I'm Back, after a Very Bleak October

It's been over a month since my last post, and i have been very busy. School has been hectic and I have had many (thus far fruitless) internship/co-op interviews, so blogging had to take a back seat to more important matters.

I've missed out on commenting on a very noteworthy month of market activity. Taken from Marketwatch.com:

The Dow rallied a whopping 11.3% for the week, even as it plunged 14.1% for the month, its worst October since the stock market crash of 1987. See The Month that Was.

The S&P posted a monthly decline of 16.9% -- its worst month since 1987, but a weekly gain of 10.5%. The Nasdaq slumped 17.7% in October, its worst month since 2001, but it rose 10.9% from last Friday's close.

If not for the rally this week, the final statistics would have been much bleaker. Still, October had many spooky moments (note: obligatory Halloween joke is now complete). The VIX (an options volatility index) still sits in previously-uncharted territory; after hitting highs above 80, the index closed at 60 on Friday. Prior to this month, peaks had been made around 40 with a normal range between 10 and 25. The VIX measures options premiums (which can represent sentiment or "fear") - readings this high show that traders expect big moves, and are either trying to capitalize on swings directly or are hedging longer-term bets with options.

Because of a busy schedule (or at least I'll use that as an excuse) I have largely ignored the market over the past month. I have generally held all of my long-term positions (though I did need to meet a margin call due to declining prices) as I was comfortable with long-term valuations and prospects. This past week, I did well with buying and selling some MRO and VLO calls (I sold Friday fearing a Monday selloff and a decline in options premiums), but energy companies are grossly undervalued right now.

Valero, a refiner, made $1.86 per share during this past quarter (after backing out one-time items and other extras). The stock was trading at $16 earlier in the week ahead of earnings and ended around $20.50 on Friday. It had traded below $15 earlier this month. As a refiner, Valero actually does better in an energy environment like the one we have now - crude oil prices are falling faster than gasoline (and other distillate) prices are. With oil at $60-70, Valero makes a very desirable margin on the difference between input costs and output prices.

Marathon Oil (MRO) has equally bright prospects. MRO has both upstream (finding/drilling oil) and downstream (refining, gasoline retailing) operations, which helps buffer the impact of a fluctuating price of oil. Marathon reported adjusted net income of $2.76 per share for this quarter - once again, before the announcement, shares were trading at less than 10x QUARTERLY earnings. Marathon is expected to make about $6/share this year - a reasonable 8-10x earnings valuation would put MRO shares around $48-60, where they were trading before this market mayhem. Additionally, Marathon is moving to possibly break up the companies upstream and downstream components into two different publicly traded companies. Jim Cramer estimates that the market values of the two companies would value current shares between about $70-$100, though trusting that pundit is always risky.

I will happily reenter calls for either company if there is market weakness early this week. Long-term valuations are wonderful - Price to Cash Flow for the trailing twelve months is just 2.8 compared to a 10-year average of 4.6. MRO is currently trading at book value, while the 10-year average for that metric is a price-to-book of 1.7. There isn't much money available to flow into the market and buy great stocks like these, but shares should clearly appreciate over time.

That's all for now, but a lightening schedule should lead to frequent posting once again. There's certainly a lot to write about, so I hope to continue to commentate during this wild market.

Our Next President...

After seeing the brilliant orator Barack Obama speak in front of 20,000 of my fellow intelligent, rational students, I can proudly say I will vote for him in November.

His hour-long speech touched criticized the current government for 20 minutes, talked about raising my taxes for 5, and then spent 15 minutes defining hope, 10 minutes asking the crowd to believe in it, and finished up discussing change.

April Fools (yes, the above joke was terrible). But for a couple good April Fools pranks, go to gmail's homepage today (gmail.com) or read an article about Sun Microsystem's past pranks (published recently in a business publication, or just google it).

I am still in the thick of exams, but some brief thoughts:

• BWLD is rallying 10% today along with the broad market on no news. Now way off of its 52-week low of $18, the stock appears to have some strength. Trading at 16x next year's earnings with a .8 estimated 5-year PEG ratio, it's still a value-growth play at these levels. I have been recommending it forever, and I'm finally just about back to break-even.
  
• I think (and hope) that this market will run for a while, so I'm not trying to short CMG... but hopefully once things settle down, there will be shares available to short.
• For the fiftieth time, the CFC/BAC arbitrage is still available for any takers. Intra-day prices value CFC shares at $7.32, still about a 20% premium over their intra-day price of $6 (after a $.50 gain today).

And a broader, less specific thought...

