I used to say you should have these four stocks to be hedged when the stock market panics, as has been the case so far in the month of May. You want a cigarette stock, a liquor stock, a phone stock and a paper stock: I.e. Imasco, Seagrams, Bell and Domtar. That’s because in a panic, you want to light up a smoke, take a stiff drink, and call your broker to inform them you are sending a letter to the manager threatening legal action over the lousy stock picks they bought you.
I never liked gold that much in a panic. (Gold and gold equities tanked in the October 1987 panic before rallying). Unless, of course, you wanted to throw a bar of the yellow metal through the Broker’s window with a threatening note attached. The first one of these is no longer politically correct. And Seagram Company is no more, swallowed up in 2000. But you can still buy BCE (BCE) and Domtar (UFS). Arguably you could drop Domtar and just text message the jerk/jerkess.
Here’s what we wrote about the euro panic/high USD and commodities in February. I wrote this comment from my hotel in Taganga, Colombia on February 5th:
I´m afraid the higher USD is going to depress commodities, reduce inflation and increase taxation, all at the expense of corporate profits.
Strap on your seat belt and assume the crash position if you continue to believe commodities are going higher very soon.
We were early by three months, which is typical.
The good news is, panics rarely last more than one month. John Dennis Brown’s book Panic Profits, clearly shows the pathology of a panic, and I believe strongly this one will be forgotten by the time you lay on another rib on the BBQ in early June. Perhaps we need a Long Weekend (Victoria Day in Canada on May 24 and Memorial Day on May 31 in the States) to sit back and reevaluate the situation.
A good friend tells me Germany has a holiday on May 24 as well - Whit Monday. They sure could use one. It was amazing to see that Cheshire Cat – Mark Haines of CNBC, absolutely surprised when he was told the U.S. companies in the S&P 500 index derived 30% of earnings from Europe. What planet has he been on? Didn't he know that? Another big chunk of major U.S. public company earnings come from China. It should be called The Tao, not Dow.
This particular market, although orderly in its downturn Wednesday, I have dubbed the “Euro Credit Panic”. It could arguably be called the “Angela Merkel’s Lost in Greece Vacation Panic” and it started on April 27, the day after the DJIA hit a one year high of 11,258.
The average U.S. market panic will create at least a 10% decline and as much as 20% – we witnessed an intraday low of 9,869 on May 6, which was a drop of 1,389 points or 14%. But I thought the low was not experienced fully by everyone, and so, it is normal that the market needs some more flushing out. People are obviously nervous we will revisit that low or worse, another 1,000 point panic drop from that fat-fingered trader that was proven never to have existed. The threat of uncontrolled computer selling adds to the general disquiet.
My message is: At DJIA 10,438, we are closer to the end of this panic than the beginning. The euro rally today is a sign of life that indicates the worse could be over already, and the stock market and commodity market could actually turn around in a hurry (UP). But I believe a Wednesday is no time to think a floor has been put in. Look for a late Friday rally to surprise on the upside. Make sure you are not overextended and make sure you have plenty of quality high-yield investments as rates have come down and interest rate hikes have been deferred.
I have been particularly negative on oil and gas stocks and believe these could deserve more correcting as people have been too bullish on them. We are buying Calloway REIT (CWYUF.PK) this Wednesday morning which has a yield of 7.5% and will go ex its distribution in only six trading days. We are buying BCE (BCE) in the $31.60 area yielding 5.50% to make sure we take advantage of the furious calls to brokers/advisors that surely are being generated by the panic market.
We sold 75% of our gold position at the top and bought some back yesterdayv (Tuesday). Gold is in deflationary mode, meaning it will have peaks and valleys, not the “straight up to $3,000” mode that the gold bugs believe is imminent, and is more typical of a hyperinflation.
On Pulp and Paper and Lumber: Pulp FOEX indices released today show price hikes put through in May are sticking, in spite of the market turmoil. Lumber futures are still weak and not helped by the Mortgage Banker Association Purchase Applications number being down 27% for the week of May 14.
We have trimmed positions in Canfor Pulp (CFPUF.PK), Interfor and Tembec (TMBCF.PK). Better to live and trade another day than to be carved up if the DJIA swoons below 10,000.
Disclosure: Long BCE, Telus and Canadian forest products and Real estate REIT's, US Timber REITs, and Gold ETF