Slapping a bandaid on an axe wound

I should probably just cut the positions that are failing me, (coal and Ags), but I just find the valuation ridiculous. But there's no reason why a cheap PE, can't be cheaper as long as this sector kyboshing continues. I've decided to layer in a rather frothy portion (20% exposure) of SMN (ultrashort basic materials) to stem some of the bleed. But given the recent price action, I would not be surprised that the Ag and Coal stocks actually fall faster than the rest of the basic materials sector. I can't have it both ways.

The Weekly Game Plan

Alot of stuff has been going on as of late. For those of you that know me, new job, a bit under the weather, amongst other things, I haven't been able to post much recently. But as usual, I'm never far from the markets.

I'm continuing a slow bleed even with a high cash position. It seems consistent that money is flowing into the most beaten down stocks with every downtick in oil. And even in days where these stocks give back some gains, money flows into tangent sectors. I continue to be perplexed by the Agriculture sector, metallurgical coal and deep sea rig sector. Has global growth truly ended, and a domestic rebound imminent?!?

When I look at the earnings, guidance, and stock price of the ag sector, I have to note that the prices are back (or lower) than they were, before the announcement of the contracts with China and India, early this year.

I could echo those comments for iron metallurgical coal and the deep sea drillers. But none that that matters in the world of fast money where sector allocation is king.

I move a little money into RIMM, after the Cramer bump made sense to me, and so far, it's been one of my top performers since. I've also restarted my Mastercard position near the recent low. Overall, I'm finding it difficult to buy into the worst of breed stocks, especially when so many stocks exhibit all the signs of prices, except for good stock price movement. Good earnings - beats, in most cases, and no reason to think the long term fundamental thesis has changed.

For this week, I'm inclined to remain fairly static in portfolio allocation. Even with a 40% cash allocation, when 90% of the rest of your portfolio works against you, it's going to be a bad week. I continue to expect a lot of volatility, and I believe we should see some strength return to the global growth story as earnings end, and portfolio managers re-assess all of the information that has presented itself.

The Weekly Game Plan

Not much has changed since last week as compared to this week. We're still in a very choppy market, and I've having a hard time finding much to be overly bullish about, at this time. In periods when fundamentals aren't being rewarded, there isn't much I'm able to do, as I'm usually not one to speculate in lessor sectors.

Mostly I've been inching in and out of positions to scrape a few dollars. I'm doing this buy adding a touch, when one of the stocks I like, is down 2-3 days in a row, and letting a bit go when it is up 1-2 days. But overall, it's been a loss due to the relative size of my long positions. Despite that, I'm remaining high in cash at about 45%, which will fluctuate from day to day. I do think a bottom is indeed slowly being carved out of the market, in a painful manner. And of course, the commodities will be the last sector to recover.

Some comments and potential changes to the portfolio

I thought I'd add some comments to my portfolio allocation. First, regarding commodities - my stance has been and will remain focused on met coal (as a key input to steel production) and fertilizers as the two main areas I want to be invested in. Deep sea drillers remain a close third.

While I like fertilizers the most (as you can see from the portfolio allocation, I do not want to increase it anymore as even the 'discussion' of ethanol subsidies being cut will slash the price of fertilizers.

Metallurgical coal is now a close second due to the 'political ethanol' risk of fertilizers. I noted that I was starting to favour coal stocks not being weighted down - Arch Coal (ACI), Massey Energy (MEE) and Fording Coal (FDG) as newer favorites to Cleveland Cliffs (CLF) and Alpha Natural Resources (ANR) and the dreaded Mechel OAO - systematically destroyed (along with much of the Russian stock market) by Putinitis. Well, Fording shorted received its bid, so I'm no longer such a fan of the stock. (I didn't manage to buy any, anyways) but the rest remain in play. In fact, I would not be surprised to see additional acquisitions in these coal names over the next few months.

