Trading update

Didnt like our blog post yesterday. Hate talking politics these days in any forum. However, politics is economics (and vice versa), and these days, when it comes to the capital markets, politics matters.

Each day we seem to go back and forth, from positive to negative in terms of market action, lurching 150 down then 50 up (in terms of the DJIA). Doug Kass used to say the market has no memory day-to-day. I simply think it is too many short-term traders, and possibly HFT. Jeff Carter on his blog ( has made a great case for how open outcry and electronic trading go hand-in-hand. We may have swung too far towards electronic and HFT the last few years.


Glad we sold our Best Buy (BBY) – even the possibility of M&A cant lift the stock over $20. BBY trading down again this morning after what should have been bullish news.

Encana (ECA) is now caught up in the Chesapeake (CHK) mess. The stock stayed above the June lows yesterday ($18.60), which is a good sign technically, although volume was heavier. On Monday, the day the Reuters story broke about the possible collusion between Encana and Chesapeake, volume was huge in CHK, but just barely average on ECA. I took that as a positive omen for ECA. Havent added to ECA yet as we slowly build a position, but close.

Wal-Mart still strong – the relative strength of WMT on market pullbacks is impressive.  Most think WMT benefitting from SCOTUS overturn of ObamaCare. I think a lot of money has the repeal of ObamaCare as a done deal. Courts and judgments have a way of surprising investors. Be careful out there. We will wait until Scotus renders it’s opinion / judgement on the case, wait until the stocks finish moving, and then see which names we want to buy on pullbacks. Be patient – a rangebound market such as this one, gives you plenty of chances to put money to work.

US dollar – I also think it is significantly undervalued, particularly if the November elections result in a pro-business Washington. I remember the US dollar soaring to 220 yen in the mid 1980’s under Ronald Reagan’s policies. However, the dollar strength nearly bankrupted the Midwest manufacturing sector in the mid 1980’s, resulting in the moniker “US Rust Belt”. There are winners and losers in every economic scenario. (When i say “also think” i was referring to Oakmark’s latest quarterly report and reading David Herro’s comments. David runs the Oakmark International Fund and is a phenomenal investor. He has (or had) 70% of his Oakmark International Fund in European stocks. Have to like that contrarian call.)

John Deere (DE) getting a boost on the corn rally thanks to drought conditions on Midwest farms. Be careful with this – one or two good days of rain and the corn fut’s will drop like a stone. Same thing happened to the grains in 1988 ( I was working for a grain merchandiser at the time, and remember the volatility in the grain markets.) In the summer of 1988, soybeans doubled from $7 to $15 per front month contract in a month or two. We are long Deere (at a higher cost basis), however i think it could trade down to low $60’s or the 2011 lows before bottoming. Like DE better than CAT here. CAT could trade to low $70’s.

Junk bond market – despite the schizophrenic, bipolar action in the stock market, corporate high yield credit spreads are holding firm. 2012’s expected default rate is about 2.6%, so a 7% – 8% yield on high yield corporates looks pretty appealing. Europe is the issue here. A Lehman-type event in Europe will have its early-warning system in the junk bond market. Keep an eye on the two high-yield ETF’s, JNK and HYG. HYG is still intact even if it trades as low as $84.

Lennar (LEN) had strong earnings this morning. We sold most of our position at $26.30. Think we get one more pullback in the sector into the low $20’s for LEN and TOL.

Texas Instruments getting cheap. Intel too. Tough to trade semi’s. As Jim Cramer says, a proverbial “house of pain”.

Finally, I am amazed at the flak Mark Zuckerberg has taken as a founder / CEO of Facebook. The movie about him was total tripe, leaving the viewer thinking his sole motivation for building Facebook was from being scorned / rejected by an early Harvard love interest, and now all this weight being given to Sheryl Sandburg as the “adult supervision” at the company as if Mark is having frat parties with exotic dancers on a daily basis and Sheryl is the school marm that keeps everyone in line. Mark just married a woman he has been dating since his Harvard days. Gee, I guess that doesnt make for a good story line. The kid has done a brilliant job, and he has made some enemies. So what…

q2 ’12 earnings estimates coming down, with some looking for negative year-over-year growth per Bespoke. Have to wait and see what the numbers look like this weekend. Still dont think it is alarming. However i could be wrong…

Long ECA, WMT, high yield, DE, LEN (smaller position), INTC, and waiting for $20 on FB



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