"Shoulda, Coulda, Woulda"

09/30/2005 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

In a fascinating review of market sentiment, Bernie Schaeffer jumps ahead 12 to 18 months and forecasts what investors then will look back on as "shoulda, coulda, woulda" regrets in analyzing today’s investment scenarios. Here's his look ahead.

"In another 12 to 18 months, investors will look back on today and wonder why they didn’t realize certain things that the market is telling them. Here are some of these shoulda, coulda, wouldas that I envision:

  • I should have bought gold for under $500 and ignored the ‘experts’ who attributed the early stages of the rally to 'speculation' that would soon run its course. I should have focused instead on the fact that gold was still at record low levels relative to the price of oil, that US government spending gave all indications of spiraling out of control, and that new trading vehicles such as gold ETFs would allow demand from the public and the hedge funds to overwhelm the club that 'managed' the gold price for decades.

  • I should have focused far less on the much-publicized concerns about a housing bubble and far more on the hidden bubble in US mega-cap blue-chip stocks that were yielding a paltry 1.7% when risk-free yields were beginning to rise above 4%.

  • I should have noted that ‘reasonable p/e ratios’ begin to look much less attractive when inflation and interest rates are rising.

  • I should have realized that the complacency reflected in the massive selling of cheap option premiums on the belief that the market had no major downside potential was the 2005 equivalent of the mindless bullishness of the late-1990s.

  • I should have realized that the answer to the question of whether the Fed should continue to tighten or stop tightening was ‘worse either way’ and that yield curve inversions were in fact bad news for the economy.

  • I should have understood that presidential approval ratings ultimately matter in determining the market's reaction to crises and that ‘guns + butter = stagflation.’

  • I should have understood that Microsoft was the new IBM and Wal-Mart was the new K-Mart and Dell was the new Compaq and eBay had been on too many magazine covers and Southwest was just an airline and Tyco was still Tyco and there was no ‘Warren Buffett put.’

  • I should have appreciated that tech stocks had no business selling at 50% above the market multiple when for 25 years they had delivered no excess returns."

Meanwhile, based on these forecasts, Bernie Schaeffer, in his latest The Options Advisor , offers several current bullish and bearish stock and option recommendations:

"Gold is trading near a 17-year high and stands to continue its advance. American Barrick (ABX NYSE) has followed suit, advancing steadily along the solid support of its 10-month and 20-month moving averages. Despite this solid technical performance, short sellers have piled into pessimistic positions against the stock. For example, it would take more than eight days for the bears to cover the 15.5 million shorted ABX shares, thus providing ample opportunity for the equity to benefit from short-covering. According to Zacks, seven of the 17 analysts covering the gold firm feel it worthy of a ‘hold’ or worse. Should this group change its mind, the shares could continue higher. For options buyers, we recommend purchasing the American Barrick January 2007 25 call.

"Beazer Homes (BZH NYSE) has been an outstanding performer, outstripping the S&P 500 on a monthly relative-strength basis since June 2000. While the shares have faltered a bit of late, they have pulled back to the homey comfort of their 10-month moving average, a trendline that supported a similar pullback in April. While short interest saw a drop of more than 4% during the past month, it would still take more than seven days to cover the 9.6 million shorted BZH shares. Should any good news roll the happy homebuilder's way, we could see the shares jump thanks to a short-covering rally. Finally, the media is fond of referring to a ‘housing bubble.’ Such skepticism suggests there is residual buying power for the sector. For options traders, we recommend the Beazer Homes May 50 call.

"Dell Computer (DELL NASDAQ) represents a great example of an over-loved, mega-cap tech stock that is failing to live up to its billing. Yet no one seems to notice. The shares have been tumbling for the past two months, and have breached the key 35 level. The stock closed below its 20-month moving average in August (for just the second time since January 2003) and will likely repeat this feat in September. Yet sentiment hardly reflects these weakening technicals. Zacks reports that 20 of the 26 analysts covering DELL rate it a ‘buy’ or better. Finally, the stock's short-interest ratio is sitting at an uninspiring two days to cover, effectively eliminating any chance for a short-covering rally. For options traders looking to speculate on the downside, we suggest the Dell May 37.50 put."

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