I noted that Cramer was on the same thesis as me, that the deep sea drilling stocks are not levered to oil, but on the equipment needed for drilling. I will look to add small positions in this sector to help move up the portfolio allocation in this area to perhaps 10-12%.

Natural gas, I see as at least a bounce play at these prices.

I'm also at around a 45% cash exposure raised from taking nice gains from my ultrashort commodities positions, albeit, slightly too soon but picking a precise bottom is not my usual game. There's also some cash raised from some sales in the best of breed financials. I'll use a dip to re-add to these names. MA, BLK and GS. I'm also thinking of added a started position in RIMM, as Cramer's argument for a product cycle is upcoming. I'm inclined to agree, but I won't be betting heavy - perhaps a 3-4% allocation made in 2 purchases if I can obtain a second set at lower prices. And of course, with Chinese stocks in a bear market, as with India, and Russia hit with putinitis, I'm left with Brazil, where Gafisa (GFA) is still my favorite. It's right up against resistance, but I'll look to re-purchase some of the shares I sold to add some exposure. I'm still looking to try to keep a 25% cash exposure.

Current Portfolio Allocation

Here's the latest portfolio asset allocation. While the composition has really changed since I last did this, it is really a result of cutting all of the UltraShort commodities, financials, etc, and adding bits of commodities exposure on the way down. This had the effect of taking some losses in some areas and gains on the recent, but small purchases in commodities. All in all, very slight gains, but considering how the market has traded, I consider being flat a clear victory.

The Weekly Game Plan

It's really a difficult market right now where anything goes. The S&P500 rallied off the July lows on heavy short covering, and commodities continually got taken to the woodshed. There was some reprieve on Thursday, but remain technically in a downtrend.

What makes this particular market difficult, is due to the velocity of money sloshing back and forth in commodities, financials, retail, tech, industrials, etc. Short term moves make little sense as it has more to do with psychology than investing. For that reason, I think it is important in this market, that you buy fundamentally strong sectors when they are down. And if recent history is any predictor of the near future, we should get plenty of chances to do so; so don't rush anything.

I remain neutral on oil and gas, bullish on coal, fertilizers and deep sea drilling. I'll stay away from the financials unless they give back a huge amount of ground, where I will pick the best of breed stocks in that area. But until then, I'll let the hedge funds have their way in that sandbox.

Mechel OAO - what a disaster that was! This is the first major blow up since I've written this blog and it probably won't be the last. If you are in the market, this sort of thing will eventually happen to you. Just expect it. For now, it's a dead stock and off limits for me, although the valuation (not including what Putin might do to the company) is just absurd.

As for the commodities market in general, I think it's important to take stock of your mental frame of mind during these declines. In hindsight, the Aug and Jan bottoms looked like such easy buys. But what was the thought process at that time? It was uncertainty as it is today. That by no means, suggests a bottom in this market, but I tend to believe that a negative psychology tends to occur near bottoms. Just how negative does it have to be; is the question.

So for this week, my game plan remains one of extreme caution. I'll look to enter additional positions in names I have conviction in, but I'll be doing so very slowly. Perhaps 5-10% down from current levels. (closer to the latter) The last thing I want is to over extend my positions. I'll be happy to layer in additional positions at higher prices when I'm more confident the selling has ended. I suspect we will need to hear more multinationals report for that to happen, so we should be carving out some sort of bottom over the next couple weeks.

Trading and Portfolio update

I'm just wrapping up the last days of my vacation, so I've been slow to post. But I haven't been far from the markets. Yes - it's an obsession.

Lots of changes in the past couple days. Here's a quick summary, but I'll sure to do a little more analysis this weekend simply for my own sake.

Cut all of my ultrashort commodities
Long some more fertilizers
Out of BLK, AMX, GFA, MTL (WoWZeRs), cut down RIO

Right now, im at 50% long coal/fertilizers and bits of natgas/deep water drillers
The rest is in cash. Technically, this is the "longest" I've been in commodities for quite some time, given that I've cut all the hedges.