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Robert Duval
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Professional Independent Trader, 16 years. Started as a equity index futures floor trader, now swing / intermediate trade, US stocks, international ETFs and stocks. Believe in correlation of markets, must undertand all markets to trade one well. Self taught by studying myself and other... More
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  • Stay The Course, Watch Emerging Markets As US Equities Grind Through Correction.

    This week US equities corrected sideways, as the overbought condition gets worked off. I am bullish into year end as markets digest eventual higher rates from the US Federal Reserve.

    In short, for this period in time, good news on growth, should be good news. Money should continue to rotate from yield oriented sectors, to cyclical sectors favoring industrial growth.

    This week I added to positions in (NYSE:BP) (NASDAQ:EXXI) (SRDL) in the beaten down energy sector. I fundamentally disagree with those calling the energy sector dead, as growth accelerates, I expect energy demand to pick up, not only in the US but in Asian markets.

    Note (BP) held above the panic - driven low:

    BP Chart

    BP data by YCharts

    SDRL Chart

    SDRL data by YCharts

    (NYSE:SDRL) is in full panic mode here -- I would reduce on a "bounce" -- so partially a trade and partially a long term investment. My average cost basis is about 32.50.

    The hysteria over (BP) potential fine, which is a long while from being finalized over the Gulf Oil Spill, and the total panic in (SDRL) over weaker oil rig bookings, and their Russian exposure, made it an opportune time to buy shares and sell puts on both companies.

    I am also highly positive on (NYSE:CBI). The shares have been knocked down on some -- questionable reporting -- on how they accounted for their backlog of orders. If one is positive on future US infrastructure buildout, in the energy sector or elsewhere, one has to examine this stock. Warren Buffett reportedly increased his stake in the company; although I would not invest for this reason.

    CBI Chart

    CBI data by YCharts

    Also of great interest should be Solar -- as (NYSE:TSL) announced they "can't keep up with demand"

    I am playing this sector via the blue chip name; (NASDAQ:FSLR). Note the major resistance just above 74. A move through this major level, could be explosive:

    FSLR Chart

    FSLR data by YCharts

    Turning overseas; I remain very positive on China "A" mainland shares ahead of them opening this segment to international investors further via the China connect program in October. Two ETF's to participate are (NYSEARCA:ASHS) and (NYSEARCA:ASHR), a China A shares small cap fund, and one replicating the CSI 300 index, respectively.

    As Investors lose their safe haven status focus on US equities; Emerging markets may benefit. Owen Williams feels China shares are not dissimilar to US shares in 2009:

    ASHS Chart

    ASHS data by YCharts

    ASHR Chart

    ASHR data by YCharts

    Also hanging strong as (NYSEARCA:EEM) corrected with the US, are India Small caps. I've written about this secular growth story, and was impressed by their strength this week.

    SCIF Chart

    SCIF data by YCharts

    Please see this article for more:

    This coming week I expect a somewhat softer tone from the Federal Reserve than markets may expect. The market has already priced in a hawkish tone, with continuing soft labour markets and inflation data, I don't see the Fed in any rush to raise rates quickly after conclusion of their QE program in October. For one reason, they do not want the Dollar to appreciate too quickly as well, this is inherent policy tightening. I expect a cautious, dovish oriented statement.

    UUP Chart

    UUP data by YCharts

    Best wishes to all investors, I appreciate your comments!

    Disclosure: The author is long FSLR, ASHS, ASHR, SCIF, EXXI, BP, SDRL, CBI.

    Sep 13 3:26 PM | Link | 2 Comments

    Its been a challenging few weeks.

    As the WSJ has publicized, active managers are having one of their toughest years ever, as the halting, slow economic recovery has been a source of uncertainty for so many. I am no exception.

    I have been looking for an intermediate top for some time, as I felt the combination of what has appeared at times to be an anemic recovery, weakness in Europe, fully valued US equities, very bullish sentiment, and a reduction in FED accommodation, was an unsustainable mix for the most highly valued areas of US equity markets.

    I have tried shorting certain indexes and high valuation stocks on several occasions in the last few months -- with negative results, overall. This has hurt what was an excellent year, now is only middling.

    I've changed my view, and focus somewhat, while still advocating caution on US small caps and other expensive areas of the market, like social media and "momentum stocks".

