After the massive gas deal between Russia and China, Gazprom looks like it might be an interesting play.

  • We know it will be doing $400 billion of business over the next 40 years.
  • The market has discounted the price of Gazprom over concerns that Europe may stop buying its gas. However, this is an unlikely scenario.
  • The company trades at a P/E of 3. Part of this may be because of distrust of accounting at Russian companies. However, the valuation looks extremely low.
  • Russia’s market as a whole has been discounted because of the invasion of Crimea. This discount may subside as the situation de-escalates.
  • The key risk is the cost of building the pipeline. China will front $25 billion for the deal. However, the excess costs will come out Gazprom’s capital expenditures. These costs will come over the next several years, while the revenues from the deal will not come until 2018. Equity markets are notoriously short-sighted, typically with a time horizon of 18 months. So any gains in the stock may not come until 2016-2017, while in the near term the stock may be weighed down by costs.

Future Speculation Ideas

I have had a lot of trouble finding the time to do more formal posts lately. Thus, my blog will transition to more of a quick notes format. More formal articles will now be distributed to my Seeking Alpha page, and linked here.

1. Healthcare bubble. Healthcare stocks have been going up. All the traditional healthcare (Johnson and Johnson (JNJ)) along with newer biotechs (Pacira pharmaceuticals (PCRX)). Likely going up because Obamacare means more people that were uninsured will now be insured. Thus, theoretically, more care overall will be provided. Trend will likely reverse when electronic medical records are instituted. EMRs will enable rationing of care, thus decreasing healthcare consumption. This is a weak theory, needs refinement.

2. Internet of things bubble. I havent seen public excitement about this yet, but the underlying trend is there. My hypothesis is this is in stage 1 of George Soros’s boom bust model.  Fundamentals look promising. The key four companies are Sierra wireless (SWIR), NMRX, ESYS, and Cisco (CSCO).
The PE ratios aren’t that high. 24 for SWIR, 20 for ESYS, 15 for CSCO. PE ratios typically get to 100 in a bubble. If the internet of things does become a bubble, there could be upside here.

3. Marijuana bubble. This looks promising. Many penny stocks. The only real company I’ve seen is GWPH. Pharmaceutical company making marijuana drugs. This company is up 1000% in the last year. It may be at the top of a bubble, or it may continue. It has been experiencing a little weakness in the past few months. Unsure if this is a test phase or a sign of a “double top”. Possibly watch this for signs that the bubble is about to burst, and then short.

4. Russia speculation. Russia’s stock market has been down because of the Ukrainian tensions. There is a fear that Europe will stop buying gas from Russia. However they have no alternatives. There is some LNG from Qatar, but not enough. It would be extremely inefficient to get LNG from Australia. US is not providing LNG until next year. Therefore, Europe will not stop buying Russian gas. Russian market is trading at a P/E ratio of 6. Some of that is because Russian accounting is very bad. But it is probably too low, and will recover in 12-18 months, if Russia does not annex any other countries.

5. China speculation. Chinese market has been depressed because authorities are trying to pop the real estate bubble there. There is a large banking system that is not accounted for on balance sheets (I.e. Companies issuing IOU letters of credit, etc) and there is fear that this informal system will collapse. This may happen. There is real risk. However, eventually markets will recover. China still has a long term expected growth rate of 6-7% or so, more than double the US growth rate. It is currently at a P/E of 10, while the US is at a P/E of 18-19. The perception of China may get better towards the end of the year, because China is predicted to overtake the United States as the largest economy in the world by 2015. The trick with this play is to find the bottom of the downturn, and to pick the stocks that will benefit most from a recovery from the dip.

Cyprus talks mean the worst may be over for Turkey

Turkey’s stock market has been in a downward spiral as Prime Minister Erdogan looks more and more like a dictator than an elected official. This has alerted me to a possible situation where the worst possible outcome is priced in to the market, and the downside is limited compared to the upside.

A possible catalyst for a rebound in the Turkish market may come on the back of reunification talks with Cyprus. Officials from Cyprus and Turkey would need to cooperate to build a natural gas pipeline to Europe, which would be a huge boon for the region. If reunification does occur, it would provide a boost in the form of increased natural gas exports.

