Potash (POT) Sitting on Long Term Trendline

I've been seeing a lot of people concerned about the action in the agriculture sector, namely fertilizer stocks. Just wanted to post up that while yes there is some concerning action in those stocks, the long term trendline is still in tact. And, that's all I'm concerned about. We all know these companies are still firing on all cylinders, as evidenced by the blowout quarters they just reported. The market, though, likes to sell off anything remotely commodity related; that's just how it is. As Lawrence so effectively points out: until the long term uptrend is broken, these stocks are still manageable.

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We are currently right around the long term trendline. You can buy around $168/169 and then stop out around $165 if you want a tight stop or $159 if you want a less conservative stop. These fertilizer names are on the verge of a major technical breakdown. And, although we love their story fundamentally.... you've got to adhere to the price action we're seeing.

Quotes From Hedge Fund Manager Paul Tudor Jones

Paul Tudor Jones is one of the most successful global macro fund managers out there. He manages in excess of $17 billion at his hedge fund, Tudor Investment Corp. Although these quotes are older (taken from around 2000), they are very generalized and still serve as great advice for any investor/trader.

"I'd say that my investment philosophy is that I don't take a lot of risk, I look for opportunities with tremendously skewed reward-risk opportunities. Don't ever let them get into your pocket - that means there's no reason to leverage substantially. There's no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities."

--

"And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control."

--

Q: Let's play a word association game. I'll say a word and you say whatever comes to mind.

Q: Technical analysis

Paul Tudor Jones: Made well over half the money that I've made in my lifetime.

Q: Fundamental Analysis

Paul Tudor Jones: Made the rest.

--

Source:
http://chinese-school.netfirms.com/Paul-Tudor-Jones-interview.html

Rough July for Macro Funds

Oh, how the fruits of success can come back and force-feed you some humble pie. Many macro strategy hedge funds savored their gains during the first half of the year as their large bets on long energy, short financials paid them off handsomely. July, on the other hand, was a different story. As oil retreated and numerous financials rallied, macro funds took it on the chin.

Peter Thiel's Clarium Capital was -6.8% for the month of July (hat tip JimPunkRockford). But, fanboys will be quick to point out that his fund is still up over 45% year to date.

Philip Falcone's Harbinger Capital was -16% for July (via BusinessWeek) as their large concentrated bets on energy and commodities (specifically Cleveland Cliffs - CLF) blew up in their face. But, once again, fanboys will be quick to point out that they are still up over 23% year to date.

This all when the S&P500 is roughly -14% over the exact same time frame. But, its all relative, right?

A Tale of Two Tiger Cubs

And this is exactly why I love tracking 'offspring' of investing legends like Julian Robertson. Although both Andreas Halvorsen of Viking Global and Stephen Mandel Jr. of Lone Pine Capital both learned the tricks of the trade under Robertson in their time at Tiger Management, both have taken what they've learned and added their own spice to the value oriented, yet growth at a reasonable price (G.A.R.P.) tolerable investment style.

Although Viking Global and Lone Pine come from the same school of thought, their returns are polar opposite year to date. So far, Viking's Global Equities III Fund is up 8.45% year to date. While, on the other hand, Lone Pine's Lone Cedar Fund is -5.38% year to date. Oh how the slightest tweaks in philosophy make a difference. While both are still outperforming the S&P on a relative basis, Lone Pine being down for the year is slightly surprising given the amazing run they had last year, netting 44% in 2007. Has Mandel's momentum run out? Its still much too early to tell.

Many 'Tiger Cub' funds often have similar positions in their portfolio, which is understandable given their similar general investment philosophies. What sets them apart from each other though, are the positions they take that are dissimilar from their former Tiger Management peers. And, in a few weeks when the next round of SEC 13F filings are released, we'll be able to see just where Viking differed from Lone Pine in their approach.

--

Courtesy of the NY Post, we see just how some big hedge funds are faring year to date. As mentioned in previous posts, Harbinger Capital is tearing it up, as is John Paulson again (he tore it up last year as well due to his bets against the subprime mess). Some notable surprises on the list are Jeffrey Gendell's Tontine Associates poor performance, -17% year to date. It should be noted though, that he is more or less a value player, and we all know value is dead in 2008 (ha!). Also notable is Bret Barakett's Tremblant Capital -8.96% year to date. Bret is the brother of Timothy Barakett (manager of Atticus Capital), whom I track on the blog. I'll take a closer look at both of their 13f's this next go-round to see how similar/dissimilar the brothers are in their investment philosophies.

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Macro Takeaways

Courtesy of Commodity News and Mining Stocks, Salida Capital (a multistrat hedge fund that has seen compounded annual returns in excess of 50%) is out with some very simple macro bullet points that effectively summarize what we're witnessing.

1. The housing crisis in the US is deflationary
2. It will be met with unparalleled monetary and fiscal stimulus
3. The end result will be another round of reflation
4. This will eventually lead to an even more inflationary environment
5. Supply constraints on most commodities will keep long-term prices higher than consensus estimates
6. Hard assets will eventually get a re-rating as their earnings power relative to the overall market is recognized and as investors buy them as an inflation hedge.
- Courtesy Salida Capital Commentary For July 2008

Crude Oil

Contrahour has a very simple chart up showing the technical weakness crude is exhibiting. The chart implies that a re-test of the $100 is imminent. Notice how on the most recent test of $120 that oil is not springing off support as it should. Instead, it is lingering about, suggesting it wants to trade even lower. In early June, when hitting the same support level, buyers rushed in and crude soared right back up where it came from. That is not the case this time around. This should theoretically be bullish for the market as a whole. But, we all know how the market loves to surprise us.

