Market Position May 15, 2013

I have had some big successes in the market lately. The short yen position has been yielding truly incredible profits lately. Almost simultaneously, the long position in Tesla (TSLA) has nearly doubled. Nearly every day after the earnings announcement has given us a new breakout to higher prices. This signals that there is a big money position being established in the stock, or that short covering is occurring now. If the huge money behind these moves are capable of mobilizing so quickly to positive news, this signals to me that they will be equally quick to mobilize in reaction to negative news.

I am not sure how long this continuation move will last. Eventually there will be a pullback – that is almost certain. But I still suspect we are only in the early phases of this boom for Tesla. I expect Tesla to generate more buzz and excitement as the year goes on.

In addition, I re-established the position in 3D Systems (DDD), according to the logic outlined in my article. Events are playing out as I had expected, with upgrades in the stock, and higher prices. This lends credence to the idea that we experienced a test phase from January to March, and we are now in a phase 4 type boom. Therefore, there should be additional room to go with the DDD long.

C & J Energy  (CJES) continues to be a dead weight in both the portfolio. The bad news about the state of the hydraulic fracturing market is out, and I believe it has been priced in. I think we have put in a bottom in this range (~$18). I dont expect the stock to dip below $17 unless the market turns worse.

I expect the market to improve as the year goes on and higher natural gas prices lead to renewed excitement in dry gas plays.

I am working up a position in some dry gas E&P companies as we speak. I do not want to reveal names and tickers, as they are tiny companies, and I have to be very cautious to establish a position at the prices I would like. I have been able to find several that are trading well below book value currently, and I have reason to expect that the book value itself is artificially low, because it is based on a past price environment, where natural gas prices were much lower than today. I will write an article soon explaining the logic.

I am using my unleveraged portfolio to purchase the dry gas companies. I am selling off a previous purchase of Halliburton (HAL). Halliburton has also come to a fair valuation in the current environment. After the settlement of the Deepwater Horizon litigation, the shares have been relieved of the pressure that was depressing them. I suspect HAL will benefit if the activity in the North American gas market picks up, but I believe the benefit will be more pronounced in CJES, so I prefer an investment in the latter.

I also sold my shares in Petroleum Geo Services (PGSVY). It is a shame to sell off such a well run company, with such growth potential. It is still undervalued, and I expect that investors at these prices would do reasonably well holding this for the long term. 3D and 4D seismic technology is only becoming more and more important, and PGS has already accumulated the Multiclient studies for the vast offshore Africa fields. However, I think there are better opportunities, like BBBI.

I am slowly accumulating more shares of Birmingham Bloomfield Bancshares (BBBI). It is currently trading at a price to book of .5, and it seems to be generating earnings at a comparable pace to BNCCorp (BNCC). The deep discount offers a considerable margin of safety, and the growth, fueled by the automotive industry boom, is bound to continue for the foreseeable future.

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The Short on 3D Systems Corporation (DDD) is Finally Paying Out

I was a little too eager to call an end to the twilight phase in my Seeking Alpha post two weeks ago. I did not anticipate the large run up in the stock, but probably should have. At the peak of a bubble, it is normal to see a test of the highs.

As the stock rose last week, I shorted shares, but did not add to the options positions. Risk control is easier when shorting a stock outright than in buying put options, because I can set a stop limit that is logically derived. For 3D Systems Corporation (DDD), the natural stop limit would be in the $72-73 range, because this is the all-time high for the stock. If it were to blow through this point, it will have passed a test, and the reflexive boom phase could continue for the foreseeable future.

However, it seems that this week has shifted the momentum back to the negative. I feel more secure in the short position now. In a reflexive bust, the further the stock declines from the high, the more likely it is to continue declining, until the stock reaches undervaluation territory. For DDD, I would not be interested in investing on the long side until the stock nears $30/share.

The only risk to the bust process at this phase is the upcoming earnings announcement on February 25. I suspect these earnings will show high growth rates, because the stock was so highly priced during the fourth quarter that 3D Systems Corporation could spend freely on capital expenditures and acquisitions for growth.

This alone would be a positive event for the stock price. However, the perception on the stock has already shifted. According to George Soros’s model of reflexive boom-bust processes (see model in my DDD article here), it is typical for the stock to continue declining for a significant period after the peak, even as earnings increase. That is, the peak in earnings typically follows the peak in stock price (this is due to the delay of acquisitions’ effects on earnings, coupled with the 1-2 month delay in reporting earnings). So good earnings will not necessarily de-rail the bust process.

But it pays, in the long run, to be cautious. Therefore I will likely reduce my short position before the end of next week to lower my exposure to an earnings-related upward move. But, in the mean time, I am letting my profits on the short position run, and am considering adding to it to cash in on a likely move downwards during the beginning of next week.

Disclosure: I am short DDD via stock sales and the purchase of March and May $45 put options. I am considering shorting additional shares of DDD in the next 72 (business) hours.