Both countries have an incentive to find a solution. And Western countries have an incentive as well, because European countries need the gas, and United States energy companies are involved in its exploration. Because all parties have a stake in the matter, there is a good chance the deal could go through. If it does, I believe the Turkish stock market could rebound.

Thus I have begun a small speculation in TUR, the Ishares Msci Turkey Investible Market Index. If the deal actually goes through, I may increase the size of this position. However, I want to keep it small in the meantime on the possibility that the situation with Prime Minister Erdogan could further deteriorate.

Thoughts from Victor Sperandeo

After a large bull movement like the one we have just had, the odds for further price appreciation decrease. However, that does not mean that one immediately needs to sell – investors need only become increasingly more critical of positive news, and more watchful for negative news.

In the words of Victor Sperandeo:

“…the median extent for an intermediate swing in the Dow during a bull market is 20 percent. This doesn’t mean that when the market is up 20 percent, it’s going to top; sometimes it will top earlier, sometimes later. However, what it does mean is that when the market is up more than 20 percent, the odds for further appreciation begin to decline significantly. Thus, if the market has been up more than 20 percent and you begin to see other evidence of a possible top, it’s important to pay close attention to that information. ”

– The New Market Wizards, Schwager, 1992

After a 30% up year for the S&P 500, this market move is growing old. Though there are no immediate signs that the move will end, going forward into 2014, investors will need to be cautious and wary of signs of a top.

The Two Sides of the Taper

If the “taper”, i.e., the tapering of the Federal Reserve’s Quantitative Easing program, occurs soon, it has positive implications for the USDJPY. This is because Japan is the probably the only country out there that is using quantitative easing with the express goal of lowering its currency, and it is doing so on a scale that much larger than any other country. Coupled with those two factors, the belief of traders that Japan will be successful in driving down the yen, is further driving down the yen.

If the taper does not occur soon, however, it will mean that Hong Kong will come under greater pressure to release its peg to the U.S. dollar. While inflation is slowly rising here, it is rampant in Hong Kong. Eventually, Hong Kong will need to break this tie. But that time will come sooner rather than later if the US continues to devalue its currency via Quantitative Easing.

More signs of shipping rebound

All signs are pointing towards a shipping rebound. This has become my most attractive investment idea. I will have to find shipping companies that are:

a) trading at significant discounts to book value

b) profitable, or have a high chance of converting from unprofitable to profitable in the near future

c) Geographically distributed. Unless I can get some kind of edge in determining in which areas the rebound in trade will be most pronounced, I may be best suited to distributing my picks to reduce my downside. For example, I could go with an Asia bias in the shipping portfolio. However, this would leave me with too much exposure to a pop in the Chinese and Hong Kong real estate bubble (which would decrease local shipping for Iron Ore). I would likely have to do hours of research to reduce these kinds of risks in my stock selection.

A Victory at Doha?

The Doha round has reached a successful negotiation. Though the agriculture issues have NOT been sorted out, this IS a momentous occasion. 

Until now, there has been no central arbiter of globalization. Globalization was allowed to proceed more or less unchecked during the 2000’s. This culminated in a level of interdependence that allowed a bubble in the American real estate and stock markets to have profound implications worldwide. 

In the years follow 2008, we have seen a total collapse of world trade. In an effort to restart their economies, many (most?) of the world economies are now printing large sums of money. However, this may spark protests of a “trade war”, and indeed, the direction I had expected this to go was a more and more protectionist stance in the major world economies. 

Now that the WTO has some credibility as an international arbiter, there is hope that this will be averted. In addition, there is more reason to believe that global trade will resume the growth trajectory that it has been on for the past 20 years. 

Thus, a speculation on the global shipping industry looks like a solid proposition to capitalize on the resurgence of global trade from the doldrums of the 2008-2012 period. Dryships, (DRYS), a company that has suffered immensely during the downturn, is my initial consideration, though I will have to do much more research over the upcoming days to find ways to best take advantage of this trend. Following a rationale of “invest first, investigate later”, I have already begun to build a position in DRYS, and I am investigating the financials of several shipping and ancillary businesses. 

Outlook and Ideas

After re-evaluating from a defensive position, I have a few solid gains.

