Why You Should Still Be Buying Dxo

Q: Anyone care to put up some good info on bearish strategies, it would be appreciated. I do buy puts to short, don't really short the actual equities, but I guess I could.

A: There are rumblings that China plans to announce in the near future that it will increase its spending on welfare in the to prevent the social unrest that many fear it will experience if the jobs market does not improve soon. Additional spending in infrastructure may be announced as well. Other banks, which might have been forced, into buying troubled companies include Wells Fargo (WFC), which acquired Wachovia (WB) several months ago. As a result Wells Fargo (WFC) took on $25 billion from TARP and reduced its dividend by 88% in an effort to maintain liquidity. What I'm saying sounds funny, but there is actually some truth behind it. There is an expiration date on both depressionary and boom periods. We should expect a reversion towards the mean in both these cases as the natural rate of emplyment is reached. I would also like to argue here, that in a boom period for example there is a limit on the amount of resouces we can consume. The peak in prices of commidites in 2007 is a perfect example. At the height of a bubble everyone expects econmic prosperity to be everlasting, people start overbidding stocks as they extrapolate from the recent growth numbers. We would have an average P/E of 20 maybe. In a depressionary period we should see the opposite to happen. We would have an average P/E of 8 maybe. I would like to argue here that this is an obvious mistake the human psyche is bound to commit. I love these threads that are a month old- you get to look back on who is right and who is wrong. It looks like practically everyone was wrong! Anyway, here is my turn: In 9 out of 10 scenarios, geopolitical forces will drive the price of oil up- recession makes the world even more unstable and of course oil is in many of these unstable hotspots. The Saudis haev already said they want oil to be $70/barrel and they are cutting back production. World demand is not waning, other sources of evenergy are miniscule and far off and lack infrastructure. The spread between the July oil contract and current prices is unprecidented- that tells you current oil is way oversold and needs to recover. That is happening already. Futures will increase as current prices gain momentum. Recently alot of signals for a market bottom have come- it may be here. That doesnt mean a fast recovery, I think the recession will outlast 2010, but the economic decay will reach equilibrium and stay relatively flat for a while before real strong recovery can begin. Read any of the great analysis on Seeking Alpha and you will be convinced. Sone of these things are already happening- that is why DXO is moving. Based on all of these above, I see a return to normalcy ($65/barrel) soon, and even sooner for DXO since it is future contracts. I think this will happen by July. So that will increase the futures well in advance and we will see those trading at $65 within 60 days. That would by about 25% increase over current prices so a 50% increase in DXO. Target price for DXO= $3.50. Plus you have the bonus of oil prices skyrocketing to $200 a barrel again if some major geopolitical event occurs. I believe in this so much that I have put 75% of my trading portfolio into DXO (not my retirement portfolio, just what I actively trade, which is about 1/3 of my retirement portfolio). I dont usually trade this agressively, but it has been a good year so far (up 50% YTD using short ETFs) so I can risk some I feel. The worst downside, I feel, would be DXO back down to $2 or 20% from here. The upside is 50-300%.

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