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.

Keystone Pipeline and Canadian Dollar Speculation

If the Keystone pipeline is approved, the Canadian dollar (CAD) will go up because of the sales of petroleum to the United States. Thus, I am now watching the political issues surrounding the Keystone pipeline.

The CAD has fallen to a recent low on lower employment and growth numbers than expected. But this short term trend would be countered by the stronger and longer lasting effects of the pipeline.

The pipeline has virtually zero opposition in Canada, but it is running into some issues in the United States because the opposition questions the claims that it would substantially stimulate the economy. In addition, environmental groups are pushing back after the latest Arkansas oil spill, so the future for the pipeline is murky.

The former claim has some validity in the short term. There would be dueling forces of construction employment (building the pipeline) and lower oil prices (decreasing employment in the oil industry). But the longer term effects would be positive for the U.S. economy. By building the pipeline, we will, in effect, set a ceiling on gas prices. This, plus the shale oil boom, will have the same effect as a tax reduction – it will increase consumption, and thus stimulate the economy.

I do not know enough about environmental issues to substantiate the latter claim. But I do know that in political battles of environmental groups versus large industries, the industries generally win. I am biased to think that the pipeline will be passed, but I will wait to make any moves on the Canadian dollar until I am more certain of the outcome.

Speculation Diary

No speculation yet, though I may get long the Singapore dollar if I see a good technical entry point. Cannot bet on the dollar/euro with this much uncertainty out there. AFK looks like a decent long on my general speculation that Africa will really emerge in an environment of high oil and commodity prices and a lack of other high growth emerging markets. Gold may be a good long here, but I am not well enough versed in the fundamentals of gold trading to speculate.

The S&P may be a good short in the next few days. I would have to wait for a break and an unsuccessful test of the 1400 level. The fundamentals in the United States are much worse than the market is suggesting here.