Buying Back Into Stocks - Steering A Middle Course Between Permabears And Ultrabulls

It’s been a while since I posted here, and that’s partly because I’ve not been doing very much except slowly adding small long equity positions. I’ve been just checking in on my trading a couple of times a day and trying to steer clear of the more volatile (and probably more profitable) instruments. I made a bit of money with a long gold trade when the Fed dropped its quantitative easing bombshell last week, but cut that on Monday just before the price collapsed below $950. I closed out my currency trades (short EUR/USD and short JPY against USD and AUD) last week when the euro jumped up above $1.30 and haven’t been running any currency positions at all. I’m tempted to go back in on the short GBP/EUR trade but haven’t quite found a point where I’m comfortable to do so.

Buying Back Into Equities

Right now my trading book consists entirely of small-ish long equity positions, which in spite of the volatility and nervousness, I’m sticking with. Most of them are well up from where I went in - I’ve mentioned a few of them before. In essence my strategy is based on looking for low priced stocks, which have good earnings potential, that I think may outperform the wider market over the next few months. So there are a couple of themes I’m working on, based on a recessionary and ‘austerity’ model, with a hint of ‘green shoots’ about them. I’m trying to position myself so that I can take advantage of any possible recovery, but also make sure I’m holding some stocks which have reasonably defensive characteristics.

The main long positions I have are as follows:

Debt laden car dealer Pendragon (PDG.L) - bought in again at 2.9p and have added to it a bit, so now around £25/pt long of them. There are some hints that the car market is unfreezing - the retail figures out earlier on Wednesday suggested that car dealers had seen a slight uplift in sales. Although credit is still tight, at some point people will have to start buying more cars, because the old ones wear out. Plus there’s some news around about a shortage of good 2nd hand stock, and obviously manufacturers are falling over themselves trying to get people to buy cars with cheap deals. This is a gamble ‘cos Pendragon need to restructure their debt, but if they manage to then I can see their price tripling or quadrupling over the next few months. I also have a small long position in rival car dealer Inchcape (INCH.L).

I’m back into Northern Foods (NFDS.L), supplier of ready meals to Marks and Spencer and loads of other supermarkets. Results out soon and if ’staying in is the new going out’, and people are still too lazy (or busy) to cook at home then demand for the sort of stuff that they produce should hold up. And I’m still long of Marks and Spencer (MKS.L) and Morrison (MRW.L) as well.

I’ve got a small long position in Brazilian oil giant Petrobras (PZE), from $5.20. I added to this on the way up, but cut most of it just above 590 on Wednesday afternoon when the oil price started to fall off a cliff on stronger inventories than anticipated.

I’ve been buying distressed US financials (shock horror!) - Bank of America (BAC) from $4.00 and Citigroup (C) from about $1.30. I’ve still got them - they’re up and down like yo-yos and I’m very tempted to bank the money but I have a feeling that they could go further. And, despite everything I’ve kept long positions in Royal Bank of Scotland (RBS) and Barclays (BCS) going.

The most spectacular trade was online estate agent Rightmove (RMV.L) which I bought a while back for 150p and sold out at 280p on Tuesday afternoon. It just couldn’t hold its gains, as it had rallied all the way up to nearly 300p at one point. Again, this was partly a bet on the shorts closing out their positions and partly also to do with the idea that even if people don’t buy houses, they rent them, and that the UK housing market (and therefore Rightmove’s revenue stream) is not completely frozen. However, I’m out of that now, will watch it carefully and may buy back in if the price can consolidate between 240p and 250p over the next week or so.

And I’ve been looking at that other unloved sector, airlines. I’m considering whether Aer Lingus (AERL.L) looks cheap enough for a tentative long, on the basis that it’s still a potential bid victim and has nearly made a profit in the last year - that’s almost a pure ‘recovery’ play. I’ve been long of British Airways (BAY.L) since it traded down to the 120p level. Also I have a successful long in US budget airline JetBlue (JBLU) which has held up around the $4.00 level - nearly 100 points from where I bought it.

I’ve got a bunch of other small caps as well but I won’t bore you with them for now! And I’ve been buying a few equities for my ISA before the end of the tax year - mainly small and medium cap companies which is risky but which I think are most likely to seriously grow if the market can hold on to its recent gains. I like healthcare and education plays.

Confidence Seems To Be Returning To The Market

So whilst I’m not crowing ‘recovery, recovery!’, and I’m ready to take profits and run at any moment, I’m trying to steer a middle course between the permabears and the ultrabulls. Most people seem to be betting on either a return to massive inflation (which I think is highly unlikely because demand is so weak, and trade is still anaemic) or deflation - which would be terrible for equities and would mean that we’d be facing a Japan-style multiyear bear market. In the UK deflation looks less likely, particularly as real costs (partly because of currency devaluation, thus higher import prices) are staying up. If confidence that economic recovery is possible begins to come back into the system - and the evidence from the last couple of weeks is that the market isn’t quite as pessimistic as it was - then some equities could have much further to go.

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