Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty

Horacio Marquez — Mon, 13 Jul 2009 14:01:34 +0000

With the “not-as-bad-as-expected” news surrounding the economy and the initial government stimulus measures have been priced in to the market, we are moving into a period of profound uncertainty. With the release of Alcoa Inc.’s (NYSE: AA) earnings report, earnings season has officially begun.

In most cases each company’s own “easy” restructurings are also behind us. They have resorted to massive lay-offs and inventory liquidations to bring costs down to the bare minimum required to run their respective businesses. Those cuts and gained efficiencies also have been priced in. Now, it is time for these companies to show what they can do organically.

Energy companies appear to have hit a wall now that China has run out of space to store oil. And other commodities businesses are suffering, too, as the U.S. Federal Reserve seems to have found religion and veered toward a much more prudent monetary policy.

After its last meeting the Federal Open Market Committee (FOMC) signaled the end of quantitative easing, at least for the foreseeable future. This is of paramount importance, because it seems to be a concession to those who worried that the Fed might debase the U.S. dollar with by over-expanding its balance sheet and fanning inflationary forces down the road.

The Fed has done a tremendous job of first restoring some sense of “normalcy” and confidence in the core markets, like interbank lending and money markets, and then proceeding to work outwards to U.S. Treasuries and mortgage-backed securities. This later step towards more prudent actions is welcome and you are seeing it in the U.S. dollar and renewed confidence in Treasuries. The latter have been received extremely well by investors and yields have started to move down, reflecting not only the lack of current inflation, but also the confidence that the Fed will not go bananas with quantitative easing.

So, ahead of a very difficult earnings season, I am not going to try to out-predict the market. The experts have been going around for a couple of months trying to just that by using expensive consultants that do channel-checking and by contacting the companies themselves to clarify statements made under full disclosure.

But the earnings season has extraordinary challenges to surmount, that are deriving from the uncertainty that is hanging over the markets like the proverbial sword of Damocles.

General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC are emerging from bankruptcy in record time and their costs, debt and massive corporate restructurings will probably make them internationally competitive once more. But there are still questions about how these companies will cope with the still dormant auto market.

The outlook for the large financial behemoths that are due report earnings is equally uncertain. We still need to see how these institutions play around with their toxic asset valuations, their loan loss reserves and their predictions for the future, particularly given the potential stumbling blocks on the road to recovery.

The three obstacles that I find especially troubling are:

The spike in credit card delinquencies.
The outlook for commercial real estate.
And the pending second wave of residential foreclosures, now in the prime and option-ARM sectors.

But do not discount the possibility of seeing mark-ups in toxic asset valuations that might favor some financials strongly.

Now, with the Fed seemingly on hold and the U.S. government’s stimuli only 30% deployed and showing little traction, where is the growth going to come from, especially since unemployment blew right through the promised 8% peak to the current level of 9.5%? On top of that, last week’s rise in continuing jobless claims and Friday’s drop in consumer sentiment offered little solace.

The good news in all of this is that savings rates spiked to 7% as consumers used their money to pay down debt. Even though this improvement in consumers’ balance sheets does not show in immediate sales growth, it bodes very well for the future. And this savings trend, which translates into reduced demand for imported consumer products, together with rising exports, resulted in the lowest trade deficit in nearly a decade.

We are making the difficult progress that we need to make in order to restore the U.S. economy to financial health, and that, in turn, is helping the dollar and Treasuries in the short term.

So, based on these massive uncertainties, waiting to be played out, the best risk-reward ratio appears to be in bonds. With a massive U.S. Treasury supply well absorbed, we are going to jump into long term U.S. Treasuries for a conservative upside, while we keep waiting for resolution on the healthcare reform, social security, and corporate earnings.

Recommendation: Buy the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays 20+ Year Treasury Bond ETF.

Source: Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty

Wall St Rises on Bargain Hunting; Alcoa Q2 Awaited

Contrarian Profits — Wed, 08 Jul 2009 16:55:08 +0000

U.S. stocks rose on Wednesday as investors scooped up bargains in the commodities sectors a day after Wall Street slid to a 10-week low, but sentiment was dampened by the start of the quarterly earnings season.

Amgen Inc shares shot up 16 percent to $60.59, one day after the biotechnology company reported positive results for its experimental osteoporosis drug. The S&P healthcare index rose 1.2 percent.

Investors were reticent to buy aggressively after Tuesday’s selloff as uncertainty over second-quarter earnings loomed. Alcoa Inc , the first Dow component to report, is expected to post its third consecutive quarterly loss after markets close on falling demand for aluminum. Alcoa rose 2.1 percent to $9.61.

After a rally that took the S&P 500 index up 40 percent from 12-year lows in early March, traders are looking for hard evidence that the economy will rebound from a deep recession.

David Sowerby, market strategist for Loomis Sayles in Detroit, said the 2 percent drop in the S&P 500 was prompting tepid buying, but cited anxiousness over earnings.

“Given that the more important economic numbers have been soft the last two weeks, it’s been somewhat of a cold shower for earnings expectations,” he said.

The Dow Jones industrial average rose 36.42 points, or 0.45 percent, to 8,200.02. The Standard & Poor’s 500 Index added 3.64 points, or 0.41 percent, to 884.67. The Nasdaq Composite Index gained 5.31 points, or 0.30 percent, to 1,751.48.

Raw materials was the leading sector in the S&P 500, up nearly 1 percent after a 2.5 percent slide on Tuesday.

Microsoft Corp was the biggest drag on the Dow industrials. Google Inc said it will launch a new operating system in the second half of 2010, taking on Microsoft’s core business.

Microsoft shares fell 1 percent to $22.30, while Google rose 1.6 percent to $403.09.

Leaders of the Group of Eight richest nations and the major developing powers gathered for a three-day summit in Italy. They are expected to agree the world’s economy is still too weak to remove stimulus measures.

NEW YORK, July 8 (Reuters)

Contrarian Stock Market Investing News - Featuring Bargain Stocks » Alcoa Inc

Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty

Wall St Rises on Bargain Hunting; Alcoa Q2 Awaited