Dow at 8000 Is Not Out of the Question

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Includes: BAC, C, CVX, FDX, IBN, MSFT, SLB, UPS, WFC, XOM
by: Laura Cadden

The following was taken from TFN’s Smart Trading Action Alert interview with Adam Lass, chief chartist of the WaveStrength Predictive Forecasting System and editor of WaveStrength Options Weekly.

Laura Cadden: Home foreclosures and late mortgage payments are on the rise. Credit markets are in turmoil, and rising prices for oil, food and natural resources are fueling inflation. Payrolls are being cut. Growth and profit protections are being downsized to match declining consumer sentiment. The terms recession, stagflation and even depression are popping up everywhere.

What do your charts show for the U.S. economy? Are we indeed headed toward a technical, full-blown recession?

Adam Lass: It all depends on who you want to talk to. If you’re paying attention to the White House right now, we are skirting the edge of the recession and have been skirting the edge of a recession for the better part of a year. If you’re more inclined to take a practical definition, I believe Warren Buffett just weighed in the other day and said for all practical purposes it is a recession.

They shave these numbers in some interesting ways. The recent report of the last quarter of 2007 came in at 0.6 percent growth for GDP. Keep in mind that’s an annualized number. That means that we would have made 0.6 percent growth if we had grown at that rate for the entire year. In the last quarter of 2007, we actually came in at something like 1.5 percent growth. That’s inside the margin of error on their studies.

For all purposes, even from Washington, we are in a recession.

LC: Now, the futures market has projected another rate cut of at least three quarters of a percentage point. Where do you see interest rates heading? Do you think they’re going to go that far?

AL: I find it hard to picture it. I found it hard to picture last time they cut three quarters of a point. These are some very drastic steps. I think 50 basis points is a lock at this point. That’s a given. If they really feel the need to jolt the market a little bit they may go for 75 basis points.

We’re headed back down to something close to one. Around 1 percent, you start getting in and around the area where the banks simply can’t make any money. It gets below the margin where the banks can’t make money.

But we’re in a serious pinch right now. What’s interesting it’s not even so much the rate cuts that they’re doing right now that’s fascinating. The most recent move yesterday by the Fed was to put some $200 billion into what used to be the 24-hour short-term window whereby it kind of keeps the skids greased between bank to bank to bank to make sure checks clear.

Not only did they put $200 billion into that, but they expanded that window to 28 days. In essence, the big concern right now isn’t so much keeping the stock market rolling. It’s actually keeping checks clearing from bank to bank, and they’re keeping this relatively quiet. We’re in for some tight times right now.

Another interesting point, JPMorgan (NYSE:JPM), in a private report that those fine folks at Reuters got a hold of and leaked out, is anticipating $325 additional billion in losses to come out of the subprime mess. Now, that’s over and above the losses they’ve already taken. And beyond that, JPMorgan has recently noted that Thornbird Group and the Carlyle Group are defaulting on their notes to JPMorgan.

LC: So what does all of this mean for stock markets across the world?

AL: Across the world, that becomes a different story. Let’s start here in the States. There’s a big difference between this dip and the last dip. I’m anticipating that the Dow dropping. We’re already roughly back to 2006. We could easily see this get back to 2002 levels before the dust settles. The possibility of Dow at 8,000 is certainly not out of the question.
The trick here is knowing which groups of stocks are going to get hit and how that affects the rest of the market.

In the tech crash, the gist of the tech crash was a bunch of companies that made a bunch of products that no one really cared about. We could do without these guys.

But the big difference between that time and this time, you could live without those companies. They went away because they weren’t truly necessary. Their technology might become necessary in some day, in another ten years maybe, but they weren’t truly necessary.

The banks are the blood of the economy, and that’s who is hurting this time. That starts to spread throughout the economy, and I think you could really simplify what it is that you want to do right now. If you were to look across all of the portfolios that I recommend, you could see a strong, common theme, and that common theme is simple. Get rid of U.S. banks. Big, singular element: Lose your U.S. banks. Lose Citibank (NYSE:C), lose Bank of America (NYSE:BAC).

Lose Wells Fargo (NYSE:WFC). I hate to say that. I love Wells Fargo as a bank. My mortgage is with Wells Fargo. And I am totally sure at Wells Fargo, if you take away all of these billions in refis, mortgages, house-based credit, you’re left with toasters and free checking accounts. These guys are priced like rock stars when they’re the most boring businesses in the world. They’re going back to being boring.

You have to take these guys all the way back to the beginning of the bubble, and that means that they’ve still got as much to go as they’ve already lost.

But that doesn’t mean the world doesn’t need banks.

You asked what does this mean globally, and there it gets really interesting. Globally speaking, there are banks out there that never touched subprime. Robust banks in robust economies that have none of this red ink, and they’re all being punished the same way, and that means that there’s actually buys in banking out there.

An example, ICICI (NYSE:IBN), one of the biggest banks in India. India is on fire right now. They’re not slipping because they’re one of the economies that’s singular, large enough, robust enough within itself. They have such a huge lower class that aspires to become an upper class that they can be self-propelled for years.

ICICI has 30 percent, roughly, of the mortgages in India; 30 percent of the small investment banking in India, which is nice stuff; they have 88 percent of the mergers and acquisitions in all of India. No one talks about them. They are, in essence, the Goldman Sachs of India, and no one is touching them right now. Their chart shows a potential for 88 percent growth in just share prices over the next 12 to 18 months, easy.

So my big theme right now is, it’s not that you don’t want to own - banks are totally essential to the economy - but you just don’t want to own American banks.

LC: Well, let’s talk about the American economy right now. There’s always a place that traders can make money in any climate. What are you recommending to your readers right now?

AL: Like I said, I firmly recommend that you should be purging U.S. banks. Better, buy puts against U.S. banks and really getting some traction.

Another good one I like puts against Microsoft (NASDAQ:MSFT) right now. I think they’re set up for a fall. In WaveStrength Options Weekly we’ve managed to score 419 percent on puts, so far, against Microsoft with plenty more fun there.

A big victim we’re picking on right now is United Parcel (NYSE:UPS). UPS is simply caught between a rock and a hard place. They ship the toys that people want. They ship the products that small businesses need. It’s a recession and gas is going up to $4.00 a gallon on the one side and a declining market on the other side. They almost are glad to see it because every package they ship was going to cost them more and more and more in gasoline. I think UPS is a big loser. Not so much FedEx (NYSE:FDX) because of their international business, although I may pick on them again soon.

Other sectors that are real easy to spot, if you have to own anything long, we’re long right now Schlumberger (NYSE:SLB) because they’re a good piece of the oil system, and hey, if as long as it’s going up it’s going up.

I don’t know so much that I’d want to own the big three, Chevron (NYSE:CVX) or Exxon Mobil (NYSE:XOM) or any of those guys right now. Their charts, they’re looking a little toppy, keeping in mind that they are gas sellers. Yes, they use their own supplies, but they also buy on the open market. So they have to buy this hyper-expensive gas and then turn around and sell it as well.

But I think the single biggest thing is puts on American banks, calls on foreign banks.

Click here to listen to the full interview.