If you are long on oil, commodities or precious metals, your portfolio has enjoyed huge gains so far in the 2008 U.S. stock market. Congratulations.
If you are long on stocks, you are losing money across the board. Large cap stocks are down. Small-cap stocks are down. Technology stocks are down. Financial stocks are crushed. Retail stocks are pummeled. Even worse, with inflation, you are even further behind than during periods of stable prices. It has been a trying period, but frankly it could be much, much worse.
The stock indexes, despite all of the negative headlines, are all trading higher since reaching the lows in March. Those stock market gains have brought the averages to just single-digit losses for the year.
Unfortunately, the levee may break (see, “You Still Need Stocks Just Not the Headaches.”)
U.S. stocks had a nice run in April and May but met very strong resistance at the S&P 500, 1,400 level. Now, with oil pushing $150 per barrel, stocks have retreated once again. The crosscurrents in the market have investors rightfully perplexed.
The Federal Reserve is signaling that rate hikes may be forthcoming in order to deal with presumed inflationary pressures. Most companies are resigned to slow growth and dwindling profit margins. The doom and gloom crowd must be very pleased at the moment.
Indeed, the future looks bleak, but if you are a contrarian investor, you know that from such darkness comes light. There are opportunities in this market that investors can exploit.
Here are a few ideas that I think will help you beat the market over the remainder of the year:
Oil Stocks
The oil run is done. As I have stated previously, the oil run is beyond comprehension (see, “The Oil Stock Pyramid Scheme.“) Only those that can remain asleep when doused with ice cold water will deny that the oil market is in the grip of a speculative bubble.
All of the nonsense about tight supplies and rising demand ignores the reality of a slowing world economy. Evidence of demand destruction is abundant, but the speculators don’t care. Why should they when they get rewarded for behavior that has little to do with reality. Those who fail to remember the past are doomed to repeat it.
That being said, I fully expect oil to…>continue its run at least through the election. Use the crazy spikes to liquidate positions if you are fortunate enough to hold shares of oil companies or those leveraged to oil’s inflation.
Interestingly the oil refiners are getting crushed as a result of the volatility in prices. I expect that to change during the rest of the year. Stocks like Tesoro (TSO), Valero (VLO) and Western Refining (WNR) all look very cheap at current levels.
Financials
The story of the year has to be the collapse of the financial sector (see, “Lehman Brothers (LEH) Share Price Smack Down.” Banks, finance companies and investment houses have all been damaged in the carnage of a credit crisis. We have not seen anything like this since the great depression.
The bottom line of the destruction is that the U.S. stock market cannot go higher without the participation of this vital cog to capitalism. The good news is that with the balance sheet write-downs and such, the financials are rebuilding their foundations. Certainly, there may be more ghosts in the closet, but I believe most of the damage has been done.
From that base, the future looks much brighter. Under the radar, the yield curve is providing an important clue as to the profit picture of the group.
The steeper the curve, the more money there is to be made from lending activity. Banks can borrow at low rates and lend at higher rates. It is that simple and right now the yield curve is steep. Over the last decade, the business became overly complicated. Credit default swaps and other derivative securities provided huge returns, supposed low risk and profits for the underwriters.
Those profits have all been wiped out.
I expect the industry to migrate back to traditional, conservative operational activities. Doing so will bring back profits and positive returns for investors.
Some interesting speculations include: Washington Mutual (WM), MGIC Investment Corp. (MTG) and CIT Group (CIT). All of these names have been pushed to the brink, spreading your risk across a few names like these makes Rational sense to me.
I also like the community banks. As the Rational Investor I recommended that my readers short these stocks back in the spring of 2006. That was sage advice.
Now, with most of the damage done, investors can buy these banks at discounted valuations. Here are names I would consider:> Frontier Financial (FTBK), Macatawa Bank (MCBC) and TierOne Corp. (TONE).
Homebuilding
It all started with homebuilding. The bubble that supposedly saved us from the dot com crash was only a mirage. Virulent speculation funded by easy credit resulted in excesses that are still being expunged.
The homebuilding group though is showing signs of life in 2008. With many predicting the end of the cycle, homebuilding stocks have rebounded from their lows. As a result, the sector is outperforming the rest of the market for the year.
Will that trend continue? I think it is a safe bet. Even with the rise, most stocks in the group trade for values below book. Historically, such a state has been a terrific entry point for investors.
But, what if home values decline another 20% as predicted? Certainly such a forecast would not bode well for builders. Then again, buying at a price well below book value offers a fair amount of downside protection.
I think the water is safe to speculate. A few names worth holding for the remainder of the year include Toll Brothers (TOL), Hovnanian (HOV) and DR Horton (DHI). I would also keep an eye on companies that are leveraged to homebuilding like Home Depot (HD) and Lowes (LOW).
The markets are very turbulent at the moment. The volatility makes for opportunities for traders and investors alike. Don’t get discouraged if stocks go down, they probably will in the short term.
The best defense is often offense. Buying on the dips or selling on strength, as I suggested with oil stocks, makes Rational sense to me.
If stocks do go down in value over the next few months, I would consider being very aggressive with your buying. The action in the market reminds me of 2002. Then stocks dropped over the summer culminating in a big fall collapse.
That washout created the next big rally. I see the same thing happening this year.
High oil prices and beaten-down banks aren’t the only things investors need to worry about! With the 2008 Presidential Election heating up, investors need to prepare their portfolios ahead of what could prove to be a momentous political shift this November! Get the season perspective you’ll need come November by signing up for Richard Band’s Profitable Investing today. In the June issue, Richard Band takes a nonpartisan view of the upcoming election and its enormous impact for investors. Sign up right now for your free six-month trial subscription to Profitable Investing!