Friday, July 18, 2008

Fertilizer

UBS is either still behind the times or they have finally started creating earnings models that are at least somewhat accurate. Only reason I point this out is because they have raised price targets on Potash (POT) and Agrium (AGU) yet again. Just last month, UBS raised its price target on Potash from $250 to $285. Then, today (not even a month later), they are out raising their price target on Potash from $285 to $320.

Additionally, a month ago UBS raised the target on Agrium (AGU). They raised its price target on the stock from $95 to $118. And, not even a month later, they are out boosting price targets today on the name again, this time from $118 to $130.

So, in 2 months time, UBS has raised POT's price target from $250 to $320 and AGU's price target from $95 to $130.

Clearly, some people (analysts, ahem) have been underestimating the true pricing power the fertilizer names have. Very limited supply + very strong demand = fertilizer company pricing power. Its really a simple concept, yet analysts and investment firms are just now latching on to the true potential these producers have. The prices simply keep going up because there is huge demand for it worldwide. Not to mention, an already limited supply becomes that more valuable because new supply cannot be brought to market for years (2012-2015) due to how long it takes to bring a new potash mine online.

Combine all of the above with the fact that these fertilizer companies are now selling potash to Asian buyers at a spot price of $1000 per tonne and you've got a huge recipe for success. Even with a slumping American economy and an overall bear market, there are bright spots to be found. Use any weakness in these names to add (or establish) your position.

This is the definition of secular growth.


Keep an Eye Out For S&P 1275

Should be the first real test of this 'rally' (if we can even get up that high). I will be looking to re-enter short positions at that level and then subsequently will stop out if we continue to march higher. 1275 was past support and is now future resistance.

(click to enlarge)


Thursday, July 17, 2008

Long Volatility


Target: $34. Goal: pure panic. Unless we get a major market rally that can drop the VIX out of its channel, we are still on the (slow but steady) road to continued volatility.


Long Illumina (ILMN)

Yesterday on twitter, I "tweeted" that I was most likely going to get long Illumina (ILMN), and that's exactly what I did. If you haven't noticed, there's been a big rotation into healthcare/biotech/biosci companies as of late. I already have exposure to this somewhat through Gilead (GILD), Biiogen (BIIB), and Thermo Fisher (TMO). But, the positions are smaller relative to my overall portfolio. So, I wanted to increase my exposure there while still maintaining diversification in the various health/bio sectors. In this market, you play what's working. Taken from Google Finance,

"Illumina, Inc. develops, manufactures and markets integrated systems for the analysis of genetic variation and biological function. Using its technologies, the Company provides a line of products and services that serve the sequencing, genotyping and gene expression markets. The Company’s customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. Its tools provide researchers with the capability to perform genetic tests needed to extract medical information from advances in genomics and proteomics."


Straight up, ILMN scares me. I'm not kidding. Its valuation is ridiculous and borderline insane. It has a trailing PE of nearly 160 and a forward PE of 41. But, this name continues to cruise higher and has had me interested for a while. So, we finally got a pullback to support and I pulled the trigger. I am keeping a very tight stop on this name for fear that it could have its head chopped off at any minute due to its sky high valuation.
(click to enlarge)

As you can see from the chart above, ILMN has pulled back from $90 to around $82 or so in an orderly fashion. That 82 level has served as a nice little area of support recently so I figured to start my buying here. The main level of support I'm concerned with though is below that at $80. As you can see, ILMN bumped up against 80 from April til early June as that area was extreme resistance. Now that ILMN has blown past that resistance, I am ultimately looking for the re-test of this area as it now should be support. At that level I will add handsomely to my position. The $80 level is also key simply because it is also right below the 50 day moving average and serves as my stop loss. If it cannot hold this big area of support, it is going lower and I want out fast. Again, the valuation scares me and it could come crashing down with no explanation. I want in this name for fundamental reasons (not valuation though!) because the company is really progressing and gaining a lot of attention/support. But, in this increasingly volatile market, you've got to really make sure you're focusing on risk management. Managing your risk/reward is half the game in this whacky market. The chart has presented me with a clear exit plan and I'm comfortable getting into this name because the price action is pretty crisp and I've got a clear gameplan to manage my risk.

