Double Journey

One of my favorite investment books is One Up on Wall Street by Peter Lynch.  I like it so much because he explains stock picking in a way that the average person can really understand.  One point he brings up is to use your own day-to-day experiences to guide you in your stock picking.  Does your kid have a favorite toy that he says all the kids need to have?  Does your daughter need that hot pair of jeans from that great new retailer?  Stay in a nice hotel that was clean and affordable?  Find out if the company is public and buy the stock!

I often use this bit of advice to try and figure out what stocks I want to buy. But today I got just the opposite.  I decided not to buy a stock because of my own experience.  I had been considering for some time whether or not I wanted to buy Yum Brands.  This is the company that holds such companies like KFC and Taco Bell.  I’m not a huge fan of these restaurants but I like the space and I like the exposure that Yum Brands has in China.

I do not personally go to any of its restaurants too often but every once in a while I get a craving for a Chalupa.   So I went to Taco Bell today, the second time I have gone in the last six months.  But for the second time in as many visits, my service was horrible.  I had to wait almost 15 minutes from when I ordered my food to when I got it.  How is this “fast food”.  It isn’t even slow food.  It is food moving at glacial speeds.

Could these be just isolated incidents?  Maybe.  But it has convinced me not to go back to a Taco Bell and it convinced me not to touch the stock.

Today, I cut my short positions.  This just felt like the wrong thing to do here with the market continuing to rally.  I do expect a pullback relatively soon but I have left the money in these shorts far longer than I wanted to.  I tried to stay disciplined and say I would get out of the short position when I lost 10%, and I didn’t do that.  The trade kept falling behind and I kept waiting for the turn that never happened.  Rather than continue to lose money, even though I think the market will turn soon, I got out of the trade and cut my losses.

I still have smaller positions in this trade, but it is past the point where I think I can reasonably make more money than I already lost.  Had to do it.  There comes a point where you have to admit you were wrong and just move on.  I don’t think the market takes off from here, but I’m also not so sure we can come back down to retest the lows.  If you have shorts on at this point, just get out of the way of this market.  I know with my luck, this will exactly mark the turn, but I just could not continue to fight the market.

I’ve actually had several different people as me my opinion on Ford.  In each case, the reason to buy was the same, it is the only of the big three that did not need to declare bankruptcy.  Chrysler looks to be having some problems selling its assets to Fiat and GM will probably run into the same issues.  Given these issues and the perceive lack of weakness, is it not a good idea to buy Ford?  For those who want to buy American, won’t Ford be the only logical choice?

My answer to each of the people who have asked me is to stay away for Ford.  I’m not saying the logic isn’t sound.  There are lots of people who will always want to buy American and Ford should benefit from its relative strength.  However, I never like as an investing thesis that a company is the least weak.  I want companies to be strong.  I want companies who know how to make money in any environment.  And this is clearly not Ford.  While strong compared to GM and Chrysler, it is still weak to Honda, Toyota, Mercedes, etc.  Ford has not shown it can win in a worldwide market and that is the situation it finds itself in.

To make matters worse, I think from an equity position Chrysler and GM will likely be the better buy when the get out of bankruptcy.  Bankruptcy is not always a bad thing.  For many companies it can be a very good thing.  GM and Chrysler will be able to shed most of their legacy cost that have weighed them down for years.  Ford will not have that luxury.  They will continue to be saddled with these legacy cost and risk needing to go into bankruptcy sometime in the future.

So stay away from Ford as a stock trade.  For that matter, avoid their cars too.

Only going to be a quick post today.  I did not go into work until late today because it seems I have an ear infection that causes me to have a pretty bad headache.  So rather than go into work in the morning I decided to stay home and rest a little bit.  Of course, with all that time on my hand I had to do something.  So I did a flurry of moves.  All told, I made four trades.  Since I normally only make a trade every week or so, doing four in one day just goes to show it is probably good I have a day job since I would spend all my time day trading.

The four moves I made were

1. Got out of my long financial position, UYG.  I had a 50% gain in just a few weeks and decided not to be greedy.  Sold it at $3.91 when I had a cost average of about $2.50.
2. Got more short the Dow.  Added to my position of DXD.
3. Increased my position in the material’s ETF, XLB.
4. Increased my position in the Chinese ETF XFI.

