Sunday, September 7, 2008

Some more plays for tomorrow

Remember that Apple has some plans for Tuesday, so the beaten down tech sector should find some bids. RIMM at 107 should go to 118 by Tuesday; that was the price I first took some down last week.

Freeport (FCX 73.91) and US Steel (X 113.61) were sold down crazily hard by the liquidators. Now they'll buy them back. If housing is going to cure itself, maybe the world economy can right itself. But don't overthink it. This market has bottomed, and this move is real. Panic will set in the shorts and in the under-invested longs, and those hedge funds have decided to stay in business will look for some alpha. They can get it here.

Arch Coal (ACI 43.29) and Peabody (BTU 53.30) are the alpha in coal.

In construction, you need Bucyrus (BUCY 54.79) which was up 4 on Friday. You had a big buyer of puts on that last week at the 60 strike. They'll go out worthless, so the stock needs to go above that level.

Foster Wheeler (FWLT 42.02) has been neglected; you can buy the stock and the 50 calls which closed at .25. I like that play with two weeks. The stock can gap a couple, and they'll still be at .40. I think this number can run to 53, and you should be able to make 600% on that play.

If you want something cheap, and don't mind reaching down look at WaMu (WM 4.27), PMI Group (PMI 4.31), Radian (RDN 4.79) and Syncora (SCA 2.74). They'll get action by the shorts who are being run over in MBI and ABK. I like MGIC (MTG 9.27) also. Last week I said it would run to 12. You should have that by Tuesday.

On the GSE's, just do a back of the envelope calculation. FRE closed at 4ish and FNM at 5 in the afterhours. These aren't going to one, because of the 80% dilution, because the public will want to play them. They're in better shape now, with the government behind them. Forget about the doom and gloom stories and the stories of home prices going down some more. 60 Minutes tonight had a story about a guy that was "buying and bailing." Buying a new house for less than $300K, and letting his house that he owes almost 400K that is "worth" 230K go back to the back. This is new? It's as old as jingle mail. You need a house to live in or rent. With this bailout, house depreciation is now over. It's not over next June, it's over now.

Good grief, let's do some simple math. Assume that the average sale price of 10 homes in a Las Vegas or Florida neighborhood is $200,000. Now 40% of homes sold are in foreclosure. What's their discount? 40? 30%? How about 28%. That's a tax bracket. So to get a $200,000 average, we have 6 homes sold at 225,000 and four homes sold at 28% off or $162,000. We have a 200,000 average price of homes sold, but homes not in foreclosure are actually selling at 225,000-11% above the average price. To get house price appreciation, we just have to slow the rate of foreclosure. So now after three years of price declines, over $500 billion of write-offs, and the government bailout of the GSE's, we are supposed to wait another 9 months for housing to bottom?

That wait is over. I didn't think that Wall Street would figure out that this bull market started until we were nine months into it. But this bailout will condition Wall Street with the Pavlovian response, that these type of events happen at bottoms.

Wall Street will soon remember that Meredith Whitney wasn't put on the cover of Fortune at the top! And then Wall Street will remember that Federated bought David Tice's Prudent Bear fund at the exact bottom! Soon even the street will be able to do this math!

We have a bodacious bull with a dog nipping at his heels, and the pig hedge funds squealing.

I feel like I'm at the Wisconsin State Fair!

But this time, I'm taking money from the shills on the street!

1 comment:

Anonymous said...

Oh, yea. Third sentence from end
= bodaacious bull