US Stock Market Outlook: Ludlow Capital Group
Ludlow Capital Issues Client Note
on Recent Market Conditions
Last Updated: Dec. 15, 2008 – 6:00pm EST
NEW YORK—Unless you have been living under a rock for the past two
months, there is no doubt now that the US economy has moved into
recession levels, but there are still ways to profit in this environment.
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Ludlow Portfolio
Core Holdings: Defensive Dividends
For now, investors main holdings should reflect a move into strong
defensive dividend stocks. Altria, (NYSE:MO),
Phillip Morris Intl. (NYSE:PM),
Johnson & Johnson (NYSE:JNJ),
Proctor & Gamble (NYSE:PG),
Kellogg's (NYSE:K),
General Mills (NYSE:GIS),
and Consolidated Edison (NYSE:ED).
These stocks offer either strong cash flow on their balance sheets, or
high and safe dividend yields well above the US Federal 30 year bond.
These should carry through any deep recession very well, and provide
for some income in the meantime.
Commodities: Gold and Dry Shippers
Commodities should provide the first indicator that deflation issues
have stabilized, and that international stimulus programs are
beginning to liquidate out into the global economy. Add in trillions
of dollars hiding out in US Treasury's, which are gaining little to no
yield, expect that money to come flooding out into the system for a
nice infusion of much needed cash.
Recent moves up in the Baltic
Dry Index indicate countries are increasing shipping activity
overseas. As this sector bottom's out you may want to give a look at DryShips,
Inc. (NASD:DRYS),
and Eagle Bulk Shipping, Inc. (NASD:EGLE).
These stocks have been beating down and should provide a good play in
any economic turnaround.
On the Gold trade you should look at Yamana Gold, Inc. (AMEX:AUY),
and New Gold, Inc. (NASD:NGD)
and Northgate Minerals Corp. (AMEX:NXG)
on the small cap side.
ETF's: Time to Go Long
Yes, even though things look bleak, longer-term investors
should consider looking at some long ETF's to begin taking small and
cautious long positions. We wouldn't recommend taking large stakes now,
as we feel there may be some additional downside in the market
short-term.
But, if you are looking for ultra-long ETF's that may make for some
good returns down the road, you may want to take a look at Proshares
Ultra QQQ (NYSE:QLD),
as a play on the tech sector, Proshares Ultra Financials
(NYSE:UYG), and Consumer Staples SPDR (NYSE:XLP).
If you are looking for 3x the leverage on the long-side, then you may
want to look at Direxion Small Cap Bull x3 (NYSE:TNA),
which offers 3x long the small cap sector, which historically has been
the best performer coming out of any recession, and Direxion
Financial Bull x3 (NYSE:FAS).
Hedge with ETF's
Many investors may overlook the use of inverse ETF's as a means to
hedge ones portfolio, while also minimizing losses. Some of these
short ETF's are ultra, which means you get 2x times the return on any
downturn in the market. Some of these ETF's are Proshares
Ultrashort Financials (NYSE:SKF),
Proshares Ultrashort QQQ, (NYSE:QID),
and Proshares Ultrashort Dow 30 (NYSE:DXD).
If you are looking for 3x the leverage on the short-side, you may want
to look at Direxion Financial Bear x3 (NYSE:FAZ),
or Direxion Small Cap Bear x3 (NYSE:TZA),
which offers 3x short the financial and small cap sectors,
respectfully.
These ETF's have had a couple of great months recently, and holding
them would
have gone a long way in stabilizing ones portfolio. It is in our
opinion that we may be closer to the bottom then to any top, but these
short ETF's may still provide some good hedge protection to ride out any
continued declines in the over all markets. Due to their volatility, we
recommend to our clients to hold no more then 20% to 30% of ETF's
hedges in ones portfolio at any one time.
Again, Ludlow Capital is projecting another potential 10% to 20% decline in the
market, and thus we are recommending clients take small dollar-cost
average positions and let the market come down to you.
Small Caps: Opportunity Plays
The market may be in wild swings now, but we forecast a marked
decrease in volatility in the market for the coming 1 to 2 years, and
small caps may be the place where you find what they call 'opportunity
plays'.
While the rest of the market has been in full meltdown, the small cap
market has seem to ride out the storm more effectively then the
overall market. Some reasons for this, ironically, has been hedge
funds inability to hold these small cap stocks in their portfolios,
and thus as redemptions came in these stocks tended to hold up much
stronger then some would have thought.
Liquidity in these issues have dropped in recent months, but
'opportunity plays' still lay out there. Some small cap issues worth
taking a look at are Cryoport, Inc. (OTC:CYRX),
which develops cold-chain shipping system for FedEx and has announced
deals with companies such as DuPont and Mayo Clinic in the month of
October. Any contract news could send this issue up.
Another small cap issue worth a look is Welwind Energy (OTC:WWEI),
which is developing wind farms in mainland China, and is expanding
their deals in recent months. News of a power purchase agreement from
China could also send this company moving.
Overall, the market may be horrible, but by moving your core holdings
into defensive stocks, hedging and leveraging yourself with ETF's, and
moving your attention to the small cap market for 'opportunity plays',
investors can still find ways to make money in this declining market.
Employment Outlook
All indicators point to a continued deterioration of the US employment
picture. We project this trend to remain the same going well into the
spring of 2009, where we may see the first signs of stabilization. We
would expect a ramp up of layoffs in Jan. 2009. Ludlow Capital Group
is projecting the unemployment rate to reach between 8% to 10% in the
extreme end.
General Motors Failure
As news that both republicans and democrats in Congress are not game
for an additional $25 billion bailout for the Detroit automotive manufacturers,
Ludlow does not see many positive options for GM, and their employees
going forward. Public outrage of corporate bailouts will find their
way to congressional phones early this week, and a new bill looks less
and less likely.
If GM does receive a bailout package from the US Congress, it will
include such demands such as massive expenditure cuts, which will
probably mean dramatic layoffs, plant closures, and concessions from
the UAW.
If GM is unable to receive a bailout package, it will look more and
more likely GM could be bankrupt by potentially by years-end. Many
questions remain on what will happen to the common shares, as the
government will seek preferred shares in the company, Ludlow Capital
has issued a D rating on GM, with a negative price target short-term.
In either case, this situation will provide an additional drag on the
overall economy going into 2009, no matter which way it goes.
About Ludlow Capital Group, Inc.
Headquartered in
Manhattan's Financial District, Ludlow Capital Group, Inc. is a full
service corporate advisory firm which serves the needs of our
institutional and public company clients. Our simple approach is to
provide customized financial solutions for virtually any of our
clients needs. www.ludlowcapital.com
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Ludlow Capital Group, Inc.
19 Fulton Street, #408
New York, NY 10038
Phone: (646) 670-6494
Email: info@ludlowcapital.com
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