'I Contrarian': Are These Six Stocks the Worst Possible Trades Today?

Each day we set out to try and make money in the markets. Well... that's the theory! Actually we do quite well for ourselves but are always searching for ways to improve.

As would most, we use a variety of different trading techniques and research processes. To avoid becoming to comfortable in our ways, once a year we look at the markets from a radically different perspective. We've invented a game we call "I Contrarian". The idea is to approach the market from a very different perspective - instead of trying to create wealth, let's try and figure out the best way to lose our wealth. The aim of the game is to identify the worst possible trades that we can find, based upon fundamental, technical, and general commentator views. The one rule is that we must hold onto our positions for at least 18 months.

Caligula: Do you think I'm mad?

Claudius: Mad?

Caligula: Yes, sometimes I think that I'm going mad. Do you - be honest with me - has that thought ever crossed your mind?

Claudius: Never. Never. The idea is preposterous. You set the standard of sanity for the whole world.

I Claudius - BBC 1976

We've been doing this for almost 10 years now & frankly we've been astounded at our track record. Preposterous as it does seem, around 80% of our "I Contrarian" winners have turned into profitable trades.

These are the six winners of 2009:

1. Natural Gas - via futures or UNG
2. Lean Hogs - via futures or COW
3. Grains - via futures or JJG
4. Shipping Stocks - via SEA
5. US Regional Banks and Short the S&P 500 - via KRE
6. Homebuilder stocks and short the S&P 500 - via XHB

We have but two comments on the list above.

Firstly, with respect to Shipping stocks, considerable supply has been removed from the market and the building of new ships has slowed considerably. If global trade does pick up over the next 18 months there is the potential for quite a supply squeeze.

Secondly, these are all pure contrarian plays, based upon the contrarian mantra: "Sell on greed. Buy on fear". These are not trades for short-term profit, but for long-term buy and hold.

Due to the nature of the exercise we will probably find very little support for these trades amongst our betters. At the moment the technicals and fundamentals can only be described as a bit rank. So we are buying purely on our past performance and allocating a small amount of our long term funds to positions on each.

We encourage you to challenge the way you view the markets from time to time. Be creative, you never know what you will discover & the results may surprise you.

We'll leave you with a short quote from why the lucky stiff.

When you don't create things, you become defined by your tastes rather than ability. Your tastes only narrow & exclude people. So create.

Disclosure: Long UNG, KRE, XHB, SEA, COW, JJG

Comments

[Roger Knights:]

You could call this Costanza Contrarianism.

Aug 27 07:16 AM

[Roger Knights:]

7. Buy the USD.

Aug 27 08:46 AM

[aureus:]

Mr. MacLeod: You have a great pen! Fun to follow. And I may even earn some money from it, as your writing have contributed to my increased exposure in natural gas. This, I think, could prove to be the trade of the year.

With friendly retards :-)
Aureus

Aug 27 09:20 AM

[GMiki1:]

Okay, I bought some more UNG on the basis that (1) we're going to go into higher demand and lower supply in fall and thereafter, (2) the downside risk can't be that great unless UNG collapses entirely, which is never impossible, and (3) The market is getting everything wrong because people are listening to the mainstream commentators.

As for Google being impervious--well, no. It makes money on advertising. What if the economy worsens--and that's a real danger.

Aug 27 03:40 PM

[daveddawg:]

I might try this idea. In Mar, the worst ideas I could have thought of would be:
Banks--Way up
Homebuilders--up
Retail-up
It seems worthless is the new value.

Aug 27 07:08 PM

[ArtfulDodger:]

Mr. MacLeod:

Good work. Good writing. Thank you.

Aug 28 02:47 AM

[mn33:]

lol at the babbling blogger who thinks he's actually creating something.

Aug 31 01:30 AM

[Aricool:]

GMiki1, one of the problems of contrarianism is a matter of catching a falling knife, as evidenced by your comments on Nat Gas, they remind me of my catching the NASDQ falling knife after the Internet bubble burst from 2000-2003. Such assumptions can kill a long term correct view by averaging in too early and lose future gains by bad timing. For exampel, even if you bought the NASDQ in 2001-2 after a 50% drop you never saw that price again.
Market timing and optimal asset allocation is everything.