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I.O.U.S.A. Movie Trailer

Hat tip to Howard Lindzon who twittered this movie trailer about the U.S. deficit. I love the Ron Paul cameo in there as well, that guy speaks the truth.



Interesting timing though as it releases in a few weeks.

Harbinger Capital At It Again

Well, looks like Falcone and his Harbinger Capital is at it again. While this technically occurred last week while I was gone, I still want to highlight it. Harbinger has been building up a 6.6% stake in Sunoco (SUN). They make mixed petroleum products and petrochemicals so I have to wager this is a play on oil prices coming down. They filed this as a 13G which was curious, because it means this was a 'passive' stake rather than their normal 13D 'activist' stake. I can only imagine they will eventually flip the activist switch on and turn to their normal rabblerousing days. In their last 13F filing (last quarter) they did not show a position in SUN at all, so this is fairly recent. Just wanted to point this out for all who might be interested because after all, Harbinger is killing it this year, up more than 40% YTD.

Source: StreetInsider.com

The Perfect Storm

Taken from Epoch, I just wanted to highlight this great slideshow about the perfect US Economic storm we are seeing currently. This is the largest I could get the text, so on some slides you will want to right click on the slideshow and select 'zoom in' to be able to read everything. Enjoy.

The Perfect Us Economic Storm

view presentation

Two New Hedge Funds to Keep an Eye On

Saw some interesting news in Bloomberg last week regarding new funds being launched by former employees of some impressive firms. First, we have Conatus capital (ex-Lone Pine) and then there is Highliner Investment Group (ex-Citadel).

Taken from Bloomberg,

"The biggest stand-alone startup was Greenwich, Connecticut- based Conatus Capital Management LP, which raised $2.3 billion. The firm was started earlier this year by David Stemerman, 39, formerly of Stephen Mandel's Lone Pine Capital LLC. Highliner Investment Group LP in Chicago raised $1.5 billion. Highliner was founded by Anand Parekh, 35, who was previously global stock head for Ken Griffin's Citadel Investment Group LLC."

It will be interesting to see what direction these funds take and how similar their portfolios are to their previous employers. I'll keep everyone updated come the next round of hedge fund 13f's.

Hedge Fund Performance Updates

This past weekend I received some information regarding the performance of some very notable hedge funds year to date. Note that these performance figures are year to date as of June.

- Harbinger Capital up 42.8%
- Renaissance Technologies (Futures fund) up 7.75%
- Paulson & Co (Advantage fund) up 20.58%
- Daniel Loeb's Third Point fund up 2.49%
- Carl Icahn's fund down -9.44%
- Steven Cohen's SAC Capital (Multistrat fund) up 1.92%
- Bristol LP up 28.14%

I'll post up some more numbers as I receive them, but so far this is all I've got. I'll definitely be adding Harbinger Capital to my hedge fund 13f tracking series. (I can already tell you they are up so much this year due to their massive bets against the housing market and their smart decision to short the sh*t out of Bear Stearns).

In about a month or so, the next round of quarterly 13f's will be released and I will be expanding my coverage. I've received numerous questions asking if I was going to continue coverage on more hedge funds from the last set of 13fs but I figured I would just wait a few weeks until the next round are out since we are already so close; that way I can get a fresh start. I'm really going to buckle down on this next round of 13f's and cover a ton more hedge funds than last go-round. I will provide in depth coverage for some of the major funds, but other funds will merely be highlighted with top holdings and major changes. For the most part, I'll try to do detailed analyses. But, for some funds, its simply not worth it. SAC Capital for instance, due to their short-term trading segment, often holds in excess of 300 positions. Needless to say, going line by line on a 13f comparing quarter to quarter can get quite tedious. My focus in summarizing these reports is to find tangible investment theses that these funds are employing. Therefore, I mainly focus on value, activist, or macro oriented funds, rather than trading or quant funds.

Look for my hedge fund tracking series in the coming weeks. For those of you who didn't see my coverage of various hedge fund portfolios last quarter, check out my post here.

Short Sellers Ahoy

Taken from the Option Addict's wonderful post on Bank Short Ideas, I present to you this oh so wonderful chart of the 'oh-sh*t-we-might-be-screwed' financial institution otherwise known as Lehman Brothers (LEH). Pay particular attention to the decreasing volume on this 'rally' in LEH. Then look back to last month's 'rally' in LEH and pay attention to the exact same volume pattern. Hmm, I wonder what's next?! Short sellers ahoy.

Feature on Harbinger Capital's Philip Falcone

I want to give thanks to reader Alex for tipping me to this specific piece on Harbinger Capital's manager, Philip Falcone. I most likely would have never even seen this piece because its from a local Minnesota paper. Harbinger Capital is a successful activist hedge fund notable for making a ton of money by shorting the housing market. Additionally, they heavily shorted Bear Stearns before its subsequent meltdown. And, year to date, their fund is up 42.8% as of June.

The article covers Falcone's background and talks about Harbinger's activist ways. And, speaking of activism, our boy at Harbinger is up to no good once again, just recently opposing Cleveland Cliffs (CLF) takeover bid for Alpha Natural Resources (ANR). (Harbinger owns 18.4% of CLF and is opposed to the merger, as noted here).

At any rate, check it out because its an interesting profile for those curious about how Harbinger/Falcone operate. You can find the Minneapolis / St. Paul Star Tribune piece on Falcone here.

Quote of the Week 7/21/08

This week's quote was actually recently featured on Howard Lindzon's blog and I really liked it. Said by Robert W. Sarnoff,

"Finance is the art of passing money from hand to hand until it finally disappears."

Let's stay focused this week so we don't end up passing money to others.

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.

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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.

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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.

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).

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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.

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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).

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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.

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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.

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And, here's what GOOG looks like now.

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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:

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That wraps up the odds & ends for now.