Summary Report: Round 13, Week 15 -- Updated Friday, February 10, 2006
Will commodities bust -- or bounce?
The big story this market week seems to be what the Street.com quickly christened the burst of a commodities bubble.
Such a bust might be good for stocks, but it’s a challenge to our Strategy Lab players. With commodities hot for some time now, their portfolios are deep into hard-resource plays.
We thought we'd take a look at how they're handling these scare resources. As it turns out, the answer is -- cautiously. A couple of players have pulled back from them, but they're not necessarily convinced commodities will bust just yet.
Taking profits
All-Star Team trader Ken Kam cashed in big gains this week in two resource plays, metals company Empire Resources (ERS, news, msgs) and Edge Petroleum (EPEX, news, msgs). The gains were impressive -- 23% on Edge, 85% on Empire -- even after both trailed down this week. Empire in particular got burned, dropping some 30% from its high on Monday to its low on Wednesday. (It did show some bounce yesterday.)
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"Now that the stock has appreciated 85%, it's not as cheap anymore, so I think it makes sense to sell some to raise some cash," he writes of Empire, adding "I've also made good money in Edge Petroleum, which appreciated 33% in January. Natural gas prices have been a roller-coaster ride, but the winter turned out to be rather mild, so natural gas prices have been weaker than I expected. . . . I continue to like this company, but with winter coming to an end, the stock no longer looks as timely to me."
(We'll note also a special offer Kam made to Lab readers this week. Once a year, Money Show Digest editor Steve Halpern asks top financial advisors and newsletter writers to recommend one top stock they would hold through the year. Kam has the report for 2006, and permission to send it to readers. Send him an e-mail at kenkam@marketocracy.com and find out whether you own a stock on the list -- or if you want to.)
Still solid gold?
Quite Contrary investor Beth Gaston Moon weighed in on the drop in another commodity this week -- and she's bought gold on this dip, in the form of GoldCorp (GG, news, msgs). The stock tumbled early this week, but it's up about 3% since her purchase.
"Gold futures have started 2006 in fine fashion. They overtook the $500 level (and then some). They achieved a 25-year peak. They again assumed the role of safe haven amid a landscape of geopolitical unrest," she writes. "Despite all of these heady achievements, gold's run may not be over just yet, as the skeptics are out in full force. From a contrarian perspective, this bodes well for the metal and for gold-related shares." Total combined Lab portfolio value chart
Gold has already treated Global Investor Vivian Lewis well this round. She's been tucking any excess portfolio cash into Streettracks Gold Trust (GLD, news, msgs), the gold ETF. It, too, bounced yesterday after a drop earlier this week -- and this bank is paying her about 12% interest over the past three months.
Lewis didn't make any new moves this week. But last week, she established a position in African gold play Orezone Resources (OZN, news, msgs), so she's no doubt hoping that commodity's crunch is temporary.
She also cautioned against betting too much on that or any one of her picks, good advice for any reader. "The stock market is not a casino in which you stake your all on a lucky number," she writes. "I do my best to pick stocks I think will go up, but in practice, my aim is to pick a group of stocks that will on balance go up. I don't think anyone on this site can do more. We all have losers in our portfolios."
Lewis, of course, continues to run neck-and-neck with Model Behaviorist Jon Markman in our race. Last time we looked, Markman was in second position, Lewis in third -- but that could change by the time you read this.
Markman isn't holding gold in the Lab, but he is into titanium. And yes, his position in Titanium Metals (TIE, news, msgs) did take a hit this week. So did his position in GMX Resources (GMXR, news, msgs), a natural gas play.
But like gold stocks, both bounced a bit yesterday -- with GMX up nearly 10%. If you've been fishing for profits in commodities, it might not be time quite yet to pull in your line.
Thinking short
If commodities are a safe haven, they should do well if stocks in general slip. And that's what Trend Trader Richard Rhodes predicts this week.
"The fundamentals surrounding the broader U.S. economy appear to be deteriorating," he wrote on Monday. "Economic growth is anemic; employment figures once again came in lower than anticipated, and wages and inflationary pressures are rising.
"In all, I remember the word 'stagflation.' Certainly the market hasn’t taken this into consideration, but perhaps the decline that began (late last week) was, in effect, the watershed epiphany to many traders that indeed that risk management dictates selling long positions in favor of accumulating short positions. Certainly, I believe that to be the case at present, and as such I will act accordingly."
On Monday, he sold long positions in Birch Mountain Resources (BMD, news, msgs) and Sun Microsystems (SUNW, news, msgs), and sold short shares of F5 Networks (FFIV, news, msgs) and Phelps Dodge (PD, news, msgs).
A short sale, of course, is a bet that those stocks will go down -- and both have this week, giving him two quick gains. But we have to add: shorting is a risky game with unlimited downside, and not one for most investors.
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Of course, Rhodes hasn't had much luck thus far in round 13. But he has come out on top of our game twice before, and he's done well by catching big market turning points. Most strikingly, in the first 10 months of 2002, his portfolio gained 60% while the S&P 500 dropped 30%.
And yes -- he was short then, too.
The effect of baby-induced joy endorphins
Last, but certainly not least, Rational Investor Jamie Dlugosch offered a journal this week to help us focus on the really important things. It seems baby makes one a buy-and-holder.
"Last week my wife gave birth to a beautiful little girl, Ellie Lynne Dlugosch. Mother and daughter are doing fantastic and we are all adjusting to caring for this precious gift," he writes. "Fortunately, I have done all my homework and buying in my portfolios and there is little to do but watch the action from the sidelines."
Congratulations, Jamie, and we're glad you found some joy in a confounding market week. "For me, this week’s events in my own family did wonders for keeping my emotions in check," he adds. "The joy endorphins are much stronger than any fears I may have."
--Ron Prichard |