Recent Investments

The majority of my recent gains have come from a large upward move in Penn West Virginia (PVA). This was the undervalued natural gas play I bought earlier in the year. My theory was that natural gas prices were rising, yet natural gas companies had failed to respond in kind, so I expected this to be corrected by the year’s end. As it turns out, the thesis was actually false – natural gas did not remain in an uptrend for long. However, two things added up to make this play successful: 1) I purchased a company trading at a price/book of 0.4, which gave me sufficient margin for error, and 2) the company had recently used its financial position to purchase oily shale acreage in the Eagle Ford.

The oil acreage allowed the company to accumulate significant income, so it is growing its book steadily. Even now, it trades at less than 0.6 price/book, so for the time being, I am leaving the full amount invested. I will likely hold until it reaches a price/book of 0.8.

In addition, I have made a few successful short term bets. I took some modest profits shorting XONE on the way down, but I did not get out in time, and the majority of the profit from the trade was lost. In addition, I took small profits from catching the bottom of the S&P 500 ETF last week. I also entered a trade on the Euro. I had intended to hold this for some time, as I believed the continuation of United States’ QE at the same time that periphery Euro countries pay down their loans would lead to an upward surge in the Euro. However, I do not believe I adequately understand the situation to profit from this, so I took today’s pop as an opportunity to get out with some profits.

New Investments

My largest new position is in Take Two Interactive (TTWO). Though the stock has already had a big run, I believe that the success of Grand Theft Auto V has not been fully accounted for. This is the best selling game of all time, and the stock has not reacted since the game broke all expectations in late September. Further, I have noticed that companies which turn from unprofitable years to profitable ones generally have a large pop on the announcement. I am hoping to take advantage of such a move when Take Two announces its earnings for both this quarter and the subsequent one. In addition, the company has poured significant cash expenditures into both developing the game and marketing it. Now that the game is out, the cash flow situation should change dramatically, with massive cash inflows against much lower expenditures. I have established a position in call options for next March, and I am slowly accumulating a stock position as well.

New Ideas

I keep questioning when the bubble in speculative stocks will collapse. Salesforce (CRM), Workday (WDAY), Tesla (TSLA, of course), 3D Systems (DDD), Stratasys (SSYS), and the like continue higher. The trend has gone too far, and I am at an impasse about what to do. To short would likely be suicide – the market still has legs, and these will run up more than the market. How long until general economic weakness forces a re-evaluation of all of these names? I could attempt to play alongside the market – but I fear I have missed my entry point (last week, when the market bottomed). Thus, I have no clear strategy here.

I am still investigating stocks in other countries. The trend of capital seems to be flowing into the United Kingdom.

The stock that has been on fire in the London Stock Exchange is Ocado (OCDO). It seems to be in the midst of a reflexive boom, but the process may be too far along to begin a speculation. The company does have a truly revolutionary product – they have actually been able to build a working business model on home delivered groceries. As a result, the fundamentals have been improving at the same time that the stock price and perception have been improving. I expect this trend to accelerate. The company is using financing for its growth, turning mostly to the debt markets rather than equity. As a result, it may be an ideal candidate for making a speculation.

As the company is already in a strong uptrend, I am wary of entering, because I may be caught in a correction to the downside. Usually, trends like this are tested by a wave of negative perception. Because the company is rapidly improving fundamentals and the idea does seem to be catching on with the public, I believe it will survive such a test. After surviving a test, the trend should emerge stronger than ever. So I will wait for such a point before considering entering a position.

I am also looking for extremely undervalued cases in European countries, but the search is yielding no strong candidates so far.

New Investing Options: Emerging Market Recovery

The pullback in emerging markets is overdone. Sure, the growth of emerging markets must moderate over the next few years, but that moderate pace still exceed the pace of developed markets. Stock prices are not reflecting this. 

New directions for research include Vietnam, Malaysia, and Indonesia. The first order of business is to determine which countries offer the best prospects at the current time, and whether any bust cycle is still in play. Next, I may pick individual stocks, but, more likely, I will invest in general ETFs, and amplify with a moderate amount of leverage. 

In addition, specific Chinese equities may offer real bargains. The fear of a banking crisis is still present, however small underpriced firms may offer enough of a margin of safety to compensate for this. I have made small profits investing in a Chinese ETF, however, picking individual stocks offers a better risk/reward ratio.