    First I will lay out where I think my assumptions may have been wrong, and then look at the remainder of the year ahead and where opportunities may be presenting themselves.

    I have assumed that the extremely slow recovery in the US, has meant a heightened risk of a failed recovery -- and a return to US recession down the road -- due to the apparent weak recovery in US housing, retail and by association, the consumer.

    I am shifting my viewpoint somewhat to a more constructive view, that the recovery is proceeding, just very slowly. I believe I have greatly underestimated the "shock value" of the events of 2008, following the bear market of 2000, and it's effects on long term investor and consumer confidence -- and that of corporations to engage in expansion, hiring and Capex spending.

    I also have to deal with my own bias. I began trading in 1998, just in time for the Asian Financial crisis. Myself, and my peers at the time on the stock index trading floor, always favored a fast bear cycle, profiting from the increased volatility and emotion.

    I very successfully traded the 1998 crisis, and made my initial career on the 2000 bear market, shorting aggressively as the tech sector unwound its overvaluation. I also traded 2007 / 2008 fairly well, as the volatility created many opportunities in both directions for the short term trader.

    After 2008, as I began more and more to focus on individual US stocks and less on indexes, and lengthen my holding periods, I successfully placed a number of "long side" trades, especially during periods of high anxiety where a clear setup existed --- but I always had a slight leaning to the "bear" side -- as that is the type of market I began in. I have never been exposed, to a secular bull market, and I began to underperform in the slower, grinding bull that has existed, through much of 2010, parts of 2011 and 2012, as I would exit long side trades prematurely, and switch to "short side trades" -- with very mixed results.

    The path from a high volatility trader, to an intermediate term investor (let alone long term) has been as slow and torturous as this economic recovery, and I have a long way to travel. As far as I know, I am the only one of my former floor trader peers to even attempt this transition. Most, as of today are completely out of the trading business -- and they are some smart individuals that could not make the transition.

    Today I believe, simply, the central banks remain in place, to ensure confidence in the financial systems in the US, Europe and Asia, until such time, as economic participants are ready to take the "handoff" -- and have the confidence to engage in economic expansion. That handoff may be gradually occurring in the US, where Europe is a few years behind -- but the ECB is there. Therefore, in such an environment, taking any kind of significant short position is both risky and illogical. Sentiment and valuations are elevated, but not remotely at 2000 levels, while interest rates are far lower.

    20X 120 in 2015 SPX EPS -- is expensive but certainly feasible, taking us to 2400.

    That kind of risk scenario, (2000 euphoria and valuations) may likely return, but is not in place today -- and in any event, would likely be preceded by elevated inflation readings and associated higher short term interest rates -- those would be signs to watch.

    However -- substantial opportunities exist in lagging areas of the market that would benefit from long - awaited Capex spending -- areas like industrials, materials and energy. It is possible lagging fund managers -- will need to "chase" the market higher -- as long as no overt negative catalysts appear.

    I do continue to be cautious on US small caps -- they look tired -- however other opportunities are opening up, partly perhaps due to rotation, and partly -- possibly -- as a result of ECB accommodation -- and that is the pending breakout in (NYSEARCA:FXI) and (NYSEARCA:EEM) markets.

    EEM Chart

    EEM data by YCharts

    FXI Chart

    FXI data by YCharts

    I am growing very bullish on these areas, and have been for some time, as they have done nothing in several years as the SPX has gone straight up --- valuations are attractive and sentiment muted.

    I have a pending article that will address emerging markets in further detail. I enter this coming week with 3 small short positions in (NASDAQ:Z) (NASDAQ:PCLN) and (NYSE:P), all showing technical weakness, a small short position in (NYSEARCA:IWM) via options, and more substantial positions in beaten down Energy names (NYSE:BP) (NYSE:SDRL) Industrials (NYSE:CBI) and emerging markets (NYSEARCA:VNM) (NYSEARCA:SCIF) along with Russia (NYSEARCA:RSXJ) (NYSE:MBT).

    Risk factors as the year progresses to this constructive stance; would be a shooting war in Europe, (or elsewhere); a major acceleration in inflation and / or short interest rates, or a severe hard landing in China. Right now I don't see evidence of any of these.

    Best wishes to all investors!

    Disclosure: The author is long SCIF, VNM, RSXJ, MBT, CBI, BP, SDRL.

