Sell GS, buy QQQQ, maybe MCD

The email thread from the week of March 23 was sometimes insightful, somewhat exciting, and definitely worth recording, so here it is. I took some editor's liberties.

DL:
Futures are up on the pending announcement of toxic asset bailout. Not sure how long the rally will last, but my impression is that this plan falls short again of a real fix. However, I can never underestimate what the market thinks. Perhaps this is the time to unload GS. How about a sell order between $104-105. Futures for GS suggest $101 as I write.
Des

EK:
I think it may be too low; the rally may have some pop. I would put a
sell at $112 over the next 3 days, plus put a tight stop loss at $90

AB:
I agree with 112/90 idea.
Thanks, Arash


EK:
Not sure if a sell order was made for $112 but today's high was 7
cents short of that.
I think the bear rally may have some legs. After riding through the
trough, we may be short changing ourselves. the market prob sells off
Tues, but I think GS may go upto to $120 this week.
What is the plan with the GS money? Are we going to re-buy a US bank
when they sell off again?

DL:
No the order was for $112 so we did not get filled. Not sure about another 10% move to get us to $120. I would settle for anything above $112. I'm also not willing to re-buy a US bank when they dip unless there was a very compelling reason like Warren Buffet....oh forget that idea. Let's not delude ourselves here, this is a bear market rally that could take us up 50-60%. The US financials are already up 50% off their March lows. I see MCD and consumer staples and utilities lagged the market today. That's where I would park the money until a better idea comes along.

AB:
It may be a bear market rally or the beginnig of the end, who knows? I wouldn't speculate on any of them.
I still think GS can be a good long term investment. But if you don't agree it seems like a good time to sell. I am fine with anything above $112 too.
Also I am open to the idea of adding some cash so that we can trade larger volumes. I don't like paying commission on small trades.

EK:
Just like I don't catch a falling knife, I don't like to sell a
shooting star (ok, maybe my metaphors need some work!). I don't see
why we should cut out of a rally; why don't we put a tight trailing
stop of $6-7 from new highs?
I'm just a bit concerned we didn't get fully vet this. First we agreed
to sell SLB and LLL to buy MCD. Then there was some talk of keeping
SLB and selling DE. Now we are selling GS to fund MCD? Does that mean
we don't sell the other stocks? I don't want to be sitting in cash
while the market rallies. I just want to be clear before agreeing to
the transaction fees.

BTW, I agree with Des's assessment there will be a bigger bank rally
when they suspend the marked to market accting. Trick is knowing
whether this will happen sooner or later.

DL:
The order for $112 was canceled this morning but it wouldn't let me enter a stop loss order for some reason. i don't know if you want to give it a try. the error message was that i had insufficient quantities to sell but the order from yesterday was not filled! I see GS is up to $113 as I type. Will wait and see then.

EK:
OK, I put in the order $6 less the high:
Trailing Stop SELL 20 GOLDMAN SACHS GROUP INC
GS:New York 104.330

DL:
I read in the paper this morning that the US Accounting Board releases their position on mark to market on Apr 2. Put that on the calendar and watch the price action on financials leading up to it.

DL:
Looks like the order was filled at 1:17 today at $107.89. My suggestion is to put the money in a defensive sector like consumer staples, utilities, or defense. I'm still licking my wounds from the past year! I know that staples will underperform if this rally continues but I'm still playing defense to survive another day.

AB:
How about getting into a high dividend stock/ETF? For example BP has very high dividend (about 8%) right now and if the economy rebounds we will not left behind, as energy prices will go up too.

DL:
If you own BP or SLB you're leveraged to oil. I agree with Arash that if their is a quicker than anticipated recovery in the economy that you could do worse than own oil. In the scenario of economic stagnation, oil fields still need servicing and new wells just to keep production flat.

BP has reaffirmed it's commitment to the dividend earlier this year, but this gives it less room to grow reserves. I just reviewed some oil and gas holdings and found FMC Technologies (FTI-N) interesting because of its takeover potential. I've heard it mentioned twice recently (I'll try to find the references) but it specializes in subsea drilling equipment. I charted the stock price performance of HAL,SLB, NOV, BP, and FTI and found them almost identical over 6 months out to 3 years. NOV was mentioned as one of the possible suitors. The other subsea equipment maker is Dril-Quip (DRQ) and Cameron (CAM). There is no oil service ETF that focuses on just the subsea portion. BP is more conservative and pays a dividend. FTI has little debt and at $4 B market cap could be digested by rivals SLB or NOV.

