Monday, December 1, 2008

What Will December Bring?

December is normally tax selling season, so the pundits are expecting another monthly sell off. It's hard to imagine that there is really much selling left at this point, other than endowment and hedge fund liquidations. In the last five weeks, many, many seasoned veterans have gone from saying "stocks are cheap here" to saying "the next stop is 5,000." This latter statement usually means that such veterans have sold most everything that they own and hope against hope that the market heads south and they can then buy in again comfortably in the 5,000 to 6,000 range. Markets like this are rarely accomodating and they won't be this time either.

Look for a healthy rally by the end of December, with violent sell-offs along the way. Some of the financials now look like bargains, but some look euthanized. Citigroup, for example, now faces an impossible debt burden. Citi will survive, but it is hard to see how it can be very profitable. Citi took in $ 25 billion in 8 percent money from TARP and the bailout last week added $ 27 billion more in eight percent money. That makes $ 52 billion at 8 percent, a new annual additional interest hit of $ 4.16 billion that wasn't there in September. That's a big speed bump for future earnings. Look for Citi to behave like what it has now become, an agency of the US government....probably not a good buy, even though it will remain on the landscape. On the other hand, Goldman and MS look interesting, if they can pay off their TARP money and get back to business. Ditto for J P Morgan, whose stock isn't quite as cheap as GS and MS. Berkshire Hathaway looks like a buy here as well. The financials still look like the best risk adjusted play out there, though tech stocks are beginning to look attractive as well.

Fixed income plays are the best of all. Short the treasury market here and the dollar. Go long oil, bank debt, and high yield debt. These may work out even better than stock.

Am I bullish? Of course.

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