Market downdraft predictable

The sudden two-day market carnage in gold (GLD) and energy (OIL)  was highly predictable, even if the catalyst for the sell-off was not.

 Here’s what we wrote just a week ago….

“When stocks are priced to perfection, then I start worrying” (Jan 13, 2011)

“The market is very strong, perhaps recklessly so, because usually a holiday weekend would be cause to consolidate. I don't fight the tape…I've kept my TSX index hedge because the big oil and gold stock weighting could cause more weakness” (Jan 14, 2011)



Cargill announcing the proposed sale of Mosaic (MOS), Steve Jobs, CEO of Apple (AAPL) taking medical leave, the timing of these events was not knowable.

But one could surely recognize a vulnerable stock market.  What hasn’t happened yet, what could happen, could be the catalyst, the pin in the bubble.

We have sold our only gold stock, Exeter Resources (XRA) and (TSX - XRC). It was painful to take the loss, but years of experience have taught me that even if a stock looks very low, never guess it can’t go lower.

I take 10% losses and call it part of doing business in the crazy world called the Stock Market. 

A +15% loss I call a survival trade, it puts a positive spin on it, as if it were elective surgery. This was one of those times.
 

On a positive note, our biggest position is TELUS (TU) and was the only stock in the Canadian S&P/TSX 60 index that was up this morning.

We have only one energy production stock – Nexen (NXY) which disposed of its 74.5 million units of Canexus Income Fund (TSX - CUS.UN) in a surprise bought deal to Scotia Capital and CIBC, at $6.40 Cdn/unit.

 
Again, the event wasn’t a surprise, the timing wasn’t knowable, but we did the right things and luck worked in our favor. We had sold all our Canexus at $6.88 and higher in December, based on valuation.

We had recommended Nexen in the Summer and bought Nexen a few days ago, as Brent Crude was trading well in excess of WTI, providing Nexen's North Sea Buzzard fields with attractive netbacks of $50/barrel.

The fact Nexen will have est $450 million Cdn in net proceeds coming in from the Canexus sale is a bonus and is available to pay down debt or fund CAPEX.The sale of Canexus also removes $500 million in debt Nexen had consolidated on the balance shee. Both factors will improve liquidity and creditworthiness.

We estimate Nexen will bring in $5.10 in 2010 CFPS and the extra spread from Brent prices could add maybe 50 cents more to that in 2011.  At $24 Cdn, Nexen is trading at only 4.3 times cash flow and the company should increase as its Long Lake SAGD operation ramps up production in 2011. Nexen’s prospective unconventional natural gas plays at Horn River and Liard could potentially double the company’s entire energy resource base, once proven.

Forest Product Stocks

US December Building Permits announced yesterday were up 16.7%. The more important number was the Single Family Dwelling number at 440,000, up 5.5%.

The fact that CME lumber futures rallied after that lackluster building permit number indicates that we continue to be in a bullish environment for logs and lumber.

May Lumber is currently at $319.20, up $5, bucking the ugly market action in gold and oil.

US Timberland REIT stocks were up today. We like Potlach (PCH) which garnered a mention on CNBC today, Plum Creek Timber REIT (PCL) and Rayonier (RYN), which recently announced a planned expansion to their specialty cellulose production.

 

Rayonier (RYN) reports its Q4 2010 earnings on January 25, as will another specialty cellulose producer we have recently purchased, Buckeye Technologies (BKI). 



January 25 will be earnings “Super Tuesday” for five major Dow components (Dupont, 3M, J&J, Travelers Insurance and Verizon).

Note we are not bearish on the DJIA (DIA), which contains a large weighting of defensive stocks.

Our "steady as she goes" theme of rising foreign revenues and profits for the ten top  components of the Dow, developed during the Summer credit panic, remains intact, and we see DJIA over 13,000 by month-end.

Disclosure: I am long TU, NXY, PCH, PCL, RYN, BKI.

Additional disclosure: This information was disseminated to clients and subscribers to the BCMI Report approximately 12-24 hours before appearing in Seeking Alpha.