Advise on MCD, SLB or BP?

EK:
I'll repeat I don't want to be over leveraged to oil :)
I think a more diversified ways to play a quick recovery is EEM and
XLK (yup, I haven't been bullish on tech in 9 years). They have both
diverged from the S&P/Dow since the Nov lows, and I've been buying
these in Feb.
I like MCD for the reasons posted on the blog. I don't see a very
compelling reason to switch BP for SLB, so let's ride SLB.

EK:
OK, I've put a sell order for LLL.to at $10 today.
They are reporting today after the bell, I suspect good earnings due
to stronger $Cdn, but cautious outlook.
This would net us another $1000 so we could take a larger position in MCD.
Let me know if you have other ideas.

AB:
This is my favorite blog. At least it posts something optimistic once in a while :)
http://www.milliondollarjourney.com/irrational-pessimism.htm

DL:
sounds good. i see tech is leading the market higher today. what makes you so bullish on tech now?

EK:
Because it's not a bank! :)
Actually both tech and EEM have similar attractive qualities like good
balance sheets, low debt, and some growth. Both have learned from
previous crashes (Asian contagion, dot.com bomb) that cash is king.
So they have not become burdened with the toxic assets and have
managed their growth conservatively. There are of course affected by
the global recession, but it's becoming clear this is primarily a US
financial and housing crisis.
I think investors looking for any type of growth will gravitate to
these two neglected sectors.

I see Lulu has beat estimates and the outlook was not bad so is
trading up after hours. who knows maybe we'll get $11 tomorrow?

DL:
yes lulu was not as bad as estimates. 8% drop in same store sales and its stock price is up 15%. this has been quite the ride.

on another note, i still haven't followed through on the SLB sale that we had discussed. Oil has had a decent run up along with the general market in the last month. Of course long term you know I'm still bullish on oil but over the short term I think oil may have topped. Should I put an order to sell SLB closer to $50 or are we in agreement to hold on for now. I'm OK with either way because I can't just put my mind around whether there is a recovery in oil (or the general economy) or if their are still more downside risks.

EK:
Well, that's a tough question. I think you have a better handle on the
price of oil so if you think you can make a little money (including
fees!) trading in an out of SLB and BP then go for it.
If you want to move into other sectors, my prefs are XLK and EEM.

DL:
Let's see if there's more to this rally. I'll leave SLB for now and watch the oil inventory numbers. The last ones showed continued strong increases in inventories which doesn't bode well for the short to medium term price for oil. We could consider a switch to BP with slightly more saftely given its attractive dividend.

Shall I use the cash from the sale of GS to put an order in for MCD say at $54? I see today its trading at $55.74. With the exchange rate we can't bid much more than $54 at present.

EK:
With mixed emotions, we are out of Lulu at $11 today :)
We now have $3,778.91 in cash so feel free to buy 50 MCD at a decent price.
Quite the ride indeed!

AB:
Sorry guys that I have been quiet. I was busy with various issues.
Generally I am fine with any decision that you both agree on (after all only a majority of votes is needed to for transactions).

However, in my view it is too late to start being defensive now. The market crash started about 20 months ago and all markets (and our club's portfolio) has already dropped about 50%. During this period we didn't really played defensively and I don't think it is now time to change that. My personal view is that we are closer to the end of the bear market that to the beginning of it (too optimistic? maybe).

So among the options discussed above my vote would be 1. EEM, 2. XLK and then 3. MCD.
Again sorry for my late and rushed message.

EK:
I agree with Arash too! how's that for fence sitting! :)

To be fair, Des suggested MCD on Feb 11, as the market was headed
lower, and avoided the big dip in early March. Give credit where
credit is due. But it has also lagged the recovery in recent 3 weeks.
classic low beta/defensive stock.

