Wednesday, July 2, 2008

Copper Disconnect

Today, we saw a disconnect between the price of Copper and one of the world's leading copper producers Freeport McMoran (FCX). Copper futures have been rising steadily the past few days and are approaching overhead resistance, looking to breakout. Yet, during this rise in copper prices, you will notice that the copper producer FCX got beat down in the market. So, we seem to have a disconnect here. Take a look at copper futures and you'll notice an area of strong overhead resistance. If it breaks this to the upside, copper could really take off. We're talking about a multi-year ascending triangle building here.Then, compare this with FCX and you see a tale of two charts. FCX is now bordering on its 200 day moving average and I like it down here. Technically, the stock has been in a long uptrend and are a direct beneficiary of high copper prices and growing copper demand. And, to top it off, FCX has the added bonus of exposure to molybdenum, a metal hardly anyone knows about. Also, I would be remiss if I didn't mention that Atticus Capital has a large stake in FCX. Atticus is the 13th largest hedge fund in the world based on assets as recently catalogued by Alpha, which I posted about here. And, you can read more about Atticus Capital's portfolio holdings in the 13F analysis I did here.

Even if the selloff in FCX continues, I'm buying here because 1.) copper prices are high and look to go even higher, 2.) FCX is one of the best copper producers out there and benefits from higher prices, 3.) they have exposure to molybdenum, 4.) it is cheap on valuation as it trades at only 13.1 times trailing and 8.6 times forward earnings, 5.) they still are cranking out operating margins of 42% and a return on equity of 20.4%, AND 6.) each time the stochastics have reached oversold levels, FCX has presented us with a buying opportunity. And, that's exactly what is about to take place. If you look at the chart of FCX below, you will see the green circles on the main chart highlight the buyable dips. On the bottom of the chart, you will notice those buying opportunities coinciding with oversold stochastic levels.So, the action we saw today was very puzzling to say the least. There was a clear disconnect between the price of copper and the copper producer FCX. I believe this is due to the fact that we have reached the stage in the market sell-off when even the market leaders get taken behind the woodshed and beaten. All the weaker sectors have already sold off and now it is time for the strong sectors to be taken down. After all, we're in bear territory. We saw this same scenario play out a few months ago when energy, commodities and the like all saw massive selling. And, after massive run-ups, we're back to the rinsing cycle of the rinse and repeat strategy. Watch FCX as it should provide a solid entry for a longer term investment. We may see continued selling due to the fact that hedge funds and the like are seeing redemptions and have to scrounge up cash to give back to their investors who want out. And, when you're short on cash, you have to sell your winners, which is exactly what they're doing.

Copper prices are rising and are close to really breaking out. Although Freeport McMoran Copper & Gold Inc has the word 'gold' in it, don't let that fool you. Copper is their game. Toss in the fact that they have exposure to molybdenum (think steel alloys) and this miner truly has exposure to some booming industries. Take advantage of the disconnect here between FCX and copper prices. FCX benefits from these higher prices and yet hedge funds and the like are forced to sell their winners due to redemptions. Their loss is our gain.


Monthly Performance: June 08

Paul Kedrosky posted up this lovely breakdown of the worst "June" returns on the Dow in History. And, although the month indeed was bad, it didn't necessarily feel that way. We never saw true panic, we never saw capitulation. Instead, we saw stocks slowly bleed it out. And, that led us to a month where the S&P500 was -8.60%. And, halfway through the year, the S&P sits at -12.5% YTD. But, for those of us with some sense and a solid gameplan, the month wasn't so bad. Why, might you ask? Well, because we saw this coming a mile away. We know the U.S. is still in a recession, we know the housing sector is accelerating to the downside, we know oil is setting record highs, and we know that the financials are still sorting through the rubble of the credit crisis. We are by no means out of the woods yet and my portfolio has been based on that for quite some time. I figured I would start posting up my monthly performance here, to stick with my theme of complete transparency. (Well that and the fact that I had a pretty damn good month and this seemed like an ideal time to brag, er I mean start logging my results on the blog haha). For the month of June, MarketFolly's portfolio was up 5.56%. And, year to date, the portfolio is up 10.5%.

