Fundamentals Vs. Fear

Something that makes investing so difficult is when the fundamentals are so good and the stocks don’t go up.  You’ve often heard in the short run, the market’s a popularity contest, but in the long run it’s profits by the pound. 

Why does a company like Potash (POT) report earnings last week that were up 220% and sales were up over 100% and yet the stock goes down?  This is what makes investing frustrating in the short run but it also gives us huge opportunities.

Let’s take Coca-Cola, Intel, Microsoft, or General Electric for example.  In the 1990s, these stocks kept going up.  Sure, their profits were good.  But, the stocks got extremely expensive based on several valuation metrics.  So, many people missed the huge run in equities in the 1990s because stocks were “too expensive”.  The ones that focused just on fundamentals (the value guys) missed out on one of the greatest bull markets in history. 

At some point (March 10, 2000 to be exact), those value guys got what they wanted.  The market peaked because stocks were too expensive.  But, the market had gone up from 1995-2000 about 200%.  So, the point is stocks weren’t moving like the fundamentals then.  They were moving based on greed.  And that greed went on much longer than most thought it would. 

We fast forward to today.  From 2000-2008, the S&P 500 has gone basically nowhere.  Flat.  But, you see the profits of Coca-Cola, Intel, Microsoft, and General Electric continue to go up.  Some have tripled from that time.  Sales have gone way up.  They’re doing more business in emerging markets, etc.  But, the stocks haven’t gone up.  Why?  Because they were overpriced in 2000.  It’s taken 8 years and counting to get the stocks to a more reasonable level while the profits catch up.

If you could draw 2 lines, where the company should be and where it is, you’d see over time these 2 lines don’t correlate very well.  This is because stock prices move up and down because stock prices are controlled by moody investors.  And therein lies the opportunity and frustration.  It’s fundamentals vs. fear.

Right now in the global growth area, you’re seeing fear beating out fundamentals.  The fundamentals for the sectors like coal, steel, energy, steel, agribusiness continue to improve.  Yet, the stocks have fallen 15-20% since July 1st.  Long-term opportunity and short-term frustration.

Patience Please & Oil Bottoming

First of all.  Let me say that I’m back in Texas and not a moment too soon.  Sure, the weather’s nice and the beaches are pretty, and the food is awesome.  But, earthquakes are something that makes me happy to reside in Texas.  Even though getting off the plane, it felt like 125 degrees.  San Francisco’s a wonderful place to visit but not sure I’d want to live there. 

My wife commented while we were there how many foreigners were there.  I know it’s a big tourist destination but it seemed like it was heavier than usual.  So, we got into a quick discussion on the dollar and why it was cheap for foreigners to come here right now.  She said well isn’t a weak dollar good, then.  All these people are buying our stuff.  I told her that’s where the great debate begins.  A plummeting dollar isn’t good but a weak dollar is actually good.  I love when she’s interested in this stuff.

Patience Please

It’s amazing to me that just 20 years ago, when you or I wanted to sell a stock, we’d run down to the bank, get our certificates out of the safe deposit box, take them to the broker, and then sell them.  What a process that was.  Now, we can push a button, sell it, change our mind and buy it back in 2 minutes if we want.  Hence, volume has increased quite a bit since those days and the volatility that goes along with it. 

But with these conveniences in trading comes a lack of patience.  It seems now just like with everything in society, we want everything now, including profits.  Maybe the late 1990s spoiled us.  Making 40% in a year will do that to you.  But, we have to recognize we’re not in that market anymore.  We’re in a more traditional stock market where gains are made in specific areas, not just a huge basket of mutual funds.  In other words, it’s not a secular bull market.  Some things go up and some go down.  You have to own bonds, structured notes, private equity, along with stocks.

I have this sense now that investors are not patient enough.  I don’t mean buying something and saying I’ll wait 5 years to make money on it.  But, if you have a strategy, let it play out.  Remember, the stock market isn’t a CD where you ratchet up a little every month.  There are times where big money is made in a short amount of time and you have to stay in the game.  The ones that got out in 2002 because they couldn’t take it anymore missed a huge runup the following year.  That’s the market.  Keep your powder dry, protect principal, and eventually, markets run.  In the meantime, I’m still long good fundamental companies and sectors with excellent long-term prospects and short the broad market.  I think that’s a good strategy in this environment.

Oil Bottoming

I was on Jack Warkenthein’s show this morning and I think I’m the first to say that I think oil has bottomed for now.  I have a 3 technical reasons and one fundamental.  One of the main technical reasons is oil has pulled back exactly half way down from its big run up this year.  That indicator alone works well for something that’s made big moves and the fundamentals are still good.

The fundamental reason is because I hear nobody talking about oil going up, only continuing to fall.  So, I’m making a contrarian call but I think for a trade it’s bottomed for now.  In fact, it was down $1.50 this morning when I made the call and it’s up $1.15 now.  If I’m wrong or when I see changes, I’ll be the first to tell you here.

Vacation

I’ll be vacationing to San Francisco until Tuesday.  I may write a post on vacaction but not if my wife has anything to say about it.