So, I'm in with my initial position at $83.xx and a big order around $80 and a very tight stop below that at $79. This is not a trade, it is an investment. It simply looks like a trade due to the very tight stop I have on it due to lofty valuations and a volatile market. People who are just buying and holding in this market are most likely getting slaughtered. You've got to adapt and maneuver around positions to ensure you're at the very least preserving capital, if not growing it.

Long ILMN.


Wednesday, July 16, 2008

Stop Losses

I want to point out 3 charts that I've monitored/been monitoring. Each chart points out a separate staple of technical analysis. Yet, at the same time, they all illustrate the use of a stop loss and how you can identify where to place your stop on your holdings.

1.) Support/Resistance. These are areas on the chart that you can visibly see a stock either having trouble breaking through at, or finding support at. These are visual representations of the price action in the underlying stock. In this specific example, I want to focus on how you can use support/resistance to your advantage in terms of either placing stop losses or price targets. In this case, US Bank (USB) was considered to be a conservative bank. But, since they are still a bank, they are still a good house in a bad neighborhood. The dividend is nice and all, but the chart gave me a clear signal after it could not find support at a level of past support. I thus placed my stoploss right below this area of support. So, if the support failed to hold, I knew the stock would be headed lower and I would need to get out. And, that's exactly how it played out. On the chart, you can see a strong area of past support around $28. So, I placed my stop below that and got stopped out accordingly once it broke down past support. This stop loss saved me from the ensuing 25% drop USB experienced. This is the perfect example as to why you should have a stoploss on all your holdings. (Oh, and for those curious, I was only in USB to begin with because I was employing a buy-write strategy. They have a solid dividend, so I was pocketing the dividend (5%+) and then writing covered calls on the name every month to pocket more money since the stock essentially traded sideways for a long time).

(click to enlarge)

2. Trendline. Mastercard (MA) is sitting on a longer term support line right now. Once again, the quote of the week has been "The trend is your friend." Once the trend ends, get the hell out. So, take all the lows of the trend and connect the dots making your trend line. If the stock breaks below the trendline, it is most likely going lower and you need to get out. Place your stop loss accordingly. So, for instance, in MA, I would be buying this dip as it is on longer term support from the trendline. Secondly, it has filled the gap (but that's a whole nother topic). Then, place your stop just below the trend line. If it breaks, its going lower. For the graph below, focus on the green trendline I've drawn in.
(click to enlarge)

3. Head and Shoulders Pattern. This pattern pops up all over charts all the time. And, if you can spot it, you can benefit from it as this pattern is typically bearish. For this example, I want to focus on Suncor (SU). I'm actually very bullish on this name for the long term. But, for now, I'm using the technical analysis to my advantage. I've spotted a head and shoulders in this name and it could potentially trade much lower (especially if oil prices continue their decline). I've highlighted the two shoulders and the head with green circles. As you can see, the head is the peak of the formation and the shoulders are on either side, at the same price level. Then, the bottom of the formation is accompanied by a 'neckline' where the two shoulders form their bases. For SU, this neckline is at $55 and is the make of break point. This level represents support as the stock has previously bounced twice at that level. So, if it breaks the level to the downside, the stock could trade much lower. Now, for all intensive purposes, this stock could just continue to trade higher and not complete the H+S pattern. But, the point is that once you identify the neckline, you've identified your stop loss. For SU, you'd place a stop loss below $55 and call it good. You can get short anywhere below that level. Or, if SU holds that level, then you can get long. For now, the pattern is an *anticipatory* head and shoulders. It hasn't actually completed the pattern so I am technically jumping the gun here. If it trades down to $55 and then breaks the neckline, then it will be complete. Again, for all I know, this name could continue to march higher. But, its just something good to consider when managing your holdings. Also note that this chart makes uses of support/resistance as well (the neckline).
(click to enlarge)


Tuesday, July 15, 2008

Odds & Ends

I've got a couple random/unrelated topics to cover so I just decided to mash them all up into one post.

