Comments on Fund My Mutual Fund: Bookkeeping: Reducing Commodities

Well.. to try and put a silver lining on it all, ...

2008-03-25T13:44:00.000-04:00

Well.. to try and put a silver lining on it all, the added manic behaviour occationally lets you buy back in, at much lower prices ;) I think we both have a similar problem. Buying is easy... but it's become very hard to figure out when to sell.

Yep that is the problem - the "rotations" are very...

2008-03-25T13:32:00.000-04:00

Yep that is the problem - the "rotations" are very short, so for all but traders it's a meandering useless market. :)

And yes few sectors left to invest in which is the current quandry. Further, when I see a Brazilian homebuilder sell off 15-20% because commodities sell off its just ridiculous. I know the thinking ... Brazilian is a commodity based economy ... and when the commodities sell off Brazil is toxic... so you have to sell the homebuilder in Brazil.

But when you take 5 steps back and really think about that, you see how ludicrous it is. But that doesnt help in weeks like last week - again, we are at a point where fundamentals mean very little. So it is hard to trust any action. I'd rather have a flat or slowly trending down market where good fundamentals matter. Right now all that matters is what is the flavor of the day. So today suddenly gold is hot again - when yesterday it was trash. Tomorrow? Could go either way. Does it have to do anything with fundamentals? No. Same goes for every sector. Hence why this market is beyond me at this point. I like to pick stocks based on the underlying story... not guessing what the hedge funds want to buy tomorrow. Which is the current state of affairs and appears to have been for the past few weeks.

Anyhow I hope for a return to normalcy at some point. I cannot wait to see Mosaic and Potash blast the cover off the ball and show these idiots that push it down 30% because corn prices fall how ridiculous they are. But until then, just marking time.

Sheng, I think the coal and steel names need some ...

2008-03-25T13:21:00.000-04:00

Sheng,

I think the coal and steel names need some specific stock selection. Coal, I think you want exposure to metalurgical coal.. and for steel, what you really want is iron. I think the cost increases in steel are coming from iron ore prices. We should be seeing some additional contracts being priced soon, which will give a better indication of which stocks to own. But for now, the ones I watch are clf, mtl, sid, and rio. (disclosure long all but sid)

Mark,
I think we're basically on the same page here. I'm not trying to make a case for financials and certaintly not the retailers levered to US consumer spending. But with so much capital sloshing around, I think we will just get another 'releveraging' of hedge funds. It's going to be the same game, but with different players and sectors.. I think the only consistant part is on the side of commodities. For now, the early cycle stocks are still in fashion. But here, I think we are talking about different time frames.. When I say "a rotation to early cycle stocks" I mean simply a push in 1-2 weeks, which brings the averages to areas of resistance. And that's the end of the play, unless the fundamentals really are worthy of an additional move. And until that happens, commodities will lag or market perform. And then we move right back into "Oct/Nov/Dec" type action. But this time, I think there is even more liquidity, since you can take all that mortgage paper, hand it over to a broker, who hands it over to the Fed, which mints some fresh bills to hand back into the munitions pile of hedge funds.

As for the manic market behaviour and hedgefund liquidations - I think that's pretty much done with. Some are unlevering, and some are ramping back up. If you add in the thesis that the oil may come off in the short term, that leaves few sectors to invest in. But it also brings down the total delivered costs of grains and iron ore to developing countries. So, perhaps we can see the dry shippers settle their problems, at the same time we see the iron ore + ag contracts get signed over the next 3 months.

I am not dumping (I own little steel, only thru MT...

2008-03-25T13:04:00.000-04:00

I am not dumping (I own little steel, only thru MTL). I am simply cutting back. Today's action is hilarious and I cannot wait to hear the explanation from the financial media that was berating commodities since last Tuesday. "Hedge funds piled back in obviously, as we called it - we told you to buy this dip! What's that? No we never said commodities are over and this was the beginning of a huge correction"

It is a bit tiring.

Just have to wait and see what tomorrow brings - remember whatever is great today usually gets sold tomorrow. The hedge fund computers decide each day what is the chosen sector. They even decided to re-enter solar the past 2 days.

Don't dump the Coal and Steel yet! I think they ha...