Since I've now turned to focusing on absolute return rather than relative return, I'll leave you to do the math in terms of outperformance. And, as a matter of fact, after having some discussions with numerous absolute return portfolio managers, I've come to the conclusion that people still pay attention to the indexes no matter what. Even if absolute return technically has no metric for comparison, you still want to be outperforming the next best alternative (ie: stocks, bonds, cash, or other alternatives). And, the next best alternative could very well be the indexes on certain months, you never know. In the end, its all about semantics and just depends on the portfolio managers absolute return goals. There will always be people who will want to compare results to the indexes just because that is what has been ingrained in everyone's mind to begin with. As long as I know my goals in running an absolute return portfolio, then relevant return is meaningless and is just a moot talking point. I'm very happy with my results thus far, but I can merely attribute it to creating a gameplan and sticking with it. I didn't panic and I stayed disciplined. That is one of the most valuable lessons you can learn when dealing with financial markets.

The macro themes we've seen have continued to play out. Housing sucks, financials suck, the dollar sucks, the economy sucks, and commodities are roaring. Many of the gains for me this month are attributed to taking a strong round of profits in my Natural Gas (UNG, CHK) and Coal (ACI, MEE) names. Additionally, I locked in profits in the fertilizer plays at the new highs (POT, MOS) and then am starting to buy them back here down at these levels. Additionally, I have been shorting the market itself through SDS, which is the etf for Ultrashorting the S&P500. It seeks twice the inverse performance of the S&P. So, if the index goes down 1%, SDS should theoretically go up 2%. I usually use this (and a few other etf's) as a 'hedge' in my portfolio, layering in and out when the market makes drastic moves one way or the other. For instance, in the bear market rally we saw leading up to this recent decline, I was adding heavily to the SDS, seeing as I knew we were still in a bear markets and the charts showed this clear as daylight. And, I posted this chart a few weeks back reminding everyone we were still in a downtrend here :
And, if we pulled up that same chart now, you would see we have fallen another 50 points on the S&P. The green circle below shows what happened to the S&P in the few weeks after I posted the original chart above. Here's what things look like currently:
In the end, everything played out like we anticipated and locked in some nice gains. I have now been taking profits in SDS as I feel we are due for an oversold bounce (and apparently everyone else feels this way too, which is concerning.... but that's a whole different conversation).

The rest of the gains this month were due to some shorter term moves I had made, most notably with Capital One (COF). I have been in and out of this name on the short side, as I feel they truly have the most exposure to the 'next leg' of problems in the financials: increasing credit card receivables/rising delinquincies & bad auto loans. COF has exposure to both and is having problems. This name has been a major component of the short side of my portfolio, to ensure I'm truly hedged. And, what better way to reap the gains than to short a financial, right? My thoughts exactly. (Note: I've covered the last of my position last week and I am no longer short this name, but I will be looking to re-short on any major pops). I didn't actually blog post about this name in my portfolio, but I did 'tweet' about it numerous times on twitter (here's an example and here's another). So, this just goes to show why you should be following me on twitter! Or at the very least, reading the twitter posts that stream as I post them on the upper right hand corner of my blog. Here's a chart outlining my entry and exit from this name:So, as you can see, all I did was stick to the gameplan and watch the charts for excellent entry/exit points in terms of risk/reward. I realize that these plays could have easily gone against me and continued to rally. But, if they did, I would have been stopped out right above the moving averages, and no harm done. It's all about knowing your risk/reward before even entering a position. For me, this month can be summed up by patience. The whole rally in the indexes from the middle of March until May was simply a rally in the midst of a bear market. I waited patiently until it found resistance, and then entered some short positions in financials (COF) and the market in general (through SDS). I continued to hold my fertilizer, coal, natural gas, and resource plays as they continued to benefit while the overall market struggled. Now, having taken profits in these names, I'll be waiting for pullbacks to re-enter the strong sectors of the market.

