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A Turning Point?



June 09, 2011 – Comments (0)

Location: TMF1000's CAPS Blog

Author: TMF1000

June 8, 2011 -

Dow 12,043.56

S&P500 1280.26

Oil 100.62

Gold 1535.90

I have enjoyed the bull market that we have experienced since the stock market lows of March of 2009 when the Dow and S&P500 hit intraday lows of 6,440.08 and 666.79 respectively. The Dow reached a post recession peak of 12,928.45 for about a 100.7% gain on May 2, 2011. The S&P500 new peak was also hit on May 2, 2011 and the 1370.58 post recession peak represented a gain of 105.5%. As nice as those gains were, individual stock investors should have done much better simply by buying good to great businesses. Good to great represent a pretty easy to hit range in my opinion, even for the newest of investors.

However, you can’t win unless you play the game. Many investors were too scared to invest when things looked the bleakest between November 21, 2008 and March 6, 2009, yet it turned out to be a great time to invest. A little money invested then would have produced great gains. And a “little money” is key. I don’t believe investors should throw money into the markets when indices are diving, but simply invest regularly small amounts. In bear markets a little can make a big difference in the next bull market.

Building a successful long-term portfolio is a lifetime pursuit and it isn’t that difficult if one doesn’t try to do it all at once. My goal is to regularly improve the quality of my equity positions over time. I want to learn about my stocks over time. I want to learn enough about them to be confident that I am channeling the majority of new money into what I have concluded are my best companies – conclusions that I have developed over time. I seldom sell entire positions, so I don’t only learn from winners, but also from my losers. I am always looking for opportunities within my portfolio and find changes in the economy will provide plenty of them as I make small tweaks to my equity and cash positions – again over time.

I don’t want to spend too many research hours on macro issues, but I don’t want to ignore them either. My portfolio is now providing clues that tell me to use patience and caution to temper my short-term decisions at least for now.

Oil prices are once again over $100 a barrel. That isn’t cheap. Supplies are fine, but speculators continue to keep prices high. They wouldn’t be investing if they didn’t have news to back their decisions. Supplies are no longer as important as the perception that oil is a dwindling resource and that China increasing prosperity will cause their demand for oil to soar. According to the 2010 BP annual report, China became the world’s largest energy consumer. They are now using 20.3% of global demand compared to the old leader the U.S who uses 19.3%.

I feel the indices may have a hard time moving much higher than the 12,928.45 top hit on May 2, 2011. The S&P500 hit an intraday high of 1370.58 on May 2, 2011 too. These numbers were lower than the intraday high peaks for the Dow of 14,279.96 and 1,576.09 for the S&P5090 both hit on October 11, 2007. The economy has improved but it isn’t close to as hot as it was running when the indices were hitting their peaks in 2007, so we cannot, in my opinion, expect the markets to hit those highs until the economy is doing better and oil prices are lower.

Oil prices are lower than its peak in June of 2008 when prices hit $147 a barrel. But oil isn’t cheap and threatening to go higher, even though supplies are fine. In 2007, when the markets were at their peak, oil prices were under $80. Speculators and demand from U.S, China and India are moving the prices higher and that could hurt any advances in the global economy.

My portfolio is sensitive to higher oil prices, but also higher cotton prices. I own a lot retail apparel stocks, so higher cotton prices affect their margins. My concerns are not focused on higher end retailers like Coach, but companies like Citi Trends (CTRN) and Aeropostale (ARO).

Retailers have weapons to fight higher cotton prices. Most manufacturers will use rayon and Lycra rather than cotton. The USDA estimates that global consumption of cotton will rise to 119.5 million bales and world production will rise to 125 million bales. The U.S will plant about 12.6 million acres and harvest about 18 million bales. This could help to ease prices, but that would depend on the quality of the crop.  High record temperatures and drought conditions could hurt the crop. The weather hasn’t been very cooperative in recent years.  Unfortunately a weather scare could cause prices to rise before the harvest in the fall regardless of the weather.  Actual bad weather could send cotton prices up to $3 per pound and higher.

Presently cotton prices are about $2 a pound. Cotton prices hit a high of $2.12 a pound in March of 2011. Last year cotton prices were as low as $40 a pound, so this is a big increase. And it could get worse. So I am cautious when adding to my apparel companies as cotton prices rise until I can get a price that I feel reflect the risk and the costs to switch to different materials. But while cotton prices are rising, and these retail stocks go down, it presents an opportunity. Unlike oil, cotton isn’t a dwindling resource. As producers increase acreage for growing it, the prices should go down and could go down quickly if weather cooperates. So I am watching my retailers closely. Overall, I feel my retailers are weakening.

Dollar stores seem stronger which tends to occur when the economy is weak or weakening. Wal-Mart just started their Wal-Mart Express stores to battle the Dollar Store threat. These stores are 1/10 the size of a regular Wal-Mart. Strength in this area of retail makes me think consumers are starting to take control of their spending.

Restaurants are still doing well, this is a good sign. I will be watching Starbucks very closely for the latte effect. So far, they are not showing signs of weakness.

I am not particularly worried about the economy at this point: I don’t think markets are going to dive to old lows. The markets may go higher before lower, but I don’t see them rising much higher than their May 2, 2011 peaks unless unemployment improves and/or oil prices go lower, so a correction is likely in my opinion.

Corrections aren’t bad things; it gives us a chance to add to our favorite stocks. My Caps list is my watch list and I own about 55 of my CAP recommendations. Many on my Caps that I don’t own, I would like to own at the right price.  A correction could give me that price. I don’t see things going down to the recession lows. I am not even sure we will have a correction, but I think a mini-correction is possible and I will be looking to add to my positions and adding new positions as the markets fall. I have enough cash to take advantage of a drop, but I am not lightening too heavily. My cash position stands at 14.8% of my portfolio and I am comfortable with that if the markets drop or goes up from here. I am well inside my comfort zone regardless of the direction the markets eventually takes.

My hope for all investors is that they maintain the discipline to stay within their personal comfort zone. Be prepared regardless of the direction the market takes and have a watch list ready. The Caps feature is a fine way to track potential candidates for our portfolio.  I plan to take far more advantage of CAPS, the pitch notes and maybe even the blogging notes. I want to make sure, no matter what happens, I am ready to act on any new opportunities.

This blog is my notes and may not help other investors. It is meant to help guide my decisions that concern my portfolio. I am heavily weighted in restaurants and retail and like it that way. This is my first blog, I have never used this feature before, but it does seem a good place to keep notes on the economy that I believe will help me make better decisions as I build some positions, lighten some positions and keep cash at comfortable levels. Presently, I am very comfortable with cash in my portfolio at 14.8%.

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