Reader Mail - Wyatt Investment Research

Stocks continue their upward climb. As TradeMaster’s Jason Cimpl told us earlier in the week, the S&P 500 has kept its date with 1,150. And it looks poised to move higher.

The retail sales data from February is positive. Despite two crippling blizzards on the East Coast, sales still rose 0.3%. And if you strip out autos, sales were up 0.8%.

Normally, it makes no sense to ignore auto sales because they are obviously an important gauge of consumer spending, but in light of the recalls from Toyota (NYSE:TM), it’s reasonable to assume that some auto sales were simply postponed due to the uncertainty.

Sales were especially strong for electronics and at restaurants and bars. Sounds like consumers are celebrating their new iPhone purchase over a beer. That’s probably led to a surge in drunk-texting.

Retail sales from January have now been revised lower two times, from an initial reading of +0.5% to the current +0.1%. Funny thing about this rally – economic data is consistently revised lower, and no one cares. The only exception I can think of is 4Q 2009 GDP, which was actually revised slightly higher.

Economic data has been improving. But it says more about the bullishness of investors that they are consistently overlooking negative data. That gives me more confidence that we will be seeing new highs for the major indices soon.

Now, let’s wrap up our week with some Reader Mail…

Kyle B writes:

I was one of (probably) many readers who took your advice and bought MPG at $1.50 and ended up with a very nice profit! Thank you!

I was curious about natural gas. Jason was spot-on by calling a bottom for UNG at $8.50 several months ago, and now I see that it has broken through support at $8.50. I was just curious about your thoughts on where natural gas is headed. I haven’t heard you mention it recently in you newsletter.

Thanks for the great newsletter – I look forward to hearing your insight every day, and keep up the great work!

Glad you made some money on Maguire Properties (NYSE:MPG). As for natural gas, let’s hear directly from Jason Cimpl:

Natural gas prices were clearly putting in important lows last Fall. And while the Natural Gas Fund (UNG) is making new lows, spot prices and futures for natural gas are not.

The UNG is an ETF that holds natural gas futures to replicate the actual price of natural gas. Sounds good, but it doesn’t work. UNG can only hold so many natural gas futures contracts. So as investors buy this stock, they dilute the value of the holdings and the stock falls in price.

You’re much better off holding natural gas producers or pipeline companies.

Thanks Jason. And for the record, the small natural gas stock in the Energy World Profits portfolio is up 36% and the natural gas pipeline company is up 42% and pays and 8% annual dividend.

Alain J. tells us to watch out for Italy

In my view, not Spain, not Portugal – but Italy is going to be "next".

And Prodi is an Italian — doing his bit in trying to divert attention away from his country. Because Italy is in some respects in a worse situation than Greece, and has probably been cooking the books even more than the Greek government.

It seems plausible that Italy could be the next country to experience debt related issues in Europe. At the same time, I would expect that Italy, and the European Commission is probably using the current lull in Euro-worry to get a handle on any problems.

The U.S. dollar has been weakening slightly and that’s a good sign that some of the fears about Europe are on hold for the time being. Now, that’s not to say they don’t ramp back up again. And Italy is a likely suspect.

But a key aspect of why Greece’s issues were so damaging was the surprise factor. Obviously, there were investors, like Goldman Sachs (NYSE:GS) who were expecting Greece’s debt to become a problem. But the timing took the markets by surprise, and the uncertainty of the outcome had a lot to with the markets reaction.

We can see a similar dynamic playing out between residential and commercial real estate. Clearly, there were investors who saw the problems with residential real estate coming. Still, the majority of investors were blindsided when foreclosures started piling up. The government is still grappling with how to stem the tide.

The problems with commercial real estate have been telegraphed. And while individual commercial real estate companies have been forced into bankruptcy, the market has been far more proactive in dealing with the issues. The Fed has put programs in place to encourage refinancing, and private equity funds have been in place since last year to scoop up assets on the cheap.

These responses have helped put a pricing floor under commercial real estate and helped minimize the effect of bad loans on banks’ balance sheets.

The fact that Fairholme Capital Management and Brookfield Asset Management had funds waiting to be deployed in the bids for General Growth Properties (NYSE:GGP) is a case in point.

I don’t mean to minimize the destabilizing potential of commercial real estate or debt problems from Italy. My point is that the fallout from such problems is always magnified when the market is taken by surprise.

John N. writes:

I am just a small time, average guy with a wife and 3 kids. Probably a typical American family. I work 2 jobs to maintain our lifestyle, and barely stay even. Realizing I can’t keep trading dollars for hours, I started to look for some unbiased help. I have exposed myself to the market for over 20 years, and honestly have had a few winners, but many more losers.

I found your Daily Profit newsletter, and liked your common, honest approach. I followed your picks. I joined Small Cap Investor PRO. I am impressed.

I would like to tell you what I have been doing based on your recommendations…..and it has been working wonderfully. I have been writing put options 1 to 3 months out on the stocks you recommend. I write the strike price below the market value. If the price drops down to the strike price, as you know, I am "put the stock". But it’s at a bargain price, and I’ve collected the premium. Examples CHNG, FEED, XXXX, XXXX. I have collected premiums on all of these, but also been put the shares a time or two. Overall, it has been almost too easy. Let me know your thoughts on my approach….my wife thinks I’m crazy, but she has watched it work for over 6 months now.

I did buy 2000 shares of mpg at 1.46. At what point do you suggest taking profits from this or at what level do you suggest taking profits, partially or the entire position. Thanks again for your work.

I love letters like this! John has clearly found an investment strategy that works for him. And I’m glad that my staff and I have been able to provide him with some good investment ideas (though I am less than thrilled that a few or our recommendations have dropped to meet the strike price on your puts).

Selling naked puts as a way to either enter a position or simply generate income is a tried and true method. You may recall Warren Buffett sold a mammoth amount of S&P 500 puts when the markets were collapsing. And he’s done pretty well with them.

Of course, such a strategy isn’t for everyone. For one, you must be prepared to buy the stock at the price at which you sold the put. Theoretically, this could mean buying a stock where the fundamentals have changed, or losing money as you are forced to buy back a put option on a company that you no longer want to own. But then that’s where solid research (like what you get from SmallCapInvestor PRO) comes into play.

Now, for Maguire Properties. The last time I recommended this stock in Daily Profit, it moved to $3.24. Will it do that again? I’d like to think so, but frankly, the volume is weaker this time around. That suggests the buying interest is not as strong and the stock will not move as high.

Also, earnings are coming up for the stock on March 23^rd, 2010. Earnings may not be a negative. But I have a hard time seeing earnings as a positive, either.

I also believe there are opportunities in commercial real estate, but I’m not convinced these stocks are “buy and hold” just yet. I will be looking for a move higher for Maguire as it heads into earnings as an opportunity to take profits. Let’s say around $2.80 a share?