    Additional disclosure: Short P, PCLN, Z

    Sep 07 12:59 PM | Link | 38 Comments
  • September Trading Update -- Lean Defensively

    This is the first installment of what I hope will become an intermediate timeframe focused, investment and trading blog.

    A few notes before we begin: This blog will be focused on my trading focus -- that is the short to intermediate terms in respect to commentary. For the very long term investor, such commentary may be useful only to make minor adjustments in portfolios.

    All commentary is simply a collection of my own thoughts and how I am approaching the current risks and opportunities. None should be taken as actual advice. Do your own due diligence.

    I come into September leaning very defensively.

    I recently listened to a very bullish analyst on TV; and his arguments essentially summed up what I believe to be the consensus bullish case in the intermediate term.

    I believe in examining both sides closely; and I'd like to state that I am a very long term bull on the American economy. Nowhere in the world, fosters the growth in innovation, work ethic, creativity, and entrepreneur attitude as does the great country as the United States.

    However, that is very different from examining the intermediate term risks, and the price paid for that risk.

    Back to the analyst -- his arguments; when asked about the rather pricey SPX at 19 TTM -- (I only use TTM, BTW -- When people start using, and pushing others to evaluate, company's valuations on other metrics such as EBITDA -- this is a caution signal on that company, or sector) --- and the high structural profit margins that exist today -- making the market (arguably) expensive in 2 different forms -- the actual TTM PE ratio, and the margins that exist to create that ratio --- the CNBC analyst declared the market "undervalued" -- because of the following macro forecasts he laid out -- and note these were asserted as "certainties".

    *Gdp growth will accelerate to 4% annual rate, helping top line growth;

    *Inflation will remain below 2% for an extended period;

    * Higher profit margins are a permanent new plateau, without wage growth to pressure them;

    * Interest rates will remain at zero or near zero for an extended period, resulting in further PE expansion.

    * Europe will have no lasting structural issues.

    I hear this and sounds wonderful. I want to agree with the Stiffel analyst, who just recently raised his target to SPX 2300 this year, from 1800! -- or the Citigroup analyst, who raised his target to 2400 "within months" -- after being bearish in 2012 and 2013.

    However I try to reconcile 4% GDP growth, with continuing no inflation, no wage growth pressuring margins, and continuing ZIRP policy -- and I am not seeing it.

    Regarding external risks -- normally I am a "crisis buyer" -- I always buy in the face of external crisis - driven selloff's like might be instigated by Europe's very weak economy, uncertainty over Russia's intentions, or the developing Syrian conflict.

    The problem is, there are no deals -- unless buying the Italian stock market on a minor selloff -- is a deal. To me its like a large retail chain advertised a going out of business sale, I show up and not only are there no discounts, but I need to pay an admission fee to enter the store. Forget it! Its like the potential tail risks -- are completely ignored by the current pricing model of the stock market.

    My reasons for caution at this juncture are also outlined in my most recent article; the net effect is in the current environment, I am seeing many more short side candidates than long, and its all about valuations and divergences.

    Some anecdotal "warning signs" -- to exceed caution:

    *M&A boom -- extremely high prices paid in the internet and tech sector, paid with stock.

    * Dramatic index price targets, mentioned above.

    *IPO boom, with the largest imminent (Alibaba, in one week, 20 Billion) --- Largest ratio of "money losing ipo's" since 2000

    *Record breaking Junk bond issuance, and deteriorating quality,such as PIK bonds (Payment in Kind -- not interest)

    *Continuing bullish / complacent sentiment

    * widespread commentary along the lines "this time is different" -- PE ratios and profit margins will remain at a "structurally higher" plateau, widespread use on Non-Gapp accounting

    My intermediate term strategy is to focus not on timing the indexes; but to focus my attention on weaker, unprofitable and debt laden companies as short side candidates. Sectors of continuing interest include selected retail, second or third tier internet, and special situations with questionable accounting facilitated by an overly accommodating junk bond market.

    To summarize;

    I continue to see a very slow growth environment economically in the US and around the world with tail risks, but a stock market generally priced for an imminent acceleration, without inflation, of that growth, and without consideration of such risks. This will last as long as it lasts -- but as in other periods, I believe risk is very underpriced at this level.

    Good luck to all investors and traders.

    Tags: SPY
    Sep 01 12:27 PM | Link | 79 Comments
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