoned.

3. All of the above will be overlaid with a dramatic turnaround in oil prices and a steady depreciation in currencies across the board. Currencies will only look good compared to each other - all will depreciate. This means gold and silver will become staples of many Central Bank and Government storehouses (especially in the Middle East).

The investments: ETFs like GDX (miners) and GLD and SLV will serve for many investors. Some physical gold is a necessity. Closed End Funds like BGR and GCS (highly recommended) will do extremely well through early 2010. USO, DBE and UNG are musts for oil and gas. LINE for income, safe haven oil and gas and a long reserve life - it isperhaps the best income/resource investment on the table.

Areas to be very cautious of: Coal - Obama's people hate the stuff. Every Administration needs a whipping boy and coal will be it.

Housing and the REIT market are for another time!

The bottom line: Inflation is coming. It will fly under the radar for awhile because no one will want to think about it. Inflation has a very nasty way of growing as money moves more quickly and it hardly ever goes away nicely.

Disclosure: Long USO (400), LINE (1500) andphysical gold (120 oz.).

Comments

[Moon Kil Woong:]

There are a lot of rotten eggs left coming with the aging of the baby boom generation. Principally all the oversupply of houses they own. There would have been a glut even without the Greenspan mega-bubble.

I agree with you the government has no will to say no. With their demographics being the biggest, that is understandable and I can't rightly say it is wrong. After all, we are in a democracy. If it's people are selfish that will reflect in their demands.

There will be a lot of stimulus going on but I'm not certain it will counter the lack of consumers to borrow. Getting banks to lend is the small hurdle. Making the public feel safe enough to to go on uncontrollable buying binges is the next part.

Then you have to ask yourself, is this really good? Certainly not in the long run. Isn't this hard when so far the government has constantly been adding to the uncertainty by dumping money into the market arbitrarily making people feel that some kind of unfair dole out is going on that may lead to mass inflation even though the Fed's move to zero interest policies destroy savings income and leads to deflation in the short term?

People have a right to be unsettled and looking to gamble on making money off of government spending sprees. But that in itself is the crux of the problem. When asset decision making is no longer based on market forces but is based on political whim run for cover. The certainty of supply and demand becomes replaced with nightmarishly fickle and myopically inefficient pet pork projects (look at the Bush Jr. budgets for a good example of that. There was more pork in them than the previous 30 years combined. No wonder the economy went to hell in a hand-basket).

Jan 05 10:20 AM

[Kashyap_Swamy:]

While I agree with the macro thesis, I would suggest some additional research on individual stock names.
For example - Fluor (FLR) already trades at a premium to its peers and almost 50% of its backlog is in the refining sector which is under a lot of pressure to cut back capex. FLR is well-run company with excellent management but at this time, I would play the infrastructure theme with other stocks.

Jan 05 11:04 AM

[NOWHEREMAN:]

Nice article Greg, concise neatly written, filled with actual facts even though you show a subjective bias toward LINE. (but we all have our Favorites)

Too bad you went back to your regular dogmatic stance in number 3. "Oil will rise against all currencies" .What will oil be priced in as it does so? If Gold, what will gold be priced in?

You no longer advocate a strong position in Gold in all of its forms and have decided to favor other areas for investment. Good, Great even.

What is your Asset Allocation? You know, The percentage of assets in the various sectors listed above?

And what is your Time Frame for all of the above?

Jan 05 02:55 PM

[yukii:]

Closed End Funds CGW is a ETF

Jan 05 04:55 PM

[Universal H...:]

NLR is an ETF also...

Jan 05 09:03 PM

[Jake2:]

"A Bush Administration would have strong headwinds in pullng this off..for an Obama Administration it is manna from political heaven. Here's what will likely happen and how to profit..."
Nice article. I hope you are right but the political stuff could delay everything endlessly.

Jan 06 02:08 AM

[Greg Pinelli:]

#3 refers to Gold vs. all currencies..but I'll bite...Oil will rise
against all currencies because the holders of this finite resource will do the math...it actually pays them long term to withhold what we want....time is on their side....
When I write the things in my articles I ALWAYS do so from the perspective of an analyst. I'm NOT advocating that these are the best outcomes..I'm simply telling you that..from my perspective..these are the LIKELY outcomes. Investing is no different from going to Las Vegas..you can hit a jackpot and be smart enough to quit..or you can drink too much and feed the casinos...
As for LINE and LGCY and other oil/gas plays I emphasize...My point is to shpw that at the end of the day you're far better off getting a very substantial distribution supported by a reliable cash flow. For those who are near retirement (5 yrs or less) aim at the distribution rate of your investments...you won't become hostage to the price...

Jan 07 08:53 PM

[einstein p ...:]

Can't eat gold, but I own it thanks to the ghost of my grandfather reminding me of times --- irrelevant or not -- gone by.

Own LINE at 11 and change, which should be a sell in this market. Just can't bear to part with the dividend. Of course, I felt the same way about OCNF which I bought at 2.76 with a dividend of 2.88 --- and then, out of the blue, there was no dividend. Normally, I would have sold but I fell head first into a boulder --- I kid you not. The stock doubled from my entry point making it the worst stock I owned with the best return to date, reminding me of the old saying --- I'd rather be lucky than smart.

Is anyone else confused about this market? I am.

Jan 14 12:39 AM

[Delojozafado:]

1/12 "If I had one group to focus on from here it would be the energy complex, preferably energy stocks & ETFs with yield." Mr Jeff Saut's comment as seen on the Raymond James home page left hand column click on "investment strategy". Mr Saut is often seen on TV and You Tube, is the Ch investment Strategist at RJ. I own the BGR &BCF as well. I also own and recommend DGP(no yld), KYE, BSR, MTP, ENY, ATPWF(inverse Loonie action), TBT & PST, the last 2... 2xTreasury shorts. The current Gem of purest all serene & one of my largest holdings (1600 units) is GLHIF. Mr Bruce Flatt and BAM recently took a 75MM CD $ stake in the Canroy trust (some current and impending tax issues) in a BDF, (share dilution) that in conjunction with the cheap Loonie and the seasonal production fall off has driven the Trust to near record lows in price. A 6.8% effective yield against the 8% payout on a unit price of ~12.71 US $s. In terms of the 2011 tax issue Mr Flatt's investments seem to stay one step ahead of the tax man. He has "aboot" a 40% stake in ATBUF which has already begun it's transformation into a REIT. GLHIF will pay you a nice dividend yield while we await the melt down of the US dollar sometime after TARP IV goes out as we continue to roll over all the TRCAs and the rest. When the O&G and Basic materials currencies reassert themselves...
Lastly after the dust settles I would not miss a chance to own the relatively new silver ETF(N?) AGQ on any pull back of the vampire killing material near or below $10. The bug with the empty petrol tank also looks very interesting at this point on its multi year chart. VWDRY That's stirred and definitely NOT to be shaken!

Jan 19 04:04 PM