|Trader Strategy Meeting
The Briefing Trader team officially meets every
two weeks to discuss our outlook on the market, trading conditions, and to
review specific investing and trading ideas. The Strategy Meeting Key Points
report provides an overview of this meeting. In the latest edition, we provide
updates on five positions all winners), discuss the near-term outlook for
the market and talk about what's working on our new Emerging Value system.
Will jump right in with position updates:
Citigroup Capital XII 8.5% Fixed/Float Preferreds (C/prJ 25.95):
Highlighted in Dec 19 report. Have picked up a $0.53 (or 2%)
dividend payment and sitting on capital appreciation of about 3%. This is one of
my largest positions. The common stock has performed extremely well over the
past month, which has helped provide a bid to the Preferred. Also seeing general
strength in Preferred stocks as investors become more comfortable owning Bank
stocks. No plan to sell position anytime soon.
Zions Banc 9.50% Series C Non-Cumulative Perpetual Preferreds (ZB/prC
26.42). Highlighted in
Dec 19 report. About 4% capital appreciation thus far. Will go
ex-dividend at the end of February. Will consider adding to position if pulls
back below $25.50 after going ex-dividend. Will need to evaluate market
conditions and company trends at that time, but not expecting much to change
between now and then.
Rentech Nitrogen Partners (RNF 25.00):
Highlighted in Jan 13 report. RNF has run more than 5 pts, or 25% in
just the three weeks since I featured it. This was my "yield with a
kicker" play (13% yield and exposure to rising Agriculture prices via
fertilizer), as I looked to take advantage of improving market and
U.S.economic conditions. Have continued to see strong bid under
Commodities-related stocks. However, stock has reached my price target. May look
to re-establish a position on a major pullback, but I'm out of it for now.
KKR Financial Holdings LLC 8.375% Senior Notes (KFH 26.12):
Highlighted in Jan 13 report. Have 4% capital appreciation from my
entry price and 2.5% from price I featured it. Will go ex-dividend in less than
two weeks. Strong run in Preferred stocks in the past few weeks makes strong
yielders like this one that much more valuable. Will be hoping for pullback
below $25.50 after issue goes ex-dividend to add to position.
Cosi Inc (COSI 0.93):
Highlighted in Jan 13 report. Stock up 43% from the price I
featured it. Price action aided by report of surprisingly strong comps
(+2.6%) on Jan 26. Results suggest that interim CEO and co's Board of Directors
kept their eye on operations while in the process of hiring a new CEO. Next goal
is for stock to stabilize above $1.00 in order to avoid delisting. Saw a high
volume advance to $1.00 on Feb 1. Stock remains within striking distance with
price action and volume suggesting a good chance of getting back above $1.00. As
I noted in the initial profile, this is a position I plan on sitting on for
quarters if not years, unless there are signs that the new CEO is falling flat
with a poor vision for turning around the company. So far, have liked what I've
heard from Ms. Stutz in interviews. I added to the position last week in the
$0.71 area following the strong comps report.
My only new position since our last update is a speculative Preferred stock --
GMX Resources (GMXR/prP 12.90 +4.15): I actually picked up this position
Thursday morning and sold out of Friday morning (today) into the gap up for a
more than 50% profit, so the position is no longer active. However, I am leaving
the commentary (which I wrote Thursday, Feb 2) intact for educational purposes:
The GMX Resources Preferred is an extremely speculative position that I'd been
researching Wednesday as part of my search for Preferreds of out-of-favor
Natural Gas companies. With Nat Gas prices continuing to fall through the floor,
seeing fear that smaller, high-cost producers will have difficulty servicing
their debts. In fact, I think many of them go bankrupt over the next year or
two. However, I've been looking for ones with enough cash to survive at least 12
months, which might provide sufficient time for Nat Gas to rebound to more
profitable levels and help drive improved cash flow & industry sentiment. I was
mixed on the GMXR story after my initial research. This is a Nat Gas explorer
that is shuttering its gas production and shifting its focus to Oil drilling.
Unfortunately, most of its Oil properties are unproven and the company purchased
them over just the past year. Based on these factors, I decided to pass on
buying the Preferred, which had fallen to distressed levels ($25 par
Preferred fell below $6.00 on Wednesday, equating to a yield of 39%).
However, after the close Wednesday, the company issued an Operational & Guidance
update discussing its latest drilling results and announcing expense reductions
that will keep co fully funded for 2012. This was big news, as it suggests that
the Preferred will continue to be paid (at least, until something else changes,
such as they start to run out of cash).
