Strategy Update

2 July 2009-
“Short everything and remain short ! except for the DOGS !!”
levels at present, Dow 8280, Gold 929.30, Oil 66.20, USD Index 79.66, EURUSD 1.3998, Copper $2.2689, Nickel $7.4382, *DOG 67.81 *this one is a short play and should go up as the DOW falls… double short DOW

TECHNICAL STUDIES & OUTLOOK
DOW JONES     downtrend
confirms breakdown in uptrend… support around 8220 levels, look for that level to be tested and likely broken if downtrend moves in earnest.
Fundamentally there are a lot of negative issues recently that could materialise:
- California default, Recent stock issuance globally to cap rises and provide downside liquidity, unemployment high, Eastern EU countries that could default on their bonds leading to Western EU states facing more write downs, lack of consumer spend and travel to hit hotels and commercial prop portfolios, Record Bond issuance leading to higher and higher bond rates (bad for stocks)
- Good news ? we have summer… oh that means less market participation and winter months for miners = less mining in winter
- $INDU for chart on www.stockcharts.com

OIL & Coal     downtrend
broke down into down trend a few days ago and todays decisive $2.00+ drop to $66 range confirms the down trend move is underway…this could logically lead to the capitulation of the metals rally also. Interesting to note that the Dow Jones Oil and Gas Index has also broken down. Stay short commodities with Oil leading the way lower !
Expect coal stocks to also suffer from the breakdown in oil… note that the coal prices for delivery in all 3 major areas have had 2 down weeks following recent up moves… is that a sign that the coal prices have resumed a downward move.
- $WTIC

GOLD     downtrend
Stuck under $940… failed to break through it after a few attempts this week. *more details under GOLD in index page. $GOLD

METALS     uptrend, but becareful
still in uptrends but with oil breaking down… becareful

USD Index     downtrend
still in downtrend
interestingly EUR might be having more issues soon versus the USD… EURUSD used to top out at $1.40 or so… but seems like the EUR might strenghten pass that point at present. Let’s see if it manages to break up decisively.
There was a comment from a fund manager that the recent CNY strenght against the USD was the cause of all the extra funds coming into the oil complex.
- $USD

BONDS, INFLATION and ECONOMIES               30yr yields downtrend
30year US Bond yields topped out at 5% recently and seems to have broken down… with it entering a downtrend at present. Looks like funds are shifting back into Bonds at present and yields might continue to fall for now. This would be contrary to the inflation fears that has been in the forefront recently, with metals prices and oil spiking up strongly.

Contrary Fundamental Backdrop (on hold for now)- Govt issuance of bonds to continue as funding needed for massive deficit spending at present… expect bond prices to keep dropping and rates to keep moving higher on the long end, even though for now the govts are artificially pressing the short end rate yields down…it could be possible that funds are coming back into bonds with more instability to come and economic meltdown to persists.
-  ECB rate confirmed to remain at 1%, unemployment 9.5%
-  USA unemployment 9.5%
-  Australia to continue to maintain its rate without hiking as trade deficit doubled ! in recent report… exports dropped significantly with the global slowdown
-  10 year Note yield $TNX, 10yr 3x Bull and Bear TYD, TXO, or 2.5x Bull Bear Fund DXKLX, DXKSX…
     or TBT ProShares Ultra Short 20+ Year Treasuries (price of bonds down these things   move up)
-  30 year US Bond Yield and Price- $TYX and $USB within www.stockcharts.com or yields can be found at  http://www.bloomberg.com/markets/rates/index.html

CHAIN OF EVENTS
nothing new comes to mind at present
*note- the recent stock issuance statistically points to 10-15% decline in the markets in the following months

Previous Chain of Event effect- 
…….

INVESTMENT THEMES
based on investment ideals (buying when prices are very cheap – trading at very low prices, most likely driven by the current fear or very bad present outlook,… but only buying where the “value” that one buys would hold or grow. Then waiting for prices to move higher when the situation or perspective normalizes)
1. Natural Gas… trading at 18x ratio to oil… as opposed to the historical 6x or so… Gas is not getting the speculative funds pushing it up and at present suffers from the perception that with weakening economies there is less need for power and therefore gas. It is used in a large percentage of industrial power production. At under $4.00 it is priced under the marginal costs of production and no one will be selling more for less than they can produce it… though there is no news that will support the price at the moment, it is trading at historical lows and at a large discount to oil prices… buy at the worse points when things are looking their worse and prices are at record all time lows and wait for things to turn around.*search for Natural Gas within this blog for more info on NatGas.
2. NZDAUD trading at under 80c… it ranges from 1 NZD buying 95c AUD to recent lows 1 NZD buying only 78c AUD… longer term historical range (15 years) shows 75-95c ran

RISK: Major issues to watch out for
1. Eastern EU states like Latvia, Hungary or something similar to default leading to a Western EU state to crash… ie Sweden who has loaned billions to these Eastern States.
2. GBP or other major currency crisis – Jim Rogers has forewarned this as a possibility within the next 6 months

Bonds That Trade Like Stocks

They look like stocks and trade like stocks – mostly on the New York Stock Exchange (NYSE). But they are actually bonds – not that most folks, including your broker, really ever notice.

