The Great Pumpkin @ MarketWatch

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Oct. 3, 2011, 12:01 a.m. EDT

Fear in the marketplace could be good for buyers

There are signs the economy hasn’t stalled

 By Jim Lowell, MarketWatch

BOSTON (MarketWatch) — Fear in the marketplace this October could be good for the buyers … very good.

Let me point out two bellwether signposts that don’t have skull and cross bones on them as a way to get to this month’s treats.

Each is reflective of key drivers of economic activity, and, to cut to the chase, both point toward growth.

TRADING STRATEGIES: OCTOBER

Getting across the chasmWith volatility already up sharply and Europe's debt crisis offering ongoing headline risks, Wall Street's most notorious month promises to live up to its reputation this year.
• Small-cap and value stocks hate October 
• Playing October’s volatility
• Fear in October could be good for buyers
• Apple, gold or both … just protect them

• Awad: Buy stocks cheap and hang tight 
• Watch your step in October 

Nyaradi:

First, August car sales countermand the abiding pessimism of no sales; both foreign and domestic sales presented ample evidence of buyers rather than window shoppers. Moreover, the types of vehicles being purchased en masse were bigger ticket truck and SUVs as well as high-end luxury cars from BMW and Mercedes. Low financing rates and the re-emergence of lending helped. Investors need to focus on actual spending not confidence reports to get a real world economic clue.

Second, a signpost I’ve noted before; rail shipments. Rail shipments is one of my preferred bellwether indicators not only of falling or rising demand for goods and services but also for the manufacturing of such.According to a recent Bloomberg report, “The three largest U.S. railroads haven’t given any indication of a sharp decline in demand similar to 2008 and 2009, when volumes fell as much as 24 percent.” The report goes on to note that rail shipments, “are the highest in almost three years.” The data is pulled from the Association of American Railroads, and represents “the bulk of materials for industrial production”. Rising shipments equate to an economy that may be slowing but is still growing.

I got a rock

Right now, belief in growth seems more ludicrous than belief in the Great Pumpkin.

But in such dark times, I still continue to think (and my charts concur), that State Street’s DIAMONDS DIA -2.20%   should sparkle more than gold. This doesn’t mean that gold can’t recover from its September swoon; it certainly can. Fear seldom dissipates quickly, even though it can build in a heartbeat. But, I still think this year’s run up is a flash in that pan.

Did Lowell just say sell gold GC1Z +2.32% again?! Drat his disbelief in the fall of the republic!

Linus wisely said that, “There are three things I have learned never to discuss with people: religion, politics, and The Great Pumpkin.”

But I have yet to learn not to speak of any of them, or gold.

I still think that those who recently bought a gold bar will be left with a 30% correction or more from current levels 12 to 18 months from now.

The flip side of that coin is the DIAMONDS. You’re netting the most well capitalized, best globally positioned, high yielding (4.6%), multi-national crop of bear market battle ships your long-term investment dollars can buy – and you’re buying them at deep discounts relative to their current (not to mention future) earnings power. In my book, this is a small brainer, if not a no brainer.

Smashing pumpkins

Requiring a bit more cerebellum, I think the time has come to bargain hunt in the junk bond attic where things go bump in the night.

Junk bonds are riskier, and in a time when investors are deeply risk averse, junk bonds are about as attractive as a partially unwrapped candy bar in a trick or treat bag.

In September we saw the yield spread widen between junk bonds and Treasurys — triggering a thoughtful piece by our senior bond fund analyst, Jeff Demaso, at Adviser Investments. He noted that, “In Sept. 2002 the yield spread between Vanguard High-Yield Corporate VWEHX -0.73%   and Vanguard Intermediate-Term Treasury VCIT +0.17%   surpassed 600 bps for the first time. Twelve months later, High-Yield Corporate’s excess return over Intermediate-Term Treasury was 15%. In other words, an investment made in High-Yield Corporate at the end of September 2002 and held through September 2003, would have returned 15% more than an identical investment made in Intermediate-Term Treasury”.

Even if you don’t agree with my view that we may maintain a slow growth trajectory in our economy, another reason beyond current yield and future returns to consider is the risk buffer that junk bonds can lend an equity investor’s portfolio.

Sometimes viewed as a chickenhearted way to play the stock markets, junk bond funds and more recently ETFs can play a meaningful risk management role – especially when paired with DIA’s treasure-trove.

Active management can be gained easily and at low cost through the above mentioned Vanguard High Yield Corporate or Fidelity’s High Income SPHIX -1.07% . The iShares Corporate High Yield HYG -1.99%   exchange traded fund is another approach. The key in reducing the nascent risk in junk bonds is diversification; now more than ever.

Trick or Treat Market

Against enough red to slake a vampire’s thirst, we have been minting green on our long U.S. dollar/short Euro pairing (via the Powershares Dollar Bull UUP +1.02%   and Proshares Ultra Short Euro EUO +2.88%  ). I see no fundamental reason to back off that trade, but given October’s increased likelihood for a Eurozone patch (born of September’s disbelief in any fix), I’d modify the pairing in that position accordingly: 60% Powershares Dollar Bull, 20% Proshares Ultra Short Euro and Market Vectors Coal KOL -5.27%   20%. This trade should help overcome any unexpected optimism even as it kicks fear in the pumpkins, delivering something even gold didn’t in September – gains. 

The Great Pumpkin

From Wikipedia, the free encyclopedia

For the 1993 Italian film, see The Great Pumpkin (film).

Linus awaits the Great Pumpkin.

The Great Pumpkin is an imaginary character in the comic strip Peanuts by Charles M. Schulz.

The Great Pumpkin is a holiday figure (comparable to Santa Claus or the Easter Bunny) that seems to exist only in the imagination of Linus van Pelt. Every year, Linus sits in a pumpkin patch on Halloweennight waiting for the Great Pumpkin to appear. Each year the Great Pumpkin invariably fails to appear, and a humiliated but undefeated Linus stubbornly vows to wait for him again the following Halloween.

The Great Pumpkin was first mentioned by Linus in Peanuts in 1959, but the premise was reworked by Schulz many times throughout the run of the strip, and also inspired the 1966 animated television specialIt's the Great Pumpkin, Charlie Brown. The best-known quote regarding Linus and the Great Pumpkin, originally from the comic strip but made famous by the TV special, is: "There are three things I have learned never to discuss with people: religion, politics, and the Great Pumpkin."  (More @ Wikipedia)