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Phil's Buying Premise

|Includes:AAPL, BA, C, International Business Machines Corporation (IBM), INTC, JPM, KO, MCD, MON, PEP, PFE, SUNEQ, T, VZ, WMT, XOM

One of our newer Members in Chat last night asked why we are buying stocks now, when it is "very likely" we are heading into a double-dip, which was the earlier topic of discussion in the evening chat (whether or not we are at a bottom and what the outlook for Q3 was going to be):

Phil - June 30th, 2010 at 10:56 pm |

Double dip/Tusca -  OK, let’s try it again.   I’m trying to say that, if you look at corporate earnings, you need to SHOW ME THE LOSSES.  I don’t give a crap about your recession or your unemployment or your debt.  I’m investing in WFR at a $2.5Bn market cap ($9.88) and I’m selling the 2012 $7.50 puts and calls for $5.10 so my net entry is $4.78/6.14.  That’s roughly a $1.7Bn market cap I’m putting money into WFR for.  In 2007, the company made a profit of $826M, that’s a 50% ROI - slightly better than TBills.  In 2008 then made $387Bn, which is just 25% back on my money but it was a rough year and 2009 was even rougher and the company lost $68M, which is why it’s so cheap now.  The bulk of that money was lost in Q3 ‘09 and they have been back on track since then and are expected to make $250M this year and about $500M in 2011.  Whether the stock market is at 11,000 or 6,000, I would still rather have $10,000 tied up in WFR at net $6.14 than $10,000 tied up in TBills at $10,000 with a promise of $3,000 in interest by 2020. 

No one is telling you to buy the S&P.   During the great depression you could have bought the Electric Boat and National Acme Co. (NYSE:GD), which returned 55,000% over those 22 years you people are talking about sitting out of the markets.  International Paper (NYSE:IP) was the internet of the day and they rerurned 30,500% from 1932 to 1954.  Zenith was the AAPL of the day and investors made 24,000% in those 22 years.  Douglas Aircraft changed their name to Boeing and made 23,000%, another fancy electronics firm was HON, good for 21,000% gains and other smart buys were GR (20,000%), NSC (18,000%), CVX (Skelly Fuel - 16,000%), UIS (Remington Rand - 12,000%), DHR (Acme Machines - 10,000%), BWA (BorgWarner - 10,000%) and CVS at 8,000%. 

Now, you are a smart guy, I’m sure you could have figured out that the company that makes planes would probably outlast the depression.  I am not bullish, I am bottomish.  We are playing with 75% cash and our 25% invested was invested AT THIS LEVEL around June 8th with the ANTICIPATION of another 20% drop.  Our biggest concern in the month after that was that we should have bought more at the bottom, right?  Well here is the bottom again and another chance to buy some so we started with a TZA play that’s already up 300% and now we’re pulling another 10% off the sidelines to play for some upside.  If we don’t get it, then we’ll just have to roll down and buy some more stock but if you want to hide out and wait until the next time the market flies up before buying - no one is forcing you to buy.  Buying stocks is risky - that’s why you can make 10,000% in the same period your TBill will pay you 30% (assuming the don’t default). 

When we buy a stock down here, we are doing buy/writes or selling puts that will give us another 20% cusion to S&P 880 or lower.  If you don’t think the S&P will hold 880, then of course it would be crazy to buy at 1,040 but if I can buy the best name brand stocks in the world for prices that are as good as I could get if the S&P is at 880 and I DON’T think we’re actually going to get that low again, then I’d be crazy not to.

Different opinions are what make markets and thank goodness for the naysayers and the doomsayers because they get people to sell perfectly good shares of CitiGroup for $3.75 and sell WFR for $9.88 etc.  When EVERYONE is confident, then I’m going to be selling but I don’t need a great depression to buy stocks at great depression prices and, don’t forget - if deflation hits, then my stock may go down in price but the dollars they make me (dividends, appreciation, option sales) for the next 20 years will still buy me the same house and oil and happy meals while your cash might do a little better (as long as you don’t spend it because where will more come from?) but, if we get into an inflationary cycle and things shoot up again - you will not only get your ass kicked all up and down Wall Street but you’ll be lucky if your cash can buy 1/4 of what it could when you first sat on the sidelines. 

As with everything else, it’s a risk/reward scenario.  If you don’t think that IBM, XOM, MON, AAPL, JPM, C, WFR, INTC, BA, PFE, T, VZ, KO, PEP, WMT, MCD have any real value and are just bits of paper (not that your cash isn’t but that’s another matter), then stay the hell away from them.  I, on the other hand, am pretty sure I will be very proud to turn those stocks over to my daughters when I die with decades of appreciation on thier books.

Disclosure: Positions as indicated but subject to change