The market is now up 5% since March 10th, when I speculated that we had reached a bottom. If this stock market uptrend continues, bolstered by a better economic environment and less fear (the VIX is now down to 23 after topping 35 two weeks ago), expect a sell-off in commodities. As I've written about before, the broad-based commodities rally extended beyond the domains of gold bugs and Texas oilmen; wheat, corn, soybeans, and pretty much every other tradable commodity reached an all-time or recent high. As the hot money raced into the DBA (ag ETF) and other vehicles to trade that boom, it may be withdrawn just as quickly. The speculation and retail-investor interest that propped up those commodities may indeed be their undoing, too. If you've got faith in the dollar, buy UUP - a strong-dollar ETF weighted against a basket of multiple currencies.

As both the stimulus package and rate cuts effectively hit the economy starting this summer, there's a possibility for a quick and strong (albeit, articulated and arguably-artificial) recovery. I'm not trying to hype-monger, but the policies that have been enacted over the past six months will come to fruition soon, and if they work as intended, then Goldilocks will be back.


"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

A Slew of Stocks - Tech, Banks, Coal, and More.

Well, let's hope I don't, but last time I wrote about the prospects of a strong opening/daily performance, the market didn't perform positively.

However, once again, futures are up after a positive sessions in Europe (on Monday) and in Asia (on Tuesday).

I'm hoping for a couple pops on stocks I personally own; over the weekend, both Microsoft and Crocs received positive writeups in Barron's. (I own MSFT calls and CROX shares). Also, I'm long VIX puts and the VIX price has been falling as the market makes small (1%) positive moves. Also, in another post, someone reported that bank shares were up overseas; I'm hoping that bodes well for my CFC stock.

To substantiate this post with something other than personal investments most of you don't care about, I'll write about a bearish idea I have (and have executed in a paper account).

Coal stocks were sitting at 52-week highs before a downgrade by Goldman on Friday. On Wednesday, I discussed a potential trade in shorting coal with my father (who is a registered investment adviser). He discouraged the idea, so I didn't do anything immediately in any real-money account, but in my paper account at UpDown.com (more on that site later) I shorted both CNX (Consol Energy) and KOL (the new coal ETF).

My reasoning is thus: extraordinary circumstances have caused a temporary bubble in coal demand. Snowstorms in China and floods in Australia caused production to cease from many mines, and a combination of legitimate supply concerns and speculative fears drove the price of coal skyward.

There's one problem with coal getting this expensive this fast - there's so much of it in the ground. Unlike oil, which might have 50-100 years left, or natural gas, with a slightly longer timeframe, it's common knowledge that there are hundreds, if not thousands, of years of coal consumption left in the ground.

According to simple economic theory, what happens when the price of a good increases? Producer surplus increases, and producers become even more motivated to bring goods to market. As they record huge profits (as they may in the coming quarters), coal producers will surely ramp up production.

Then, when the snow melts, the waters retreat, and the coal dust settles, there will be more production capacity than there will be demand.

Big coal companies like CNX are trading at valuations of about 50-70x TTM earnings and 15x forward earnings (which take into account higher prices). But if prices fall (or even stabilize), these valuations will be unjustifiable. Look at big oil/gas companies - Exxon, Chevron, Conoco, Marathon, BP, and most others trade at multiples of less than 10.

So when the coal companies tanked Friday, I made nice 5% one-day returns on my newly-shorted shares. If only I would have done it with real money.

***Note: UpDown.com is a site I recently discovered. I have been using it for less than a month (so have not been eligible for payment), but here's how it works: you beat the S&P or write highly-recommended reviews, and you get paid. If anyone is interested in joining, just message me.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Recent Trades and BWLD

Here's a few quick thoughts for any regular readers (if there are any) to keep up with:

Yesterday, I did my first two options trades in a while.

I bought Microsoft March 29 calls (the stock was at $28.20). My thinking behind this is that the Microsoft-Yahoo marraige will begin to clear soon, and as uncertainty leaves the arena, MSFT shareholders will feel more secure. Plus, the stock only has to rally a couple points in over a month for it to be a profitable trade.

Second, I bought March 25 puts on the VIX (S&P 500 volatility). As the awful news is now mostly fully exposed (though there's some hidden stuff trickling out, recently AIG's writedown), the market will start to calm down. Most major banks have already written down most of what they'll have to. Also, earnings have been largely OK, and once that season passes, there probably won't be much for the market to freak out about . I'm hoping to unload this in a week or two.


Lastly, BWLD releases earnings today. I have no idea if they'll beat, meet or miss, but the stock will probably move big in one direction or the other. I'm long, so I obviously have faith in the company, but there's obviously some chance that investors may get blindsided by a bad report. However, I think they'll report in-line with estimates, and reaffirm future growth, which should hopefully help move the stock higher.




"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."