All told, I increased my exposure to the market a few thousand dollars but probably went net short since my two long positions were about as long as the position I sold in the financials.  I really have no idea how long the current rally will last.  I have a feeling it might go up some more tomorrow as the market reacts positively if it is either good news or bad, the sign of a bull market.  I keep waiting for the market to correct, and yet it doesn’t seem to want to do it.

If you look at my positions,  you will know that I have a very good day.  I am long the financials, China, and materials.  All of these are doing really well as this market rebounds.  I’m unfortunately a little bit more in cash than I want to be but I’ve been waiting for a pullback that does not seem to be coming.

I don’t see any reason to rush into this market still, but I’ve been saying that for the last several weeks while the market continues to make new highs.  That leaves me with a lot of cash to try and figure out what to do.  I do think this rally has been getting a little long in the tooth, but that is the problem with crazy markets.  They do not have to make any logical sense.  I’ve been wanting to get short the market, more short than my current short position in the dow.  I think I will do a hedged position tomorrow.  I want to get a little bit longer on my materials and China position and then get short the market for the eventual correction that we will get.

I suggest you do the same.  This rally is going on eight weeks.  That is pretty crazy if you think about it.  People are piling into stocks to avoid missing the rally.  At some point, the buyers just will not be there anymore, and that’s when the market is going to reverse and reverse hard.

I decided to post a page that includes all my current holdings in my retail account.  You will notice that most of these I have covered at one time or another in my blog post.  I thought I would consolidate it on one page and keep it up to date so that people could get a sense of what I own and why.

People say all sorts of things.  But if you really want to know what a man is thinking than you want to follow where he puts his money.   I read blogs all the time where people say they have great ideas but they don’t actually do anything that they write about.  That is not the case with this blog.  I put my money, my actual money, behind what I write.  So if you ever want to know if I actually did what I said I was going to do, just check out the page to see if I updated my holdings.  You can now hold me accountable to practice what I preach.

No.

I should just leave it at that.  The market has had a fantastic up spike in the last few week.  The market hit its lows in mid March and then rallied strong after that.  Does that mean you should buy?  Should you get in before it is too late?   I should just remind people that a similar market rally happened at the end of December through the beginning of the year and we quickly came back down to a new fresh low.

The jobs number tomorrow is not going to be pretty but I do not necessarily think that it will drive the market lower.  I think that the market is in the middle of a bear market rally.  I think it will run up, and could even get to 900, in just a matter of a few days.  But I really think there are some real problems we are not quite through yet and it is tough to believe that we will suddenly past 1000 anytime soon.

I did buy a smal position in a Chinese ETF (FXI) but I did not start throwing my cash into the market.  I will wait to buy on the market dips.  I think we may be consolidating around a bottom, so I do not think we will blow past the March lows, but I have no desire to go chase the stocks into this rally.

Take your time and have patience.  Sell any stocks you have some solid profits in (you should have been buying as the market went down) and sit and wait for the market to retreat.

I should mention I actually was right two days in a row.  I mentioned at the end of my post two days ago that I was going to cover my short position.  My reasoning at that point, and which proved to be right, was that the market would have a sharp correction the other way as traders covered their shorts.  The market rallied slightly in the morning, and then pulled back toward the middle of the day.  I decided to sell my short position at that point and get out while the getting was good.

My timing in this regard could not have been better.  The market had a strong rally starting almost literally as I sold my short position.  The exact timing of the rally was certainly more luck than skill on my part so I cannot take too much credit.

The market this morning is tanking once again, stirred on by worse than expected job and housing numbers.  Well duh.  More on that later tonight.

Over the past several weeks, I have been looking to take some positions.  While I don’t think the market is going to turn around and take off anytime soon, I am trying to take a few positions right now.  I do not want to try and pick the bottom, so I’ve decided to just try and take a few positions here and there over the next several months.  I have a very large cash position and I want to be well position if this market ever turns around.

So I am deploying some of my cash right now and I’m trying to be smart about it.  Things I am buying right now are for the most part, long term holds which I do not plan on getting in and out of anytime soon.  I’ve taken three positions.  Some of them I think are relatively conservative in this market, one of them is going to sound crazy.