My estimate is that the expense cuts keep the Preferred safe for another two or
three quarters, which will give the company a chance to a) ramp up its Oil
production, b) turn back on some Nat Gas production should prices rebound, c)
find additional financing. That said, it would not surprise me if this company
failed to exist in two years, as the transition from a Natural Gas producer to
an Oil player is fraught with risk. But, for now, GMXR says it is fully funded
for the year, which makes the 33% dividend yield I was able to purchase the
Preferred for look extremely attractive. I picked up the position at a $7.10
average price and have already seen a 29% gain on an intraday basis. My target
for the position is the $10.00 area. I'm not suggesting that you buy the name
down here, rather highlighting the strategy.
I've found the Preferred to be one of the best ways to play distressed
positions. In fact, my largest position (that I've held for about 3
yrs) is a JP Morgan preferred that got flushed down to 50 cents on the dollar
during the financial crisis that not only rebounded to par, but now trades at a
10% premium to par. In fact, there were a host of Bank Preferreds that fell to
$2-5 during the crisis, that now trade back around $25 par value. When buying
Preferreds, it's important to pay attention to the covenants. I read every
prospectus before taking a position. For example, with the GMX Preferred two
features I like are that 1) the Preferreds are cumulative, which means that the
company owes you the interest payments even if they've been suspended for a
period of time (this builds more value into the Preferred than a non-cumulative
Preferred); 2) if the company suspends payments on this Preferred for four qtrs,
the interest rate jumps from the 9.25% coupon (at $25 par value) to a penalty
rate of 12%. As I'm writing this, Nat Gas is running almost 8% today, which is
helping give a bid to GMX Resources common shares (GMXR 1.37 +0.43, +45%) and
the Preferreds (GMXR/prP 8.88 +3.17, +55%). If Nat Gas continues to run, it's
likely I'll hold onto this position beyond the $10 target price.(GMXR/prP surged
to $12.00 in early trading. I waited for some volume to come in before I started
selling, realizing at average exit price of approx. $10.80. Closed a little
early, as security later saw intraday highs of $14.00).
Chart Trader (CHART)
We have two things going on right now in stocks that we haven't seen
in years and years: low correlation ratios on many days (no longer 90%
of stocks either up or down every day, inverse the dollar), and what I see as
real "animal spirits" among investors (when people get excited about something,
the crowd just runs over the shorts who try to stand in the way).
That puts us somewhere along the way toward completing a 'sentiment bull cycle'
at some degree. The end stage will be when we see small buy-to-open options
orders all stacked toward call buying at the retail level. We aren't there yet.
A couple weeks ago, I noted that it was silly to sit in front of your
screens trying to short when all four of the world's biggest central banks were
expanding their balance sheets actively, and China was done tightening.
Even though the correlation ratios have dropped a bit, this is still mostly
I think you still have to honor that idea.
In addition, even though survey data shows a complete lack of bears, we know a
couple of important things that I want to point out in perhaps a different light
than you are used to hearing:
1) Volume was notoriously lacking during the majority of the rally in January.
2) Asset managers piled into cash and cash equivalents, and retail investors
redeemed funds from equity positions, both at a high clip during the fall of
Put those together, and you have a lot of PMs coming into February
without enough equity exposure (given that their benchmarks are now +6%
or so on the year, and cash is earning nothing; and the low volume on the
advance suggests most of them didn't participate a whole lot).
The conclusion I draw is that, if the macro data improves a notch or two more, a
lot of capital that has been 'waiting for a pullback' may start to panic and
index itself for Wall Street job security (as large money managers do the
equivalent of buying a lot of SPY to reduce their risk of ruin, in relative
That suggests the possibility of a kind of blow-off move from here to the upside
At the same time, the trade I am currently most excited about doesn't make sense
according to any of the above: I am strongly bearish Crude oil, perhaps
even for something like a minor crash. In light of the 'liquidity' and
'Stocks flat squeeze' themes above, this idea seems impossible. But, no matter.
That's what the tape is saying. I don't know what is going on for certain.
Perhaps there was just too much event-related premium built in due to Middle
East tension, and demand has simply withered as a result. I'm not sure. But I am
The design and development of the new Emerging Value system
is now behind us, and with the system now live, my team has turned its attention
to earnings season and monitoring both Emerging Growth and Emerging Value names
as they report. While this earnings season has tended towards the disappointing
(lots of companies reporting smaller EPS beats and top-line misses), I
have one observation so far that I think is worth passing along.
