The Stock Surfer

Wal-mart to America: Smile, You Can't Afford Better Stuff!

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I'll get to Wal-mart (WMT) in a minute--first, some context.

Lately in my Strategy Lab portfolio, I've had quite a bit of churn. Why? Nothing seems to stick. One day, commodities are the only bull market; the next day, they are toast. One day, financials are an easy short; the next day, they rally sharply. There are two alternatives to churn: 1) Buy and hold. 2) Cash.

Buy and hold, in this market, will get you crushed. On CNN the other day, an emailer said the recession was hurting him because every day his stocks were going down. As if he had no control over this, as if the buy and hold robot were forcing him to do nothing. It's ok to sell! As for cash, I actually prefer it right now in my personal portfolio, but I've been trying to stick to the Strategy Lab contest rules, which require that one be 65% invested. But what stock is safe?

Today, I've found my answer. Wal-mart. WMT is not hot or cold; it's just right. I had been trying to play "battleground" stocks, like Goldmas Sachs (GS), where there are strong opinions on both sides. But with WMT, who cares? You don't go to Wal-mart because you are passionate about the fashions or the ambiance of the stores. You go because you, America, are in debt, and Wal-mart is cheap. The stock is blissfully boring, and a great place to put cash to work if you really need to.

[Simultaneously posted on my personal blog, with pictures and charts.]

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The Desert Island Portfolio

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If you were stranded on a desert island for 3 weeks, which stocks would you hold? Would it be Potash (POT), the subject of the Strategy Lab's "Question of the Week"? Would it be a financial stock, or a solar stock, or perhaps a Chinese solar stock? These are the questions I've been asking myself as I prepare for my honeymoon, which will not be on a desert island, but pretty close for stock monitoring purposes.

Here's what I came up with, explanation to follow:

Consumer Staples: 37%
Wal-mart (WMT), Philip Morris Intl (PM), Colgate-Palmolive (CL), General Mills (GIS), CVS Caremark (CVS), Kraft (KFT)

Energy and Royalty Trusts: 25%
Petrobras (PBR), Permian Basin (PBT), Prudhoe Bay (BPT), Precision Drilling (PDS)

Video Games: 20%
Activision (ATVI), Electronic Arts (ERTS), Gamestop (GME)

Short ETFs: 10%
Ultrashort Financials (SKF), Ultrashort S&P 500 (SDS)

Cash: 8%
Dry powder ($$$)

As uncomfortable as I am with this market, I can't ignore the change in street sentiment. As Jeff Macke has said, you need to trade the tape you have, not the tape you think you should have. I think the market should go down. I think the Bear Stearns (BSC) buyout prevented disaster but socializing risk will not, in the end, prevent a potentially deep recession. I think the consumer is in trouble and deflation is the real "flation" to worry about. I think LDK Solar (LDK) is unsafe. The tape says I'm wrong. For now. That's ok, but I don't want to chase hot sectors and get burned. A few weeks ago, I was tempted to "go for the gold," but in one day all the gold-heavy portfolios were obliterated. This is how I feel about solars and metals and even fertilizers. So what do I do?

My organizing principle for a snorkel-friendly portfolio is the money version of the hippocratic oath: Do no harm. Consumer staples, in my opinion, will do no harm. They are insulated against a weak consumer, and margins for companies like GIS and KFT should increase if commodities deflate. Video games will do no harm. I have written extensively about the strong video game cycle and won't repeat myself here. I only wish I could own Nintendo (NTDOY.PK) for the SLO contest. Energy trusts will do no harm, mostly because of their attractively high dividends. Ultrashorts actually may do me harm when looked at individually, but as part of a portfolio they will act as a protective hedge against disaster--sort of like an automated external defibrillator (that machine that shocks the heart back into rhythm, you know, after the doctor yells "Clear! Clear!").

