Friday, January 18, 2008

Bookkeeping: Closing US Steel (X) and Flipping into Ultrashort Russell 2000 (TWM)

I have almost no insurance at all in the portfolio (any short exposure) and while we are down a lot, until we open down massively and get complete and utter surrender it is hard to see a bottom formed.

I opened US Steel (X) as a trade Jan 4th [Two New Positions] - this was not a long term hold but a shorter term trade.

While I am not a secular bull on steel, I keep a small part of the portfolio for cyclical companies (short term moves) like the refiners, or just some shorter term trades, so I am going to try one here with US Steel (X).

50 day moving average is $106 so this is where I enter. Now, since this is more of a trade instead of a long term position I am taking a different tact than normal. Usually I build up a position over time but I am doing a quick 2.6% exposure (300 shares) - if X strengthens I will add to this position and then if I can get a 10% or so move I will flip out. If this 50 day moving average fails, then I will set a stop loss somewhere near $100, take the loss and move on. Let me stress again, this is not a typical position but I try to keep a small portion of the fund for opportunities like this. I have avoided this whole area (metals, mining, steel, dry bulk) the past few months due to the inevitable time when people realize emerging markets can't decouple from their export markets, and it has worked out well thus far.

All in all, considering how bad the market has been, this stock has held up very well. I bought in around $106 and am selling in the $102s for a smallish loss. Keep in mind, however, I entered after the stock had fallen from $122 just a week earlier, so my good entry point is keeping my head above water in this position. The stock has since traded in a range of $96 - $112, and still sits very near its 50 day moving average.

I am going to put this cash raised (along with Crocs) into Ultrashort Russell 2000 (TWM) so I have at least SOMETHING that goes up, if we continue to sell off. It won't offset the huge drops we have been seeing in individual names of late but it is something.

Again I have been mighty impressed with the strength in US Steel (X) and based on how well it has held up in this massive sell off, I might need to change my tune on the steel sector. Cleveland Cliffs (CLF) the iron producer I also considered at the time, has also held up very well. But I'd rather sell something that is holding up its value, as opposed to selling off stocks that are being unfairly hit 20-25% down for no reason other than panic and "lock in losses". So this is why I decided to sell this name. When the market regains it's feet I do believe US Steel should do very well considering how well it has held up.

As for the market, I do think the risks of recession are now being priced in. Everywhere I go I hear recession talk - not 1 month ago, no one was talking about it. I am shocked at how much of a 180 this market has taken in terms of "change of consensus". All fall, everyone was denying a recession could happen. Now you would be hard pressed to find anyone, except our Fed Chief or CNBC talking heads, who deny one. I can't recall a time since I've been involved in the markets when consensus literally changed on a dime like this. Usually it is a very wretching process when people "deny deny deny" like we had all fall, and early winter. Then in a span of 3 weeks we seem to have given up the ghost. In the big picture this is a good thing, because the closer we get to 'reality' the closer we get to pricing assets correctly. So we seem to have passed the denial stage and now are going through the recognition phase. As for the market - this is historic type of action and I am reading a lot of data such as "% of stocks below 200 day moving average at 2002 levels". 2002 was gosh awful. Putrid. Terrible. So knowing we are approaching those levels, makes me more bullish for at least some bounce (soon). But first it appears we need a "close your eyes and throw up" moment. Going below Dow 12,000 could provide such an opportunity... can you imagine - we were just below Dow 14K on Dec 11th. 5 weeks later we are talking of hitting the 11,000s. The compression of time, space, and volatility in this market is amazing. [Note, I will be very happy to be wrong on this theory, and see a +6-8% move up straight from here!]

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