Archive for May, 2008

Back from Vacation

Wednesday, May 21st, 2008

I’m back from a week in the Galapagos Islands and have been busy with positioning portfolios the last two days. If you are really bored or have an interest in the animals/birds/marine life of this unique biosphere, you can check out the photos on my travel website at: http://mballard.smugmug.com

As I review the current state of the economy and the financial markets, I came across the following article that I thought I’d share with you. I think its an indicator that we will likely have a bit of a pull back in the major market averages while our favored sectors (energy, ag, metals, defense, infrastructure, and companies with significant foreign sales – all of which have factors independent of the US economy supporting them) will outperform at least on a relative basis.

As I get further into the week, you should see more discussion on what we are doing, but we’ve been setting some trailing stop losses under some of the stocks that have had parabolic moves up. These stops won’t clear out our entire position if the stocks fall, but rather they will automatically book profits on 10% to 25% of various positions. We also have some GTC purchases at lower prices that may hit if we get a bit of a pullback. In markets like 2008, you have to be proactive and try to buy on over-reactions selloffs and sell on over-reaction price run-ups. Little-by-little, you end up with a year that has done better than other portfolios, plus this system takes the emotion (and potential for emotion-based bad decisions) out of the investment process.

A perfect example of this situation is how we’ve dealt with Potash Corp. As it was going up in its parabolic move, we sold 10% or 15% of our position off at new highs along the way generating cash. The stock eventually corrected but we’d booked profits that we were able to roll into a new holding. Devon Energy is a good one to look at. It sold off with the rest of the energy complex a few weeks ago, and we bought shares on the way down using GTC purchases as strategic technical levels (20 day moving average, 12 day moving average, etc). When the fundamentals returned to the energy sector, the stock is now trading on average 10% higher than our cost. I’ll take a 10% return on an investment over 5 weeks whenever the market will allow it.

This sort of strategy will likely go on for the duration of this market as long as it appears to be locked into a trading range between the January & March lows and the May highs.

Here is the article I was mentioning that has me concerned that we’ll likely selloff the major average a bit in coming days:

Exorbitant Oil Snuffs Rebate’s Benefit

By Tony Crescenzi

5/21/2008 11:24 AM EDT

At 11 a.m., Bloomberg posted a highlighted headline noting that the price of a barrel of crude oil had leapt above $131 a barrel. Three minutes later, there was another alert when oil crossed $132 a barrel. The rapid increases are numbing, and they are eating increasingly into the tax rebates being sent to consumers.

The Economic Stimulus Act of 2008 was signed into law by President Bush with much fanfare on Feb. 13. The plan is expected to return about $130 billion to individual taxpayers.

An additional $30 billion or so of stimulus is expected to be reaped by businesses in the form of accelerated depreciation and bonuses for the purchase of new equipment.

Unfortunately, the recent rise in energy costs is threatening to completely engulf this sizeable stimulus. To wit, note that when the Stimulus Act was signed, crude oil closed at $93.29 a barrel. Today, with oil at $132 a barrel, the price of oil has hence increased about $40 a barrel.

Given that the U.S. consumes roughly 20.5 million barrels a day, this means that if recent price increases are sustained, the cost of energy to U.S. consumers will increase by about $300 billion over the next 12 months. The actual toll will be smaller than that, given that some of the extra oil expenditure will be recorded as revenue by U.S. entities and because shareholders in U.S. energy companies are reaping benefits, but the fact remains that the tax-rebate checks won’t go as far as they would have if not for the surge in the price of oil.