I have no doubt that someone will pass me atop the SLO leaderboard, but I like my chances of remaining near the top even as I sit on the beach and enjoy some light reading, like Reminiscenes of a Stock Operator and Fooled by Randomness. I also look forward to spending some time underwater--as long as it's me with flippers on, not my portfolio. See you in a few weeks!

(PS--After seeing Dennis Gartman on Fast Money, I may add some steel and coal plays. Why? He's smarter than me...)

[This article simultaneously posted on my personal blog, with pictures.]

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Randomness Thoughts From A Bear

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I am growing more bearish by the day. More on that in a minute.

Because of my honeymoon, I was able to pry myself away from the daily market banter and reflect on my general market strategy. Although my time away didn't help me in the Strategy Lab contest, I think the bigger picture ideas that enlightened my brain will help me be a better trader in the long run. (I also realized that the time I was spending on the contest was taking away from my quest to make money in the real world--I'm putting a stop to that!) Here are a few of my reflections, heavily influenced by my beach reading, Fooled By Randomness by Nassim Taleb. In any order:

* Our minds want to see cause and effect in randomness. You see this every day in the market headlines. "Dow falls on recession worries." "Oil rises on Nigerian violence." Cause--Effect. The journalist wants to write a coherent story, and our mind wants a linear explanation. The problem is, there so many factors at play--buyers and sellers with their own perspectives, companies with agendas we can't see, governments with competing priorities--that we can't possibly identify a single cause. This doesn't mean there is no cause and effect, it simply means we must be skeptical of the simplicity and aware of uncertainty.
* We make our decisions out of emotion and try to explain them with reason. Taleb talks a lot about this, and how difficult it is to make a truly rational decision. As much as we try, we tend to act first and talk about it later. This is not necessarily a bad thing, but can lead to delusions. When we make good choices we like to credit our genius, when we make bad choices we blame our emotions or the weather.
* It's the size of the gain that matters, not the frequency. You can be right on the market 80% of the time, but if you lose all your money when you're wrong it does you no good. Taleb's style is to be right rarely, and make a lot of money when that happens. I'll no doubt hear more about this in his other book, The Black Swan.
* Most information is meaningless. The amount of information thrown at us is increasing every day, but is it making us smarter? Which data points or expert opinions should be trusted? Avoid CNN for a few days, and see if your life suffers.
* Price fluctuations always show volatility, but only occasionally show a meaningful move. This is similar to the cause-effect fallacy. If we watch a stock in real time, we see it go up and down within a certain range very rapidly. This is often little more than volatility with a number of random causes. A guy could be selling because he is moving to Australia, or buying because he typed in the wrong ticker symbol. We simply don't know, and should avoid reading too much into simple price fluctuation.

So how will this help my trading? I'm not completely sure, but I keep coming back to the theme of risk-reward. This year I've been focused on risk management, but have not always been aware of the reward side of the equation. Sometimes, even if it's likely that I will be wrong on a trade, I may want to attempt it simply because the reward will be high if I'm right. Conversely, I may want to avoid the easy trade that will not make me any money even if it works. In addition, I want to learn to avoid getting pushed into or out of trades due to meaningless bits of information or tiny price fluctuations.

Now then, why am I bearish? The rally since Bear Stearns Day has taken the market back to around 1400 on the S&P, which appears to be a significant technical level. I would be foolish, after what I just wrote, to give a firm reason for the rally. From a psychological perspective, my best guess is that investors were relieved that the financial system would not collapse, and shorts have been covering. But I am very skeptical of interpreting this move as a signal that the economy is in good shape and a bear market has come and gone. Doesn't the housing bubble/credit crunch have broader implications than a quick recovery would suggest? I think so. Interest rates can't go much lower. The dollar, if it strengthens, will create a headwind for the bright areas of the market (commodities and exports). Deflation could be the real "flation" to worry about.

On a risk/reward basis, I'm looking to short financials (SKF), short oil and gas (DUG), and short real estate (SRS). And I'm open to being wrong.

[Posted simultaneously on my personal blog.]

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