"Market Monitor"-Bernie Schaeffer, Chairman of Schaeffer's Investment Research
Friday, November 28, 2008PAUL KANGAS: My guest "Market Monitor" this week is Bernie Schaeffer, the chairman of Schaeffer's Investment Research and the publisher of the "Option Advisor Market Letter" based in Cincinnati, Ohio. Bernie, welcome back to NBR.
BERNIE SCHAEFFER, CHAIRMAN, SCHAEFFER'S INVESMENT RESEARCH: Pleasure to be here, Paul, as always.
KANGAS: Has the stock market's recent upturn, along with that nice rally today, has it convinced you that it has made a major bottom or would you call this a bear market rally?
SCHAEFFER: This is the third of rallies in the order of 20 percent that we've had since October. So it's not unusual from that standpoint. I think there are some favorable developments, particularly on the side of the Fed's action to be purchasing these mortgage securities, the Citigroup bailout. I think those factors could contribute to a continuation of what I would still label as a bear market rally. The interesting thing about this bear market is it's gone so far and so low, below what I call the line of demarcation between the bull and the bear, which on the S&P is about 11,020, the 160-month long-term moving average, you can actually rally by more than 20 percent from current levels and still be in bear market territory.
KANGAS: What kind of stocks would you buy to participate in a bear market rally now?
SCHAEFFER: Right now, I would look to the home builders and the financials. Those are the stocks that were hardest hit. I think they're going to rebound the furthest on the way up.
KANGAS: What would convince you to turn completely bullish?
SCHAEFFER: Completely bullish. We would have to get back over the line, so to speak, above that 11,020 or so level on the S&P. And I'd like to see some more -- even though people say there's fear out there -- currently, Wall Street analysts have 45 percent buy recommendations on the S&P stocks and only 10 percent sells. You go back to the early '80s, it was 25 percent buys, 25 percent sells. It doesn't have to get that extreme, but I think there's still a lot of people, a lot of prominent people looking for a bottom to be in place. We're down 50 percent. That's as far as bear markets go. That's not as far as certain bear markets can go.
KANGAS: I understand you're disappointed that corporate stock buybacks haven't been very impressive. I've seen a lot of them, but not impressing you.
SCHAEFFER: They're down about 90 percent year or year in November. Of course, the reason for it being cash is tight, companies are conserving their cash. They're not borrowing money to buy back their shares. And that's been a very supportive factor in past declines.
KANGAS: Right, now on your last visit with us in late-May with the Dow in the 12,600 range, you saw signs like high levels of short interest rate, investor pessimism and negative magazine cover stories, all of these things supposed to be signs of bullishness, but it didn't turn out that way at all, did it?
SCHAEFFER: It wasn't a good period for contrarianism. But I would say the most important factor there was the big short interest was really a sign of the hedge fund bubble in disguise.
KANGAS: Ah.
SCHAEFFER: Because basically hedge funds had big short positions but they had much bigger positions on the long side. So they liquidated their shorts, but provided some support, but the long liquidation to de-leveraging is what did the market in.
KANGAS: Now during that visit, you had three option recommendations, two calls and one put. Let's see what happened. AK Steel (AKS) really took a tumble but it only cost you 15 percent to buy the put premium. So you only lost 15 percent on that one, not 89.
SCHAEFFER: Correct. That's the saving grace on option buying as long as you got some winners to offset your losers.
KANGAS: Burlington wasn't, but I think that was only about an 8 percent premium, so that's as much as you could take. All right and let's have one more. This was a put option that you bought on Microsoft (MSFT) and made money.
SCHAEFFER: Right.
KANGAS: OK. How about new recommendations?
SCHAEFFER: OK. On the call side, I'm looking at the S&P-- the spider S&P home builder ETF, (XHB). I'm looking for the home builders to lead the way as this bear market rally might unfold. I'm looking at seven-month option on that instrument with a 23 percent premium, good premium, big move potential. I don't own XHP.
KANGAS: OK, quickly now.
SCHAEFFER: OK, Wells Fargo (WFC), financials looking to lead the way again. Wells Fargo, I'm looking at a five-month call option with a 19 percent premium. I own Wells Fargo.
KANGAS: OK and one more.
SCHAEFFER: On the put side I'm doubling down on Microsoft. This is stock that's heavily owned by hedge funds, vulnerable to liquidation. I'm looking at a five-month put on Microsoft with a 15.
KANGAS: Do you own one?
SCHAEFFER: I don't have a position in Microsoft.
KANGAS: OK. The only position you have then is in Wells Fargo.
SCHAEFFER: Correct.
KANGAS: On a call option. Very good. I appreciate your being with us once again, Bernie.
SCHAEFFER: Pleasure, Paul.
KANGAS: My guest, Bernie Schaeffer of the "Option Advisor Market Letter."
