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That lonely sinking feeling



January 17, 2014 – Comments (12) | RELATED TICKERS: MGM , PSX , PM

The Cowboy Junkies are probably not whom you turn to when you are looking for investment advice, but I was looking at DragonLZ's recent blog entry about how to know when the market is topping and thinking about gut feelings, technicals, and valuations and I find myself in the same boat - I don't like this market, not one bit.

Sector rotation is the name of the game for the last couple of months and one of the sectors that suddenly got off on a tear are the casino stocks.  MGM, the most highly levered of the large names, has placed a huge amount of gains into my account, completely offsetting the totally wrong call I made on GCVRZ - and if anyone followed me into that warrant, I am sorry, because I got it totally wrong.  Not the first time I've screwed up on a warrant bet, either (I am talking to you, JMBA); I'm no good at them.

Now I've been holding casino stocks for a few years because I gamble and stay at Vegas from time to time and I've learned that, unlike John Cusack, at the end of the movie I really do prefer a sure thing.   But what I've noticed is that when the market is frothy and toppy - when the hedgies are trying to churn a few more drops of espresso out before the foam goes flat - the casino stocks generally pop, and pop heavy.  Small cap industrial names and energy - cyclicals - tend to do the same thing to a lesser extent.

And that's kind of the pattern I'm seeing.

I don't know quite how to interpret Buffett's bid for PSX's midstream assets.  They'll be a nice complement to MidAmerican Energy Holdings; I am divided as to whether they'll unlock more value for PSX by turning it into a pure refinery play; or whether Buffett just skimmed the cream off a good stock and turned what's left into a run-of-the-mill competitor to VLO and TSO where the crack spread rules all and volatility is king.  I am sort of fearing the latter, and, honestly, if I wanted to own a TSO and make crack spread bets, I could have done that any time.

Finally, I am noting a distinct lack of interest from the market in my beloved tobacco stocks, PM and MO.  10-year treasury yields are flirting with 3% and I think if you assume that PM and MO can't continue buybacks forever, that the risk of capital loss in these names at a risk free rate of 3% is starting to make their dividends - especially reinvested dividends - look like dicey long-term prospects.  

The entire landscape for investors looks dicey and I think that is the main reason there is any interest in stocks right now at all - everybody knows, especially Leonard Cohen, that real inflation is happening even as the CPI numbers and the Fed say no - and everybody knows that stocks represent real assets, valued in dollars that are worth less every day.  As soon as an alternative arises - even a 4% risk-free alternative, as in the Forsyte Saga - people are going to dump their South Seas shares - Macau, I am looking at you - and the landscape is suddenly going to look very different.

That's my story and I'm sticking to it.  I still think we've got about 5% to go in the major indices from here.  But if you've got runners, consider taking some profits. 

12 Comments – Post Your Own

#1) On January 17, 2014 at 1:59 PM, ikkyu2 (98.48) wrote:

OK, this time I took my own advice.  I just hit the bid on ten stocks and paid 10 commissions.  I am 67% in cash.  Time to hit the showers :)

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#2) On January 17, 2014 at 2:55 PM, MoneyWorksforMe (< 20) wrote:

Well said, + 1

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#3) On January 17, 2014 at 3:50 PM, Valyooo (34.92) wrote:

I'm 110% invested! but 35% of that is short term trades. By. Ext month I'll be 25% cash

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#4) On January 17, 2014 at 4:14 PM, NOTvuffett (< 20) wrote:

keep some powder dry


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#5) On January 17, 2014 at 7:25 PM, constructive (99.97) wrote:

I don't follow your thinking on PM. Why assume that buybacks can't continue? How do slightly higher (but still low) interest rates negatively impact the value of a high ROE business that can pay dividends or buy back stock with its free cash flow? And wouldn't you expect tobacco to underperform in a more bullish environment and outperform in a more bearish environment?

I am liking PM more these days but haven't bought any yet. 

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#6) On January 18, 2014 at 12:34 AM, ikkyu2 (98.48) wrote:

Was listening to CNBC this afternoon on a long car ride - I use SIRI satellite radio.  I listened along, nodding, as Bob Pisani and his guest pontificated about how earnings aren't, so far, growing into valuations.  The guest at one point said "If the 10-year Treasury hits 4% you'll see a flight out of equities" and I remembered what I'd written this morning and laughed out loud.  So much for contrarianism.

Still, equities right now are kind of a "clothespin" buy - what I mean is, you put a clothespin on your nose, buy the S+P at this P/E, and try to pretend it doesn't stink.  I am glad to be backing out at this time.

Mega, PM and MO got clobbered in the last major downdraft; they just got clobbered a lot less than everything else.  I think the most worrisome thing about both those stocks is decreasing revenues year-over-year.  The only reason EPS grows are these buybacks.  I think the dividend has been a major draw for tobacco stocks and as rates rise they become less attractive.  

I've cited in this space my belief that PM and MO are the 100-year stocks you want to own if you have to pick a stock that you can't check in on for 100 years.  But I'm not certain about this thesis.  There are strong secular trends against tobacco consumption: Bill Gates and Warren Buffett have devoted billions to anti-tobacco initiatives worldwide; every government that pays for healthcare, which is all of them, has strong anti-tobacco initiatives underway; and people really don't like to die of heart disease or cancer.  That tobacco companies exist at all in the face of headwinds like these is a marvel and a testament to the power of neurotransmitter modulation; nicotine won't get any stronger, but I think anti-tobacco efforts might, so that is the eye with which I am viewing tobacco stocks at this time. 

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#7) On January 18, 2014 at 1:32 AM, Valyooo (34.92) wrote:

It's just a pet peeve, but I hate when people say things such as "a flight out of equities". That's impossible. For every seller there is a buyer. So for everybody fleeing, there's an equal amount of people flocking to equities. Revalutation would be an accurate term. 

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#8) On January 18, 2014 at 2:12 AM, awallejr (56.54) wrote:

Not necessarily Valyoo it could be 1 person buying from 10 people fleeing.  But I don't adhere to Ikkyu's thesis since there are plenty of stocks selling for PEs of 10, which would be considered cheap.

I think this bull market has years to run absent black swan events.  Go ahead go in cash and get maybe 1% yield. You know I want corrections, mainly because it gets new money into the market.  But people are still scared since 2008/09 is still fresh in many people's memory.  Smart money buys the dips on stocks showing solid earnings.

In the end follow the earnings.

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#9) On January 18, 2014 at 12:41 PM, constructive (99.97) wrote:

Thanks, that makes more sense.

I assumed that the rest of the world where PM operates might be 10-15 years behind the US in anti tobacco measures on average. In which case they still have a runway ahead of them. MO's US business has made a lot of money over the last 15 years.

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#10) On January 21, 2014 at 12:37 PM, ikkyu2 (98.48) wrote:

I would hesitate to assume the US is leading the world in any significant way in 2014, Mega.  I'd like it to be true, but I find no evidence that it is.

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#11) On January 21, 2014 at 1:02 PM, constructive (99.97) wrote:

US smoking rate is 18% and declining, global smoking rate is 18.7% and declining a bit slower. With population growth, global cigarette use is still increasing.

I don't like reading this stuff, I'm talking myself out of investing in an addictive product that gives people cancer.

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#12) On January 21, 2014 at 10:57 PM, ikkyu2 (98.48) wrote:



The WHO has a huge amount of data on smoking statistics.  I lost the link to the good graphs, but it turns out that Europe is the major smoking hub of the world; the US smokes more than nearly any non-European country.

All countries are investing money in anti-tobacco measures.  They turn a profit on these monies when it comes time to pay healthcare bills. 

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