1. Capitulation. Everyone and their dog is looking for it, and frankly, that makes me think we won't get it for some time. If everyone is waiting for everyone else to panic and sell, then who is actually going to be selling? It used to be that not many people paid attention to the Volatility Index (aka the VIX), but as the year has gone by, you see more and more people referencing it. It now appears that literally everyone is watching it. And, apparently there is a disconnect between the VIX and this market tumble (more on that later). At any rate, the VIX did spike on this morning's sour open. It spiked to 31 but then quickly retreated back down, laying down a nasty inverted hammer on the chart. We'll see how the rest of the day/week plays out.

(click to enlarge)

2. Mosaic (MOS) has sold its nitrogen business (Saskferco) to Yara International for $1.6 Billion (courtesy of Bloomberg here). I suggested in one of my previous posts that MOS was essentially 'top-ticking' or selling the top in the nitrogen trade, as they wanted to focus more on potash and phosphate. Although the stock is down on the news, this is a very buyable dip, as it will further their bottom line down the road. Nitrogen, although a strong part of their business, is not seeing the ideal pricing power conditions as their potash segment is. Again, my thesis on these fertilizer plays all along has been to play them due to their potash exposure; nitrogen and phosphate were only added bonuses. The potash segment has very limited supply and strong demand worldwide. And, add in the fact that new supply cannot be brought to market for years, and you've got the ideal combination for $$$.

3. Google (GOOG). On the chart, many of you know that this thing has a nasty gap to fill all the way down around $480. Yesterday, GOOG broke down past $520 and gave me the signal to short. However, they do have earnings coming up and that could obviously be a catalyst in either direction. So, for the mean time, instead of straight up shorting GOOG, I've put an option strangle to work. (If you're unfamiliar with a strangle, it's essentially an options position that makes money only if the underlying stock makes a big move in either direction. You can read more about it via Investopedia here). I was going to play a straddle on this name, but GOOG options are ridiculously expensive and so even playing a strangle (typically cheaper since you're using out of the money options) is still expensive. So, yesterday, I entered into the strangle of GOOG 480 Puts and 560 Calls. Obviously, with GOOG trading down again today, the put side of the trade is making money, while the call side is not. If GOOG continues to trend downward, I may just take profits before earnings altogether. But, we'll just have to see how that plays out. I had drawn up this chart last week and intended to post it as a short, but I completely forgot. This first chart is the GOOG chart I drew last week. The second chart will show where GOOG sits currently. Since marking on that first chart, GOOG has fallen from $560 to $505, a pretty strong move to the downside. Here's the chart I drew a little while back.
(click to enlarge)

And, here's what GOOG looks like now.
(click to enlarge)

So, as you can see, GOOG has fallen pretty hard and could very well continue down and fill the gap at $480, as that is our final goal. Keep in mind though that earnings are coming up and could provide a massive catalyst for this stock to swing violently in either direction. That's why instead of just shorting it, that I have put on the strangle, to hedge myself.

4. The trend (is still) your friend. Seeing as how that phrase was the Quote of the Week for this week, I found it very appropriate to post yet another great up-trending chart in this shitty market. Central European Distribution Company (CEDC) came up while I was researching new plays in Central Europe/Eastern Europe/Russia. Taken from Google Finance:

"Central European Distribution Corporation (CEDC) is an integrated spirit beverages business. The Company produces vodka at two distilleries in Poland and is a distributor of alcoholic beverages. The Company is also an importer of spirits, wine and beer in Poland. Its products are also exported out of Poland. CEDC offers a portfolio of alcoholic beverages with over 700 brands."
I'll be doing more research on this name, but you simply cannot ignore a great chart. Pull up any time frame: 1 month, 3 month, 6 months, 1 year.... they all look the same:
(click to enlarge)

That wraps up the odds & ends for now.


Monday, July 14, 2008

Follow Up (Re: Something to Pass the Time)

A while back I wrote a post here where I wanted to see what readers were most confident of in terms of investment theses.