No Man’s Land

The easiest time to make money in the markets is when it’s at an extreme.  It could be the overall market or a specific sector like gold or oil.  Right now, we’re in no man’s land.  We called for a rally based on the fact that too many people were bearish and everyone was tossing in the towel.  We got the rally.  Financials rallied 35% from their lows on average. 

But, that rally has stalled.  Now, you’re seeing the selling coming back into financials, commodities, utilities, consumer discretionary stocks, etc.  So, pretty much everything is selling off (see below).  Basically, health care is holding up.

So, is this the final capitulation.  I think not.  I believe this slowing economy and tough market may drag on for a little longer than the average investor wants.  Perhaps through the election.  You can still buy the extreme fear and sell the extreme optimism.  Unfortunately, we’re not at either right now.  In the last week, I’ve added some more shorts back on and have done more today.

It’s tough watching steel, drillers, agribusiness, and the rest of the “good stuff” sell off.  But, in a tough market, I’ve said it before, there’s no place to hide.  So, what my plan is to continue to add to these but stay short the general market. 

But, don’t get me wrong.  This is tough right now.  Nothing’s easy.  Cash is king (even if it’s paying virtually 0%)

Where’s Oil Going?

That’s the $100,000 question.  I don’t believe the bull run is over at this point.  However, we’ve seen a big pull back since hitting $146, down around 15%.  This reminds me of gold when after it had its big run from August of 2006 until March of 2007.  It went from $680 to its high of $1025 or so.  Then, it fell back to $850 in two months (losing exactly half of its gains).  After that, it moved sideways for a couple of months and then popped in late June and early July. 

Oil has run straight up since really the last week of January 2008 from $85 to $146 pretty much straight.  That uptrend is broken.  No question about it.  But, some will come in and buy this dip at some level.  I believe it will stop around $115 or so.  That would be roughly giving back half of those gains in 2008.  Then, perhaps we’ll get some stabilization and just be in a trading range for oil in the low $100s.  Then, we’ll have a better gauge whether oil is pausing or will break down to another level, perhaps below $100.

I think the long-term bull market will continue but I don’t believe you need to rush in there.  It looks like we’re going lower for the short-run but currently I have no trade on in either direction on oil.  I do own RIG & PBR still and will add to them on some stabilization.

Steady As She Goes

The rally in financials continues this morning while the sell off in commodities continues.  I’m still suspicious of this rally but this is the most conviction we’ve seen in this rotation all year long.  From a helicopter view, it does make sense.  Commodities were overextended and financials were treated as if they were going out of business.  The Treasury stepped in to bail out Freddie Mac & Fannie Mae and then the better than expected earnings from 4 big money center banks.  That set the stage for a huge rally.  As I’ve said, that money going into financials wasn’t new money, but money coming out of the commodities and global growth stocks.  The commodity index is down about 12% since its high in early July.  Meanwhile, financial are up 35% just in the last 5-6 trading sessions.  Amazing. 

I continue to analyze the rally and it is not impressive.  But, that doesn’t mean it can’t keep going for a while.  In fact, bear market rallies are sometimes the strongest.  That’s what makes it so difficult.  You really feel as though the worst is over and then down we go.  Look back at your charts from 2000-2003 where we had several strong rallies only to eventually fail.

So, our strategy has to continue to be cash, shorts (added some in the past few days), financials, global growth, etc.  You can’t bet too much on any one area or any one strategy.  Otherwise, you’ll get burned.  Just look at Costco this morning.  Costco is down 12% this morning after reporting weaker earnings.  This is a “recession proof” stock that a lot of big names like Tobin Smith love right now.  And, the stock made sense.  But, down they go.  Then, you look at health care.  It makes sense but Gilead Sciences fell 10% on Friday.  So, the point is to be careful and make smaller moves right now.

There is also some contradiction out there.  The Fed is printing more money which is inflationary so interest rates have gone up after the “bailout”.  But, at the same time, gold is selling off.  Go figure.  I remain long in gold and will stay long until the uptrend is broken.

Also, don’t forget the pairs trade.  This market begs for this strategy which is long the good stocks in a sector and short the bad ones. 

For now, I’m observing and staying fairly neutral.

A Wild Week

This was a fun week.  Especially if you caught some of the up and haven’t been riding it down all the way. 

 

Citigroup turned the market around this morning.  We would have gone way down based on the earnings that came out last night.  But, Citigroup came out with ONLY a $2.5 billion loss.  Wow.  How would you like to be the CEO getting a pat on the back for ONLY losing $2.5 billion?  But, it was better than expected.  So, for the 3rd day in a row, we had a financial company beat earnings expectations.  First, it was Wells Fargo on Wednesday.  They raised their dividend that day as well.  What a statement that was.  Then yesterday it was JP Morgan.  Today, it was Citigroup.  So, the financials had a huge week.  The biggest I’ve ever seen.  But, it’s amazing these are still at the same levels they were back in June even though some have risen 40-50%.

 

Interest rates were up big this week as well.  You see if Fannie Mae & Freddie Mac bonds are paying more than treasuries because they have an implicit guarantee but not a real one, then if the implicit becomes explicit, you sell treasuries and buy those bonds.  So, up we go on long-term interest rates.  So, bonds in general had a tough week.  Not to mention that money was flowing out of treasuries into stocks.