• Health Care spider (XLV) - This is an ETF.  I actually picked this one slightly due to my fianceé saying she thought I should get into some healthcare stocks.  I had a hard time picking a winner in this space.  I had considered Johnson and Johnson or a Pharma like Pfeizer, but decided to just buy the basket of stocks.  The reasoning is simple here.  Not only do I think this sector will continue to fare well in the down economy, but I actually think there is some huge growth opportunities in the next few years.  The U.S. is aging.  You cannot fight demographics.
• Biotech ETF (IBB) - This is another ETF.  This ETF actually has  many of the same holdings as the other ETF (Gilead and Amgen for example) which means this is an undiversified pick.  This is OK if you know what you are doing and it does not represent an unusual amount of your portfolio, which these holdings do not.  Anyway, the same logic applies but with a twist.  This sector will continue to see consolidation over the next few years.  Many of the smaller players are going to get snapped up and the winners are going to become very big players.  On this one, I struggled between picking Gilead or Celgene as individual stocks rather than the ETF, but decided to just go the basket approach.
• Morgan Stanley (MS)  - This one might seem like the oddest pick given how I feel about the economy, the housing sector, and the financial sector.  But like I said, I am not looking to bottom pick.  As I have said over and over in this blog, the government is making it EXTREMELY profitable to be a bank in the future.  While there is certainly cause for concern, the banks that come out of this mess are going to make lots of money.  Morgan Stanley is going to survive.  They have already taken the very painful step of writing down their assets and deleveraging.  So I want to start getting into banks.  Not just any banks, the right banks.  These stocks may easily triple over the next few years and the winners fall aside, and the winners start reaping the benefits.  Many of which are on all our backs.  I thought about going with Goldman on this one, but in the end decided Morgan was the better play right now.

I was actually looking to buy a few more things today, before the market turned around.  But the government announced a plan to help out borrowers, and the market reacted positively to the news erasing earlier losses.  I really really wish the government would just shut up and stop changing the rules.  These wild swings in the market are making it hard on me, and everyone else, to be able to make any rational choices.  They are distorting behavior at every turn causing people to rethink decisions or act in ways they might not normally act.  I was about to do the very thing they are trying to get people to do.  They want people to start taking some risk and get back confidence in the outlook.  But when prices move wildly like they have been, it makes it impossible for me to get any sort of comfort level.

I went short the market last Wednesday.  I did it by my normal method; I bought the Exchange Traded Fund SDS.  I bought this ETF when the market turned negative in the morning.  After three days of Rallying, I figured we would get at least one day of a correction.  My plan was to get in and out of the ETF as quickly as possible.

Unfortunately for me, it was also a travel day for me.  I was returning from my trip in San Diego so I was in the car for the middle part of the trading day.  In the car, I was listening to the news, and the market continued to go higher.  It ended the day several percentage points higher, meaning I was down almost 5% just that day.  Thursday, the markets were closed, so I was forced to hold on to the position.  I resolved to get out on Friday.

I woke up early on Friday to find the market trading relatively flat.  I was still certain that there was no way we would get five up days in a row in a market like this, so I waited until the market dropped a little bit, and I was going to sell.   The drop never came, the market inched higher and higher throughout most of the day.  Since it was a short trading day the market close before I could do anything meaning I had to hold on to my position throughout the weekend.  I was now down 10%, right at my stop price, and I was for certain going to get out on Monday.  I was hoping the market would not open up sharply higher, as this would increase my losses.

Well the market gave me a gift today.  The market tanked, dropping 8% in one day.  Since I was double short in my position, I made up my losses and more in one day.  While I was going to sell in the morning, it was clear the market was weak so I held on to it till the end of the day.  I sold half the position at the close and made a small profit after taking some very big losses.  I will get rid of the rest of the position as soon as it is reasonable.

The point of the post should be pretty clear.  I got REALLY lucky in this trade. I should have gotten out way before I did.  I almost had to take some big losses and the market bailed me out today by falling apart.   If you were me, you would also understand this.  Trying to play this market can really drive you nuts.  There was really no good reason the market was rallying last week.  There was no bottom reached.  Even if the bottom was reached, there was no reason stocks should have been up 15-20% in a week.  That’s insane.  That is not a sign of a healthy market.  But the fact remains, just when you think you have it figured out, the market does crazy things.