Investment Capitalist

(A little early but market’s at emotional extremes and margin liquidations are taking place)

Certainly a short term bottom but hardly anything else. This market is in deep … Anyway, for now minimum 5% - 10% bounce to be expected in general indices. Severely battered former fliers could rally as much as 50% to 75% but only if you take the profits.

Names to watch:

FCSX, HTE, FTO (refiner, short later), CSUN (not yet, panic coming), ESLR, ALVR (30%), CBAK (l/t accum), HIMX, HTE, CQP (not LNG, this one is secured with some assets and cash flow, pair anyone?), QID (yes that’s right, figure it out), SOHU (short?), SPY

Happy trading. More later. Research now.

Short M&M’s Anyone?

Perhaps it’s time to put on the contrarian hat and re-visit metals and mining stocks. Aside from the macro tide that could be turning against the sector in the long-run, the near term is looking more and more like a blow-off top could be underway. The group has had the wind at its back with a declining dollar and surging demand in emerging markets, but with a coordinated defense from further declines in the Dollar underway by the Treasury and Fed, that tailwind has been neutralized. Furthermore, record breaking prices after a parabolic run in these stocks since the start of 2008 is leading to what PhD laden economists like to call “demand destruction”, although that term is more applicable to oil, there are similarities in metals attributable to substitution. Stock prices have gotten way out in front of earnings growth for now and although setting up short trades would be counter to the primary long-term uptrend’s, in the near term stock has been liquidated by institutional holders that won’t return to the bid for some time. As the June 30 mutual fund redemption deadline approaches, these are the stocks the funds will tend to be unloading in preparation to meet redemptions. Remember, June 30 is the first available redemption following the blood bath in March.

So here are a few names to consider for potential short positions. I would probably build the position slowly by cherry picking into intraday rallies while keeping a position stop above a new all-time high. US Steel (X) is up 75% since the start of ’08 and the move has been a straight line spike. I wouldn’t short Steel but keep an eye on it as a sector proxy.

Mechel (MTL) has multiple bearish diverging indicators and strength was aggressively sold into on Tuesday, June 03.

Nucor (NUE) around $75 is failing at new highs but prices are also at the upper boundary of a long-term uptrend. I could see a drop to $60 and still have the uptrend intact while a drop to $68 is highly likely.

Carpenter Tech (CRS) has bucked the uptrend all year and now with the sector turning over, the sell-off in Carpenter is accelerating. Sell into any rallies but watch the 200w-EMA at $48.

Great Northern (GNI) has been under distribution all year as I imagine all the large mutual funds have been selling the stock in waves. I see GNI testing $90 from current levels around $118.

The uptrend in Steel Dynamics (STLD) looks poised for a sharp correction below $30 but the fundamentals remain strong for this producer so I wouldn’t look out farther than a few months on this.

I kid you not, the best way to trade is build positions slowly over time and as they show YOU relative strength in the face of fast and deep corrections in the general market, you should add to your line with the comfort of knowing you bought into a short term retracement.

Here’s a reminder of long ideas discussed…

Regarding those increasingly volatile Chinese stocks, there’s a bearish overlay on Chinese material producers because of government controls on prices. Therefore, refiners and marketers like Sinopec (SHI) are operating at forced losses to prevent major inflation spikes at the pumps. The same discount is weighing down a “producer”, which also happens to be integrated as an exploration company with massive overseas producing properties. CNOOC (CEO) is a massive producer that is not restrained by government price caps, but as is sometimes the case with the market, it has not quite yet seen this dimension to the equation. So CNOOC is poised for a huge upside breakout in prices.

Shipping stocks have entered a confirmed period of expanding margins due to a rapid tightening in available tanker capacity to get that ever more scarce crude to European and US markets. Excel Maritime (EXM), Ocean Freight (OCNF), Nordic American (NAT) and a few others are still attractively priced even though they’ve bounced more than 50% from their lows in February/March. These companies already pay a high yield and are structured so that those dividends expand as cash flow increases. Great medium term plays here.

If you’re long a basket of energy stocks and need some offsetting short exposure, stay with the refiners as their input costs are going to continue increasing. Speaking of energy, Ivanhoe (IVAN) looks ready for another surge to the upside, so long-term accumulation of this stock would suggest topping positions off here in the low $2 range.

ReneSola (SOL) is going parabolic. If you don’t know what that means, never mind.

Sunpower (SPWR) would be more reflective of current market fundamentals if it were trading closer to $110, at least with Oil above $120 and sustaining.

