Trade Like Jesse Livermore

by: Chris Damas

“The only way to start being right is to stop being wrong.”

That’s an old saying from my favorite trader of old, the infamous Jesse Livermore, known for shorting the market in the early 20 century. See more of Jesse Livermore here.

I try to emulate Jesse in my trading, recognizing the market doesn't agree with me, and changing strategy to cut losses and get on the winning side.

By the way, Jesse shot himself in a hotel room at the age of 60 - that part I hope not to copy. You can't take the stock market that seriously.

When the DJIA (NYSEARCA:DIA) bellwether rose above 11,700 last Friday, I knew my stock market short positions were in trouble.

No matter that we have been short while still owning quality dividend paying stocks including Bell (NYSE:BCE), TELUS (NYSE:TU) and Imperial Oil (NYSEMKT:IMO).

The DJIA finally closed at 11,808 on Friday, up a whopping 267 points. Toronto was up a more subdued 119 at 11,949 without the big earnings releases that the DJIA has benefited from since Alcoa reported on October 11.

But the Canadian bellwether could come alive with Barrick Gold (NYSE:ABX), PotashCorp (POT), the aforementioned Imperial Oil and Nexen (NXY) releasing this morning. Rogers Communications (RCI.B) reported yesterday and earnings were above expectations.

It didn’t matter that the big Dow mover stocks that reported their Q3s last week such as IBM (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), United Technologies (NYSE:UTX) and Coca-Cola (NYSE:KO) said nothing about earnings in 2012, preferring to focus on the slam dunk already 10 months over 2011 (I think 2012 will be challenging). Only 3M (NYSE:MMM) disappointed, giving a clue that all is not well in the Houses of Merkel and Sarkozy.

It didn’t matter to the market that no big Dow stocks reported dividend increases. Yes, we got a few expanded share buybacks, from IBM and Coke notably, but these are promises, not obligations, to support their equities.

So I left it to Monday to confirm that being short this market was really, truly, indeed, the wrong way to be positioned.

When Monday opened up, I covered half of my S&P 500 (NYSEARCA:SDS) and S&P/TSX (HXD) inverse double leverage short ETFs.

The DJIA closed Monday up another 104 at 11,913, and I knew I had made the right decision.

As Jesse also would say, “when the market shows the path of least resistance you should get busy, and don’t dally."

So I stopped being wrong. I covered and started buying stocks, being right. I am taking some gains and rethinking where the market is going.

The DJIA is looking to be up over 240 points pre-market, which would be over 12,140.

I think the stock market will move higher now that the pressure from the European summit has resulted in a hatchet deal to let the Greeks, the European banks, and the politicians off the hook. It’s another matter whether “Occupy Wall Street” will move to “Occupy Brussels," as the 99% that didn't get bailed protest the money printing announcements.

Trading notes:

A few stock ideas I have been working on and starting to buy:

Aastra Technologies (OTC:AATSF) or AAH on Toronto - really has been hammered with 80% of their business stemming from Europe. But at $13 last Friday this stock was a steal, with a market cap of only $190 million versus sales in the Q3 announced Friday after the market close of $156.6 million in revenues, cash flow of $43.4 million, and cash and STI of $118.5 million. Twenty cent dividend declared with Nov 1 ex date.

The stock trades lightly and already moved up to close at $15.84 yesterday, where I bought some more. Could easily go to $20 in this market rally.

PetroBakken (PBKEF.PK) or PBN on Toronto – I have been enjoying trading this one for the past couple of weeks, buying progressively higher from less than $8 to now $8.32 with sales above $8.50.

PBN says they have 170 million in oil equivalent reserves, mainly light sweet in Saskatchewan and Alberta, and at $95 WTI should generate $1.0 billion in cash flow per annum versus a market cap of $1.6 billion CDN. All the hand-wringing about the 96 cent dividend being cut or the $750 million convertible debt being put back to the company in February 2013 goes away when the oil price rallies and the company either sells itself to the Chinese or buys back those converts.

PBN just went “ex” 8 cents today, but the market reflects anxiety about a cut in dividend. If they cut the dividend by 50% to 4 cents per month that will help generate $90 million more cash flow for more drilling in the Bakken, and the stock would still have a good yield of 5.65% at $8.50.

Because crude is up $3 today I would not expect weakness on PBN but I would trade it. I am a seller if it gets too frothy but my minimum target price for a buyout would be $12 based on recent takeovers in the Bakken such as Brigham. PBN reports Q3 on November 9 and over 100 million of the 187 million shares outstanding are owned by PetroBank (OTCPK:PBEGF).

Canfor Pulp Products Inc. (OTC:CFPUF) or CFX on Toronto – It was wise to wait for CPPI’s Q3 to be released before buying this one back (recently sold at $14.50 area), in spite of it going “ex” a 40 cent dividend on November 1.

The company estimated it lost 20,000 more tons of pulp production in Q4 after losing 45,000 in Q3, and the boiler retrofit under the Green Transformation Program cost almost $20 million more than expected due to delays. This extra expenditure will cut into Q4 cash flow, but over the long term, the project will reduce energy costs and improve efficiency. Note CPPI has always benefited from getting its residual wood chips from 50% owner, Canfor, a strategic advantage. They had built up inventories to allow for the big turnaround project, so sales and cash flow were decent, even if production was down.

CPPI currently pays a juicy but possibly vulnerable annual dividend rate of $1.60 (12% yield), which is not being completely covered at current cash flow levels. The stock got pummeled down to the $13.25 area where we have bought some. We plan to buy more only if it goes lower. Street analysts are generally negative on CPPI and think NBSK pulp prices are going to crater next year, but the European debt relief deal should keep the market for pulp from tanking.

CPPI does only 20% of its revenue in Europe, 40% in North America and does 40% of its business in Asia.

CPPI just announced a $70 price cut for its main product, NBSK pulp, for China, where pulp traders have been sitting on their hands. Even so, tissue plants continue to be built in China, and tissue requires NBSK pulp for strength.

I think the Chinese and a probable price cut in North America are already priced into the stock. With the divvy, you are buying the stock at $12.85, yielding almost 9.3% even if they cut the dividend by 25% to a more manageable level of $1.20 per share. My target for the stock is $15.

I am keeping my short positions on at half mast, because I think the market still is riding on 2011 euphoria versus a 2012 earnings hangover. In the meantime, party like its 2009.

Disclosure: I am long AATSF.PK, PBKEF.PK, CFPUF.PK, BCE, TU, IMO.