Sticking To My Long Trades Pays Off Big Time

First off, apologies for the smug “I told you so” tone of this post. But I think I’m entitled to a little bit of smugness, especially after I nailed the mood music in my call to go heavily long in mid-July. Anyone taking up my view ought to be sitting with a big grin on their face by now.

The main point I want to make in this blog is to show how it pays to hold and run those winning trades. As I always say, I trade with small stakes but aim to run those positions over long timeframes, adding to winning positions. And that’s worked. There’s still cash on the sidelines, prices have been showing momentum, and so far, none of the selloffs have yet really got any sustained momentum behind them - rather they’ve been treated as buying opportunities. So I’m staying ‘long and strong‘…

The bears will argue, as they have been since March, that it’s a summer bear rally (trading volumes are thin and tailing away) but I think there’s something more fundamentally interesting happening here. And as one of my favourite hedgies Paul Tudor Jones says, if the market moves up by 45% and you catch the move, does it really matter whether we call it a bull market or a bear market rally? He thinks it’s a bear market rally. It might well be. Next year’s equity market might not be a pretty picture at all, as the drag of massive unemployment combined with consumer caution and higher resources costs sinks in. But if, before then, we’re going to 10,000 on the Dow, 5,000 on FTSE and 1,100 on the S&P, does it matter? Well, yes, if you’re risking buying in at this relatively late stage. But if, like me, you’re sitting on a long FTSE position from 4,130 and a pile of equity longs, every single one of which is well up from where you bought, you can afford to be a bit more relaxed. And that’s why there’s still upward momentum.

So Why Am I So Bullish?
I think we’re in the midst of a massive restocking move. The way companies have protected their profits is to slash their costs in every way possible - viciously laying off workers, shutting down factories and not buying in any new stock. Inventories are still very depleted at this stage. But at some point demand must begin to reach a floor, especially in key areas like automobiles and housing, and suddenly businesses are under pressure to increase supply. The housing market in the US and the UK is undoubtedly still a basket case, but the rate of decline in prices and volume of transactions has turned around from ’slump’ proportions to ‘tentatively positive’, as banks and households respond to the massive amounts of liquidity that have been pumped into the economy. All of these factors, combined with the longer term macro picture of competing demand for resources especially from the BRICs (Brazil, Russia, India, China) look likely to sustain this move through to the end of the autumn, in my view. Although I’d be wary of buying any Chinese stocks at current levels. And as demand recovers and inventories get rebuilt, that feeds through to higher commodity prices. In effect the long resources trade that dominated the first half of 2008 is back in play. So I’m bullish on commodity stocks, I’m VERY bullish on car sales, and even more controversially, I’m bullish on some cheap banks, airlines, and real estate plays.

As ever I’m looking to trade this move by trying to spot ‘value’ stocks where the market hasn’t yet priced in the impact of a recovery. So this is what my book currently looks like:

Resources
I’ve got a long position in mining giant BHP Billiton (BLT.L). I sold out when the price dipped down to 1,500 but bought back in again at 1,540 following a positive trading statement. I’m also in Aquarius Platinum (AQP.L), the world’s 4th largest producer of platinum. Platinum is a key industrial metal. Aquarius swung to a loss last year but if I’m right we’re going to see prices improve. This is a risky stock, with problems with power supplies/infrastructure in South Africa and considerable forex risk too, but I think it remains undervalued in relation to its peers. And in the oil world I’m holding on to BP (BP.L) and Afren (AFR.L).

Financials
I have long positions in Citigroup (C), from 290, which I’ve added to on the way up, and E-Trade Financial (ETFC). Both are still essentially priced to fail and I don’t think that’s going to be the case. Despite all the toxic trash swilling around in the opaque pools of finance, if the economy recovers, so do the banks. I also bought small long positions in insurers Prudential (PRU.L) and Aviva (AV.L), both of which are up around 25% from where I went in, although I might take some profits on them soon.

Airlines
Airlines, again, can be extremely risky and volatile stocks. They tend to track moves in the wider market, and can behave a bit like leveraged index trades. But I’m now £10 point long of British Airways (BAY.L) (scaled up from all the way back at 121 - see previous blog) and US carrier JetBlue, from 422. I may have another go at Aer Lingus (AERL.L) too. It’s not been doing too well, putting it mildly, but the ‘embedded value’ of its assets, routes and longer term recovery (takeover?) prospects mean that there might be some worth in holding a stake in my view.

Real Estate (QED.L) and Workspace Group (WKP.L), both of which are now very substantially in profit. To these I’ve added, from mid July, giant real estate play British Land (BLNN.L) which now is the subject of big takeover rumours. If that comes true, it would certainly spark a big rise in the share price. It has been an incredibly tasty trade so far as I went in at 375, scaled up at a variety of levels between 380 and 450, and am now £8 point long with the stock sitting at 512 as I type! I see no reason why these stocks shouldn’t continue to recover further if the macroeconomic background continues to improve.

Telecoms
I’ve been long of BT (BT-A.L)since the stock was trading around 85p, now at 130. I’ve also increased the size of my long position in Vodafone (VOD.L). A number of analysts have recently upgraded their view of BT’s prospects and both they and Vodafone seem to have been successful in cutting costs. And both businesses generate tons of cash, they will be prime beneficiaries of any recovery. So I’ll hold them for now.

And as usual I’ve got a rag-bag of small speculative caps.

Beware
Now this is a tricky moment. There’s not much hedging in my positioning and you can see that it’s weighted towards risky and speculative stocks. I have managed to get a bit out of a short GBP/USD position which I’ll talk about in another blog. We’ll see more volatility, especially as traders return from holidays in September. A lot of angry, frustrated bears really want this market to collapse. I have stops in place which I’ll respect if they’re hit, and I won’t be afraid to take profits by scaling back some of the trades, while trying to leaving the core longs alone, if we hit a bumpy patch. There are big risks - China’s stock market looks overcooked; unemployment is still a massive issue; rising commodity prices will squeeze margins; consumer spending isn’t exactly enthusiastic; deleveraging continues; but I think these are risks that are reasonably contained.

If you want to look at exactly the opposite view that I’m taking, take a look at this. But it’s not really been a trade that’s worked over the last couple of months! There’s been a self-reinforcing momentum behind the move upwards and that’s what I’ve been taking advantage of.

A sensible contrarian would argue that the ‘gung ho’ stay long tone of this post is a classic reversal indicator. So be careful. But I think there’s more juice and more value to be had, particularly in beaten down sectors like banks, real estate, steel and autos.

Next time I’ll fill you in about how I’m trading currencies - bit more of a mixed bag, that one. It’s unreasonable to expect everything to go according to plan!

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