2008-03-25T12:51:00.000-04:00

Don't dump the Coal and Steel yet! I think they have more room to run. It was just consolidating with all these newbies getting in. As far as commodities. Ag is still good as well. Gold and metals I think are slowing down quite a bit, because of everyone and their grandmothers getting into it.

Jeff, I don't know anymore. I agree some financial...

2008-03-25T12:08:00.000-04:00

Jeff, I don't know anymore. I agree some financials can be bought here, but even most regional banks have heavy commercial loan exposure. Something like US Bankcorp is a quality name but really I am not a financial investor - in a normal year these guys return 9-12%.

As for the cycles, each one is becoming shorter and more violent. The first one was late August all the way through mid October. That might of not even been an "early cycle" rotation, but simply denial of all the issues and trust that Fed cuts solve everything - once Ben cut the discount rate as a surprise in mid August, the market went straight up for 2 months.

Then after November sell off, we rotated to early cycle names for 3-4 weeks

Then after the January sell off, we rotated to early cycle names for 2 weeks

Now? I don't know if today is already the end but if in theory it is, it was a 4 day rotation (last Tue, Wed, Thu, and yesterday)

Today looks like most days over the past few months - same names rallying, same stocks falling. But these countertrend moves are purely vicious.

Most stocks people are rotating too don't have good prospects. Even the financials are in for MULTI year slowdowns in earnings- even with cheap money. The 4 remaining investment banks have lost a large part of their business entirely - selling crackerjack boxes as "no risk". Many of the commercial banks juiced earnings by taking excessive risk and leverage - so if they return to 95-00 eras of profitability and business, is that really a great investment? Most return 6-9% at best. Granted they have dividends but these guys STILL need to deal with the coming RECESSION. They are only now dealing with the CREDIT crisis. What happens when credit cards, auto loans, student loans, home mortgages continue to default? I just see no reason other than for 3-5 day countertrend rally trades to be in them and thats now what a mutual fund is built for.

Maybe Goldman I can see because they will probably get much of Bear's business and they are a global brand and have a lot of overseas exposure but the whole finance group is just facing major headwinds - people think for a few months but its headwinds for years.

As for retail... the same. Without the consumer coming back with their house ATM, and inflation to boot where is all this spending going to come back to take them to 2004-2006 levels?

Granted they are sold off but my point with all these "early cycle names" is what "is the cycle"? The cycle is going to be many many many quarters of flat to no growth. Doesn't seem like a compelling rationale to buy. Do you think JCPenney or Macys is suddenly going to see a spike in sales in 2 quarters? in 4 quarters? What will change in the consumer by then? We have not even really begun job losses. And inflation is now becoming a major factor for bottom 40-50%. Unless prices flatten it will move up to the next 10-20%. ANd suddenly your talking about an impedement to most of the nation.

With that said, people with adjustable home loans can benefit but how are they going to tap their house if the prices continue to go down and many are underwater?

I just cannot make a case for these names other than for very short term trades when they get beaten to a pulp for 4-6 weeks straight - they rally hard for 1-2 weeks, then resume a selloff. And most of the rally is short sellers covering. Again, not exactly something I can build a thesis on to hold for 6-12-18 months. But my time frame here is different than others.

Last Jan/Aug, we saw the same thing. unwinding of...

2008-03-25T11:21:00.000-04:00

Last Jan/Aug, we saw the same thing. unwinding of commodities for early cycle stocks. And again, its playing out the same. When the initial move up by financials and retailers push the index into 'overbought' areas and in todays case, the 1400 area of the S&P, the early cycle stocks perform the best.. but they immediately turn to chop as the next 'playbook' move, says to cycle out of them, and move to mid/late cycle stocks, which is more characteristic of where the global economy is. It's at this point where the index is pushing up at resistance, and potentially rolling over, do commodities perform the best.

As for retail/financials, I think some financials are worth a short term investment, because liquidity and interest rate cuts have allowed them to borrow cheap, and lend at higher rates again. Yes - I realize its the same old game again.. but actually, we have some different players this time. With the brokers having access to cheaper capital now, lending to hedge funds, isnt it possible that we move right back into the "releveraging of hedge funds". Perhaps this time, main-street vs commodities.