Financials, energy and steel are looking good. America is on sale.

August 22, 2008

The Shadow Stock Trader
Friday, August 22, 2008
By Horacio Marquez

Email – #13

** Financials, energy and steel are looking good. America is on sale.

Financials are up strongly today, despite the Fannie Mae and Freddie Mac saga. These two institutions have depleted their capital and are awaiting strong measures by the US Treasury to shore them up. The big questions are what form will those measures take, and what result will they have on the value of equity holders. Their debt is generally understood to be in good standing and there is a strong government backing.

The Lehman Brothers’ situation is also fast evolving, with talk of a possible bid to buy the company by Korean Development Bank. This franchise is extremely valuable, given their undisputed leadership in fixed income. At its current value, Lehman is trading at a discount from its asset management operations alone, and you would be buying the entire brokerage operation for a negative valuation. This is a total steal. As news of this deal could come as early as this weekend, the shorts have to mitigate potential losses by covering some of their positions. I am ultimately very bullish on Lehman’s outlook. Remember last week, I indicated that George Soros had increased his holdings by “only” 10 million shares. That’s the camp we want to be in.

In the midst of this, our latest addition, the Energy Select Sector SPDR (XLE), was up strongly on the face of renewed strength in oil and gas. The big integrated names have made a clear bottom and started rallying nicely. And Goldman Sachs came out this week reaffirming their bullish outlook for crude prices. With the Olympics almost finished in China, cars will be allowed back to the streets in the Olympic cities, and factories will be restarted, driving demand of oil and commodities back up. At these levels, exploration and production companies are making a nice chunk of change.
The renaissance in commodities makes iShares MSCI Emerging Markets Index (EEM) look extremely cheap and oversold. Yesterday I confirmed with local contacts that the Brazilian economy has shown no slowdown whatsoever from the so-called US recession. And there’s already talk that certain countries might be easing monetary policy, now that their inflation numbers are improving. Among those, Australia. So both the commodity recovery and prospects of easing monetary policy (since they were ahead of the inflation curve in their monetary tightening) bodes very well for Aussie stocks and our own iShares MSCI Australia Index (EWA).

Steel prices remain very strong. The drop in energy prices is a great bonanza for steelmakers, who consume it in large amounts in their smelters. Although our holdings in Market Vectors Steel ETF (SLX) has formed a bottom, it hasn’t yet come out strongly out of it, in part because it’s being held back by a 20% sell-off in Korean steel giant Posco. The Posco sell-off is a typical sell-the-rumor/buy-the-news story in advance of their probable purchase of Daewoo Shipping in Korea. Looks for that to happen next Wednesday. This would give Posco vertical integration protecting them from future ship steel plate drops. As with the CVRD purchase of Inco, Wall Street punished the stock heavily ahead of the news. Only later did they recognize the merits and synergies of the merger.

There’s progress being made towards stabilizing the mortgage market by putting an end to Fannie’s and Freddie’s uncertainties, and additional progress towards unlocking the massive value in Lehman Brother’s stock. As a result, the market, and the US economy, keep running out of excuses to stay negative. The truth is that America is extremely cheap as measured by the US Dollar, the value of hard and financial assets, and it becomes a magnet of funds from abroad as we are seeing today. The future is bright. Take advantage of the volatility to enter into longer-term positions that will bring huge gains.

Stay tuned for fresh picks coming soon.

Enjoy and Profit,

Horacio Marquez

All Shadow StockTrader recommendations will be posted on the Monument Street Publishing website. Simply go to http://www.monumentstreetpublishing.com and click on “Money Shadow Stock Trader.”

Stock

Current Price

Comments

Energy Select Sector SPDR (XLE)
$74.23
Buy

Market Vectors Steel ETF (SLX)
$79.76
Buy

iShares MSCI Emerging Markets Index (EEM)
$40.05
Buy

Vanguard Financials ETF (VFH)
$39.31
Buy

iShares MSCI Australia Index (EWA)
$23.22
Buy

All Money Shadow Stock Trader recommendations are posted on The Monument Street Publishing website – www.MonumentStreetpublishing.com Just click on ‘The Money Shadow Stock Trader’

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