OTCJ: The Ulitmate Easy Money Trade for Early 2009

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To OTC Journal Members: 

Today you will be reading the first edition of our 10th year of publication. The first version of the OTC Journal was published on January 5, 1999. I'm proud to say we've reached the 10 year mark. The ninth year was terrible, as it was across all classes of equities.

The Best news is 2008 is behind us. Next weekend I'll cover some predictions for 2009. It's not likely to be a blockbuster year. That won't come until 2010. However, there will be rebounding stocks and some new global ideas with huge potential. Two days ago I celebrated the end of a hideous year. Now I'm looking with some guarded optimism at 2009.

China Energy Stages Year End Rally

Before moving on to the ultimate easy money trade for Q1 '09, it's worth mentioning my current favorite small stock is trying very hard to make a decent accounting of itself as we turn into the New Year.

Yesterday, CGYV managed to trade above the $2 for the first time since early November. The high trade of the day was $2.09. This company fits absolutely perfectly into a theme which could dominate the markets in 2009. First and foremost- it's as green as green gets. It's in China, where 6% GDP growth is still expected. It's expertise is energy efficiency, the "Holy Grail" to our new Secretary of Energy, Stephen Chu. And, most importantly, the company is growing like crazy and set up for another big year in 2009. More on that in future editions.

Discussions with the company lead me to believe 2009 will be another blockbuster year. In 2008 we should end up in the $22-$23 million in revs with about $1 million net profits. In 2009, I believe the company is likely to exceed $40 million in revs with net profts in the $3 to $4 million range. I'm still looking for $5 to $6 in 2009.

If you didn't catch it in Mid December, check out the feature CNN did on the company. Link below. Consider this- how many of these small stocks find their way onto CNN? It's pretty impressive, and a sign more recognition is to come.

The TARP Shows Signs of Working

Believe it or not, the TARP is actually showing signs of working. It is reflected in the value of performing pools of AAA rated mortgages. The value of these solid mortgage portfolios has been decimated, wreaking havoc on the balance sheets of financial institutions as they are archaically "marked to the market".

Here's a chart comparing the level of the S&P 500 to the value of AAA Mortgages. As you can see, during the September to November carnage, the S&P and AAA Mortgages fell apart in tandem.

Recently, the value of these performing mortgages pools has finally started to come back. I know it's tough to see on the chart. Here are the numbers- those mortgages have risen from a low of about $.28 on the $1 to the current level just under $.40 on $1. They are now running ahead of the S&P 500 in terms of rebounding to reasonable levels.

This serves as evidence the TARP is actually beginning to show some signs of helping the banking industry. Consider the position of a bank. The government wants banks to originate new mortgages loans. Under the TARP program, Bernanke and Paulson are providing the funds for the banks to do so. Why would you originate loans at par when you can buy existing performing mortgages at $.40 on the dollar? It's a much better deal. 

The market was hoping to see the TARP put a real bid under these mortgage portfolios, and it is starting to happen. Once the performing pools firm up, banks will originate favorable loans for consumers more readily, helping stimulate a return to economic growth.

The Easy Money Trade As the Fear Bubble Deflates

The most widely followed measure of fear in the markets is the Volatility Index, VIX for short. During Q4 of '08, the VIX traded to unbelievable stratospheric levels, but is now starting to come back to earth. 

As you can see from this chart, the VIX is falling and falling hard. This is what technicians call a "Head and Shoulders" formation, which is generally a technical death knell for a chart. Those of us who still like to own stocks want to see the VIX fall apart. As it drops lower, stocks will start doing better.

In the last two years we have seen more bubbles form and burst than in any time in history. The Real Estate bubble burst in conjunction with the credit bubble. Oil made a meteoric run along with nearly all classes of commodities, and that bubble vaporized faster than it inflated. I'm still waiting for Goldman Sachs to be right about $200 oil. 

The VIX represents one of the largest bubbles of them all- the FEAR Bubble. This was huge. If we've learned nothing over the past two years, have we not learned there can be a lot of money to be made getting yourself positioned when bubbles burst? Here's an idea to make some money on the explosion of the fear bubble.

