April 14, 2012 Deja Vu

Risk/Reward Vol. 114

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"Did you hear them talkin' 'bout it on the radio/Did you try to read the writin' on the wall
Did that voice inside you say/I've heard it all before
It's like deja vu all over again"---lyrics from "Deja Vu (All Over Again) by John Fogerty

"My kid's gonna grow up/Gonna grow up to be a fool
'Cause they ain't got no more room/No more room for him at school"---lyrics from "Why I Sing the Blues" by B.B. King

"Though April showers may come your way/They bring the flowers that bloom in May
So if it's raining have no regrets/Because if its raining rain, you know, its raining violets"---lyrics "April Showers" by Al Jolson

On Monday, the Dow Jones Industrial Average dropped 131 points, a hangover from the disappointing jobs report of the previous Friday. On Tuesday, it fell 214 points more on growing concern about European sovereign debt--especially from Spain. On Wednesday, the market rebounded 90 points on good earnings from Alcoa, the first Dow component to report quarterly results. On Thursday, the market leaped 181 points following a hint of QE3 from Federal Reserve Vice Chair Janet Yellen (see last week's discussion of the Fed's impact on the stock market), a good Italian bond auction and expectations of a good earnings season. On Friday, the Dow dropped 137 points on news of a slowdown in the growth of China's economy and a spike in Spanish debt yields. The Dow fell more than 1% for the second week in a row.

Does it seem that you "have heard it all before. It's like deja vu all over again"---a repeat of the yeah/boo roller coaster market of last fall: rising on positive domestic news and falling on worries from Europe and/or China? Geez, I hope not. But, just in case, I am prepared. I continue to pare consistent losers (this week EXC), even those that have not come close to my 8% loss limit. Moreover, with Europe queezy again, I reduced my exposure to it, taking double digit profits by halving my positions in IDG and NWpC. I still have exposure to European financials, and will watch them like a hawk. I like their dividends, but will not sacrifice the profit I have garnered on them.

On Wednesday, natural gas fell below $2/mmBTU (or cu. ft.) for the first time since 2002 and currently trades at 1/2 last year's level and $10 below the 2008 prevailing price. On Tuesday, it was reported that at winter's end, the amount of natural gas in storage was 2.5trillion cu. ft. which, due to the mild winter, was 1trillion cu. ft. more than normal. With natural gas being produced at elevated levels due to the miracle of fracking, it is estimated that the total U. S. storage capacity (4.4trillion cu. ft.) will be filled by early October---well in advance of the heating season. Unlike B.B. King's son, I am "schooled" and ain't no fool--there "ain't no more room!" This fact will depress the entire natural gas industry--from production to pipelines to storage. I surveyed my holdings on Wednesday and sold (still at a profit) any position that was more than 50% reliant upon natural gas for its revenues. This included ETP, BPW, SDT, CHKR and LINE (even though LINE has an excellent hedge in place). The whole sector stinks right now--and I am passing (on) gas.

But, don't confuse oil with gas. I still like domestic oil plays including CLMT, PER, NS JMF and MHRpD. I also like companies that USE natural gas. Indeed, my best performer year to date (over 60% profit) is TNH, a producer of ammonia fertilizer used in corn production. The increase in corn planting and the drop in the cost of its primary feedstock (natural gas) have resulted in a leap in anticipated profits and a spike in its stock price.

With the Q1 earnings season having begun this past week, I am sitting at 45% cash, well above my 25% position of just a few weeks ago. This week, I raised cash on Wednesday and Thursday by paring losses and taking profits on growth (non or low paying dividend) stocks. I even sold half of my AAPL to lock in a nearly 50% gain, something I could do with tax impunity because I held it in my 401 (k) where most of my "trading" stocks reside. Frankly, with the "risk on/risk off" teeter-totter back in vogue, the old adage "sell in May and go away" has some appeal--with April "showering" us in "viole(n)t" fits and starts. I very much want to keep my big dividend payers. They held their value all week, and even on Friday my loss was very modest considering the blood bath. But a wholesale exit with a 5% YTD gain plus paid and accrued dividends, which is what I would achieve if I liquidated today, is not out of the question. We will see what happens. Will U.S. earnings and guidance be strong enough to overcome renewed fears from Europe and uneven news from China? Who knows? But, I am positioned well, nimble and ready to move---either way.

I am mailing this edition on Friday because I am about to board a flight to London to see Barb, Lizzy, Matt, Paddy and of course Arthur. I will be back on Monday--- a Pan Galactic Three Day Pass a la Kilgore Trout.