So maybe we rethink MCD at this time. I like to buy these defensive
sectors when the market looks to be topping or is starting to head
lower, to lose less in a downturn. I don't know how much longer this
rally has to go but I think we may be a little late OR early for MCD;
it may make sense in a month or two.

Due to the stock vetting and decision making nature of our club, quick
trading is not always possible, (probably a good thing.) Forces us to
think our ideas through and take a longer term view. Also, I treat the
club's fund as a small extension of my personal portfolio. So if I
wanted more exposure to oil or EM than what is in our club, then I
just leverage more in my personal portfolio.

Again, I like tech, and in particular BRCM but I haven't looked at the
fundy's yet, and it's up 30% since I suggested it in Jan 22 (the blog
is great for I told you so's!). Unless I have time to research that,
I'd like to put in a buy order for XLK and remove the order for MCD
(for now).
I like the strong cash positions on most all large tech names MSFT,
IBM, AAPL, etc.

DL:
I took the liberty of cancelling the MCD order tonight. I'll leave the buy order to one of you guys. I'm OK with XLK, but just want to clarify the reasoning so that we can see where we went right as well as wrong and take account of trades so we can all improve as stock pickers and or traders!

So I 'm seeing the reasoning for XLK because it is supposedly in one of the few remaing growing sectors of the economy with little of the toxic assets that got the financials into trouble. It is also a higher beta stock during a market rally. Because we haven't as yet vetted any individual names, it looks like XLK is the play but as you know, ym tendancy is to try and dig into a company to see if there is any added gain from owning a specific name as opposed to the index.

For most positions we should at least have some vague idea of exit points both if our thesis is correct or somewhat correct, and also when our trade hasn't turned out well. I think we were all blindsided somewhat, at least I know I was, by the ferocity of the downturn that began in Sept 09. With our currently exited GS, we had anticipated some kind of bounce in the financials after the Sept drubbings but none really occured until the last 3 weeks. Our thesis was that GS was one of two investment bankers left after the others were taken out or went belly up. This is still true but the banking model seems to be evolving away from independant broker dealers, and quite frankly, the gov't seems to be making up the rules as we go along and this makes investing in financials very difficult. We may find ourselves in the financial space again sometime in the future, but I don't think we made a huge mistake selling it at this juncture.

With LLL, we were buying into a hyper growth stock but the economic downturn beat up its expansion plans. As far as I can remember we didn't have a good exit plan for this one but we did get the high price of the day (h/t Eddie).

GE's failure was a known risk. Their financial exposure was pointed out in our blog, but I for one thought that the rest of the company could bring them through. Ironically GE at $7 was quite attractive to me because, GE could not be allowed to fail. It's industrial assets alone were worth multiples more than $7/share. If they're going to bailout GM, then if the finacial arm of GE could bring them to the brink, then I am certain that the US gov't would step in and clive off the industrial vs. the banking divisions. If GE would be allowed to fail, the entire USA would be teetering. That is hard to envision. So i did some trading in GE in my personal account but missed the big move up back over $10. For the club though, bailing on GE when we did was I think the best move the club has made in its short history. I know we lost money on it, but boy it could have been a lot worse!

I've been meaning to do this for awhile, but this is getting too lengthy already so I'll leave SLB, DE, and XLP for you guys or for another time. I might just post some of this email on the blog for some permanent record of our thoughts and reasonings for our trades. This should hone our skills.

So with XLK, let's have some exit plan for better or worse, because it's hard to make good decisions when you're paralyzed with fear or hypnotized by greed!

EK:
Thanks for cancelling MCD, I'll put in the XLK buy order. Just to be
clear, XLK is an alpha play NOT a beta play. And I say we exit XLK
when the alpha turns negative

DL:
Qqqq was filled @ $29.70.

EK:
Yeah, I was about to explain the change from XLK to QQQQ. They are
almost identical, but I notice QQQQ has had slightly higher alpha than
XLK over the past 1,2,3 years. Actually more technical reason, with
the exchange rate, we could buy 100 Q's at 29.70 but NOT 200 shares
of XLK at $15.70. we would have to buy 190 shares or something weird
which may have some odd lot premium.
In terms of composition, we don't get IBM, HPQ, AT&T, VZ, instead we
get AMGN, TEVA, Gilead. Not bad tradeoff.