Before heading down that path, let's review my new ideas for 2009- all introduced in December, and all global plays for 2009. On December 13th I introduced the following:

  • The China ETF (FXI) at $29: Currently at $31 (7% gain plus 5% dividend)
  • The Brazil ETF (EWZ) at $35: Currently at $36.70 (5% gain plus 4% dividend)
  • The South Africa ETF (EZA) at $34: Currently at $39.61 (16.5% gain plus 8% dividend)
Based on Friday's closing prices all three of these ideas are giving you very favorable returns with nice dividends. All three represent the DOW like stocks in their respective countries, and all 3 economies are doing far better than the US economy. All three should work much higher throughout the course of 2009. If you like owning Gold in 2009, you really should own EZA. It will mirror gold and pay about a 7% dividend at the current price.

I'm throwing one more ETF into the mix, and this is likely to be the easiest money idea of them all. It's an idea designed to put money in your pocket as the fear bubble deflates.

The Long Bond and TBT: The Easiest Money Around

Another way of measuring the shear scope of the fear bubble is by looking at US Treasuries. As money has come pouring out of all classes of investments, it has been seeking as little risk as possible.

Despite all of our economic challenges, the stalwart US Government Treasuries are still considered the safest investment in the world. 

Money has been pouring into US Treasuries as fast as it can get there. Here's a quick review of Bonds 101. When there's more buying than selling in bonds, just like all securities, the price goes up. When the price goes up, the yield (or interest rate the bond pays), goes down. 

In the last quarter, the very short term 90 day US Treasury was bid up so high that it was actually yielding negative interest. You had to pay to own these bonds. The 10 Year US Treasury is currently yielding and absurdly low 2%- that's basically unheard of.

There's money to be made as the US Treasuries come back to earth in conjunction with the bursting of the fear bubble. The best way to make money is to look at the "Long Bond". These are the longest term US Treasury bonds- from the date they are issued, the don't mature for 30 years. Hence the nickname "Long Bond" for the long term maturities.

The Long Bond has been trading with a yield of between 2% and 2 1/2%, which is absolutely insane. It's the long bond equivalent of oil at $140. Consider the following- if you buy the long bond with a 2.5% yield, this means you are going to be content making 2.5% on your money all the way into the year 2028 and beyond. The last time the Long Bond had a 2.5% yield? You guessed it- 1952.

As fear continues to subside, money will come pouring out of these bonds. When they crack, they will absolutely fall apart. This is what the pros call a "crowded trade", and when the pros leave, they will all leave in a hurry and at the same time. 

Here's the trade, and it took me quite a lot of digging to find the easy way to do this. There are two ETFs that mirror the US Treasury long bond. The beauty of these ETFs- you trade them just like a stock. You don't have to pledge the huge capital associated with buying Treasuries.

TLT represents the Long Bond. It goes up when the Long Bond goes up and yields go down. TBT represents the inverse of the Long Bond. It goes down when the Long Bond goes up, and vice versa.

I won't bother showing the chart of TLT. Suffice it to say the chart goes straight up starting in early November, and is now topping out and starting to turn back down.

Let's look at TBT. This is the inverse security. Look at the way TBT absolutely falls off a cliff starting in early November. TLT went the other way, trading from about $90 to $120 over the same time.

This security is starting to turn back up after the severe drubbing it has taken. Let's review. AAA mortgages are finding a bid and trading up nicely for the first time in months. The VIX is absolutely falling apart as the extreme levels of fear are starting to subside.

In about 2 1/2 weeks there will be a new President taking office. He has surprised the markets with his selections for cabinet posts- he has been selecting experts the market really respects.

Like him or not, I believe there will be a renewed sense of optimism flowing through our nation as the old administration leaves and the new one comes in. In conjunction with all this, the Long Bond will get clobbered as money flows into instruments with better yields.

If you want to take advantage of the evolving climate, you should own TBT. There's a couple ways to do it. Simply buy the ETF at or below $40. If you buy on margin, you can buy twice as much with the same capital. You will either make or lose twice as much. 

If you want to take more risk for less capital, you can do it through options. I would suggest the March 40 Calls- symbol TBT.CN. They are trading at about $4. For $4,000 you can control 1,000 shares, or 10 calls.

I believe TBT is easy money. Between now and March it could easily regain the $60 plus level from October. If you just bought the stock, it would be 50% on your money. On margin, you double your money. The option would be about 4 times your money.

TBT below $40- I love it. Easy money for Q1 '09.

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