Seeking Alpha
Long/short equity, contrarian, deep value, event-driven
Profile| Send Message|
( followers)  

With many stocks touching all time highs, and the Dow Jones Industrial Index more than double its 2009 low, the market is vulnerable.


(Click to enlarge)

The conflict in Syria may be the trigger for the next leg down. Conflicts in the mid-east seem to be a recurring theme for the past several decades if not centuries, and the violence shows no signs of easing. The apparent use of chemical weapons has finally caught the attention of leaders in the United States, Canada and the United Kingdom, among others, and they appear on the verge of a decision to intervene. Where that will stop is hard to say, but it seems there will be turmoil for some time to come.

Along the way, the escalating violence has traders bidding up the price of crude oil, now approaching $110 a barrel.


(Click to enlarge)

At the same time, the United States central bank appears on the eve of an end to its massive stimulus program euphemistically called "Quantitative Easing" instead of just "outright market manipulation". Whether that reduction in so-called QE happens in September (as many predict} or later in the year is irrelevant. The fact is we are going to see materially higher interest rates and very likely sooner rather than later. The bond pros can adroitly play the short term swings and take their chances, but for the individual investor, safety is a better plan.

Safety is a word that rolls off the tongue quite easily but offers very little guidance. Even short term treasuries yielding a fraction of a percentage point of interest cannot really be termed safe, since for certain the value of your investment will dwindle as inflation outstrips the yield on the debt and the trading value falls in the face of higher rates. So what is safe?

My view is that investors should adopt a multifaceted strategy to deal with the risks inherent in today's stock market. The prevailing theme of this strategy is that real money is made when there is blood on the floor but you cannot benefit if you have to sell stocks at cheap prices to buy other stocks at cheap prices. Simply stated, you have to have a cash position.

In addition to cash investors should address the risks in stocks.

Companies selling oil into world markets at prices tied to Brent are likely to benefit until the conflict in the Mid East is resolved, and that does not seem likely to happen any time soon. A mix of seniors like Canadian Oil Sands (OTCQX:COSWF) and juniors like Bankers Petroleum Ltd.(OTCPK:BNKJF) are among my favourites.

High oil prices may trigger higher inflation expectations. We have enjoyed years with low inflation but they are not the norm over long periods. The massive "money printing" by central banks will eventually have to resolve itself somewhere and it just might be in terms best measured by inflation. Long term protection against inflation is best achieved with hard assets. I like washed out base metal stocks with large reserves as a hedge for a portion of my holdings. Names like Freeport McMoRan (NYSE:FCX), First Quantum (OTCPK:FQVLF) and Cameco (NYSE:CCJ) are on my list as well as a smattering of juniors like Nevada Copper (OTC:NEVDF), New Millennium Iron Corporation (OTCQX:NWLNF) and Royal Nickel (OTC:RNKLF).

It also makes sense to have a liquid short position. Some names which are particularly vulnerable to a market downturn are Whirlpool Corporation (NYSE:WHR), CP Rail (NYSE:CP) and Apple Inc. (NASDAQ:AAPL). Whirlpool (WHR) participates in one of the world's most competitive industries and is closely tied to economic activity. At recent prices it has touched all time highs. History suggests this has run its course. CP Rail has run to highs as well, fueled by intense cost cutting and operations tweaking under the auspices of Hunter Harrison, recently installed by Bill Ackman to run the company. Ackman has already started to sell, possibly to try and offset the shellacking he has taken on Herbalife (NYSE:HLF) and J.C. Penney (NYSE:JCP) holdings. The share price of CP Rail is well ahead of its earnings and the 100 plus year-old technology of rail does not warrant multiples in the twenties and higher. Apple has been a stock market darling, but now faces greater competition, shrinking margins and maturing markets. Highly liquid, it is likely to follow the market down and reward Apple bears. If you become an Apple bear, you should be discreet about it since the Apple fans seem rabid in their love for the company and you will want to avoid being beaten or lynched for disagreeing with their fervor.

Residential real estate in some areas of the United States remains a good investment, since many homes are selling for less than they cost to build and there is a shortage of homes on the horizon, the result of several years of under building which has lagged family formation. Again, selection and prudence are key watchwords. It was over enthusiasm for housing which started the whole crisis in 2008-2009.

For my money, I am long oils such as PennWest Energy (NYSE:PWE), Pengrowth Resources (NYSE:PGH), Canadian Oil Sands, Lightstream Resources (OTCPK:LSTMF) and Bankers Petroleum (OTCPK:BNKJF) and mines such as New Millennium Iron Corp., Iamgold (NYSE:IAG), Seabridge Gold (NYSE:SA), Adriana Resources (OTC:ANARF), Mercator Minerals (OTC:MLKKF), Capstone Mining (OTCPK:CSFFF) and Cameco Corporation (CCJ) and a few technology companies like Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Micron (NASDAQ:MU), short a handful of stocks like Whirlpool, CP Rail, Salesforce.com (NYSE:CRM), Royal Bank of Canada (NYSE:RY), TD Bank (NYSE:TD), and my favorite short Apple (where I am short both puts and calls). I have an interest in 8 real properties purchased in Atlanta ,which I see as excellent long term value, and I hold a substantial cash position.

I don't recommend stocks but I do recommend you consider the risks when you invest. I hope this article helps in that regard.

Source: Get Liquid Or Regret It: The Case For A Flight To Safety