Stocks are up almost close to 100 points today, but will it hold? It may seem, at first glance, that the bulls have made little progress during the past few sessions. But that’s not so.
What has happened, basically, is that value-oriented buyers have stepped in to stabilize prices, while trend-following speculators have accelerated their short selling. We know a great many shorts are out there because the ratio of trading volume in put options to call options has skyrocketed to levels last seen during the financial meltdown in late 2008 and early 2009.
This is an explosive situation. In early March 2009, Citigroup (NYSE: C) came out with a “less bad” earnings bulletin than Wall Street expected, triggering one of the most sweeping and powerful short-covering rallies in stock market history.
A smaller version could take hold this summer as the European Union stitches together yet another bailout for Greece.
This time, again, American banks are set to lead the way. According to the BIS, U.S. banks have only about $32.7 billion of exposure to Greek debt. Moreover, analyst Glenn Schorr of Nomura thinks the total may even be a lot lower, after hedges are taken into account. Just wait till that news gets around!
For a contrarian play, I recommend buying one of the safest U.S. banks, JPMorgan Chase (NYSE: JPM). Analyst estimates for JPM’s 2011 and 2012 earnings have moved up nicely over the past 90 days, making the stock an excellent rebound candidate when the overall market turns. From here, I’m projecting a total return of 30%-40% in the year ahead.
If your taste runs more to income investments, take a close look at master limited partnership Kinder Morgan Energy Partners (NYSE: KMR). Earlier this week, it launched a secondary offering of 6.7 million new shares. As happens almost invariably in these cases, the share price dropped, reflecting a temporary glut.
Take advantage of this momentary misalignment to buy KMP, which currently yields 6.4%, mostly tax deferred. Stick the partnership into a taxable account, not your IRA.
