The Patient is Etherized: Consume the Preferred Organ

You know something’s up when the market keeps rising in the face of pitiful economic and corporate earnings news.  That’s precisely what happened last week when consumer confidence was smashed, GDP shrunk and yet the Dow charged ahead nearly 15%. 

Some might call it a bull market.  Others would say that was heresy: “What, with the dollar on its way to becoming worthless?  How dare you speak of a bull market!”

And yet that’s exactly what it is.

On the 10th of October, when the Dow Industrials fell briefly below the 8000 level and the panic was general, 93% of all stocks traded on the New York Stock Exchange registered new 52 week lows.  Let me repeat that, because it’s going to be years before it happens again – if it ever does:

ALMOST ALL NYSE STOCKS TRADING
ON OCTOBER 10 RECORDED NEW LOWS

As difficult as it may be to process, this is perhaps the single most telling piece of evidence pointing to a bottom in the market.

How many more stocks would have to hit new lows before the zombies and one-way gold-dolts admitted that the panic was over?

An interesting (but relevant) aside: Bob Farrell, former head of Merrill Lynch Research for over 40 years and one of the premier market analysts on Wall Street, wrote a widely read and distributed piece on technical analysis and general market tendencies called “10 Market Rules to Remember.”

Rule #4 of the canon reads: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

In other words: these types of sharply moving markets tend to correct equally sharply – not allowing investors to contemplate their next move in tranquility.

The chance of a “bottoming process,” therefore, is next to nil.  There will be no basing or plateau-ing at these levels.  The next move will be a violent thrust up yer pantleg.  And if you’re not ready for it, you’ll be doubled over, gasping like a schoolboy who’s just discovered his acorns.

There’s money to be made here, Junior!  Get on board!

Here’s another one:

What you’re looking at is the anticipated and actual year over year growth in earnings for all ten S&P 500 stock sectors for the third quarter of this year (not all companies yet reported).

What the chart shows is that nearly all sectors surprised to the upside (particularly consumer discretionaries, by 30.90%), and that the financials were wholly responsible for the negative earnings of the index as a whole.

Considering the fact that the financials are now the property of the Government of the United States of America, you have nothing more to worry about.  And no excuses, either, for not climbing on board.

Cash Buildup Threatens to Break the Dam!

Related item: cash hoards at mutual funds have reached near record levels, standing currently at 25%.  The last time this happened was in the early 1980’s, at the outset of the current bull market.  The difference between that time and this, however, is that money market funds then paid you 10%+ for cash.  Today, if you can find 1.5%, you should consider yourself rich.

Not only that, but cash levels such as these are almost always a reliable predictor of significant bull moves in equities.  Ned Davis Research offers that the market regularly rises 12% whenever money-fund balances hit 11%.  So what might they do at 25%?

Perhaps last week’s 15% gain (the biggest one week Dow surge since 1974) can be attributed to this money starting to find its way back into circulation?

So given all of the above, what’s the best way to deploy at this point?

Good of you to ask. 

There are literally hundreds of good buys out there, but we want to highlight a single theme in today’s free Oxbury Chart of the Week.  (For more detailed information on this theme subscribe to Oxbury’s Residual Income Report).

Preferred shares have taken a thrashing since Dr. Paulson disemboweled Freddie and Fannie and tossed all their preferred organ meat in the garbage.  Since then the market wasn’t sure what to with the rest of the financial world’s perferreds and decided to practice a little of their own medicine, dumping anything that had ‘preferred’ written on it, regardless the issuer or fundamentals of the company, and using whatever tool was at hand to do the cutting.

The result is a bevy of great yielding securities with the full faith and backing of the U.S. Government.  And you don’t have to be Warren Buffet to get in on the action.  (For those out of the loop: the rich old arse recently took big positions in the preferreds of Goldman Sachs and General Electric, each yielding 10%.)  Financial preferred shares are widely available.  Here are just a few issues to consider.

We’ll start with the Citigroup Capital Vii preferreds (CPRV:NYSE), now yielding 9.58%.  As the chart shows, this issue is slowly finding a footing and reworking its way back towards par value at $25.  Capital gains potential here is significant.

JP Morgan’s JPMPRJ:NYSE is another issue worth mentioning.  JP Morgan has been, along with Wells Fargo, a beacon of strength among the financials.  Accordingly, its

preferred pays 7.3% — a good measure less than the competition’s.  Earlier this month, J.P. Morgan CEO James Dimon bought $10.5 million worth of his own JPM preferreds.  That should offer a little confidence.

And finally, lying somewhere between the two is Bank of America’s preferred ‘H’ series (BACPRH:NYSE), yielding 8.90%.  Like Citigroup and J.P. Morgan, Bank of America recently availed itself of the Federal Government’s $700 billion rescue fund to shore up its balance sheet. 

This alone should give investors a warm feeling.  After the Lehman Brothers bankruptcy, Dr. Paulson essentially decided which of the major financials would be allowed to live and which would die.  The above three were chosen as worthy of continued existence.

They’re now considered too big to fail.

Go eat your organs.

Matt McAbby
Analyst, Oxbury Research