Goldilocks of Goldman, Market Bears and Positions for This Market

by: Global Investing Editor

Abby Joseph Cohen of Goldman Sachs (NYSE:GS) has spoken bullishly, as is her wont. She now expects--based on earnings forecasts--that the S&P 500 will end the year at 1050-1100. Corporate profits for the index she pegs at $75.The top ranked macro forecaster thinks the “new bull market” began in March, and expects US GNP to rise about 3% annualized in H2.

The only negative she sees, and it is a big one, is the job market where she says in her CNBC interview “we are beginning to see improvement”. She says that "job losses are slowing and there is some job creation going on.” She adds that “labor markets are unlikely to turn all at once on a dime.” "many people are looking for strong singals on the economy and now we are getting them" quoth Abby.

This rosy scenario from the Goldilocks of Goldman brought out the nay-sayers in force. Paul Tudor Jones called the post-March market move “a bear market rally” and describes these as “a feature not an oddity of secular bear markets. He says to wait for “a better opportunity” to invest “on a potential autumn pullback” Jones runs Tudor, a major hedge fund.

Jones thinks that between swine flu and a drop in China stocks there is “potential for global equity markets to pause in September.” “Investor psyche is still fragile,” he adds, despite the S&P rise of 47% since Mar. 9.

Over at Aberdeen Investment Management in London, Hugh Young weighs in with another warning about Chinese equities which he says are “fully valued” and “in a bubble” China's half-trillion-dollar stimulus programs are not necessarily feeding into the real economy but are certainly boosting the stock market, he warns. AIM manages two yield funds we own or have owned in the past.

Dangerous strategic errors are being made now by investors. One is to look for a quick fix with a high-risk speculative leveraged play or an over-concentrated portfolio. They are hard to find, even if you are a Nobel Prize economics. Another is to stay out of the market because you were burned last year. The way to make money is slowly and steadily with a diversified and non-correlated set of positions.

Frida Ghitis, one of our paid contributors, writes on three of her favorites below:

  • Pres. Obama just announced a $2.4 bn plan to spur American electric car production, adding to programs by carmakers, to press the accelerator on developing cars charged with clean, renewable, cheap batteries, not dirty, expensive, scarce petroleum. This is great news for Chilean Soquimich (NYSE:SQM), the largest producer of lithium, the principal component in rechargeable lithium ion batteries. SQM mines lithium from the salt of the desolate Atacama dessert. SQM expects a big jump in demand, forecasting higher lithium sales in 2010. The private auto sector is hard at work on electric cars. And green recession-fighting governments are pumping in R&D funding SQM will benefit from the push. It will also benefit from our need to eat as Soquimich is a top producer of fertilizer.
  • Once government help for private industry sparked cries by free traders against unfair advantages or protectionism. No more. Government support is boosting Canadian plane and train maker Bombardier (OTCQX:BDRAF). Ottawa will lend C$173 mn to BDRAF from state job protection funds to help it deliver planes promised to SAS. No country complained. In this recession, everyone is subsidizing. The Scandinavian sale should bring Bombardier $300 mn. Bombardier appeals not only for its aircraft business, crashed in the recession, but alsoo for its public transport lines catering to renewed spending on urban mass transit after being hurt by a drop in oil prices and tighter municipal budgets. An end to the recession should help both parts of BDRAF.
  • Profits at Chinese wire maker Fushi Copperweld (NASDAQ:FSIN) plummeted in Q2, but did not catch us by surprise. Chairman Li Fu, owner of a sizeable chunk of FSIN, had warned about challenges short term.Q2 income at $1.56 mn, was 80% down. Revenues fell 23% despite volumes up about 10% because prices, pushed down dropped almost 30%. The most encouraging positive news was widened gross margins. FSIN copper-clad aluminum wire are used for telecommunications, utilities, and electrical jobs and are made in China and in Fayetteville, TN. FSIN will benefit from improved efficiency post-recession and by the China stimulus. Management expects earnings growth to resume later this year.

Other positions to watch:

*News of 3 scandals: the Brazil Senate is investigating Petrobras (NYSE:PZE), the state-controlled oil company, for fraud. Its partner is BG Group, (OTCQX:BRGYY).

*Second, the Brazil Justice Ministry is running an antitrust inquiry into Visa Net, the recently launched credit card co. whose payouts enhanced the accounts of Santander (STD). Another Frida pick, STD has broken above its 50- and 200-day trendlines. If you like that sort of thing, it marks a buy.

*The Israeli generic drugmaker is suing Merrill Lynch in a NY Federal Court for misrepresentation in selling Teva (NASDAQ:TEVA) auction rate preferred paper the Bank of America subl underwrote. Teva charges that the ARP price was “secretly manipulated”; the there were “material omissions” regarding the nature and characteristics of the security by the brokerage; and that Teva was led to believe that the ARP would act like short-term investment-grade debt, would pay a market yield, and would be liquid and redeemable at par either immediately or during periodic auctions.

Teva also won another boost for its ambitions (via Barr) in birth control pills as its appeal against extension of the Bayer (OTC:BYERF) Yasmin contraceptive won court approval.

TEVA, in conjunction with Sun Tech biotech sub Cure Tech will do phase I trials of a vaccine from humanized monoclonal antibodies in hepatitis C and phase II trials in inoculation against liver and bowel cancers. The Israeli IDB bank via Clal controls the biotech entity Teva partnered with. No amounts were given for the deal.

*GlaxoSmithKline (NYSE:GSK) will pay $46 mn plus to develop a Nabi (NASDAQ:NABI) drug against staphylococcus aureus (methiacylin-resistent bacteria), with later milestones and royalties payable if it works. Nabi is out of Rockville, MD. GSK is British.

*BCE raised its H2 guidance thanks to retailing rather than depressed Canadian wireless phone services. It also raised its dividend to 40.5 Canada cents from 38.5, a real mark of confidence. BCE expects a 7-11% jump in EPS thanks to The Source and the other half of Canada Virgin Mobile, both retailers, and it is now on track to be a high-dividend play again, after the abortive attempt to sell itself to a Canada pension plan. The Q2 earnings at C$372 mn or 45 cents/share were down overall by C$20 mn but not in per share terms. Without items eps was 58 cents/sh. Revenues at C$4.3 bn were nearly flat.

*Also from Canada, IAM Gold (NYSE:IAG) reported flat revenues at C$225.3 mn but net up 33% to C$44.1 mn or 12 cents/sh. This is only a penny higher than last year, because there are more shares out. This is after an impairment charge of $9.3 mn or 3 cents/sh. IAM has available C$479 mn for buying out weak sisters in gold mining thanks to its new share issue at $14.50. We did not buy this way which would have created a loss; we let IAG buy out our assets in Orezone (OTCPK:ORZCF) and continue to own a stake in its African mines with ORZCF, still listed in Canada.