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Up, up and away!

As I mentioned in Friday's morning's post, we did a lot of bottom-fishing on Thursday as we began to develop disaster fatigue with long plays on XLF at $11.50, shorting TLT at $123, shorting VXX at $49.50, TNA at $34.50, Berkshire Hathaway (BRK.B) at $65, Alcoa (AA) at $10.20, Valero (VLO) at $19, IMAX (IMAX) at $15.75, Boeing (BA) at $58.32, AGQ at $170, Chesapeake (CHK) at $27.50, Disney (DIS) at $30.14 and Barrick (ABX) at $47.50. They were hedged, of course and, for the most part, you still had a nice chance to make those entries on Friday - but not so much this morning as the futures are up about 1.5% already (7:30).

Friday morning, in my alert to members, I reminded them that Barclays (BCS) looked like an excellent VALUE to me, no matter what the PRICE was ($8.75 after hitting $8.40 the day before) and this morning, that PRICE is up well over 10% in EU trading. Did the VALUE of BCS change materially over the weekend? Of course not, certainly not by the $4Bn their market cap gained - like the song, the VALUE remains the same - only the highly variable price of a share of BCS is undergoing ch-ch-changes...

I pointed out similar hedged, long-term plays could be made on Goldman Sachs (GS) ($94), Morgan Stanley (MS) ($13), Bank of America (BAC) ($6) and Citigroup (C) ($24). Of course we hedged them per our discussion in the morning post (TZA was our morning choice but we're out over 650 on the RUT) but then we went long on EWG (Germany) again with the very aggressive Oct $16,18 bull call spread at $1.30, offset by the sale of the $17 puts for .90 for net .40 on the $2 spread. Ten of those in our virtual $25,000 portfolio cost $400 and can return $2,000 in less than 30 days if EWG is over $18 and, guess what - they're over $18 this morning!

Another bullish bet we placed was USO Nov $28/30 bull call spread at $1.30, selling the $27 puts for $1.10 for net .20 on the $2 spread with a 900% upside if USO simply doesn't drop from where it is now. That's what's nice about options - you don't need the market to go up to make money good money. On this trade idea, your worst-case scenario is owning USO at net $27.20, about 10% lower than it is now. That would equal roughly $72 oil.

Obviously, if you don't WANT to be long on oil at $72, then you don't sell short puts when it's at $80 but, again, when you are a VALUE investor, this is exactly the kind of play we like to make - when the PRICE of something we want gets cheap. You can't be a value Investor if you aren't able to place a VALUE on the stocks you buy. As I often say to my TA friends, these are not just random numbers on a chart - they are real companies that have very real returns on investment no matter how apocalyptic the rhetoric gets in the MSM or from the rest of the punditocracy.

One example I often use with members is buying jeans. You have jeans - just like you have stocks. Maybe some of your jeans are old and need to be replaced and maybe you just have some extra money and want a new pair but, after 40 years of buying jeans, you damned well know what a new pair is worth and what you are willing to pay for them. So, usually, you have no urgency when you go to the store to buy them and, if they are not on sale but you expect one soon - usually you are willing to wait. When there is a sale, you know if the price is good or not and you buy when you see a deal.

Why is it you put more thought into a $50 pair of jeans than $50,000 worth of stocks? If you know Levi's fit you well do you care if the local paper ran an article saying Lee Jeans are better? No, you KNOW what works for you and your wardrobe - just like you should know what works for you and your portfolio. When the jeans are marked down 40% because it's after Christmas, do you worry that they will get cheaper or that suddenly they must be no good or do you know that the current market environment is not likely to last so you snap them up because, again, you KNOW you want to own those jeans long-term.

Stocks are no different. A good stock is like a good pair of jeans and will give you VALUE, no matter what PRICE you pay for them but will give you a better VALUE when you manage to get them for less. As we often discuss in Stock World Weekly, the PRICE of the markets, as well as commodities, are strongly influenced by moves in the dollar and here's our multi-chart of the S&P, adjusted to reflect various other PRICING instruments:

Click to enlarge

Isn't that interesting? The only way the S&P seems to be performing poorly is against the dollar which, unfortunately, is how we see it priced every day. Against any other measure of VALUE, the S&P has had a pretty good month! One "share" of the S&P bought 290 pounds of copper at the beginning of August or September, now you get 340 pounds - up 17%. You could trade your S&P units for 26 ounces of silver on August 22nd - a month later it's 36 ounces - up 38%. If the gold and silver bugs are right and those metals aren't a total joke - then the S&P had a fantastic month, right?