In re your Nat Gas views, I think your they are dangerously over simplistic and not at all rigourous enough to even be taken seriously. Maybe you can address the who picture instead of automatic contrarian hand-waving talk.

The current pop up is just massive short covering and rabid bull sector rotation desperation. Why can't Nat Gas (NG) go under $2? If most of the producers are 100% hedged for '09 (hence likely why their stock prices are not in the toilet w/ NG price) and they have to produce to keep their valuable leases and we have a 100 year supply, then why stop production at any price when you're getting top (hedged) $ any how??? Someone needs to explain to me why will they given these (and many other simar) factors.

Besides, did you notice that rig counts bottomed in early June and actually started to uptick in July-Aug. Also, day rates never came down enough. Not a good sign if you believe in major production cuts.

Also, if you look at the last recessions NG droped to around $2.5-2.7 in real terms (adjusting for inflation); however, that was when US NG production was believed to have peaked, which is why we later created infrastructure for LNG imports- and those lows were before we became the Saudi-Arabia of NG with massive supplies. So, it would stand to reason that we'll see below $2 easy; esp. since we got so quickly to $2.5 w/o resistance.

Moreover, I'm very concerned about the long term pricing of NG. I'm trying to see it as bullish as you do, but many long-term factors seem like it might keep it very low- not the least of which is LNG imports from Russia and Arabs when NG gets back over $4.

Have a look at the LNG import spike between end '06 and early '07 and it tracks *exactly* with a step down of NG price from 7 to 5. This is insane that LNG could crush prices during a robust US economy. I'm very scared now that with the paltry 2% trend growth expected for the US (and EU?) going forward that they'll dump excess Euro LNG onto the US and repeat that '06/'07 event. This would almost certainly keep NG prices under $4 in the expected weak situation for '10. This is a huge uncertainty in playing '09 weakness esp. if buying into NG driller/services securities to play the "perfect storm" against NG. That is, the LNG would dump just enough supply to easily keep the storage full, thus keeping NG exploration and cap ex down to a minimum, and b/c most NG producers are only partially hedged for 2010 (maybe 30% or less?) then they would get killed in 2010 making there hedged supported stock prices 2009 quite high. This uncertainty really sucks! Can you discount this scenario?

the EU is expected to recover more slowly than the US so why won't the LNG plays dump what ever they can on the US. As I analyze the charts, the LNG chart tells me a very bad story. That is, the June '09 LNG was sold at only ~ $4.3 while volumes where a little above that just before the '06 event (see above) when NG price in '06 was ~7, and then dumped 2X the volume for 6 months and were more than happy to collect only $5 in that time. Again, this was when the EU and US were heading into a peak earning cycle. This tells me that the LNG players will keep US NG prices in the toilet (<$4) until the US (and EU?) are in a full recovery. Very, very bad for NG sector stocks for 2010. Please debunk this gloom and doom scenario! It seems all too possible if the magal V-shape recovery does not materialize in early 2010. Hence, why with a weak EU they'll dump there LNG at a (double? june '09) high rate and keep the US storage near max, thus NG prices in the toilet.

I'd really hate to additionally bet on a V-shape recovery on top of the structural NG risks I've discussed. There are much more (risk adjusted) profitable bets on a V-shape recovery in the market.

Betting on a V-shape recover is over the top for a NG bet at this point. Also, how can you be so sure that that '06/'07 event (see above) won't repeat in 2010?

In summary, NG prices seem destined to go well under $2 well into November, and while it may rebound next year LNG will keep it near $4 and kill/hurt most US NG producers until the economy fully recovers (1-2 years) and get NG price in the $5-6 range.

So, you can try catching a falling knife or put your money in soaring NG stocks which will collapse next year when there hedges are gone and NG is kept too low b/c of LNG. Seems like NG is a bad bet until at least Nov.

Cheers,
Ariel-




On Aug 27 03:40 PM GMiki1 wrote:

> Okay, I bought some more UNG on the basis that (1) we're going to
> go into higher demand and lower supply in fall and thereafter, (2)
> the downside risk can't be that great unless UNG collapses entirely,
> which is never impossible, and (3) The market is getting everything
> wrong because people are listening to the mainstream commentators.
>
>
> As for Google being impervious--well, no. It makes money on advertising.
> What if the economy worsens--and that's a real danger.

Sep 13 11:41 AM