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An update on my personal investment philosophy

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May 25, 2008 – Comments (10)

Around six months ago I posted a message in my blog that outlined my personal investment philosophy.  Not only did I enjoy sharing my thoughts and ideas with everyone here in the great CAPS community, but it helped me as well.  I am now back with an update.  I am going to have to be fairly general in a lot of the things that I am bullish and bearish on because I want to remain nimble in the current market environment and TMF rules prevent me from trading specific stocks within ten days of mentioning them.  Everything that I am trading in real life I currently have in my CAPS portfolio.

LONG PLAYS 

I continue to be very bearish on the U.S. dollar and very bullish on "stuff"  aka commodities, like grains, metals, and of course oil / natural gas.  While many in the investment world, like Barron's, have continually doubted the global decoupling theory.  I believe that it is very real.  Perhaps not complete decoupling in that China and India will be completely immune from the current slowdown in the U.S., but they will remain enough so that their demand for natural resources will be insatiable.  Throughout 2007 I concentrated my portfolio in companies that will benefit from these trends, most heavily in anything having to do with oil and natural gas which in addition to demand from emerging markets have the added bonus of mismanaged infrastructure in major producing countries, geopolitical risk, and a finite supply.  Add the tailwind of a weakening U.S. dollar to this trend and this trade was a no brainer.

Having said this, the current mind blowing rally in the price of oil has exceeded even this bull's wildest expectations.  I am not selling anything, but I am fairly hesitant to significantly add to any of my positions until a pullback happens...if it ever does.  What I have been doing is concentrating my portfolio more in my favorite companies.  As everyone can tell, from my constantly full 200 pick CAPS portfolio I like to buy a lot of companies.  I have been selling some of my smaller E&P positions and buying more of my two favorite plays, neither of which are in the U.S.

As I mentioned, I continue to be bearish on the U.S. dollar.  This theory has led me to purchase companies that are heavily involved in exporting goods.  There has been a lot of weakness in some of these companies lately, but I believe that this trend will continue.

NEW: SHORT PLAYS 

None of the things that I have mentioned should surprise anyone who has followed my blog.  Well, here's the new twist to my real world portfolio...shorting.  After taking a loooong vacation from shorting stocks in the real world I have begun to do so again.  I decided to do so for two reasons.  The first is that despite trying to be as positive as possible when writing articles for my blog, I have been having a much, much easier time to find stocks and industries to bash.  I finally decided to cave in and said to myself, if some of my best investment ideas right now are shorts, why not play them for real.

I have started shorting small groups of stocks in two sectors.  My largest short positions are in restaurant stocks.  I have written on numerous occasions in the past that I think that this sector is headed for a world of pain.  I have absolutely no doubt that this is the case...the only question is when.  If the average person who receives a government stimulus check is as stupid as most believe and they waste it on going out to dinner and buying crap then it may delay the pain for this sector.  Either way, it's coming.  Here are the three main reasons why:

1) Outrageously high prices for gas and food are going to cause discretionary consumer spending to fall off a cliff.

2) Restaurants are already feeling the pain of higher prices for things like bread and vegetables, but they haven't seen anything yet.  Significantly higher meat prices are right around the corner.  Meat price inflation has lagged the inflation for other types of food because producers decided to rush their animals to slaughter.  I was actually early on this trend, but it has been starting to get some press in the last couple of weeks.  Here's an example: Pricier US chicken coming to a store near you.

3) The July increase in the minimum wage (and another one that is scheduled for a year from then) will increase labor costs at restaurants.  The food services' industry is currently the largest U.S. employer of minimum wage earners.

So there you have it.  Consumers will eat out less in an environment where ingredient and labor costs will be rising.  It is a perfect storm that will hammer even the best-run companies.  In shorting them for real, I have been looking for casual dining chains (not fast food) that have P/E ratios of 20 or higher.  There's a fat chance of any of these companies being able to generate 20% earnings growth in the current environment.  A concentration of stores in the areas of the country that are being hit the hardest right now, like California, Florida, or the Midwest doesn't hurt either.

The other area that I have started to short companies in is credit card companies.  Credit card delinquencies are on the rise and consumers will continue to rack up massive credit card bills as they are no longer able to afford the basic necessities of life, like expensive food and gas.  I have been looking for pure credit card plays that have actual exposure to the debt, not companies like Mastercard.  The credit card companies are going to have to keep more of the credit card debt on their books in the past if they are unable to securitize it and there is going to be a dramatic increase in defaults as real wages significantly lag inflation and the unemployment rate rises.  An exposure to auto loans as well as credit cards is a plus.  I am trying to stay away from companies that have a large number of bank branches that will provide them with access to a cheap source of funds, but a small presence is fine.

