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Is The United States Really Headed For A Breakup? + Vic Wisemann’s Thoughts on CI, AA, LOGI, TWC, INTC, BAC, JPM, TOL, LEN and more...

Vic Wisemann
InvestorsObserver
Featured Contributor

Last year was a pretty bad one for the market. The Dow Jones Industrial Average lost over a third of its value and the S&P 500 Index lost a little more than that. This is just the drop from year end to year end and they had both fallen off all time highs to close out the prior year. Since their highs of October 2007, they are down around 40%. On the plus side, they were off more than 50% earlier and have made a bit of it back. But, all in all, it was not a fun year by any stretch.

As if we didn't have enough to worry about as we start this new year, I recently discovered there is a 45% to 55% chance that the United States will dissolve and it will happen around the end of June 2010. So says Russian analyst Igor Panarin, a former KGB analyst, who is dean of the Russian Foreign Ministry's academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books and appears in the media as an expert on U.S.-Russia relations so we know he is credible. Or maybe we just know he can speak.

Read on to see how you can profit from this bold prediction even if the country does not fall apart.

According to Mr. Panarin, he based the forecast on classified data supplied to him by Russian security agency (FAPSI) analysts. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S.

He contends that wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines and foreign powers will move in.

While I do not agree with Mr. Panarin about the imminent breakup of the United States, I do see some very difficult times in the near term. We are in the midst of a deepening recession. Unemployment is rising and companies across sectors are feeling the pain of the weakened economy.

Just days into 2009, managed care provider Cigna Corp. (CI), aluminum producer Alcoa Inc. (AA) and computer products designer Logitech International (LOGI) were among those announcing big layoffs as companies scramble to cut costs even deeper. The flurry of layoffs suggest the employment picture will remain grim throughout this year.

The layoff announcements came just before Time Warner Inc. (TWC) said it would take a $25 billion impairment charge in the fourth quarter for its cable, publishing and AOL units. The steep charge will likely lead to an operating loss for the fourth quarter.

At the same time, Intel Corp. (INTC) revised its sales outlook again for the second time in recent months. The company said it now expects fourth-quarter revenue to drop 23 percent, below prior estimates, on a further weakening in demand from computer makers. In November, the company had forecast sales of $9.0 billion, down from an even earlier forecast of $10.1 billion to $10.9 billion.

All signs are pointing to a rough first half for 2009. That being said, we also know the market historically leads an economic recovery by as much as six months. So it stands to reason we could be looking at a market recovery in the latter part of this year or the first part of next year. Before we get there, we can expect stocks to stay relatively flat or even fall a bit.

Two sectors, financial and housing, will most likely lag behind the market as it climbs out of the hole it is currently in. Companies like Bank of America Corporation (BAC), JPMorgan Chase & Co (JPM), Toll Brothers Inc. (TOL) and Lennar Corp. (LEN) may be among the last to start the climb out of this bear market.

To play one of these potential laggers, you may want to try a Bear Call Credit spread. Since we don't expect a big upsurge until next year, assuming the country is still here, a long-term spread with expiration in January 2010 would be ideal.

For a hedged trade on TOL, you may want to look at the January 2010 30/35 Bear-Call Credit spread for a 1.05 cent credit or better. That's a 26.6% return and the stock has to rise 46.8% to cause a problem.

Be certain you understand the risks and rewards before you put any of your money at risk. If the trade does not fit your personal risk/reward profile, then move on to the next trade that does fit. It is better to miss some potential profit than gain some actual losses with a trade that doesn’t fit your goals and tolerances.