 

Oil  was down for 4 straight days and goes into the weekend around $129 per barrel.  That’s about an 11% drop this week.  Has that cracked or is it just another opportunity for you and I to load the boat up at cheaper prices?  Too early to tell but I’m not making any moves just yet.  Still holding some drillers.

 

Commodities in general have fallen this week along with the stocks.  Steel, coal, agribusiness, all of these down anywhere from 5-13%.  And, that’s my problem with this rally.  Every time we’ve seen a false rally this year, it’s been comprised of money coming out of global growth and into beaten down areas such as automobiles, homebuilders, financials, etc.  We need new fresh money coming in this market.  We’re not seeing that yet.  There’s a ton of money out there ready to come in but it’s not coming in yet.  

 

It looks like a bottom from the surface.  The volume spiked, the panic spiked.  But, we didn’t see that complete washout where almost all the volume is down volume.  On top of that, we didn’t see a huge amount of intensity Wednesday & Thursday even though the Dow was up almost 500 points in two days.  So, for now, we have to treat this as a bear market rally like the spring rally.  That means if there are stocks you own that wished you didn’t in June, you’re getting your chance to sell them at higher prices.  Also, you’re getting your opportunity to add to or establish short positions.  If this pattern continues, I’ll be doing just that next week.  This is no market to mess around with.  It’s still highly dangerous.

 

Where to go?

 

1. Gold still is catching my eye.  The Fed has told us they are going to keep the printing presses going 24/7.  They helped bail out Bear Stearns.  They are letting investment banks exchange their bonds for treasuries.  They sent stimulus checks out.  They are backing Freddie & Fannie loans.  Where’s all this money coming from?  So, down will go the dollar and up will go gold.  So, I still like gold.
2. I think on the way up you still have to short small companies.  These companies have to be struggling with the financial crisis.  Big companies can withstand this.  But, the small ones I have to believe are struggling.  So, there are numerous ETFs that short small companies.
3. Next.  Financials.  If you believe that the worst isn’t over for financials, you can buy the SKF which is the double beta short financials ETF.  I don’t own this but I’m watching it.  The market could roll over but financials may do well on a relative basis going forward.  In other words, the bottom may be in for financials, but not the market.  That is possible.  I would suggest a pairs trade where you own the best companies individually and buy SKF to hedge essentially making the spread.
4. Global Growth.  Everyone is panicking and acting as if the billion people industrializing over the next 20 years are all of the sudden going to stop.  I don’t think so.  Will those economies slow.  Sure.  But, these areas are going down fast.  We already know the profits are coming in fast for coal, steel, and agribusiness.  So, add to those on weakness. 

I hope you all have a great weekend.  And as always, thanks for your interest in my work.

On The Air

I’ll be filling in for Daniel Frishberg on The MoneyMan Report on Biz Radio this afternoon from 4-6 p.m. CST.  You can hear it in Houston or Dallas/Fort Worth on 1110 AM or streaming at www.bizradio.com

I’ll be writing a full blog this evening on my thoughts on this week and what I’m seeing.

Panic In Commodities

Everyone is running for the exits today in commodities.  Agricultural commodities are down around 3-4% today.  Oil is down to $129, or $5 per barrel.  Then, gold which was up huge is now approaching $950 an ounce.  This is pulling down coal, steel, agribusiness, drillers, etc.  Did the world stop growing in one day?  This is profit taking.  Everybody has been waiting to see who flinched first.  Once it fell two days in a row, profit takers ran with it. 

I’ve said it before and I’ll say it again.  Let’s look at what’s leading today:  financials and anything that’s been beaten down.  So, we’re once again seeing a rotation, not new money.  We’re only seeing a 70% up day.  Just like yesterday.  I’d love to believe this is the beginning of something big.  But, I just can’t.  Yes. I’ve covered some shorts and I’m enjoying seeing some green on the screen, but I’m skeptical.

I’d be careful and not make too many big moves in here.  The chances of whipsaw are extremely high.  I think we’ve got more upside but be careful

A Welcomed But Suspicious Rally

Many have asked me what a bottom looks like.  It does look very similar to this.  Indecision, high volume, a lot of fear, technicians confused.  But, we’re missing those 90% down days where all the volume is down.  However, we are getting a welcomed rally today.  I think it’ll continue but will probably be another place for us to short into.

I’m suspicious of this rally today because once again money is coming from global growth (steel, agribusiness, coal, energy) and going into financials and beaten down areas.  That’s not the recipe.  The recipe is for it all to go up.  I’ve mentioned this before.  Every rally in 2008 that looked like this failed.  We don’t need rotation.  We need fresh money coming in.

But, the news from Wells Fargo (WFC) was good.  They beat estimates and they announced they are raising their dividend.  Wow! So, the financials are up big.  That got us going this morning.  And, it’s bounced around but I imagine we can ride this one for a while. 

As for gold, I’d be using the dips to buy more.  Not necessarily today, but perhaps around $950 per ounce. 

Perhaps more later today.