 

MISSED OPPORTUNITIES 

The only short play that I have written significantly about that I have yet to short in real life is Mexican airports.  Man I really missed the boar on this one.  Companies like OMAB and PAC have been getting crushed and I saw it coming from a mile away.  Oh well.  They probably have a lot more pain to come.  The more traffic they have, the more money they make and traffic will continue to weaken at them as U.S. and Mexican consumers are hit with higher prices for food and gas (tortilla prices have risen so much that there are major protests in Mexico).  Additionally, higher fuel prices are causing airlines to raise their ticket prices causing a double whammy...consumers have less disposable income to spend on a thing that is becoming increasingly expensive.  It's getting so bad that several airlines could eventually go bankrupt.  The low-cost Mexican carriers are at higher risk for this.  Any of them going bankrupt would hurt the traffic levels at Mexican airports as well.

MEMORIAL DAY THOUGHTS 

 

On this Memorial Day weekend it pains me to be so bearish about the American economy and where our terrible politicians are taking us.  I have been doing activities that fill me with a tremendous sense of national pride like sitting in the stands of a Yankee game with my son, eating a hot dog and peanuts and going to parades.  Unfortunately, there's no room for sentimental feelings in the cold world of investing.  If the government is going to run our great nation into the ground I have an obligation to protect my family by hedging against it in my investments.  I have done so by investing in oil companies, ag companies, and foreign companies.  By no means to I believe that the U.S. is doomed, just that we are losing our place as the world's most dominant nation.

I always find summarizing my personal investment in writing pholosophy helpful.  Hopefully some of you will find something here that helps you as well.  I'd love to hear others' thoughts on my current philosophy and suggestions about companies within these sectors that would make good purchases or shorts.

Have a great Memorial Day weekend everyone!

Deej 

10 Comments – Post Your Own

#1) On May 25, 2008 at 10:07 AM, TMFDeej (99.26) wrote:

Wow, that corn picture is a lot bigger than I thought it was :).  Don't forget to scroll down to catch my ideas on shorting stocks.

Deej 

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#2) On May 25, 2008 at 10:10 AM, WillSurfForFood (73.69) wrote:

Thanks for the summary of your investment ideas Deej. The one thing I keep thinking about is the realtionship between oil and other commodities. I think the lack of growth in oil production and higher prices that come with it will put a cap on world economic growth which will in turn limit demand for metals. I think the soft commodities should continue to do well. It is just a theory and I'm curious what others think.

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#3) On May 25, 2008 at 11:51 AM, devoish (96.56) wrote:

Under the Fair Labor Standards Act (FLSA), the federal minimum wage for covered nonexempt employees is $5.85 per hour effective July 24, 2007; $6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009. Many states also have minimum wage laws. Where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher minimum wage rate.

I have never worked in a restaurant, but I am guessing that when I sit down to eat for 1&1/2 hours the minimum wage workers involved in my meal are the waiter, the busboy, the dishwasher,and hopefully someone with a mop and some cleaning agents. I also am quite cetain that these people are not dedicated to my table and are responsible for at least five other tables.

$1.40/hour increase times a 1.5 hour meal, times four employees, divided by 5 tables, adds less than $1.75 to the $40.00 check my table of four is paying.

Those numbers are purely estimated, so if they are a mile off I would love to hear from someone who has worked in a restaurant who can tell me better but I think you are overestimating the impact of mimum wage.

Unemployment, the devalued dollar and the impact of higher fuel prices spreading throughout the economy I think you are spot on with.

On a side note, I buy organic food for my family whenever I can. Organic food prices have not been impacted by rising prices for petroleum based fertilizers, or pesticides. Noone is growing organic corn for biofuels either, so that issue has not impacted our prices either. Transportation costs I am sure will eventually hit us. At WFMI I was buying a two lb. bag of organic rice for $2.59, a month ago there was a sale and I bought quite a few bags for $2.00ea. When the sale was ended it is at $2.79 for the same two lb. bag. I have no idea what conventionally grown rice costs. Organic Valley milk has not gone up in price either. Yet.

In the past I paid less attention to what I was spending on food, but it is what I am spending outside the food store (fuel) that has me paying more attention to what I am paying inside it.

http://www.organicconsumers.org/articles/article_12216.cfm

I like UNFI better than I like WFMI.

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#4) On May 25, 2008 at 12:42 PM, IBleedConcrete (34.28) wrote:

devoish - According to CAPS the restaurant industry average profit margin is .06% right now, with a 5 year average of 6.6%.  Suddenly that piddly little $1.75 per table is pretty important.

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#5) On May 25, 2008 at 3:07 PM, Tastylunch (29.36) wrote:

By no means to I believe that the U.S. is doomed, just that we are losing our place as the world's most dominant nation.

unfortunately I strongly agree with this. You have no idea how sad that makes me. 

I agree with the rest of your take. Not sure I have the guts to go into credit cards yet, I think it could be a year or so before they blow up...

