Tuesday, September 9, 2008

Bookkeeping: Shrinking Further - 3 More Positions Out

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The commodity space continues to be demolished. Unfortunately, rhyme or reason is useless right now and when I look at long term charts I now see stocks which have given back most of their 2008 gains. I do understand the "slowdown" theme but when people are running into Home Depot (HD) for 2% growth with a nearly 20 multiple and selling stocks at now 10 multiples which will be "slowing" from 40-60% growth to 25-30%, there is really no justification. This is simply forced selling by hedge funds.



At some point these stocks will be excellent buys and much like the banks will enjoy a tremendous oversold bounce but the selling is simply relentless. Really jaw dropping I have to say. I've been selling 2-3 "global growth" stocks a week for the past 5-6 weeks and still the ones that remain in the portfolio cause a lot of damage. The time frames for "wins" in these names are simply too short - I got in some late Thursday/early Friday hoping for a 48-72 hour bounce and by Monday AM many were down 8%+. So it simply "too hard" to own these, and the irony will be when everyone gives up on them, they will rally.

Again, these are either signaling (a) massive delevering of the hedge fund community or (b) the type of global recession you will want to stock up canned food at this moment. The fact that the stocks of the commodity companies are being pummeled to the tune of 10-12% a day while the actual underlying commodities are now holding up or even going up (at worst flattish the past week or two) is pointing to the (a) condition. Like I said - someone who times the buys perfectly is going to make a lot of money at the bottom, but right now the bottom seems endless. It is really amazing to see, the same action in a group with profits and growth, as we saw in financials and retailers and the like over the past year.

I'm selling 3 more names since this market is currently making no sense to me. I do "get" the rotation thesis, but when you have to know which hedge funds are liquidating what stocks every day - that has nothing to do with investing anymore, and hence makes the market impossible to invest in. I'm an investor, not a hedge fund tracker. So this is not the market for me as I now have multiple stocks with forward P/Es of 10 or less being sold off to the tune of 8-10% a day.

Right now we have given back 13 months of work, and are right back where we started - pathetically that is outperforming 99% of equity mutual funds over the past 13 months but it feels like a big waste at this moment. I'm a fundamentalist at heart even if I talk about charts all the time, and fundamental investing is simply being mocked right now. Fast money is moving too quickly and building on trends is worthless unless you are going with the "hope" trend i.e. buy these stocks because we hope in 6 months the housing, financial, credit, and economic conditions will be just fine... in the US only of course. The rest of the world? It will die off.

Chinese search/gaming stock Sohu.com (SOHU) we are leaving with a $900 loss. The stock has pulled back to its 200 day moving average, and might be a good buy here but frankly when you are beaten over the head so many times you don't feel like even testing something to see if its a good buy when there is a 80% chance you will lose money. So I'm "capitulating". We started this position in February 2008 and exit the 0.8% stake in the $65s.

The ETF for cattle/hogs is iPath DJ Livestock ETN (COW) - my thesis here is grain inflation will pass through to meats. I still believe that to be true but truth matters little in this market. This has actually held up ok but only due to the fact our original purchase was at a decent price did we not lose a lot of money. We started this in April 2008 and leave with a $900 loss as well. Another 0.8% stake.

Another commodity stock leaves with iron ore maker Cleveland Cliffs (CLF) - while iron ore prices are keeping up, showing little of the weakness that natural gas or crude oil has shown, it simply does not matter. Hedge funds piled into this name and now are being forced out en masse. What I would really like to see and be interested is seeing takeover activity in this space - since these companies actually have hard assets that are of value, if these selloffs continue some larger companies in the sector should be coming in to buy assets on the cheap. We shall see if it happens. Next year analysts believe this stock will earning $16, whic is more than double 2008 earnings - this means it trade at 5x 2009 estimates. Obviously that does not matter in this market. Charts say this could be $40 tomorrow and if you are going to trade at 5x 2009 estimates why not 2x? or 1x? Maybe we can get this to $0. Why not. Better to buy Macy's (M). We gave back a ton of gains in this one but leave with a $4400 gain after starting the position in March 2008. This is a 1.20% stake that we just pushed up from 0.3% late last week.


As bad as the situation is, the reality is we've sold a ton of these type of commodity/global growth stocks, and cut back on a lot of others. But by simply re-entering the group for a "trade" late last week we've been neutered within 24 hours. This is simply not a market worth bothering with at the moment. Again, I expect these stocks to rally when everyone has simply been disgusted and sold out. That's typical of the market.

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