I posed the following questions and then gave some time for readers to answer. I originally said that my answer to the first 2 questions would relate to oil. But, after doing some more research, I'm going to have to change that up ever so slightly. My first answer will not relate to oil, but my 2nd one still will. Without further ado...

Contest Question:
1. If you had to pick only 1 stock to hold for the next year, what would it be?

My answer: Potash (POT). Simply cannot ignore the pricing power they have. Huge demand and limited supply = killer combination. Add in the fact that new potash cannot be brought to market for years due to the length of time it takes to bring new potash mines online. I've been long since August 2007 and have yet to see signs of slowing demand. Originally, I was going to go with Transocean (RIG) for this answer. But, after research, I discovered that not many of their rigs are coming up for renewal in the next year. If they had more rigs coming up for renewal at today's higher dayrate prices, then I would have picked them hands down. Not to mention, with oil's rapid price ascension, these stocks could come crashing down should oil prices reverse course in rapid fashion. But, RIG does play into my answer for #2.

Non-Contest Questions
2. What is the investment thesis that you are MOST confident of, hands down, regardless of time frame?

My answer: I'm most confident in the thesis that slowly but surely, oil companies are only going to have 1 last place to look for oil: deep water. Shallow water finds are slowly starting to fade. Oil demand will continue to rise in the future and they are essentially running out of places to look for oil. The only other place to go is deeper. This is evident by Petrobras (PBR) essentially snapping up 80% of the deepwater drilling rigs for their own use. This is a longer term investment thesis, but I really believe that the deep water drillers (not the integrated oils) will be the way to play oil in the future. Transocean (RIG) and Atwood (ATW) are my favorites in the space as of now. There are numerous others you can play though such as Diamond (DO), Pride (PDE), Noble (NE), etc. Note: Although unrelated to drillers, I also think Suncor (SU) and various other Canadian Oil Sands companies will be a great play longer term as well, as they have found their niche in the oil supply market.

3. Of these four alternative energy choices, which investment will yield the best returns over the next 5 years? 'Clean' Coal, Nuclear, Solar, or Wind? (This one's tougher to gauge than you might think, especially with America's uncertain future political environment)

My answer: Over the next 5 years I actually think natural gas will yield the best returns. But, I technically did not list that as an answer choice. So, choosing from the choices above, I would say coal will yield the greatest returns. This mainly stems from my belief that coal will maintain (if not grow) its energy supply 'market share' over the next 5 years as it takes a lot of time to bring other alternatives to scale. For instance, nuclear power could take anywhere from 10-50 years to truly gain approval and be mass implemented. Solar, while ridiculously hyped, is still nowhere near mainstream and could possibly be over-reliant on subsidies. Don't get me wrong though, solar could easily be the victor out of the group in 5 years time simply due to rapid adoption/expansion. Wind could gain a massive following over the next 5 years as well, now that Boone Pickens' plan has surfaced (I wrote these questions long before Pickens' plan was public). So, with those recent developments, wind could see a very meaningful push in the coming years. But, for me, it came down to the fact that coal already supplies a ton of the world's electricity. Not to mention, there is high demand for metallurgical coal for steel. Even if all the other alternatives listed above do make positive strides towards bringing new energy supply to market, power generated from coal will still be a necessity. I summed up why you need to be in coal in this post here: How to Play Energy in the Immediate Term.

So, there you have it. Would love to get feedback to see what people think of my theses. And, if you haven't already, check out the the comments section of the original post here to see what readers' answers were. There were definitely some good ideas in there. Also, if you didn't have a chance to voice your opinion, feel free to leave your answers in the comments section of this post and hopefully we can get another discussion going.


Quote of the Week 7/14/08

The Quote of the Week this time around is an oldie but goodie. Simply put,

"The trend is your friend."

Until the trend breaks, ride it. Once it breaks, get the hell out. And, Kevin's Market Blog has a great chart which illustrates exactly that point. What chart might it be? Oh that's right... crude oil.


(click to enlarge)