Wednesday I spent the bulk of the trading day cutting my exposure to the inflation trade that I’d put on. My baseline reasoning is that oil has been the key driver behind inflation, but today’s oil inventory report was very bearish for the market and resulted in some technical damage as oil dropped below the $87 support level intraday. Although oil barely managed to climb back above $87, I believe that the technical damage has been done, and we are likely to see added selling pressure over the next few weeks and months. Given the substantial amount of speculative money still in the oil ring, prices could potentially correct pretty sharply here, and that will surely help to temper inflation expectations over the next few months.
As a result, I sold some positions in my portfolio that were centered around the inflation/global growth trade, and continued to rotate into recent purchases such as staffing and consumer plays. These buys are clearly with a value orientation, because growth looks to still have plenty of room on the downside. Here are my moves:
(VGZ)–I sold the rest of my position at $4.86. Gold in general performed well today despite the oil selloff, which is interesting. However, oil and gold tend to trade together, and I have no thesis for them decoupling. Therefore, plunging oil prices increase the risk in gold, so I sold my position.
(RIC)–I sold half my position at $3.45. The reasons above apply, but I chose to hang on to a still sizable position because I believe this stock has a near term catalyst in the form of Q4 earnings.
(TLT)–I covered the short at $94.65. I don’t think the long bond yield is going to go much lower, but if inflation eases, there is no reason for it to continue higher in the near term. There is a cost to shorting the long bond, so I’d rather book the profit and sit on the sidelines for now.
(CNEH)–I sold a quarter of my position at $2.24. This stock is still ridiculously cheap, but it is an oil stock and that isn’t the best sector to be in right now.
(XTO)–I sold the entire position at $50.97. Natural gas is a different play from oil, and I think it is a lot less vulnerable. Nevertheless, I already have exposure through CHK, and natgas could come under pressure if oil drops substantially. I’ll take my small profit here and cut some exposure to the entire energy sector for now.
(BOLT)–I sold my entire position at $18.85. Another company that I like long term, but the fact of the matter is that the oil services sector is going to suffer if oil tanks. This stock is notoriously illiquid, so it doesn’t take much to drive it lower.
(PKX)–I sold my position at $126.68. I don’t think basic materials stocks have bottomed yet, and especially not Korean basic materials stocks. I’d rather take a small loss and let them come in more.
(USO) March 66 puts–I bought a moderate size position in the USO March puts to play the potential downside in oil.
(CHCG-OLD)–I increased this position by about 120% today at $2.75. I continue to like overseas consumer stocks, especially when you can get them this cheap. With 2007 guidance of 43-47 cents per share EPS and earnings due out in the next few weeks, I am surprised by the panic. That said, it traded 2x the average volume on no news today, so I’m thinking we could be seeing some capitulation. It looks like an opportunity to really get a position in the stock, and that’s what I’ve done.
(TBI)–I doubled the position at $13.00. This was not well executed, as I got overanxious in adding and didn’t get as good a price as I could have. That said, I have continued to be conservative with position sizing, and I’m going to continue to buy it as it declines. The stock is cheap, the balance sheet is clean, and they’ve got room to buy back stock if it goes much lower.
All in all, I’m looking to shift to longer term value plays, and that means buying the beginning of the cycle stocks. The financials and homebuilders haven’t yet come back far enough to tempt me, but I continue to watch and wait.