One sector I've been thinking about looking into that nobody in CAPS blogs has been talking about is newspapers. My local paper the dispatch has laid off most of it staff and has gutted about 40% of thie local content.Newspapers been bad forever it seems but I think this environment could finish a lot of the weaker ones off and hurt the rest. They don't seem to figured out how to make money on the interwebs, their subscribers continue to flee and with retailers in trouble their ad business has got be in line to take a big hit. Most of them are really beat up already but WPO and NYT still have some room to go imo. I wish I listened to my gut and went into these earlier.

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#6) On May 25, 2008 at 5:25 PM, MakeItSeven (31.64) wrote:

I agree with almost all of what you said but I suppose you're looking for different opinions, not agreement :).  My 2c:

- industrial commodities might not be so hot since a few percentage change in supply/demand may effect a big change in prices.

- if you're certain that US dollar will go down, a good way to do that is with RYWBX.  It's up 13.95% so far this year and pays 16.67% in dividend according to Morningstar.

- another area for shorting is insurance companies due to increased frauds, investment problems (aka AIG), and even increased payments on non-fraud accidents (I just raised my car liability insurance to over 1M since I heard that sometimes people might let the accidents, with you at fault, happen when it could be avoidable).

Investment is not about "wishing" as the perma-bulls like to accuse short-sellers.  It's about looking at the cold hard facts and make your judgement in order to survive and, hopefully, prosper.  There's no lack of investment money in the US so good companies will automatically shine and have plenty of money to invest and expand.  The bigger risk, as demonstrated in recent years, is not the lack of investment but the excess of bubbles. 

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#7) On May 25, 2008 at 5:51 PM, IBleedConcrete (34.28) wrote:

Slightly off topic but related to the dollar's value.  Have you heard of any banks or brokerage firms which offer checking or money market accounts tied to a basket of currencies, not just the dollar?  It might be costly to make a lot of foreign exchange transactions but it would come with less individual currency risk.

Personally I don't have the amount of liquid assets or the risk aversion required, I'm just curious.

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#8) On May 25, 2008 at 10:09 PM, DemonDoug (34.07) wrote:

deej, got any specific recommendations?  I've looked at PNRA as a short candidate as it's had a huge runup and I believe is overvalued.  I wonder if there is a short restaurant ETF.

As always, I agree with your theses.

Also, I don't think it's such a bad thing that the US loses it's dominance.  Doesn't make me sad.  The US can't carry the world on it's back forever, so it's I think a good thing for humanity for other countries to raise the standard of living of humanity.  It's also a known fact that industrialized nations have lower birth-rates, which again is better for the long-term survival of all humanity.

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#9) On May 26, 2008 at 12:49 AM, devoish (96.56) wrote:

ibleedconcrete,

Thanks for the stats. 

devoish - According to CAPS the restaurant industry average profit margin is .06% right now, with a 5 year average of 6.6%.  Suddenly that piddly little $1.75 per table is pretty important.

My point is from the customers point of view, rising everyday costs of grocerys, gas, heating oil etc. costing you $100.00/ week more than you were used to is going to keep you away from restaurants as Deej suggests. Whether your bill is $40.00 or $42.00 because of minimum wage is not going to stop you from your Friday night at the restaurant if you still had that $100.00.

From your margin stats the restaurants already have to make up 6%, add to that having to make up $1.75, which is 4% on a $40.00 bill, (and a lower percentage if the bill is higher). If they raised prices for both expenses plus keep their 6% profit marging that $40.00 bill goes to less than $44.00. In order to  maintanin their 6.6% profit margin they need to get an additional .26 cents ( $4.00 * .066) bringing hte bill to $44.26. If I have an extra $100.00 a week, like I did last year, I will notice $5.00 on the bill and switch from Panera's to Fridays in discust at the increase, while someone else from Fridays is discusted and switches to Panera's and the restaurants soldier on. But when my $100. disappears because gas is $50.00 more each week and grocerys are $20.00 more each week and the money I budgeted for heating oil was to low last month to cover my actual bill, I stay home. Then the pool of restaurant customers shrinks, and they start going out of business, until there are enough customers to support what is left and their struggle for supremacy of a smaller pie continues. But it is not the minimum wage that did it. In fact, had that $100.00 not disappeared into oil and grocerys, the minimum wage increase would have created 5 potential new restaurant customers, who suddenly have an extra $85.00 after their 60 hour work week, and found themselves with a few extra bucks to spend for a lunch at Chili's, creating a job opening for one more busboy or a little more profit for the owner.

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#10) On May 26, 2008 at 9:33 AM, TMFDeej (99.26) wrote:

Hi Doug.  I'm short a lot of restaurants in my CAPS portfolio.  You can poke around there for some of the ones that I cannot talk about.

IBleedConcrete, cool username.  If you want a CD or account that gives you access to different currencies, check out Everbank.

Deej 

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