RD's Picks

Hmm, maybe there's a reason for this goofy market

I ran across some interesting bits describing how hedge funds and money managers are being cornered into liquidating some of their assets. From Friday's 10:30 am Briefing.com market update, "CNBC is reporting that there is a significant forced liquidation going on at a big risk-arbitrage hedge fund. That news has prompted a renewed sense of uncertainty and leaves the indices flirting with fresh session lows." Friday's Wall St. Journal ran a piece titled "Impact of Mortgage Crisis Spreads" by Gregory Zuckerman, James R. Hagerty and David Gauthier-Villars containing the following, "...as banks began getting worried about their hedge-fund clients in recent weeks, some hedge funds were asked to put up more collateral to back the loans, or anticipated these requests. The funds sold some of their holdings of high-quality stocks to raise the cash, and closed out "short" trades. ."

If those aren't isolated incidents, it would explain a lot of the market action we've seen lately. A lot of quality stocks have been falling with no real news while homebuilders and mortgage lenders have had some strong run-ups. Both would be consistent with fund managers selling off what they can sell to raise cash and being pushed to cover their short positions in the weaker sectors.

If that is what's going on out there, it represents a great opportunity for individual investors to accumulate some good names at fire sale prices. Of course, the final clearance sale might not be here yet.

Portfolio notes

The portfolio's still under water, but after a strong showing on Friday, break even is within reach. I'm pretty happy with the stocks in the portfolio right now, but would like to adjust the weights a bit. If and when GSF recovers, I'll sell some of that off and bring it to under 10% of the holdings. Proceeds will go to bringing NVS' weighting up some and possibly adding a US based defensive stock. I plan on looking at Anheuser Busch, Pepsi, Coca-Cola and some others over the weekend. With cash at 1.5%, I'm at the point where I've got to sell what I like least if I want to add something.

Other than that, I don't foresee any big moves. I will continue to trade around positions as opportunities present themselves, although that's tough to do with a job keeping me busy during trading hours. To take advantage of the volatility, I'll put in small buy or sell orders with limits well out of the money and look for volatility to trigger some low buys and high sells.

Portfolio Rundown, biggest % gainer to biggest lose
(reasons for picks are in earlier blogs)

Rubio's (RUBO) reported earnings on Wed evening, beating estimates by a penny. Apparently they sold a lot of those delicious fish tacos. They also reported higher same store sales and success with a new marketing strategy focusing on higher quality, higher priced menu items. This is a thinly traded stock and there was only enough volume to get a little over 2000 shares despite trading nearly the whole first week of the contest below by limit price. My biggest percentage winner, but the smallest holding in the portfolio.

Cisco (CSCO) - see my blog from Wed for more. Basically, beat earnings estimates and raised guidance. John Chambers, the CEO, also stated it was the best global business environment he's ever seen - good news for anyone with a global business model.

Prospect Capital (PSEC) raised their net earnings estimate for the quarter. The price action in this one since the contest began has been interesting, the stock got hammered from 16 and change down to 14, then the press release with the higher estimate triggered a run back up. It's been pretty volatile and I've had some success selling, then buying it back lower.

Wells Fargo (WFC) and Bank of America (BAC) are actually ahead for me in the contest; a little surprising given all the turmoil in the financial sector. WFC went ex-dividend this week and I'm looking forward to the payment in a few weeks. I was torn between these two as my financial sector holding at the start of the contest so got some of each. BAC yielding 5+ % is an attractive alternative for bond investors; Wells also has a good yield and has been handling the mortgage meltdown very well. The Federal Reserve pumping several billion dollars into the market on Friday certainly didn't hurt.

Northgate Minerals (NXG) is a gold miner. No new news here. Looks cheap on fundamentals because they need some approvals to proceed with one of their new mines. Had I looked at the commission schedule more closely, I wouldn't have chosen this one - 5 cents per share on a $3 stock puts a crimp in the returns. If I decide to raise my gold exposure, I'll pick something with a higher share price so the commission isn't as much of a hit.

American Railcar Industries (ARII) was one of my worst performers, but made up nearly all the losses on Friday, trading from down 4% to up 12%. No news, but they report earnings on the 14th. The last quarterly report was strong, looking for the same this time around.

Mattson Technology (MTSN) has been up and down a couple of times and is currently a slight loser for me. I have had a little success averaging down, then selling a piece as it popped up to $10.30.

AT&T (T) hasn't done much at all. I've averaged down a little bit.

Novartis (NVS) was added to put a defensive name in the portfolio. I bought in small chunks and was able to average down, but am still under water a bit.

Chevron (CVX) has been beaten down a bit. I thought it was a good value at the start of the contest and it's now a better value.

Unilever plc (UL) was also added as a defensive name. So far it's been a pretty lame defense, but I still like it as an income stock with some growth potential.

Global SantaFe (GSF) was my worst performer, but recovered a little late this week. I kept averaging down the first week of the contest and it kept getting cheaper. This is my largest holding and biggest dollar loser in the contest. Like CVX, it looked like a good buy at the start and has been marked down even farther.

RPM International (RPM) had a bad week with no news. I averaged down a little this week and the market continues to offer up an opportunity to average down further. It did recover a bit on Friday. Expect RPM to continue the 30+ year tradition of raising the dividend in Oct.

Disclosure: I own shares of CSCO, PSEC, WFC, T, CVX, GSF, and RPM

If anyone's actually reading this, thank-you and have a great week.

Comments: View Comments |  Friday August 10, 2007