Does the Economy Matter if the Herd Doesn't Care?
By Adam Lass
Is this the best market since 2005? 1995? Ever?
Has the economy fully recovered to levels exceeding the very peak of 2007?
Are we on the verge of a stupendous five-year, or maybe even ten-year, boom like we saw during the Clinton days?
Are stocks about to double three times over?
These are the questions the market is forcing us to ask.
Plenty of Room to Move, But Who Can Afford to Drive?
The market as a whole still has substantial room to grow before it matches the highs of 2000 and 2007. But several key sectors — particularly energy and discretionary retail — are already challenging all-time highs.
Who's got enough gas left in the tank to drag the blue chips up and over this hump?
The Industrials? Super-cheap labor allowed them to pull us out of the abyss. But the Industrials face a bitter choice: either huge spikes in material costs that threaten to overwhelm the export advantages gained by a rock bottom dollar; or a reborn dollar, higher borrowing costs, and a relative competitive disadvantage.
Tech? Once upon a time, an average investor could name ten stocks. Now all anyone cares about is whether the next iPhone will have a white cover. Apple (NASDAQGS: AAPL), Google (NASDAQGS: GOOG), and Facebook have just about sucked all the air out of that chat room.
Retail? It's priced like profits could still double, but margins are still razor thin and unit sales are flat at best... and quite possibly falling.
Real Estate? The only reason we've seen any light here at all is because the banks were forced to slow down foreclosures. But this only means the 18-month inventory in heavily discounted distress sales will now hang over the market for 36 months.
Does the Economy Matter if the Herd Doesn't Care?
And yet, the markets hold on. Investors stare at this overhang and buy shares right up to the edge, gapping up to the top and then stalling repeatedly.
Personally, I'm somewhere between God-awful suspicious and downright bearish. But that's just based on my view of the economic set-up.
And quite frankly, it's not up to me if the herd has some kind of wild hair up its collective @%#&. Hmmm... Seems that didn't clear copy edit.
Well let's just say I think the bulls are damned short-sighted — but still in charge for now — and leave it at that.
Over the past few weeks, I've done my best to prepare you fine folks for whatever may come. I've suggested call options against companies that have a chance of beating the rap...
Those puts against the Home Builders ETF (XHB) didn't fare quite as well. (I should mention that my friend Ian Cooper was doubtful it would; but I still like the idea of keeping a long-dated put against this sad crowd in my back pocket.)
Last week's retail puts are still par at entry, which is cool considering their expiration date is still some five months off. Your energy play is up roughly 20% with plenty of upside room to run. And your gold play is, well, pure gold — up 75%, according to my ticker.
So, what do you buy when the market is smoking some kind of trash?
How about some trash — or rather, the folks who haul it.
If you believe at all in further economic recovery, you have to believe that trash generation is going to rejoin its 50-year boom.
Are you one of those tree huggers who thinks that recycling will be the end of all that?
First of all, don't start e-mailing dirty messages to me. I live on an old soybean farm, recycle or compost about 90% of my family's output, and my idea of a good time is a long hike in the Appalachian woods...
Beyond that, the trash collection company I have in mind for you got on board the recycling thing years ago.
I'm talking about Waste Management (NYSE: WM), the true 800lb. gorilla of the trash game.
The Devil in WM's Details
Back when I owned and operated my own business, I did my level best to get away from Waste Management because they were always jacking up the price of dumpster collection.
But every time I found a new vendor, the same two-shade-wearing, mobbed-up wise-guy salesman would come swaggering back in to tell me WM had swallowed up the competition... and my price was going up again. So I gotta tell you that I don't love these guys on a personal level.
But as anyone who has ever read Milton's Paradise Lost knows, Lucifer never thinks he's the bad guy. And professionally, WM's got trash down to a very profitable science.
Let's start before the end of the recession and move forward: During the crash, Waste Management did a fine job retaining its cash base of households and corporations, who were forced to pay fixed rates for weekly pickup — regardless of whether the cans and dumpsters were only half full.
Now, WM is posting strong cash flow, a 3.6% dividend yield, a trailing P/E of 19.03, and forward P/E of 14.2.
It is, as mentioned earlier, heavily into the recycling side of things. The company just announced the opening of a $20 million facility in Philly capable of processing over 20,000 tons of recyclables per month.
Strategies and Tactics
WM's chart offers up three overarching scenarios: a crash, a stalemate, and the rally that has the bulls frothing so much.
And until the trumping rally that's been in place since 2008 breaks, the smartest play is to ride with the bulls at least as far as the 2007 highs.
Should WM hit my Probable Target of $41.19, WM July 38 Calls (WM1116G38) — trading for $140 as I sit to write and posting a Delta of 0.6382 — ought to see $314 for gains exceeding 124%.
Think of it as the ultimate green play: recycling a trash market into pure gold gains.
Contributor, Wealth Wire
Editor, Wealth Daily
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