The pipeline of Nuclear Power Plants in development is so large, and this is such a long-long term play that one must have a long-term position in Uranium fuel production and sales. My favorite is USEC (USU). Google can provide you the background and additional color on Reuters. Sorry but why repeat what’s already been written? Besides, do you really care why I like what I like? Most of you seem to only be concerned about the “what” and in terms of the “why”, you’re more concerned with your golf handicap. Most important point is this, directly from USEC’s website: “The AC100 series will be the first centrifuges used to produce enriched uranium for sale when commercial operations begin, scheduled for late 2009”. Remember, long-term, as in let your heirs inherit a huge position you built up in 2008 for their benefit in 2088.

Let’s not forget the short side, for a well-balanced book would not be complete without this side of the equation.

More to come soon…

Broadcast Us

I’m becoming convinced that Chinese stocks are presenting an opportunity for swing traders. These particular stocks accomplish their moves in gaps. Here is China Life Insurance (LFC):

To see China Life trading in the $50 range after last year’s parabolic run, which began in many of these names last August, for the institutional long-term buyers, this is somewhat of a reprieve. The market is overly discounting China right now, a lot of bad p.r. around the Olympics, but the stimulus injection the Olympics will undoubtedly create will be felt this year and next.

At the very least, I think a more appropriate price for China Life is much closer to $75. Continued strength in the Yuan will have a positive effect on these names, so $85 could be forecast by some estimates. On the flip side, to attach a bearish pair to this long idea, one might consider Aluminum Co. of China (ACH). At $40, it remains overvalued and the same positive factors influencing China Life are acting as a headwind for China Aluminum. I see fair value for ACH close to $24.

China Southern is the country’s largest carrier, and their growth is mind boggling but not surprising. Look at these ratios:

Long term weekly chart of China Southern (ZNH):

My numbers suggest China Southern is worth closer to $50 based on their recent earnings release. Again, institutional long-term buyers are relieved about where prices are now compared to the runaway in early ‘07.

This is one of those instances where “noise” becomes primary mover and lets the crowd get emotionally involved. If there is a 300 point rally in the Nasdaq from here, the 80 point gap in Google is just the beginning. I talked about the financials when the market was almost 800 points lower than where it closed Friday. Now that the dollar is rallying, it’s important to focus on tech stocks.

That big huge cavernous looking gap underneath GOOG is going to keep a lot of weak players out of the stock until she’s run another 100 points at least (where they’ll jump in and you should be selling to them, like all good traders ashould).

Remember, there is an enormous short position that is now very trapped (sorry for sic.) for lack of a better word.

Being that it’s Monday, we probably saw a net inflow of retail money into mutual funds, now that tax season is over and the markets been grabbing headlines.

I can see an early pullback across the board as sellers will be defensive, meaning there are going to be a lot of “sell strength” bears out in the first half of the day and maybe even the algos’ net effect will be bearish and strength is tested here.

The market will try to test the depth of bids. If there’s a lot of natural size on the bid (not just short covering), and the pullback is shallow, it will cause the “buy to cover” positions to probably switch from limit to market.

This order flow will compete with the natural bids, causing most predatory algorithms to take notice and snuff out any efficiencies. This proprietary flow will become liquidity that crosses the firms books and becomes natural size in the broker controlled dark pools.

And the best part is this will all happen pretty fast. Short term traders can really focus right now and do extremely well. Pick a couple dozen stocks, fine tune your parameters, become a technician temporarily and exploit this “noise”.

Ivanho Energy picked up 20% in the past couple weeks since it popped up on Investment Capitalist.

Ivanhoe Energy, for having figured out how to dramatically alter the energy equation of bringing Bitumen (Oil Sand) to market in a cost effective and very ingenious manner that is patent protected, environmentally friendly, and has been tested by all the major producers with investment in Oil Sands, the market seems to not have noticed.

The stock has been under accumulation for a couple years now, but it is still news dependent. Nevertheless, she’s making me wonder what the runaway breakout price for crude is before oil-sands begin to look like an acceptable solution to America’s energy needs?

If we see crude get through $125, people will certainly begin to notice. Plus, the longer crude prices stay up in triple digits, the long term rolling averages used to price baskets of crude will begin to rise as well. This certainly has a trickle down effect in many areas.

Right now, energy stocks appear to be where tech stocks were in 1997: just about to enter their 2 year climax.

FC Stone Group (FCSX) is up huge on blowout earnings. I indicated in the April 2 post that the fundamentals here are absolutely incredible, the volatility in the markets is the equivalent of a major gold rush, and they are shielded from the mortgage market because none of their trading partners are exposed to anything but the commodity sector, primarily as producers and hedgers. Their numbers today not only further confirmed this perspective, management really showed investors how much talent is at the top of this company.

From the April 2 level, FC Stone is up approximately 33%. There is much more upside but the only short-term issue is the gap underneath. I wouldn’t normally recommended holding on a gap of this size but with this particular stock, rather than trading out, I would prefer suggesting setting up a collar around the position to protect some of these gains. If your desk allows it, either buy some puts or sell some calls or both, but probably against a small percentage of the position. 

Disclosures: None