Next up: July. Will we see an oversold bounce? Will we continue to bleed it out slowly? Who knows. All I know is I'll be monitoring things closely, waiting patiently to set up my next move based on what happens at this test of support/the March lows on the indexes.


Tuesday, July 1, 2008

John McCain's Energy Plan

TheOilDrum has a post about John McCain's energy plan found here. Reason I point this out is because its a smart move to position your investments accordingly come the election in November. Both candidates have various implications for numerous sectors based on their proposed policies. And, I'd recommend figuring out how you want to position yourself should McCain be elected versus positioning yourself should Obama be elected, as both have different outcomes in a few sectors (namely energy and healthcare).


Monday, June 30, 2008

"Arithmetic, Population, and Energy"

Couresy of vruz, I have stumbled upon a very thought provoking series of videos. These videos chronicle a presentation by Prof. Emeritus Dr. Albert A. Bartlett on “Arithmetic, Population, and Energy." The series is 8 segments long and they are all very insightful. I have to mention that the series starts off slow in the first segment as it is laid out like a class lecture. But, it picks up a lot in the second segment. If you sit down and take an active interest in the videos and follow his presentation, you will find the series fascinating. I realize many people these days are so busy they don't have the time to sit down and watch an 8 part video, so I'll embed arguably the most important segment (the 4th one) and then link the rest of the segments below for those who are interested.

Segment 1: http://www.youtube.com/watch?v=F-QA2rkpBSY
Segment 2: http://www.youtube.com/watch?v=Pb3JI8F9LQQ
Segment 3: http://www.youtube.com/watch?v=CFyOw9IgtjY

Segment 4:


Segment 5: http://www.youtube.com/watch?v=qHuwgxrTKPo
Segment 6: http://www.youtube.com/watch?v=-3y7UlHdhAU
Segment 7: http://www.youtube.com/watch?v=RyseLQVpJEI
Segment 8: http://www.youtube.com/watch?v=VoiiVnQadwE


Quote of the Week

I'm going to start a new 'tradition' here per se. Each Monday morning, I'm going to start off with a 'Quote of the Week.' These quotes will come from a collection I've assembled over the years from great investors/traders/books/etc. Whenever I've felt confused or overwhelmed, these quotes bring me back down to earth, preventing me from doing something stupid.

So, without further ado, the Quote of the week, a favorite of Eric Bolling's (highly successful energy trader/conoisseur):

"Trade with your head, not over it."


Sunday, June 29, 2008

A Deflationary Environment? Wait, What?

The other day, Todd Harrison from Minyanville.com was on Yahoo! Tech Ticker with Aaron Task discussing the markets and brought up an interesting scenario: a deflationary environment. Immediately upon watching that video, I started questioning one of my underlying investment theses. All along, I have partially been long commodities and energy on the basis of a very inflationary environment. But, *what if* all my notions are wrong and instead we see bubbles begin to burst and lull into a period of heavy deflation? I don't necessarily agree with it, but it's definitely something to think about, and that's the point. I love insight like what Todd provided us with, because it makes us question our notions and come up with alternative investment scenarios. Should deflation indeed come to roost, then I would need to have an actionable plan to fall back on. So, it's time to start coming up with Plan B "just in case." Even if this scenario does not play out, it is still a great macro thinking exercise to inherently reverse your entire thought process at present. In the markets, you've always got to be looking forwards. Should signs of deflation pop up, we will need to be prepared to benefit from that, rather than scrambling around trying to figure out what is going on.

What's funny is that literally hours after watching the video and having those thoughts, Soren Macbeth posted on his blog that the exact same thoughts were running through his mind. So, needless to say, look for an ongoing conversation over the next week about a possible deflationary scenario gameplan. Because, even if we don't necessarily think that scenario will play out, it never hurts to be prepared and to constantly question your theses so you can patch up any holes you might find.

Check out Todd Harrison's thoughts on a deflationary environment here.

Thoughts? Post 'em up!