Bonds are supposed to be for the big guys. You know – the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that continues to bring bonds within the reach of individual investors.

These mini-bonds look and trade just like regular stocks. And rather than being priced and traded like traditional bonds – with $1,000 face values traded in lots of tens of thousands or millions – these trade in more manageable quantities, with face values of 25 bucks or less.

Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have rather scary acronyms given by the banks that put them together and brought them to the market. But, behind the forbidding facades are some very investor-friendly securities.

Mini-Bond ABCs
I’ll start with one of them called Trust Preferred Securities (TruPS). These have been quietly trading for quite a while, yet haven’t been on most investors’ radar because they’re just not widely touted by anyone.

Behaving much more like preferred stocks, these securities arise from regular everyday companies, including big utilities and many other industries, which essentially issue them to bank holding companies. The holding companies then package them up as trusts and issue them to investors in the markets just like stocks.

The bank holding companies then use the funds to invest in bonds from the issuing companies. Those bonds typically have intermediate to longer maturities, and the cash flow from the bonds is what pays dividends on the TruPS.

The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the SEC, while the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds.

So the investor benefits from the steady dividends and the advantages and security of owning a bond, and the company gets access to cheaper after-tax capital.

There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINEs (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.

But what makes them all similar is that they’re issued in sums typically amounting to 25 dollars, with calls by the issuing company at their issuance price – again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TruPS and then know the yield to the call price as well as the call dates.

The result is that you and I can put together a group of these bonds from a variety of industries that pay us quite well – with yields running for most from 7 percent to over 14 percent.

And even better, even though these trade like stocks on the NYSE, they tend to be very steady in price – even when the stock market is in a tizzy of trouble – mostly because nobody in trading rooms or hedge funds knows about them. And that’s perfect for us.

One more thing to note: Because they are brought to the stock market by banks, some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don’t get spooked – just look behind some of the names on the stock tables to find the real issuer.

How about some examples of these bonds that trade like stocks?

Mini-Bond Favorites
I’ll start with an easy one from the giant US telecom company: Verizon (NYSE: VZ). The A-rated issuer has a TruPS trading under the symbol of PJL on the NYSE, with a dividend of 7.625 percent due in 12/01/30.

Trading pretty consistently just shy of the 25 buck range, the yield is running currently at around 7.8 percent. I see this paying you a steady and solid dividend rate that trumps the dividend from the common stock and the regular bonds by a whopping margin.

Next is an issue with a bit more in yield from another telephone operator with regulated phone lines based in the Kansas side of Kansas City in Overland Park. Embarq has its 7.1 percent due 06/01/36 TruPS which trades on the NYSE under the symbol of FJA . The bond continues to trade a bit more up and down than the Verizon issue in mid to upper teens – giving us yield at a great value.

The result is a current yield for FJA nearing 10 percent, payable every June and December. A newer issue, it’s not callable until June of 2012, which would be a huge gain for you at the current price in the market.

Verizon isn’t the only baby-bell to go to the NYSE for some of its bond issuance. Qwest (NYSE: Q) has had a pile of challenges – but still maintains an impressive chunk of telecom assets in a crucial section of the US market.

I see the credit prospects of this utility being good enough to sustain the cash coming from the company’s TruPS trading under the symbol PKH . The bonds are the 7.75 percent due 02/15/31. They continue to trade positively – in the mid- teens dollar range. Callable like the others at 25 – so we have only upside if that were to occur. The yield therefore is a big one: currently over 12 percent.

Last up in my examples of these stocks that pay you comes from my favorite airline holding company: AMR (NYSE: AMR).

The holding company for AMR has a PINE trading under the symbol AAR, paying 7.875 percent. Trading around $13-$14 apiece, they’re generating another huge yield of over 14 percent.

And while many might question the stability of owning a bond from an airline, note that AMR continues to pay its bills, and has continued to prove that it can rollover credit lines and bonds and has continued to have ample access to new leases and other new lines of credit.

Disclosure: No positions