January 2008 Archives

The stock markets are certainly uncertain. Even with the Fed statement of a 50 basis points cut in the federal funds rate to 3 percent, the markets still closed the day lower, albeit just slightly.

Given all pessimism, I want to start buying again, especially commodity related stocks. However, given that the market remains turbulent, I am not sure that now is the proper time to become fully invested.

So what exactly am I waiting for before I do begin buying more aggressively again? To be honest, I am not sure. I know if I saw a sharp correction, I would jump in with both feet. And, I suspect many traders and investors would do the same. I suppose if the markets begin to show more stability, that too might encourage me to start buying. The reality is, I am in a wait and see mode.

Switching topics, the above photographs show Chateau Lake Louise in Banff National Park (see Google Maps). The top photograph shows the result after post processing and the bottom photograph is straight out of the camera with no post processing. I bracketed my exposures to +1, 0, -1 ƒ stops of the camera exposure. I found the 0, and +1 ƒ stops photos too bright and went with the -1 ƒ stop setting. If you visit Lake Louise, you will notice that the lake has a turquoise blue color from the glacial silt in the lake. The original photograph does not show the color of the lake very well. Using some techniques that I learned from Chromasia Photoshop Tutorials, I changed the color of the lake and increased the contrast. I made some other subtle changes as well; however, those are the larger adjustments. I thought some of you might find interesting looking at both the before and after pictures.

The top photograph is linked to my Flickr site, where the photographs are hosted.

I have been extraordinarily busy this past week, so I did not watch the markets as closely as I normally do. I did, however, purchase more oil stocks and stocks in a couple other sectors. Although I did not load up the proverbial boat with oil stocks, I might further increase my exposure soon. Those who follow my blog know that I am an oil bull, believing that oil prices will continue to rise because of the inability to match supply with demand at current prices. However, there might be some further downward pressure on oil stocks as northern hemisphere enters the spring season and the demand for oil is temporarily lessened. Of course, the current market turbulence might further add to the downward pressure.

That said, I believe that the stocks of oil companies are unlikely to fall much further. Put differently, there is much more upside than downside, especially as you lengthen your time horizon beyond one year. As time progresses, the world demand for crude oil will continue to increase. As the volume of oil consumed increases, the amount of crude that must be found just to replenish the natural decline of existing oil fields also increases. And then, more oil must be found to satisfy the increased global demand. Thus, those companies that have large reserves should do well.

With the recent market turbulence, I am sure a lot of you are anxious about your stock holdings and what you should do next. Your first step in making any decisions should be to understand what you own.

Barry Ritholtz wrote an article back in October 2005 titled, Apprenticed Investor: "How My Doin?", where he provided a spreadsheet. Rather than link to Barry's spreadsheet from here, I ask that you visit Barry's article. After completing his spreadsheet with each of your holdings allocated to a sector, you will clearly see how diversified you are. Moreover, you will see for each of your stocks its overall percentage of assets. You will also complete some standard valuation measures such as dividend yield, price to earnings ratio, projected growth, PEG ratio, and beta.

Another excellent source of information to be used in conjunction with Barry's spreadsheet is the S&P 500 website with quantitative data. With the S&P data and your spreadsheet, you can see whether or not you are overweighted in different sectors relative to the index.

If you are managing your own money, you are most likely weighted significantly different than the index. You have taken a deliberate strategy to be different. However, you should review your portfolio periodically and ensure that your current weighting reflect your intentions. Over time, your portfolio weightings will change as some sectors lose while others gain.

My portfolio has a large cash position relative to the overall portfolio. I have been purchasing more oil stocks during this current correction. And if prices continue to fall, I will purchase more. My intent is to be overweight commodities in general and oil related stocks in particular. Nonetheless, I still have stocks from other sectors. So I am not completely concentrated in commodities.

A correction is a good time to realign your portfolio. You should review your holdings to ensure that your overall portfolio reflects your current beliefs and desires. For example, if you believe that financials have been through the worst, you might begin to overweight the financials. As you think through your portfolio holdings, you can begin to think through different scenarios. For example, if the market falls another five percent, you plan to do x. If the markets rally hard, you plan to do y. The key point is to thoroughly review your stock holdings to make sure that you are comfortable with your current position.

I just checked the markets and I am surprised to see that the S&P 500 is down after having started strong this morning. I do not know about you, but I find the recent stock market action extraordinarily interesting.

So what I am doing? I purchased some calls on Blue Nile, Inc. (NILE) a couple days ago and I have been scaling into some oil related stocks. I am about even on the Blue Nile calls and am looking to continue to purchase more oil stocks should they go lower.

During the past week, I moved my weblog to a different web host pair Networks. While I expect to be back in full production within a week, I am still working out some of the bugs. So I need your patience for a few more days.

The markets are certainly interesting. I will comment more soon.