As I see it, the real action this earnings season has not been in growth stocks,
but in value stocks. Granted, one quarter doesn't make a trend, but
this is a departure from what we've seen pretty consistently since the March
2009 low, when every quarter new growth themes and leaders popped up on the
Emerging Growth rankings with great regularity. Now, we're seeing the most
surprising reports coming from value companies.
For example, when the Emerging Value system debuted on January 25, Seagate (STX)
was ranked #1. This stock had already seen a good-sized rally in January (in
addition to valuation metrics, EV also has a relative strength component to it),
but despite that the stock was still very cheap according to multiple metrics.
On top of that, STX also featured a nice dividend yield, an active share buyback
program, and a lot of cash. When the company reported earnings on January 31,
STX reported numbers and issued guidance that suggested that the company -- and
the notoriously cyclical hard drive industry itself -- had definitively returned
to growth. The stock has run 30% since being added to the EV rankings,
but even at these higher prices STX offers reasonable multiples, rebounding
growth, a nice dividend yield, and a supportive share buyback program. If you're
a fund manager, how can you not own that?
There have been other, less spectacular examples of value stocks reporting
surprisingly strong earnings this quarter: Computer Associates (CA), Teradyne
(TER), Wesco (WCC), most Airlines, etc. Semiconductor companies in
particular are almost all saying on their conference calls that the cycle is
finally showing signs of turning in their favor.
The common theme here among these stocks is that these are generally highly
cyclical and/or commodity-driven businesses that are suddenly reporting growth
stock-like quarters, or at the very least much better visibility, as the
economic cycle shows signs of finally turning from a headwind into a tailwind.
In addition to this step-up in business activity, another common characteristic
among these stocks is that most of them have aggressive share buybacks in place
and have been raising their dividends. As such, it makes sense that money is
flowing into companies that sport a combination of moderate valuations, cyclical
tailwinds, good yields, and supportive share buybacks.
The question in my mind is whether this is just a temporary uptick in an
otherwise frustratingly slow recovery, or a legitimate turn in the cycle. You
don't have to be an economist to answer that question, because the price action
in stocks should provide a pretty clear answer.
A lot of the standout value outperformers currently look ripe for some
profit-taking, but we should know in a few weeks whether this trend has staying
power or not.
Commodities Trader (COMDX)
Weakness in the dollar index since mid-January gave a boost to select
commodities. In addition, the recent Chinese PMI data of 50.5 provides more
evidence that China is looking at a soft landing, which adds support to the
commodities space. Add to that the recently seen positive U.S. economic data and
factory data in Europe and record U.S. January auto sales and price strength
extends further in select commodities. One thing is clear, buyers of commodities
still remain present.
The labor market has seen improvement recently with initial claims falling to
levels not seen since 2008, but consumers still remain cautious as seen by the
recent personal income data, which showed that despite a boost in personal
income, the personal savings rate rose in December. This could weigh on the
economic recovery since consumer spending makes up about 2/3 of U.S. economic
demand. On the earnings front, about 2/3 of U.S. cos that have reported YTD have
topped analyst expectations, which has helped support the recent rally in
Despite recent positive economic data, crude has been declining as a result of
higher stockpiles, which just pushed crude down to a 6-week low, while gasoline
consumption fell to a 10-year low. Crude is more likely to see more downside
this week than upside. Meanwhile, natural gas futures are about 14% lower since
last Friday. The recent announcement by Chesapeake Energy that the co will slash
production sent nat gas futures rallying, but when Exxon Mobil, the largest nat
gas producer in the U.S., reported on Tuesday and said that it has no plans on
cutting natural gas production, it's no wonder that nat gas continued to
decline. Nat gas should see some life near-term following news that truck-maker
Navistar announced that it will begin offering natural-gas-powered engines this
Overall, I'm still buying commodities and commodity-related names that I
believe are in a near-term uptrend, following a pullback. I'm also
shorting less fundamentally attractive names following rallies on broad-market
strength. Areas I'm focusing include crude and nat gas, grains and ag stocks,
platinum, liquefied nat gas plays, miners, coal names and oil tankers .
I'm bullish on grains still (CORN, JJG and select related stocks like CF, CNH,
DE), bullish on lng plays including LNG and GLNG and platinum (PPLT). On the
other side, I'm still bearish on oil tanker names OSG and FRO and would short
them on any strong broad-based rally.