Uncle John's Cabin

My 6 Step Program to Recovery

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In light of my recent abysmal performance, I decided to put my portfolio on a 6 step program. (No I couldn't come up with 10. Darn!)

Step 1: Discovering and admitting my mistakes. I believe I have accomplished step one with a previous post, "Losing My Religion (or Gambler's Ruin)". Hello, my name is Uncle John and I am an investor AND a trader.

Step 2: Accept my current position and improve from there. It makes little difference if I am up or down in a stock right now. Only work on what will happen in the future. Although its hard to forget I lost over 40K in the China shorts, I will hold it if I believe it will recover even some of that loss. At this point, I wrote my losses down to 0 and started over. It doesn't matter where I am, only where I am going.

Step 3: Finding some beliefs to work with. This got a little trickier and will be the key to my success. Here's a list of beliefs I either rediscovered or changed.

* Earnings - With the kickoff of AA reporting the other day, we have a 40 day window here to trade in. Expectations are very low and the price is built into most stocks. Any earnings miss could be bad. A number of warnings and misses will be worse. But, forward guidance will really be the key here. Any further guidance down will do some damage. I believe earnings will be bad and forward guidance will drag the market down, especially after the run up we had before the earnings kick-off last week. The stocks that had the biggest run ups (for no seemingly good reason) were financials and real estate/home builders. Expect these to go down hard again.

* Global infrastructure - I believe this play still works but China has the "only until the Olympics" syndrome which is breaking down now even before the games start. Commodity and material plays should work here when the S&P tanks. As Dennis Gartman says "Things that hurt when you drop them on your foot" is a good place to start. I will exclude corn from this theory as the crop reports didn't seem to help it.

* Theory on Oil and Nat Gas: Oil is trading in a channel between $100 and $110 a barrel. There is very little downside to oil at $100 but there is a possible breakout above $110. Nat gas works here as well as it is under its historic ratio of cost relative to oil. Historically, the ratio has been 7:1 for oil to nat gas and we are trading about 10:1 today. Either gas will rise or oil will fall.

*China - China was down almost 40% YTD but recovered to 30% down. This was only temporary as inflation, problems with the Olympics, political pressure (Tibet), shortages and the worst winter in 50 years will drive the market down again.

Step 4: Create a plan:

Earnings - Buy shorts on the market indices, the financials and real estate. Sell after a nice gain or before Wal-Mart reports, ending the earning season. If earnings and guidance start significantly turn against me, lighten up on the shorts.

Oil - with a price range to work with, sell the rips and buy the dips. Work through oil services companies mainly and not oil directly. This works well with the 7:1 vs. 10:1 ratios. Even if oil goes lower, nat gas still has a ways to go to make it back to it's historic ratio of 7:1. Drillers and services should work well in either case. If oil stay high or goes higher, drillers get the additional boost. I'm not sure I like the refiners here as they are being squeezed by the crack spreads.

Global infrastructure - Wait for steel to dip before buying. Add gold on dips to my buy list. As the market tanks, I believe gold will head back towards $1000 again. Materials like iron ore (RIO) should do well in a range. Possibly coal as well but I am worried about recent price concerns. (EDIT: Coal may be fine but I haven't quite figured out who produces what type of coal to be sure to get back in yet. Until I understand it, I stay out.)

China - Short after a run up and sell back shortly after any upturn.

Step 5: Start implementing my plan:

Earnings - I trimmed some positions in my shorts that I rode down but held them overall to take gains as the market falls. I also cost averaged down a few positions I thought would do better than others like financial shorts and China shorts.

Oil - I strengthened my position in (CHK) and bought back into (APA). I kept my (SLB) position and added (RIG).

Global infrastructure - Waiting for a dip in steel (X) and maybe (MT). Holding (RIO) and looking for more materials plays excluding aluminum. Possibly Freeport for copper and other minerals. Avoid the transports. Imports are down and creating a drag on even the high flying rails. Bought a small position in (CAT) before earnings. Bought a gold mining stock (AUY) after gold fell.

China - Hold on to those China shorts (FXP). I recently cost averaged down a bit.

Step 6: Adjust as necessary.

"Videbimus in Caelos." - sorry for the pig latin... /grin

My best to all,
Uncle John