We're even getting 10% more oil and gold per unit than we did earlier in the month and food prices have pulled back a bit too and home prices have gone down too so pretty much everything you want to exchange your S&P shares for has gotten better for you against your stock - everything except the cash you have in U.S. dollars - and that's why we have been Cashy and Cautious since the dollar bottomed out in April - cash is also an investment and, when the S&P was at 1,350 and the Dow was at 12,800 - we decided the dollar at 73 was a better VALUE than most stocks.

Finally, five months later, the rest of the world is starting to agree with us but - surprise world - we're done with that and starting to look to convert our piles of cash back to equities again. Will it take five months for the world to catch up to us again or will the underlying value fundamentals continue to assert themselves through the end of the year? That will depend on earnings results (which we do care about) and the level of investor panic over our various crisises - whether real or manufactured (which we care less about). As I said on Friday - we welcome the crisis because, like the Chinese, we also see the opportunity hidden within.

We discussed the global situation in this weekend's member chat and I made the point that our last proper recession was in the 70s and during that decade we had war, debt, high unemployment, rising commodity costs, divided government, slowing global economy ... things were so bad, both the U.S. and Europe turned to conservatives for answers and we got Reagan, Thatcher etc. There was Kent State, Charles Manson, Peruvian Earthquakes, Chinese Spy Satellites, the Cold War, the Pentagon Papers, Idi Amin, Israelis taken hostage at the Olympics, Wallace Shot, DDT, Philippines under marshal law, Nicaraguan Earthquakes, the October War in Israel, Patty Hearst kidnapped, lower speed limits (my pick for biggest catastrophe), Ethiopian Famine, India testing nukes, Tornado Summer, Lebanon Civil War, Saigon Falling, Ford assassination attempt, the Metric System, the Wreck of the Edmund Fitzgerald, Soweto Riots, Karen Ann Quinlan, Ebola, Son of Sam, New York’s blackout, Love Canal, Jonestown, Iran revolution, Three Mile Island, Greensboro Massacre, Nicaraguan Revolution and that Happy Days episode where Fonzie jumped the shark ...

Imagine if just a few of those things happened these days, with the hyperbolic media coverage we give everything. Ebola, especially comes to mind when you consider the way we freaked out over SARS and the Bird Flue – imagine graphic images coming at you 24/7 as each new case of Ebola was discovered ...

As I said on Friday – it’s always something and all that stuff happened to us in one decade (the decade of our Bicentennial too) and things really didn’t get better until about August of 1982, with the Dow at 800 after having been at 1,000 in 1966 so 16 years of nothing until then. Reagan had been elected November of 1980 and the hostages were released and oil prices came down but a lot of bad stuff was happening then too (Olympic Boycotts, John Lennon shot, Poland Revolution, Cuban exile, ABSCAM, Saddam vs. Iran, Grain embargo with Russia, Toxic Shock, Pope shot, Libyan War, Aids broke out, Reagan Assassination attempt #1… – all in just 1980 and 1981) but it’s all about attitude.

Reagan doubled our debt and had an irrational tax policy that his vice president called "Voodoo Economics" that could never possibly balance the budget and he doubled the size of government while collecting less taxes and pushed us into the biggest military build-up in history, building nukes no less! All that and the markets began to rally because he made people feel confident and then the jobs came back but, mostly, it was inflation that made everyone rich – the same inflation that Ford and Carter had tried to tame was FLYING in 1980 and 1981 in the teens before it began to calm down.

One of our members pointed out that my commentary could be summed up very simply as "We didn't start the fire, it was always burning since the Wold was turning..."

That's where we are this fall - it's a turning point. One of those times in human history when we will need a great leader to step up and take charge and simply change the attitude of the people. Unfortunately, Obama has been a huge disappointment on that front and none of the Republicans seeking to replace him seem right for the job either. The relentless negativity of the mainstream media needs a counterbalance and we're not going to get too carried away with our bargain-hunting until we do get technical confirmation. But while we wait, there are plenty of very good bargains to be had - with stocks that will fit our portfolios like a good pair of jeans - ones we can hold onto for the long term.

It's going to be an interesting week with another look at Q2 GDP, the ever-lovely Case-Shiller Report, Durable Goods, Consumer Confidence, Personal Income and Spending and the Chicago PMI. Also, the government still may be shut down on Friday. Short-term notes will be auctioned off this week - the first post-Twist set to be bid on and we have a TON of Fed speak beginning with three of our governors today and six more as the week

Disclosure: I am long FAS, BCS, BA, BRK.B, IMAX, AGQ.

Additional disclosure: Positions as indicated but subject to change.

Source: Just Another Manic Monday: Value Investing