Tuesday, August 19, 2008


How many times in this type of turbulent market have you heard the term "FLIGHT TO QUALITY'? I have heard it over and over. Where do you find quality these days? We got "hot" PPI numbers today and while gold did go up about 2%, we did hear some analyst today put a $600 price target on gold. He cited speculators being forced out of the market as a reason for his prediction. I submit that oil will become the new gold. Now I know that gold went up more than oil today on a percentage basis. My prediction is that in the coming months "Flight to Quality" will become synonymous with "Flight to Energy".

Now lets examine where the markets go from here. I usually hunt for quality stocks to buy. Right now I am hunting for stocks to short. I don't see a catalyst to drive these markets higher. The only real catalyst would be a significant decline in the price of oil, which I don't think you will see.

The first stock that I think is a decent short is Life Time Fitness (LTM). Now this is not a sexy pick and you aren't going to see stellar returns in one day on this one, but I think this one heads lower over time. If I had a gym membership, it would be one of the first things to go as the household budget gets tighter. The stock is trading at $33.40 and I think it could well see a new low around $25. Again, those of you that read my blog on a daily basis you know that I think the worst is yet to come for the consumer. Many analyst like this stock and many others say that it is a perfect way to play the obestity trend. I think shorting it is a good way to play the consumer's thinning wallet.

While I don't usually like to short stocks trading under $30 per share, I will make an exception for Carmax (KMX). Many analyst have really liked this stock because of their ability to generate cash flow. While they have done well in the past, I am concerned about how they will fare in the declining economy. One aspect of their business is FINANCING. I looked at their financials and saw increasing notes due in the short term. If the consumer gets hammered, this company could get caught with increased inventory and declining cash. Not exactly what I am looking for in a stock. Again, I have nothing against the way this company has been run in the past, I just think they are going to get hurt by the economy. They closed today at $14.95 so a run down to $11 would give you a nice percentage gain.

I heard one trader make a very interesting comment today. He speculated that the run up in the price of oil was short covering ahead of tomorrows inventory numbers, as we have seen a "pop" the last three weeks after the crude inventories were reported. It will be interesting to see how crude fares into the close tomorrow. I think we are beginning to see price stablization at these levels.

I saw another "talking head" on Cavuto saying that he sees oil at $30 a barrel in two years. I am going to send an email to the major networks with some outrageous comment and see if I can get on TV. Don't listen to these radical calls. You need to be listening to what is really happening in our economy. Fed Funds rates are low, but the cost of capital is rising. YOU HEARD ME--THE COST OF CAPITAL IS RISING. Companies are being forced to pay higher interest rates. This is going to be bad for our economy. I can see the DOW sitting at 10,000 if we don't get some stability in a hurry in the credit markets.

If I have to be bullish on any sector, it would be technology. Cisco has beaten the street this quarter and after hours Hewlett Packard (HPQ) beat the street. I also like IBM. I am not ready to buy either of these just yet. I want to see the overall market strengthen before I commit capital to any new longs. I do think that tech rebounds first---but we have to see a real rebound, not just bear market rally.

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Dollar.Discipline said...

$30 oil! What kind of thought process is that? That guy needs to back off the anti-depressants a little.

The ONLY way oil EVER gets that low again is if we go total solar.